Customer Reviews

Dynamic Hedging: Managing Vanilla and Exotic Options (Wiley Finance)

5 star:		(24)
4 star:		(10)
3 star:		(4)
2 star:		(3)
1 star:		(6)

 

 

This book provides a healthy dose of practical wisdom for options traders so that they don't blindly follow their mathematical models into oblivion. The author (Taleb) has a PhD in finance, but also has traded in the pits, he knows both theory and practice and where they diverge.

Taleb focuses on hedging, which is a trader's main task when running a large portfolio of options. Instead of using a flood of equations, Taleb relies on charts, graphs, and tables to make his points. Most of the equations & heavy mathematics are relegated to the appendix, presumably because quants (or software) will price the instruments. He covers the behavior of the Greeks (delta, gamma, vega, theta, etc.) for vanilla options as well as behavior of exotic options, and delves into the practicalities of volatility, hedging at discontinuities, and various other topics.

The book is very popular on trading desks, and although I found it pretty good, I didn't find it to be outstanding. Also, notably, the book does NOT cover credit & interest rate derivatives at all; hopefully this will be corrected in the next edition.

So if you need a book on the practicalities of hedging a portfolio of vanilla/exotic options, then get this book. On the other hand, if you want some basic options theory, or want to focus more in pricing, or need a basic introduction, look elsewhere (perhaps to Hull's or Wilmott's books).

I would not recommend this book to build up an academic background but rather to develop an understanding and an intuition of how dynamic options are. As a hedge fund options trader this book has been very valuable to me to validate my own observations and where necessary to correct those observations, which at the time seemed correct, but which the author through market experience manages to convey the proper meaning. This book is not only factual but also provides you with the right frame of mind to think about options. I believe you can also use the author's experience to boost your own practical experience.

Yes, this book could use an editor - there are all sorts of errors everywhere. While it makes the reading pretty tough, I think this is really one of the most useful books on options around. It's a little like Campbell/Lo/MacKinlay's book on empirical finance, but with a more experienced and real-life perspective. It's a bit refreshing after all the copycat books on option pricing that still don't contribute much beyond what Hull has written. No question, top 5 in practical finance reading.

this book has helped me in NUMEROUS interviews over the years... it is a book that always keeps me fresh... HOWEVER, thank god i have a solid background in derivatives - otherwise, the 107 errors i found (mathematics, definitions, explanations, etc) would have driven me to a point of complete confusion... NEVER have aloof traders edit your book - get someone who understands derivatives and is separated from the world of day-to-day trading... this book could have been the bible of understanding the risks in options - including exotic options... instead, it is just a good book... well done Taleb... but could you have been more slack with the editing?

Taleb's writing style is unique, to say the least. If you can get past it, though, his material is solid gold!

The structure of the book is very disjointed and information dense. I typically read 4-5 pages, spent a day or two figuring out what nuance he was trying to communicate, and then was absolutely floored by the insight. I've read the book several times over and expect re-read it several more.

Taleb's risk management perspective is at odds with "pricing" but right-on for "risk management". He would willingly trade a small certain loss for a possibly large gain rather than vice versa. This perspective is probably consistent with most dynamic hedgers; you expect the hedge to be a drain on income but also to save you from catastrophic events.

As a non-trader implementing dynamic hedging programs, Taleb's perspective and insights have proven invaluable. I have avoided countless pitfalls into which I would otherwise have fallen. I look forward to future editions of this book!

It is nearly impossible to write a book that is both mathematically rigorous and sufficiently down to earth to be accessible to the professional trader. This book is a step in the right direction. It maintains the mathematical accuracy and depth without bogging the reader down with technical derivation of formulae. At the same time, it is written by a trader whose experience in the real market compels him to constantly question the `nice' assumptions used to derive these formulae.

Taleb is first a market practitioner who uses models and pricing formulae to enhance trading and not the other way around. If there is a discrepancy between theory and reality he doesn't blame the markets.

The book is very personal and leaves no doubt what the author's opinion is on VAR, continuous hedging and other sacred cows of modern finance. The debacle in the financial markets in 1998 and the apologetic excuses by famous traders and theoreticians indicates that there is more than a grain of truth in Taleb's skepticism.

The importance of this book is that whether one agrees or disagrees with Taleb, it forces the reader to question his basic assumptions and rethink common truths. The book is unique: it is stylish, philosophical, literary, and if one may say so of a hardcore financial book - it is very entertaining.

I liked Taleb's book, but I also found it quite frustrating to read. Whenever I looked closely at a definition or an equation, it was more likely to be incorrect than not. Further, I'm afraid I also found the prose at times overbearing: statements to the effect that 'People with PhD degrees are of a higher mental calibre than those without', and similars, are really out of place. I think the book should have been more rigourously edited by the publisher. Authored by a practitioner with interest in mathematical analysis, it could have been an extremely useful book.

From the derivative trader's point of view, there are three main ways to characterize this book :

1. On the technical side, the book explains new and refreshing aspects of options that every risk manager, who never actually traded exotic options, should read to understand the trader's "situation" when it comes to hedge a portfolio. Part II clearly describes the core aspects of plain vanilla options. Chapter 9, on Vega and volatility surface is well written, but could have been more precise on examples. Part III correctly outlines binary and barrier options and one feelt that Taleb was a currency option trader ! Some "wizards" are very true (p.60, on the Burnout of traders) and some, like the "risk management rules", are pure conceptions of the author without bringing anything new.

2. The editor could have been more careful with the reader's comfort, the charts are often two pages away from the written descriptions, the notes refer to pages at the back of the book, etc...

3. The author is sometimes so pretentious that it becomes very irritating and actually damages the quality of the book. It seems very obvious that Taleb has a wrong understanding of modern risk management. Today's (good) risk managers are sometimes ancient derivatives traders, they are mathematically and financially skilled people, they are part of the financial landscapes taking part actively in the management of positions. This book contains some good real life analogies, but the others are regrettably offensive.

This books stays a good book to read and to recommend

Taleb's book successfully bridges the gap between well-posited but academic accounts of options theory and the practical knowledge and vernacular that are privy to the best traders. It is thoughtful and interesting, scholarly yet intuitive - and written in such picturesque prose that will at once charm and provoke you! The author makes the point well that market reality at times can be grim and much less forgiving - and certainly much richer - than current theoretical modeling make it out to be and shows how the trader can stack the odds in his or her favor. This book is an invaluable source of ideas for anyone who wants to monetize their empirical research on markets.

This is not a book for beginners (and I'm not a beginner). I found parts of it really compelling, particularly the ones that emphasize what can go wrong when you write options making simplistic assumptions about the liquidity of the underlying asset. I buy options a lot more often than I sell them, but I always wonder what the sellers are doing to hedge on their side (and whether they think buyers like me are idiots). Compared to many technical books, this mixes in a lot of traders' lore--usually you find the traders' lore with no math, or the math with no traders' lore.