For many people, options trading is a strange and mysterious investment practice. Fortunately, there are numerous educational books on the subject that demystify options and help traders profit from them. Here are five of the most notable titles:
- "Option Volatility and Pricing," by Sheldon Natenberg
- "Fundamentals of Futures and Options Markets," by John Hull
- "Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits," by Dan Passarelli
- "The Option Trader's Hedge Fund," by Dennis Chen and Mark Sebastian
- "Options Trading Crash Course," by Frank Richmond
Options as a Strategic Investment by Lawrence McMillan
Widely deemed the Bible of options trading, Lawrence McMillan’s 1980 classic, “Options as a Strategic Investment,” provides traders with practical option trading strategies designed to minimize risk and maximize profit potential. Its 1,000-plus pages contain information on specific options strategies and market conditions in which they tend to work best. The book dives deep into using options as a hedge and explains how tax laws apply to option trading profits or losses. McMillan also offers detailed advice on trading index options, trading options on futures, and measuring market volatility.
Option Volatility and Pricing by Sheldon Natenberg
This book has long been read by options market professionals and has been called the "bible" by options traders. Understanding how market volatility relates to options pricing is key to helping traders evaluate fair values in the options market. Sheldon Natenberg’s “Option Volatility and Pricing” provides a clear explanation of theoretical option pricing models, complete with examples of specific trading strategies that have shown historic profitability, in various market conditions. Natenberg's easy-to-follow descriptions help readers understand the key concepts involved in trading options, such as risk management, the relation of options to their underlying assets, volatility, and options pricing.
Fundamentals of Futures and Options Markets by John Hull
Options trading is particularly popular with traders who regularly trade the commodity futures markets. John Hull's "Fundamentals of Futures and Options Markets," which is considered a companion text to his book “Options, Futures and Other Derivatives,” offers a clear understanding of the futures and options trading markets. Widely recognized as an authority on derivatives, futures and risk management, Hull has served as a consultant to many of the best-known investment banking firms. Consequently, his book contains actionable information on swaps and other derivative instruments, trading interest rate futures and strategies for estimating the time value of options.
Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits by Dan Passarelli
To truly master options trading, one must cultivate a robust understanding of the “Greeks", which refer to the following Greek terms:
- Delta — option price movement in relation to underlying asset price movement
- Theta — the time value of options
- Vega — volatility-related option price changes
- Rho — option price movements caused by changes in the risk-free interest rate, commonly equated with the yield on U.S. Treasury bills
Passarelli's book explains the impact that each of these factors has on option values, and presents various option trading strategies that seek to profit from changes in any or all of the “Greeks.” This lets traders accurately evaluate option pricing and identify profit opportunities.
The Option Trader's Hedge Fund by Dennis Chen and Mark Sebastian
“The Option Trader’s Hedge Fund,” co-authored by hedge fund manager Dennis Chen and options trading coach Mark Sebastian, offers options traders a business model that can help them earn consistently profitable returns. The 2012 book provides a step-by-step primer for setting up a short option investment portfolio, designed to generate a steady income from selling, or writing, options.
Options Trading Crash Course by Frank Richmond
Billed as the "#1 Beginner's Guide to Make Money With Trading Options in 7 Days or Less!," this book is perfect for beginners to learn the ropes and get to trading in record time. The book is geared toward those raring to go, so be cautious: the depth of the material is more superficial and less extensive or in-depth than the other books in this list. But, that can also make it a much easier read for some newbies.
Sheldon Natenberg. "Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition." McGraw-Hill Education, 2014.
John C. Hull. "Fundamentals of Futures and Options Markets." Pearson Prentice Hall, 2008.
Dan Passarelli. "Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits." John Wiley & Sons, 2012.
Dennis A. Chen, Mark Sebastian. "The Option Trader's Hedge Fund: A Business Framework for Trading Equity and Index Options." FT Press, 2012.
Frank Richmond. "Options Trading Crash Course: The #1 Beginner's Guide to Make Money With Trading Options in 7 Days Or Less!" Independently Published, 2018.
Lawrence G. McMillan. "Options as a Strategic Investment." Penguin, 2002.