I had to vacate my old flat and move to a new apartment recently and hence had to shift all my books. This entailed categorizing all of them to suit the new shelf space. It was quite an effort and I had to take a day off from work to get the task done. In the process, I stumbled on to this book that was lying in my inventory for many years. This book was published way back in 2004 and I bought it sometime in 2007 thinking that it might give me a 10,000 ft. view of Black Scholes. Working on details sometimes might make one miss the forest for the trees. Books such as these, exist to provide intuition behind the option pricing math. Having said that, the math in the book is not dumbed down as title might seem to suggest. I read this book after 6 years of purchase. At this rate, I think I will barely manage to read all the books that I have, by the time I die Smile.

Ok, firstly about the author. An earlier book by Falcon Crack ,”Heard on Street” is a popular book among newbie financial engineers. The book is a collection of interview questions posed to people seeking a junior quant position. This book is not directly targeted towards that kind of audience. It claims to give an intuitive background to Black-Scholes and I think in that aspect, it does a fair job. It has “trading” in its title and I think it is grossly misleading. There is a chapter on trading but it could as well have been pushed to the appendix.

What I liked about the book ?

  • Put call parity explained through a visual that shows the relationship between intrinsic and extrinsic value of call options. The fact that you also get to see put option pricing dynamics in the same visual makes it very appealing. This explanation gives the much needed intuition in order to grasp the Black Scholes formula
  • Single summary table that explains the effect of strike price, time value, interest rate, volatility, underlying price, dividends on the call and put option values.
  • Trivia – European Vs. American Option – Why are they named that way ?: Paul Samuelson at MIT said that he carefully chose the names “European” and “American” (back in 1960s), as he wanted to take a swipe at snobby European economists who thought themselves more sophisticated than their American counterparts. Samuelson did this by naming the more sophisticated exercise style as “American” and the less sophisticated as “European”
  • Nice argument that verbalizes the reason for the absence of “Put-Call Parity” type of equation for American options.
  • Why is the value of the option, not a function of risk preferences? – Intuitive explanation as to why a quant lives in a risk neutral world for pricing options.
  • Derivation of Black Scholes using various approaches and a nice explanation of various terms in the Black Scholes pricing formula.
  • Provides good intuition about option greeks.

There are some things that are not so pleasant about the book. But I don’t want to waste time writing about them. Already the author has wasted his time writing them in the first place.

The book is easy on eyes and can be easily read from cover to cover in one sitting. Since this book goes one level deeper than the MBAish books like Hull, it might be a good supplement to such books.