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Dynamic Hedging: Managing Vanilla and Exotic Options
Destined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers
Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management.
Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management.
Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
528 pages, Hardcover
First published December 31, 1996
180 people are currently reading
4038 people want to read
About the author
Nassim Nicholas Taleb
61 books14.3k followersNassim Nicholas Taleb spent 21 years as a risk taker (quantitative trader) before becoming a flaneur and researcher in philosophical, mathematical and (mostly) practical problems with probability.
Taleb is the author of a multivolume essay, the Incerto (The Black Swan, Fooled by Randomness, Antifragile, and Skin in the Game) an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision making when we don’t understand the world, expressed in the form of a personal essay with autobiographical sections, stories, parables, and philosophical, historical, and scientic discussions in nonover lapping volumes that can be accessed in any order.
In addition to his trader life, Taleb has also written, as a backup of the Incerto, more than 50 scholarly papers in statistical physics, statistics, philosophy, ethics, economics, international affairs, and quantitative finance, all around the notion of risk and probability.
Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering (only a quarter time position). His current focus is on the properties of systems that can handle disorder ("antifragile").
Taleb believes that prizes, honorary degrees, awards, and ceremonialism debase knowledge by turning it into a spectator sport.
See Wikipedia for more details.
Taleb is the author of a multivolume essay, the Incerto (The Black Swan, Fooled by Randomness, Antifragile, and Skin in the Game) an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision making when we don’t understand the world, expressed in the form of a personal essay with autobiographical sections, stories, parables, and philosophical, historical, and scientic discussions in nonover lapping volumes that can be accessed in any order.
In addition to his trader life, Taleb has also written, as a backup of the Incerto, more than 50 scholarly papers in statistical physics, statistics, philosophy, ethics, economics, international affairs, and quantitative finance, all around the notion of risk and probability.
Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering (only a quarter time position). His current focus is on the properties of systems that can handle disorder ("antifragile").
Taleb believes that prizes, honorary degrees, awards, and ceremonialism debase knowledge by turning it into a spectator sport.
See Wikipedia for more details.
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Displaying 1 - 25 of 25 reviews
September 26, 2009
Do you remember reading The Divine Comedy and getting (finally) to the part where the two poets (apparently on an extended smoke break from their barista jobs in Brooklyn) get to the ninth circle of Hell only to think to yourself, "Brutus and Cassius? Really? I mean Judas I totally get, and these guys are distasteful and all, but the inner circle?" Well, your discombobulation is pardonable because, in fact, it was Dante who was confused. We may forgive Signor Alighieri for his error, for he was born 700 years too early to recognize the ominously darkened visage of Nassim Nicholas Taleb next to the ludicrously grinning mug of Paul Wilmott as they bookend Judas Iscariot for all of eternity. But I digress...
The thing is that this book is bad. Really bad, and in need of an editor. The redundant sentences bounce off of each other without forming a coherent picture of anything but Taleb's ego. He says in the preface that he "clambered up to my attic where, during 6 entire months, I spent 14 hours a day, 7 days a week immersed in probability (at a Ph.D. level). Then I began to write this book." Bullshit. Note that the "(at a Ph.D. level)" is really in there. The good Dr. spent 2352 hours (conservatively) preparing to write a book that says in all of its 500 pages something I can say in 3 words: derivatives are nonlinear. As they say in The Big Lebowski, I guess he's just "not into that whole brevity thing."
I kept waiting for the Ph.D. level probability to show up. It didn't. There was an apparently straight-faced claim that we should care about the seventh derivatives of our options positions, which seems more than a bit ludicrous. All this was interspersed with asides in grey boxes that completely disrupted the flow of the text. Honestly, the best way to read the book is probably to read the grey boxes and nothing else. And then there was the relentless repitition of the refrain that quants don't know what they are talking about, experienced traders know these things in their sleep. Taleb, despite his claims of 2400 hour marathon mathematical musings cannot seem to make up his mind if he is a mathematician, a trader, or both. The only thing that is clear is that he believes himself to be above all of them. 2400 hours and the only thing he learned to do was walk on water...
This book is not without a following, which to me is very odd. I suspect it originates from the lack of other books on the subject at the time of its publication. Taleb does manage to point out convincingly (by beating you over the head with it for 500 pages) that nonlinear instruments carry with them risks that linear ones do not. Kudos. Still, the amount of intuition garnered about how to deal with, or even think about such things contained in Dynamic Hedging is tiny compared with, for example, the books by Sheldon Natenberg or Lawrence G. McMillan.
Lots of people write bad books, so what is it that qualifies Mess. Taleb and Wilmott to be satanic hors d'oeuvres until the end of days? The ninth circle of hell is about betrayal, and these gentlemen have repeatedly run roughshod over the very people who would be their biggest champions: quants. In their blindingly narcissitic quest to prove to the world that they are smarter than their peers, they have done more than any source since "Revenge of the Nerds" to perpetuate the myth that people schooled in the mathematical sciences can't tie their own shoes without an M.B.A. with bright eyes and a firm handshake to show them how. They need you to believe that all quants follow models blindly and without question in order for you to be impressed by the fact that they themselves do not.
The thing is, Nassim Taleb is a very smart guy (the jury is totally out on Wilmott). Though this book is quite poorly written, I understand that his others (which I've not read) are better, and his public remarks seem to indicate that he has a much better than average grip on the statistical realities of the market. His approaches seem sound. If he had just held the scimitar aloft and said, "let us slay the black swan," then I assume that lots of quants would have been there with him sparking up the torches and sharpening the pitchforks. Instead, he chose to demonize his own kind in order to stand even farther apart. If this sounds familiar, it's because it is the plot of many a teen movie. The coolest of the unpopular kids, when given an opportunity to sit at the cool kids' table in the cafeteria (read: interviewed by CNBC), inevitably turns his back on his true friends. Et tu, Nassim?
Wilmott plays his own insidious version of this game. In many ways, his is worse. Whereas Taleb wants to be recognized for his genius, Wilmott wants to be paid for it. He convinces the quants (and their employers) that they are more or less worthless, but for the tidy sum of $17,999.00 (honestly) he can train them to get their Certificate in Quantitative Finance (CQF) designation, which he invented, and that all will be right with the world. This "there's something wrong with you that only I can fix" attitude reminds me of Scientology a bit.
So what do we do with these two poster boys for Muchausen-Syndrome-by-Proxy? I say call it like you see it. Not every book that sells well is a great one. That liquid splashing your ear is not rain, my friend.
The thing is that this book is bad. Really bad, and in need of an editor. The redundant sentences bounce off of each other without forming a coherent picture of anything but Taleb's ego. He says in the preface that he "clambered up to my attic where, during 6 entire months, I spent 14 hours a day, 7 days a week immersed in probability (at a Ph.D. level). Then I began to write this book." Bullshit. Note that the "(at a Ph.D. level)" is really in there. The good Dr. spent 2352 hours (conservatively) preparing to write a book that says in all of its 500 pages something I can say in 3 words: derivatives are nonlinear. As they say in The Big Lebowski, I guess he's just "not into that whole brevity thing."
I kept waiting for the Ph.D. level probability to show up. It didn't. There was an apparently straight-faced claim that we should care about the seventh derivatives of our options positions, which seems more than a bit ludicrous. All this was interspersed with asides in grey boxes that completely disrupted the flow of the text. Honestly, the best way to read the book is probably to read the grey boxes and nothing else. And then there was the relentless repitition of the refrain that quants don't know what they are talking about, experienced traders know these things in their sleep. Taleb, despite his claims of 2400 hour marathon mathematical musings cannot seem to make up his mind if he is a mathematician, a trader, or both. The only thing that is clear is that he believes himself to be above all of them. 2400 hours and the only thing he learned to do was walk on water...
This book is not without a following, which to me is very odd. I suspect it originates from the lack of other books on the subject at the time of its publication. Taleb does manage to point out convincingly (by beating you over the head with it for 500 pages) that nonlinear instruments carry with them risks that linear ones do not. Kudos. Still, the amount of intuition garnered about how to deal with, or even think about such things contained in Dynamic Hedging is tiny compared with, for example, the books by Sheldon Natenberg or Lawrence G. McMillan.
Lots of people write bad books, so what is it that qualifies Mess. Taleb and Wilmott to be satanic hors d'oeuvres until the end of days? The ninth circle of hell is about betrayal, and these gentlemen have repeatedly run roughshod over the very people who would be their biggest champions: quants. In their blindingly narcissitic quest to prove to the world that they are smarter than their peers, they have done more than any source since "Revenge of the Nerds" to perpetuate the myth that people schooled in the mathematical sciences can't tie their own shoes without an M.B.A. with bright eyes and a firm handshake to show them how. They need you to believe that all quants follow models blindly and without question in order for you to be impressed by the fact that they themselves do not.
The thing is, Nassim Taleb is a very smart guy (the jury is totally out on Wilmott). Though this book is quite poorly written, I understand that his others (which I've not read) are better, and his public remarks seem to indicate that he has a much better than average grip on the statistical realities of the market. His approaches seem sound. If he had just held the scimitar aloft and said, "let us slay the black swan," then I assume that lots of quants would have been there with him sparking up the torches and sharpening the pitchforks. Instead, he chose to demonize his own kind in order to stand even farther apart. If this sounds familiar, it's because it is the plot of many a teen movie. The coolest of the unpopular kids, when given an opportunity to sit at the cool kids' table in the cafeteria (read: interviewed by CNBC), inevitably turns his back on his true friends. Et tu, Nassim?
Wilmott plays his own insidious version of this game. In many ways, his is worse. Whereas Taleb wants to be recognized for his genius, Wilmott wants to be paid for it. He convinces the quants (and their employers) that they are more or less worthless, but for the tidy sum of $17,999.00 (honestly) he can train them to get their Certificate in Quantitative Finance (CQF) designation, which he invented, and that all will be right with the world. This "there's something wrong with you that only I can fix" attitude reminds me of Scientology a bit.
So what do we do with these two poster boys for Muchausen-Syndrome-by-Proxy? I say call it like you see it. Not every book that sells well is a great one. That liquid splashing your ear is not rain, my friend.
August 19, 2007
This book will be of zero interest to anyone not involved in the securities trading industry and of small interest still to those not involved with derivatives. To those remaining, this is rightly regarded as essential reading. It is an entertaining combination of intuitive explanations, mathematical derivations, and war stories from the trading floor. Taleb's book is one of the best at teaching derivatives concepts by heuristics rather than pedagogy; while the latter is important, the former is indispensable. His main fault is that it sometimes harps too hard on certain points while skimming rapidly over others that are not easily understood by those less familiar with derivatives trading. Other books are probably better introductions. But once you read those, this one should definitely be next on your list.
August 11, 2016
Taleb is one arrogant dude who loves flooding his books with archaic words which were last employed in the English Language by Geoffrey Chauncer. But alas, Dynamic Hedging is a strong advanced text which goes through many nuanced topics. For example, he makes some good points on managing option greeks. Some chapters I really enjoyed which are hugely important in practice that you don't learn in any classroom: soft American options, discrete delta vs continuous delta, fungibility. Just a warning that you might have to read over sections multiple times before you digest ideas.
For example, for american options, you can tend to think of the early exercise having some sensitivity to interest rates (as rates go higher, it becomes more optimal to exercise puts and less optimal to exercise calls), so in some circumstances, the early exercise provision of american option is actually an option on rates. Also, every mathematician teaches delta as a continuous derivative d[option value]/d[spot], but really what's important is to the know the delta at discrete intervals since no one hedges continuously and also since in a real options book the greek sensitivities might flip or go through extreme changes over discrete intervals. Just some great material which makes you think hard.
The structure of the book jumps over the place, but mainly Taleb is focused on options, volatility, and exotics. So not exactly a good book on vanilla rates or commodities for example.
This text is certainly one I keep as a reference guide on my desk. As a sign of its value, everytime I read it, I do learn something new. I rated it highly based solely on the excellent and juicy material but the writing style is really horrible. Not for beginners but a great read for anyone interested in the deep details of trading derivatives.
For example, for american options, you can tend to think of the early exercise having some sensitivity to interest rates (as rates go higher, it becomes more optimal to exercise puts and less optimal to exercise calls), so in some circumstances, the early exercise provision of american option is actually an option on rates. Also, every mathematician teaches delta as a continuous derivative d[option value]/d[spot], but really what's important is to the know the delta at discrete intervals since no one hedges continuously and also since in a real options book the greek sensitivities might flip or go through extreme changes over discrete intervals. Just some great material which makes you think hard.
The structure of the book jumps over the place, but mainly Taleb is focused on options, volatility, and exotics. So not exactly a good book on vanilla rates or commodities for example.
This text is certainly one I keep as a reference guide on my desk. As a sign of its value, everytime I read it, I do learn something new. I rated it highly based solely on the excellent and juicy material but the writing style is really horrible. Not for beginners but a great read for anyone interested in the deep details of trading derivatives.
September 30, 2011
Nassim in action -- one can't go wrong.
December 24, 2011
I read this book when I was still studying. At that time I found it interesting because some topics were discussed in a different way than other standard references (such as Options, Futures and Other Derivatives).
However, I opened this book again many years later, after I had been working as a practitioner on a trading floor for many years, and found most of it utter nonsense. In particular the paragraph about the risk manager enquiring about an infinite delta close to the expiration of a binary...
So this book would have been useful at some point as it gave a slightly more practical approach to pricing / hedging derivatives, but in the meantime Wilmott's book Paul Wilmott on Quantitative Finance 3 Volume Set have filled that void.
However, I opened this book again many years later, after I had been working as a practitioner on a trading floor for many years, and found most of it utter nonsense. In particular the paragraph about the risk manager enquiring about an infinite delta close to the expiration of a binary...
So this book would have been useful at some point as it gave a slightly more practical approach to pricing / hedging derivatives, but in the meantime Wilmott's book Paul Wilmott on Quantitative Finance 3 Volume Set have filled that void.
September 29, 2019
Useful reference for anybody who trades options. A lot of practical wisdom not found in classical options literature.
June 30, 2013
This book is only interesting for the anecdote postings that Taleb makes - everything else is either ego inflation or wishy-washy nonsense that doesn't really feel like it's in any way connected to dynamic hedging, which is what this book is about. I know that, for some bizarre reason, this book became almost a 'classic' among option traders (why???), but I recommend anyone interested in hedging take the pragmatic approach and read books such as Option Volatility & Pricing: Advanced Trading Strategies and Techniques followed by Volatility Trading With CDROM for a much better understanding of the problem of hedging. Sinclair, specifically, gives 2 chapters to hedging, discussing different approaches to formulating an optimal hedging strategy.
February 24, 2010
Not for the beginner but an excellent book. It shows you the actual mechanics of successful trading strategies and systems. You need a solid background in statistics before you attempt to tackle this book.
April 17, 2020
Good analysis of exotic options hedging.
November 4, 2022
He leído la Pentalogía Incerto de Nassim Taleb y me gusta mucho en tanto que ofrece buenos razonamientos y modelos de pensamiento que extrapolar a otras disciplinas. Pero mi habilidad con las matemáticas es prácticamente nula y, como consecuencia, este libro me ha resultado de muy poca utilidad.
Alguien con más habilidad para las matemáticas probablemente le saque mucho más partido, pero para alguien como yo, con una formación de letras puras, quizás le sea más útil leer Safe Haven Investing de Mark Spitznagel y, por supuesto, Fooled by Randomness, Black Swan y Antifrágil de Taleb.
Alguien con más habilidad para las matemáticas probablemente le saque mucho más partido, pero para alguien como yo, con una formación de letras puras, quizás le sea más útil leer Safe Haven Investing de Mark Spitznagel y, por supuesto, Fooled by Randomness, Black Swan y Antifrágil de Taleb.
April 24, 2023
Oh man! 25 years after first reading this thing, still don’t like it! What a piece of junk!
Too painful for a casual read and not deep enough for involved reading. I honestly thought that my older self would be a bit more forgiven and tolerant and maybe find some redeeming qualities to this book. Well, naaah. It was bad then and it is bad now. A waste of ink and paper!
Taleb did well to move away from this rubbish middle of the road, muddled-up style that satisfies no-one. He had gotten better as a writer and found his style - and fame - as an essayist with the Black Swan. This early book doesn’t really do him justice.
Too painful for a casual read and not deep enough for involved reading. I honestly thought that my older self would be a bit more forgiven and tolerant and maybe find some redeeming qualities to this book. Well, naaah. It was bad then and it is bad now. A waste of ink and paper!
Taleb did well to move away from this rubbish middle of the road, muddled-up style that satisfies no-one. He had gotten better as a writer and found his style - and fame - as an essayist with the Black Swan. This early book doesn’t really do him justice.
December 31, 2018
high quality. makes you surprised at who the author chose to become. Best part is the trader wisdom. (traders don't often write books)
January 3, 2019
A bit challenging for a newbie, yet a must read to understand options.
August 18, 2020
Important book for real-world risk managers.
May 5, 2021
Best comprehensive and practical book on option. Period.
August 13, 2021
Een must read voor iedere optiehandelaar.
November 29, 2021
Heavy on exotics
May 25, 2022
How the legend was born. Must read for options market makers.
November 14, 2023
Good mix of trading intuition and general math framework.
December 29, 2024
Dynamic Hedging is a polarising read. On one hand, it offers a rare blend of intuitive insights, practical war stories, and lessons in derivatives trading, making it a must-read for those in the industry. On the other, it suffers from overwhelming repetition and Taleb's unchecked ego that disrupts the flow of the book. The arguments often meander, leaving essential points underdeveloped or lost amid Taleb's self-indulgent tangents. Nonetheless, it's a useful read; just be prepared to wade through lots of unnecessary stuff.
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June 4, 2016"Guys this is a very difficult book! But there comes a time where you have to overcome difficulties if you really want to learn. (Though I assure you: if you have not previously studied John C. Hull's book, it is hard to jump out already in the simplest things)"
February 7, 2016
This is a good book on the subject. A little technical in parts.
May 27, 2016
A long time read finally finished today, though it is more of an investment reference book than a read. Somewhat complex and not for the everyday investor.....
July 24, 2023
V technical. Read for fourth moment arb
April 3, 2024
yap yap yap pls get an editor Taleb
Displaying 1 - 25 of 25 reviews