Saturday, 18 February 2017

Some of my favourite, or most useful, finance books

Fortune's Forumla was one of the most fun reads I've ever been fortunate enough to stumble across. That's a big call, but I mean it. It's certainly been a while since I last read it, but it has been worth reading more than once. I must read it again. William Poundstone's narrative theme is the Kelly Criterion largely centred around Ed Thorp with a dash of Claude Shannon. You gotta read it to understand how the mob's low latency telephone betting arbitrage underwrote an embarrassingly large amount of AT&T/Bell's revenue. The amazingly simple story within: buy the worst performing stocks the next day, sell the best performing, rinse repeat for a couple of decades. Just read it.

At four companies I've been involved with, I used C/C++ code that was transliterated from Espen Haug's The Complete Guide to Option Pricing Formulas book. As far as option pricing goes, this approach was largely enough pricing to make some millions of dollars. Last time I just ocr'd the relevant pages, as the CD had gone walkabout, and transliterated the BASIC code to C/C++ fairly directly. Pricing and unit tests done in less than a day. Perhaps I should do it again and release such C++ as open source so I can stop the repetition. I kind of prefer the size and convenience of the first edition, but the second edition is certainly an improvement.

I like Barry Johnson's Algorithmic Trading and DMA: An introduction to direct access trading strategies even though it is not overly insightful for a market professional. It is nice, clean, and easy to read but its real usefulness to me has been as the "goto" description of a call auction if anyone asks you. That small snippet is dog eared. Somehow I find it a particularly pleasant book even if it is not filled with great insight. A tidy reference.

As far as understanding option trading goes, there is only one that is worthy that I've come across. It is ancient but still relevant and a great introduction for a budding trader. Sheldon Natenberg's Option Volatility & Pricing: Advanced Trading Strategies and Techniques. This is the ancient 1994 edition I've read and recommended over the years. There is a newer 2014 edition, "Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition", but I can't vouch for it as I haven't read it, though I know I probably should.

For futures and option basics, especially for new finance staff, just stick to the biblical Hull, "Options, Futures, and Other Derivatives (9th Edition)", but why is it now so expensive? You might find a better price in a university's co-op bookshop. Just a tip.

I'm not the biggest Taleb fan, but whilst I found the mildly annoying "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto)" was well worth the read, albeit through gritted teeth, you gotta give Taleb a lot of credit for the masterclass that is: "Dynamic Hedging: Managing Vanilla and Exotic Options."

Rebonato's "Volatility and Correlation: The Perfect Hedger and the Fox" is a favourite of mine though I've only read about half of it as it is my most "missing" book. Over the years, somehow it has just walked out of a few of my offices and disappeared into the Ether. Perhaps there can't be a much better recommendation than that? I'd like to read it all but I can't really afford to keep buying copies. I credit this book with stimulating me into some newer and novel ways of thinking about volatility and pricing that aren't contained in any text book. That is a real credit to Rebonato's intuitive way of presenting his thoughts on pricing and volatility. He's a good teacher. Perhaps it is the most valuable half read book I've never completed? Hmmm.

As another fun, albeit soft, read, Peter Berstein's "Against the Gods: The Remarkable Story of Risk" is about as good as it gets. The story about the English using the Roman life tables for their annuities is a rip roarer, especially when you look at those median life spans from the 1600s. There is a lot of context in many of his books that have enriched my life. Highly recommended.

What's next on my list? Well I'm waiting on Amazon to deliver Dave Cumming's autobiography, "Make the Trade". It should be a beauty based on this snippet:

A snippet from Sniper's tweet
(click to enlarge)
I've chatted briefly to Dave a few times and always found him to be terribly interesting and engaging. I'm sure his tome will be a great read, full of historical gems that only someone who has been there and done that can provide.

Happy trading,