Option Volatility & Pricing: Advanced Trading Strategies and Techniques - by Sheldon Natenberg

I have been a professional options trader for over 11 years. In my experience most options traders fail, and for two reasons: naive faith in mathematical models and software, and a basic misunderstanding of the concept of impled volatility.

This is the one book that everyone who has worked for me has been required to read: it is ESSENTIAL. There is no other book that covers these topics in the the way that market practitioners think about them, nor does Natenberg forget to include anything that's really useful.

I have to agreed with another reviewer: understand and study this book! Options trading is a zero-sum game. Professional traders have the edge and been earning a good living from the ill-prepared, arrogant, and naive for years.

If you trade options, you will quickly learn that it is essential to understand the concept of volatility. Natenberg explains the concept of volatility in great detail, and shows how this concept applies to different option positions.

Natenberg not only takes great pains to explain the concept of volatility, in addition to other inputs into an option pricing model, but clearly shows that option pricing isn't the exact science many seem to believe, for the simple reason that we never know if our volatility estimate is correct. I suspect many traders just don't understand the severe limitations current models have in different situations (ie. how the Black-Scholes model underprices options near expiration).

For the mathematically inclined, there are ample formulas and equations in the appendix.

Read it, study it, and apply the concepts to develop your own trading system.