The Complete Guide to Option Pricing Formulas

Simply put, Haug's book is a must-have for all students and practitioners in quantitative finance. The book has grown to over 500 pages in its second edition and contains a wealth of practical information related to option pricing formulae making this book a worthwhile purchase even if you already have the first edition. It is useful to anyone needing to implement, validate, or value financial derivatives in today's trading, market or credit risk management environment. My guess is that it will help you with a good 80% of the quantitative finance models you needs to implement or validate. It is written in a reference manual style which means the text is sparse and to the point. At the back it contains an excellent bibliography cross-referenced throughout the book just in case you need to consult a relevant academic paper with a higher verbosity level. In fact, for students the bibliography alone is well worth buying this book. The included CDROM contains VBA implementations of most of the formulas referenced in the book which is useful to fast-track your understanding of the practical implementation of the mathematics.As anything in life the book is not perfect. The title of the book suggesting it is the Complete Guide, by Haug's own admission is a bit ambitious. The major asset classes covered is still equities with a bit of commodity, energy and interest rates derivatives. Surprisingly, no credit derivatives are covered. The inclusion of VBA-code printouts in the text seems a bit superfluous as the code is available on the CDROM. This results in the book being a bit thicker than it should be, so maybe a next edition will be more kind to the environment! A solid 5-star effort.

I have been implementing various options calculators in many programming languages on several operating systems for over 25 years. Since the first edition of Haug's book, it has proven to be invaluable. It saved me many hours of research. Does it contain typos? Sure it does. However, I have compared some of the formulas to those in the first edition, and most of them have been corrected. Is the published code to the algorithms the most efficient one? Not by a long shot. But these are minor details. If you are an experienced programmer, you will easily improve the code, and if you are implementing the formulas in VBA for Excel, the code is quite adequate. The most common complaint is that the book did not help in trading options. I would not know. Does Gray's Anatomy help a neurosurgeon? I doubt it. This book is clearly meant for the quants, risk managers, and developers, not for the traders. If one is looking for a pricing formula for any of the scores of various exotic options, this is the first place to look. Often the presented material provides everything needed. In the rare cases where it does not, copious references are provided.

A former market maker recommended this to me as one of the best. It's the first options book I've read, but I've enjoyed it very much and feel much more knowledgeable about options after working through some chapters. Personally, I think chapters 1, 2, 3, 7, and 12 are the most relevant for someone who is mostly trading american options. These chapters cover the foundational generalized BSM model, many of the greeks up to 3rd order, american options, binomial tree pricing methods, and implied volatility. It's very thorough. There's plenty of examples and a lot of visualizations. There's also some basic code implementations for many of the pricing algorithms. Overall very happy with my purchase.

his is not my ordinary book review. These are good books that will only appeal to a small fraction of my readers, because few will have need for the knowledge. Both are written by Espen Gaarder Haug, who is kind of a character. He collects option pricing formulas the way some people collect Barbie Dolls, Beanie Babies, or Baseball Cards. He has interacted with some of the brightest minds in the field, and collaborated with a few of them. In both books the math is significant -- it would help if your calculus was sharp, and for any value some algebraic knowledge is needed.Let's start with the more esoteric of the two books, The Complete Guide To Option Pricing Formulas. Almost every option formula is included there, together with ways of estimating volatility, certain statistical techniques, aspects of compound interest math, etc. The book is very comprehensive, and for those that need how to estimate the value of standard and non-standard options, it is a good book to keep on hand as a reference, together with the free CD-ROM containing an Excel add-in that allows you to use the formulas inside Excel. I have used them for some of the insurance companies I have worked for; the software was easy and reliable.The second book Derivatives, Models on Models, is different. He interviews 15 significant thinkers on options and derivatives, and presents 15 papers by them. Most of them contain tough math; some I couldn't understand. The real value of the book was in the interviews, where many of the interviewees showed significant knowledge of the limitations of their models, and how derivatives were misunderstood by the public, or by their users.There are quirky aspects to this book, including cartoons and photos that are somewhat self-aggrandizing to the author, but make the point in a humorous way. I liked both books, but only a modest fraction of my readers should have any interest here.