Best Text/Source for understanding Options, derivatives, and trading strategies?

This book is the classic and a quick google search produces a pdf copy.

I also like Volatility Trading by Euan Sinclair but if you can only get one book get the above and pay extra attention to the chapter focused on options greeks.

The Hull book is standard...you can get the theory and stats, less so the different scenarios. Any specifc scenario/question you had?

Jimbo: Is the book just known as the "Hull Book?"

Here's an example:

Let's say you had a mutual fund that said they could deliver a return equally comparable to the S&P 500 index. How would they do this using an equity swap for a client?

My only logic was to purchase the 500 stocks that make up an the index in their exact proportions(but that is too labor intensive)

The book is Options, Futures and Other Derivatives by John Hull. If you've heard of the Hull-White model, same guy.

To your second question:representative sampling and they wear a little bit of risk. I think vanguard actually beats the index slightly.

I'm not sure what an equity swap is, but i'm assuming it's like a total return swap...you pay me some funding level and I pay you the return of a particular asset. it's like a synthetic loan.

Yeah they are fairly similar. Basically they are just exchanges of cash flows where at least one of the indices is an equity index.

My guess would be the fund pays some type of money market return and receives the return on the S&P 500 index for a fixed period. The return on the index consists of capital gains and income distributions.

That's what I got from the dense foliage of explanations I've read and what you referenced.

In college we use the Hull Book and Shreve's book. Start with the first Shreve: Discrete Models. Then go onto continuous models. Be warned that if you're not good at math or have no formal background in it, you're going to have some trouble with Shreve.

I read Hull in college. It was ok. The book you want is the Sheldon Natenberg book (Option Volatility and Pricing). Everyone at my fund swears by it, and I personally think it is fantastic.

Paul Wilmott on Quantitative Finance. It's a two volume book, but Hull's is easier to read. Jimbo hit the nail on the head with Eq Swap being similar to a TRS. Mutual fund would look for a counterparty who will pay the SP500 index return for 12 months (or whatever agreed upon time frame) while mutual fund will pay say 3 month LIBOR it also contains an equity payment with an agreement with say 100(In-Io)/Io where In is the index level on payment date and Io is index level on preceding payment date, and 100 is the notional principal. The first payment date, the Io would be the index level using the next payment date but applied to the index level from previous (i.e. pay schedule mar,jun, sep, dec yr07, for march (1st pay) use index level from december 06).

We use Hull in my Derivatives class. I've also heard that Natenberg is really good. A friend of mind recommended I read McMillan on Options and Options as a Strategic Investment, both by Lawrence McMillan. He has read them, but I haven't so I can't comment on them.