Customer Reviews

Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit (Bloomberg Financial)

5 star:		(15)
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2 star:		(1)
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When I bought this book, I was expecting really in-depth analysis of various Greeks and their effects on basic option positions as well as complex spreads. However, I was bit disappointed.

If you have read any decent preliminary option trading books (Natenberg, McMillan et al) or if you have been trading option spreads for say 1+ year, this book would be useless. In aggregate there would be about 10-12 page material which may useful for such people. Last chapter on relationships between implied and realized volatility is OK.

For some reason the author has morbid fear for graphs of positions and greeks. He ends up giving tables after tables to illustrate effect of various greeks on option position.

If you are at a stage where you think I buy call option when I am bullish and I buy put option when I am bearish, this book will help you understand the effects of other equally important variables in pricing and trading, but then there are so many other which give this information in a better fashion in my opinion.

I believe that a mentor's aim is to impart his knowledge based on many years' experience so that his scholar student excels the mentor. Mr. James B. Bittman must be a great mentor, since Passarelli's book not only matches the excellence of Bittman's book (`Trading Options as a Professional') but exceeds that lofty level.

This book is not for the Beginner in Options Trading. Options are derivative instruments; their prices are derived from the prices of the underlying securities. The theoretical price of options may be calculated using the Nobel Prize winning Black-Scholes model with six inputs: stock price, strike price, time to expiration, risk-free interest rate, dividends, and annual volatility of stock price (the standard deviation of the short-term returns over one year). The Greeks (delta, gamma, theta, vega and rho) express the sensitivity of the options price with respect to the price of the underlying, time to expiration, volatility, and interest rate. The establishment of options on VIX (CBOE's Volatility Index, popularly known as the Fear Index) enabled traders to trade volatility itself; Passarelli's book provides an excellent guide for such traders to understand the Greeks (including volatility Vega, an adopted Greek!).

In Chapter 1, Passarelli imparts the Basic knowledge to the reader interested in option trading, in a mere 20 pages of crisp, crystal clear exposition of the basic option strategies and the profit and loss diagrams (the risk profile). I strongly recommend that this chapter be read at least twice to ensure that the concepts presented are well understood. I wish the authors (of well written books on Option Trading) would point out that Call Buyer and Call Seller are participating in a `Zero-Sum Game' and the Buyer's gain is the Seller's Loss and vice versa. The Zero-Sum game is evident when the Profit and Loss diagrams for Long Call (Call bought) and Short Call (Call sold) are clearly presented as mirror reflections of each other (with the mirror along the horizontal price axis).

Greek Philosophy in Chapter 2 provides a good presentation of the Greeks and a clear explanation of the Put-Call parity (or as the author learned in his early professional life: Call is a Put, Put is a Call). In the author's own words `this book is meant to be less a how-to manual than a how-come tutorial.' However, I believe the `How-to' is the harder part for the reader to grasp and the reader could benefit immensely from any guidance provided by the author in this regard. Knowledge is enlightening, but profit is elusive. How does the reader apply the `Greek Philosophy' to accomplish successful trades?

In the discussion of the Historical Volatility, the author is a little unclear regarding the normal vs. log normal distribution assumption in the Black-Scholes model. The model assumes a normal distribution of returns of the underlying security, which is same as saying the underlying security price distribution is lognormal (has a longer right tail compared to a normal distribution). As the author states: Historical Volatility is the annualized standard deviation of the daily returns. Implied Volatility is the volatility input to the pricing model that will produce a theoretical price matching the market price of the security (between the Bid and Ask prices).

While discussing implied volatility (p 58) the author describes volatility trading brilliantly as follows. In the mind of a volatility trader option prices are translated into volatility levels. The actual prices of the options themselves are much less relevant to this type of trader. If such a trader buys options when volatility is low anticipating increased volatility, profits are assured when volatility does indeed rise. The author states succinctly: A trader who thinks a stock is going to rise will buy the stock. A trader who thinks IV (implied volatility) is going to rise will buy options.

Chapter 4, Option-Specific Risk and Opportunity is worth its weight in gold for any reader interested in learning how to trade options. For example, the P&L illustration of Kim and her Long ATM call scenario shows the hockey stick region bounded by the P&L graph at trade time (44 days prior to expiration) and the kinky line showing the P&L at expiration with breakeven at $36.10. This discussion could be further enhanced if the author does not go overboard with the notion that Greeks rule the trade and stock is of little consequence. The reason we look at Greeks (instead of just stock movement) is `divide and conquer (understand)'. The Greeks are (partial) derivatives of the option theoretical price with respect to the associated parameter input in the pricing model (while the other parameters are held constant). The bottom line is this: if stock rises she wins and if it falls she loses. Pascarelli's excellent analysis familiarizes the reader with the Greeks to such an extent that the Greeks (including the adopted one, Vega) are not strangers anymore! The Greeks are good company, but ultimately you profit with the stock that you brought to the option dance. I would highly recommend that the reader re-read and absorb the six pages of the Long ATM Call before proceeding with the rest of the chapter. The page long discussion on `Finding the Right Risk' is an excellent way for the reader to weigh the question: trade stock or option?

In Chapter 6, the author makes the concept of Put-Call parity very easy to understand so that the terms `Synthetic Positions' and `Arbitrage' are nor scary creatures any more. The beginning/intermediate reader may just skim through this chapter since `market makers are among the only traders who can trade positions profitably...'.Besides, if you need a `Box' full of `Jelly Rolls' you can always visit the nearest Dunkin Donuts!

The next several chapters cover advanced topics which in the author's words `have a lot of moving parts and can be intimidating to the new comers'. I consider myself a beginning/intermediate trader and believe in understanding the concepts well before applying them in real world trade scenarios. Even if you decide to skim through or skip some of the advanced discussions, I strongly recommend that you read the four pages (314-318) on `How Market Makers Manage Delta-Neutral Positions'. Here you get a good understanding of what made Mr. Pascarelli a good market maker and now a good teacher for readers like me. Also, the final chapter on `The Trader's Thought Process' has some good advice for the reader.
Volatile Markets Made Easy: Trading Stocks and Options for Increased Profits

If you are interested in trading options and have some basic options knowledge, this book is well worth the small investment to gain insight into options trading mechanics. Most options books I have bought do not cover greeks in this amount of detail. When setting up a spread, this book gives a detailed analysis on the effect of each greek in the position. It covers many of the common types of trades.

"In my top half dozen options books worth buying".

As a long-term trader (and presenter) of options I've read mostly all of the serious options books that would be used as teaching resources. Whilst Natenberg, McMillan, Hull et al are all good there is something particularly honest about this book in it's style: the humor with which the topics are presented. The author carefully explains the greeks over dozens of pages with excellent examples then goes back over the elements of an option's price when a particular strategy is used. He derives and explains the changes as the underlying changes. His description rivals the computer-generated pay-offs. Excellent!

For a while now I have run courses in advanced retail trading (no, that's not a contradiction) but in these elite courses I teach strategies without using the words 'Put' or 'Call'. I'll just use expressions like long delta etc. as, in the end, all options trades are an arrangement of the greeks. Once that is understood positions can be conceptionalised instantly and a trader's probability of success shyrockets. Ultimately this is where this book takes us.

This book is a good introduction to trading by understanding the greeks and, yes, the author uses strategies with puts and calls.

Incidentally buying a good book is, essentially, a low long delta position with very low theta. Gamma this one to your success. But beware: the IV will keep you awake at night thinking of strategies!

This is not your average options book. You can tell it was written by a guy who did this for a living. The first few chapters are worth the price of the book alone.

It's the only book I've read that discusses when the time value (at what point during the day and week) time value comes out of an option.

We've all seen the time premium accelerating decay graph a million times. Did you know it's only valid for ATM options? This book is the only source (book, Webcast, seminar) that I've encountered that points this out. OTM options have a more linear time decay (page 41). Very valuable info for us sellers who were holding onto short positions for the expected big pay off during the week of expiration.

FYI, the author recently (5/2011) did a live educational Webcast on the CBOE's Web site on the greeks and adjusting iron condors that I found very informative. It should be in the CBOE Webcast archives (under the Education tab) by the time you read this.

After starting to trade options I got burned on some bad decisions. Typical of starting out but what really killed me was not accounting for/understanding Theta. The "intro" book I read didn't cover this. Trading Option Greeks is perfect in that it's easy enough to follow but comprehensive enough to cover the Greeks...integral to options. Looking back I now see how option trading without understanding these concepts was foolish. This book covers some complex concepts which sometimes meant reading sections twice. This said, it's worth every penny. Just buy this book.

This book contains an unbiased review of option strategies. Although more experienced traders may find nothing new, novice traders should read and understand all the information in this book.

I have read the first three chapters so far. The book is well written and is loaded with examples of detailed explinations of the principles taught. The early chapters appear to lay the foundation for more complex strtagies that are presented later in the book. For me the book is an excellent recourse.

This is an excellent book on a topic that a lot of traders, have no deep understanding. It explains the Greeks in a layman and a trader language, and provides a clear view how to trade and profit using the information, given by these indicators. I like the examples given, especially those on Delta Neutral Trading, which other books hardly mention. Of special interest, was the clear perspective of Market Makers, and how they view trading from their end. This helps a lot, us retail traders,to place our orders in a more efficient way, for faster execution. My congratulations on this book, which was long due.

I am unsure about the real value of this book or the Greeks for that matter. Sure I understand what the Greeks are, but are they really that important? Are they going to tell you something really unique. I don't think so, at least the book does not convince me that they are worthwhile as a options tool. For example I sell a naked put at 50 with 50 days to expiration. The current stock price is 55. Now the stock price goes down to 54 after one day. Of course the Greeks are going to change value in response to this to reflect a less optimistic position. So what exactly does the number change in Greeks tell me?. Ok so with the stock decline the Gamma makes Delta go a little more positive. The implied volatility increases a little as does the price of the option and so my theta increases etc -these are all intuitive things that happen in response to a stock decrease. Great so the question is are the actual numbers of the Greeks helpful in this circumstance-I don't think so? the author does not explain if there is some magic number of importance for example the delta hits this number 0.6 be aware! or theta is -0.004 this number if terrible because..... Analytically in terms of practical examples or translating the Greeks in terms of options positions this book is extremely poor-the author should have done a step-by step guide to a example trading position showing the Greeks changing over x amount of days and how the Greeks would have told us how to maintain or change our position(or entry and exit). I have traded options for a number of years and have what I consider to be good mathematical skills. In terms on analytically applying Greeks to my trading, I really do not see the point. Hopefully somebody can convince me that the numbers spit out by the Greeks are actually useful in terms of an options trading strategy! I remain optimistic as I want to believe.