February 4th, 2009Best Book For Understanding Option Greeks
Trading stock options can be fun, addictive, and potentially profitable. People are drawn to stock options because of the potential for out-sized and highly leveraged returns. But leverage works in both directions, and trading stock options can also be fatal to account values when trading without the proper knowledge and experience.
On the surface, stock options are a simple tool to both manage risk and enhance returns. But to avoid costly mistakes, it is necessary to have a more intimate view of stock options. That view should include a thorough understanding of the option greeks (delta, gamma, theta, vega, rho), pricing models, trading strategies and adjustments, and portfolio management. All option books provide a snapshot of the option greeks, but for that intimate view of the option greeks, you will need this new book by Dan Passarelli, Trading Option Greeks.
Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit by Dan Passarelli
Like all option books, this book starts with a high level overview of stock options – opening and closing positions, expiration cycles, standardized contracts, and expiration day price modelling. But the book accelerates from there to provide a deep understanding of all of the option greeks. And there is an entire chapter devoted to the subject of volatility, something close to the hearts of options traders experienced in the financial turmoil that started in 2007. Rounding out part one of the book are discussions on put-call parity and synthetic positions, volatility-selling strategies, and the effect of dividends on option pricing.
Part 2 of the book digs right into some complex trading strategies such as vertical spreads, iron condors, butterflies, calendar spreads and diagonals. But every strategy discussed is done so with a keen view on the affected option greeks. The example on the bear spread explicitly shows the assumed values of all option greeks at the beginning of the trade. As the assumed time and stock price changes, all of the option greeks change as well. The dynamic relationship between option greeks and time and stock price is the key to really understanding and trading options profitably. Dan’s book is the best one out there that delivers on this premise, while at the same time providing details on complex option trading strategies.
Part 3 of the book provides 3 additional chapters on the subject of volatility. And it ties in the volatility discussion with advanced trading styles that few people understand and implement well. Delta neutral and gamma neutral trading are methodologies to reduce volatility in account values. It involves taking multi-sided positions and spreads that balance out the greeks. It’s easy to start a new delta neutral and gamme neutral portfolio, but managing it and keeping it neutral is a little more work. Passarelli’s book covers both sides of that difficult equation in great and easy to understand detail.
Part 4 of the book adds additional insight into more trading strategies – straddles and strangles, and other complex spreads. And it also gives general guidance on the psycological aspect of trading, and the trader’s thought process. If I had to conceive the idea for my own options trading book, this book would come very close the vision. It’s another one of those must and must own options books that belongs on every traders bookshelf.
Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit by Dan Passarelli