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Trading Options Greeks


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Table of Contents

Foreword xiii Preface xv Acknowledgments xix Part I: The Basics of Option Greeks Chapter 1 The Basics 3 Contractual Rights and Obligations 3 ETFs, Indexes, and HOLDRs 9 Strategies and At-Expiration Diagrams 10 Chapter 2 Greek Philosophy 23 Price vs. Value: How Traders Use Option-Pricing Models 24 Delta 25 Gamma 32 Theta 38 Vega 42 Rho 46 Where to Find Option Greeks 51 Caveats with Regard to Online Greeks 52 Thinking Greek 53 Notes 53 Chapter 3 Understanding Volatility 55 Historical Volatility 55 Implied Volatility 58 Expected Volatility 61 Implied Volatility and Direction 67 Calculating Volatility Data 68 Volatility Skew 69 Note 72 Chapter 4 Option-Specific Risk and Opportunity 73 Long ATM Call 73 Long OTM Call 79 Long ITM Call 83 Long ATM Put 84 Finding the Right Risk 89 It's All About Volatility 89 Options and the Fair Game 93 Note 94 Chapter 5 An Introduction to Volatility-Selling Strategies 95 Profit Potential 95 Chapter 6 Put-Call Parity and Synthetics 113 Put-Call Parity Essentials 113 American-Exercise Options 119 Synthetic Stock 120 Synthetic Stock Strategies 124 Theoretical Value and the Interest Rate 132 A Call Is a Put 133 Note 133 Chapter 7 Rho 135 Rho and Interest Rates 135 Rho and Time 137 Considering Rho When Planning Trades 138 Trading Rho 142 Notes 143 Chapter 8 Dividends and Option Pricing 145 Dividend Basics 145 Dividends and Option Pricing 147 Dividends and Early Exercise 148 Inputting Dividend Data into the Pricing Model 152 Part II: Spreads Chapter 9 Vertical Spreads 163 Vertical Spreads 164 Verticals and Volatility 178 The Interrelations of Credit Spreads and Debit Spreads 180 Building a Box 181 Verticals and Beyond 183 Note 183 Chapter 10 Wing Spreads 185 Condors and Butterflies 185 Taking Flight 185 Keys to Success 194 Greeks and Wing Spreads 195 Directional Butterflies 195 Constructing Trades to Maximize Profit 198 The Retail Trader versus the Pro 205 Notes 207 Chapter 11 Calendar and Diagonal Spreads 209 Calendar Spreads 209 Trading Volatility Term Structure 218 Diagonals 228 The Strength of the Calendar 233 Note 233 Part III: Volatility Chapter 12 Delta-Neutral Trading: Trading Implied Volatility 237 Direction Neutral versus Direction Indifferent 237 Delta Neutral 238 Trading Implied Volatility 241 Conclusions 247 Chapter 13 Delta-Neutral Trading: Trading Realized Volatility 253 Gamma Scalping 254 Art and Science 258 Gamma, Theta, and Volatility 259 Gamma Hedging 259 Smileys and Frowns 265 Chapter 14 Studying Volatility Charts 269 Nine Volatility Chart Patterns 269 Note 282 Part IV: Advanced Option Trading Chapter 15 Straddles and Strangles 285 Long Straddle 285 Short Straddle 293 Synthetic Straddles 298 Long Strangle 299 Short Strangle 302 Note 306 Chapter 16 Ratio Spreads and Complex Spreads 307 Ratio Spreads 307 How Market Makers Manage Delta-Neutral Positions 316 Trading Skew 321 When Delta Neutral Isn't Direction Indifferent 322 Managing Multiple-Class Risk 323 Chapter 17 Putting the Greeks into Action 325 Trading Option Greeks 326 Choosing between Strategies 326 Managing Trades 329 The HAPI: The Hope and Pray Index 329 Adjusting 330 About the Author 333 Index 335

About the Author

DAN PASSARELLI is the founder and CEO of Market Taker Mentoring, a leading options education firm that provides personalized, one-on-one mentoring for option traders and online classes. He began his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker and also traded agricultural options and futures on the floor of the Chicago Board of Trade (now part of the CME Group). In 2005, Passarelli joined CBOE's Options Institute and began teaching both basic and advanced trading concepts to retail traders, brokers, institutional traders, financial planners and advisors, money managers, and market makers. He has appeared on FOX Business News and other business television programs and contributes to financial publications such as TheStreet.com, SFO.com, and the CBOE's blog. Passarelli is the author of the first edition of Trading Option Greeks and The Market Taker's Edge.

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