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Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, 2nd Edition


Trading Option Greeks

Second Edition

In option trading, there are an infinite number of uses for the "greeks" (delta, gamma, theta, vega, and rho), which measure changes in an option's value. From finding trades to managing and adjusting them, the greeks are truly a trader's best resource—but only if you know how to properly apply them.

Nobody understands option greeks better than author Dan Passarelli. And now, with the Second Edition of Trading Option Greeks, this seasoned options expert provides you with the tools you'll need to effectively implement them in your everyday trading endeavors.

Written from Passarelli's unique perspective, traders of all levels can benefit from this reliable guide. Page by page, it skillfully covers some of the most essential elements of this discipline, including various types of spreads, put-call parity and synthetic options, trading volatility, and advanced option trading issues. Along the way, it makes use of new charts and examples, and discusses how the proper application of the greeks can lead to more accurate pricing and trading as well as alert you to a range of other opportunities.

Having a comprehensive understanding of the greeks is essential to long-term trading success. This updated edition of Trading Option Greeks illustrates how you can apply the concepts contained here to real-world trading scenarios and get the most out of your time in today's dynamic market.

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,, and the CBOE's blog. Passarelli is the author of the first edition of Trading Option Greeks and The Market Taker's Edge.

Foreword xiii

Preface xv

Acknowledgments xix


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


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


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


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