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Trading Options Greeks

by Dan Passarelli

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This excellent read by Market Taker founder Dan Passarelli explains the so-called options “Greeks”, a series of data points that help reveal how an option’s price is likely to be affected by changes in the underlying’s price, volatility, time decay, and interest rates. Although these forecasts are not guaranteed, the Greeks may provide traders a way to estimate option changes due to market factors. Comprehensive knowledge of the Greeks can help traders to avoid common pitfalls and increase profit potential.

Part One, "The Basics of Option Greeks", consists of eight chapters outlining the major Greeks – delta, gamma, theta, vega and rho - and the role each plays in option pricing. Packed with real-world examples throughout, this section shows how each Greek fluctuates based on differences in time to expiration, volatility, and the price of the underlying. Passarelli shows the primary importance of understanding delta in particular. He also explains how many professional traders use the Greeks in option selling strategies that are neutral in terms of market direction.

Part Two concentrates on spreads, a perennial favorite of more experienced option traders for the way they allow traders better control over risk. The section starts with an in-depth treatment of vertical spreads in several varieties, as well as the interrelationship of credit and debit spreads. The discussion then moves to the more complex wing spreads involving multiple options and strikes, as well as iron condors, calendar and diagonal spreads. Passarelli’s unique approach will help you see how each Greeks influences spread pricing, and which Greek matters most in determining your spread’s pricing moves. These multi-leg positions involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

The final half of Trading Options Greeks shows you how one can trade both realized and implied volatility. This more advanced discussion helps traders advance as their experience grows over time, even though the forecast implied volatility provides may not be correct. Covering “direction-neutral” and “direction indifferent” trades, these more advanced techniques help traders succeed even when markets are moving sideways (or not at all). Passarelli’s combination of clear analysis, real-world examples, and intelligent pointers makes this a useful read for beginning and advanced options traders alike.

Option strategies entail risk and are not appropriate for everyone. Before trading options, you should review Characteristics and Risks of Standardized Options. Some option strategies involve multiple positions simultaneously. These multi-leg strategies incur additional commissions and may invoke special treatment when preparing your taxes. If you are unsure about how a particular strategy may impact your financial picture, please consult a tax professional before trading.

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