Monday, February 1, 2010

Passarelli, Trading Option Greeks

I think we profit enormously from looking at alternative approaches to a problem. Take long division, for instance. I learned how to do long division in an American school. Then I met someone who had learned arithmetic in a Hungarian school and did long division entirely differently. Or look at the technique at Math Mojo.

Options, more than most trading instruments, require the trader to be mentally flexible, to be able to assess a scenario from multiple perspectives, to know how to accomplish a single goal in a multiplicity of ways. For starters, option trades can be described in terms of a set of theoretical “moving parts,” the Greeks. The Greeks don’t cause a change in the price of the option, that’s the job of supply and demand. Rather, they are alternative ways to understand option pricing and changes in pricing. The Greeks also offer an elegant set of tools to help manage both trade and portfolio risk.

Dan Passarelli covers familiar ground in Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit (Bloomberg Press, 2008) but often with a fresh slant. (How could I not smile at a chapter entitled “Greek Philosophy”?) His prose is sometimes vivid: “While choosing closer strikes can lead to higher premiums [in an iron condor], the range can be so constricting that it asphyxiates the possibility of profit.” (p. 191) Moreover, Passarelli is a strategic thinker who urges a careful weighing of the data: “Trading is both cerebral and statistical in nature. It’s about gaining a statistically better chance of success by making rational decisions.” (p. 223)

Passarelli’s book is thorough, covering the basics of option Greeks in the first half (spanning about 150 pages) of the book and then moving on to spreads and volatility trading. It’s both a good text and a worthy reference book. It will have a place in my library.

1 comment:

  1. Brenda,

    Just found your blog by googling "MathMojo" (my blog). What a happy surprise to find you referencing it. I am flattered. You made my day.

    I put up a post about it at Math Mojo and Financial Insights, with a shout-out to your blog.

    All the best,

    Brian (a.k.a. Professor Homunculus at )