Trading Option Greeks, by Dan Passarelli - Book Summary & Review

Trading Options Greeks, by Dan Passarelli

My Book Summary & Review

The Greeks are measurements of options risk. Most options traders understand at least the basics of the options Greeks such as delta, vega, and theta. But if you have a much better understanding of the Greeks, you can trade around a specific one while basically neutralizing the risk in the others. That’s the beauty of trading options. You can trade volatility only, or you can gamma scalp, or even trade time to collect income while watching the clock run out on an option.

Trading Option Greeks explains how to break down and trade certain components of option prices. Traders can single out which of the option Greeks they want to trade around, and Passarelli teaches us how to do this.

“Ultimately, mastering options is not about mastering specific strategies.

It's about having a thorough enough understanding of the instrument to be flexible enough to tailor a position around a forecast. It's about minimizing the unwanted risks and optimizing exposure to the intended risks.”Dan Passarelli, Trading Option Greeks

It’s a pretty straightforward book without too many complex equations, which I really liked. It’s similar to other options trading books in that it goes over the basics and then all the different strategies such as calendars, strangles, verticals, etc… But it looks at all these setups from the point of view of each of the first order option Greeks.

If you really want to get a solid understanding of the Greeks, this is probably the best book for that. Most options trading books have sections near the beginning that go over them, but Trading Option Greeks is solely dedicated to the topic throughout.

Gamma Scalping & Gamma Hedging

My favorite part of this book was the section on gamma scalping. Passarelli walks us through a 7-day example of someone gamma scalping a delta-neutral position daily. It’s a very insightful example. He shows this example both from the point of view of a long gamma trader as well as a short gamma trader.

This example is a great explanation of how Theta is the daily cost of running a gamma-scalping position.

"There exists a trade-off between gamma and theta. Long option have positive gamma and negative theta. Short options have negative gamma and positive theta. Positions with greater gamma, whether positive or negative, tend to have greater theta values, negative or positive. Lower absolute values for gamma tend to go hand in hand with lower absolute values for theta. The gamma-theta relationship is the most important consideration with many types of strategies. Gamma-theta is often the measurement with the greatest influence on the bottom line."Dan Passarelli, Trading Option Greeks

Here’s a graph showing the effects of time on the P&L of a delta neutral long gamma position. Your profit goes up as the price moves either up or down, but the time decay is constantly pulling the profit line down. 

Volatility Charts

This was another excellent section of the book. Passarelli shows 9 different examples of volatility charts showing the behaviors of realized volatility against implied volatility. For each different chart he walks through what the likely cause of the chart pattern could be and how a delta neutral trader could have traded that volatility setup. I learned a lot about not just how to read a volatility chart, but how to dissect what the chart is really showing.

My Thoughts on Trading Option Greeks

This was a really good book, probably the best book I’ve read that focuses on understanding the Greeks in options trading, which is so important as you scale up your trading book. I’m considering adding this book to my all-time best options trading books list. With the classics on this list, such as Option Volatility & Pricing by Sheldon Natenberg and Options as a Strategic Investment by Larry McMillan, a book needs to have something special to make it on this list. Since options Greeks are so important to understand as you size up your options account, I think this place deserves a spot among the best options books because of its hyper focus on the Greeks.

If you’ve made it this far, I recommend checking out my book review of Trading Options as a Professional, by Jim Bittman. It’s one of my favorite options books, and is mainly focused on how market makers trade in the options market and the effects this has on options prices and flows.