Trading Options Greeks – How Time, Volatility, and Other Pricing Factors Drive Profits : [PDF Download]

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“Price can be observed rather easily from any source that offers option quotes (web sites, your broker, quote vendors, and so on). Value is calculated by a pricing model. But, in practice, the theoretical value is really not an output at all.

It is already known: the market determines it. The trader rectifies price and value by setting the theoretical value to fall between the bid and the offer of the option by adjusting the inputs to the model. Professional traders often refer to the theoretical value as the fair value of the option.

At this point, please note the absence of the mathematical formula for the Black-Scholes model (or any other pricing model, for that matter). Although the foundation of trading option greeks is mathematical, this book will keep the math to a minimum—which is still quite a bit. The focus of this book is on practical applications, not academic theory.

It’s about learning to drive the car, not mastering its engineering. The trader has an equation with six inputs equaling one known output. What good is this equation? An option-pricing model helps a trader understand how market forces affect the value of an option. Five of the six inputs are dynamic; the only constant is the strike price of the option in question.

If the price of the option changes, it’s because one or more of the five variable inputs has changed. These variables are independent of each other, but they can change in harmony, having either a cumulative or net effect on the option’s value.

An option trader needs to be concerned with the relationship of these variables (price, time, volatility, interest). This multidimensional view of asset pricing is unique to option traders.”

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