In his 2011 book entitled The Market Taker’s Edge: Insider Strategies from the Options Trading Floor, author Dan Passarelli “offers lessons from the trading pits from the perspective of a professional trader turned options evangelist for the benefit of both aspiring professional traders and nonprofessional traders alike.” According to the book’s foreword: “What the trading industry has needed is a book that brings professional-trading experience and real-world know-how to the self-directed, individual trader; that is what Dan Passarelli’s book delivers.” Some notable points from the book are:
From Chapter 1, “My First Year in the Options Business” (Pages 2,13): “Mastery of the options game is about learning to exploit the nuances of a game of chance, not predicting the future. …Abstract thought is supremely necessary for an options trader, specifically in relation to the volatility component of option trading.”
From Chapter 3, “Spreading Risk” (Page 45): “Good option traders fit the trade to the outlook; amateurs fit the outlook to the trade.”
From Chapter 5, “The Zen of Trading” (Page 64): “Experienced traders…think like a casino; they don’t think like a gambler.”
From Chapter 8, “Using What You Know About Market Makers: Part 2” (Pages 108,110): “The strategy for middling the market [enticing the market maker to trade favorably off the bid or offer/ask] is to enter the order in such a way that one can assume the market maker is getting some edge. …When the bid and offer sizes are unbalanced (i.e., there’s a significantly greater number of contracts on one than the other), it sometimes indicates market makers’ preference as to whether they would rather buy or sell midmarket.”
From Chapter 9, “Using What You Know About Market Makers: Part 3” (Page 120): “Try to avoid trading opens and closes. It’s always best to trade in high liquidity.”
From Chapter 17, “The Symbiotic Relationship of Makers and Takers” (Pages 210-212): Market takers make a living selling options (or option positions) at a higher option premium than that at which they buy. Market makers make a living by selling at a higher volatility than that at which they buy. …Market makers typically know down to the tenth of a volatility point exactly what the volatility of the bid and the offer are as well as their theoretical value. …The volatility market is inefficient because of the number of market participants who…are not trading volatility.”
From Chapter 18, “Playing the Numbers” (Page 219): “…because volatility tends to revert to its mean, when volatility is above or below its mean–especially significantly–traders should try to figure out why.”
Some reservations regarding the advice in the book are:
- The most specific examples of edges discussed in the book are those of market makers. Readers may be disappointed in the lack of specificity regarding edges for market takers. The book mostly addresses how equity options work, not statistical analysis of the profitability and reliability of option trading strategies.
- Readers may find the author’s ambivalence about prediction frustrating. For example, from Page 216: “Analysis of volume and open interest is much like technical analysis using a stock chart and indicators. It doesn’t predict the future. It takes available data and helps its analyzer better understand what has been going on, so he or she can make more informed decisions about the future.” What is the difference between making “more informed decisions about the future” and prediction?
- As noted in the book’s disclaimer, “examples may not include commissions, fees, margin, interest, taxes, or other transaction costs. These types of transaction costs will impact the outcome of all…trades…”
In summary, option traders may find the “casino” perspective of The Market Taker’s Edge useful as background on option market operations, but the book does not offer statistical analysis of strategies and tactics accessible to market takers.
Frequently Asked Questions
What is a market taker in options trading?
A market taker in options trading is a trader who buys or sells at the prices quoted by market makers rather than posting those quotes. According to The Market Taker's Edge (2011) by Dan Passarelli, market takers make a living selling options or option positions at a higher premium than the premium at which they buy, while market makers profit by selling at a higher volatility than the volatility at which they buy.
Does The Market Taker's Edge give individual traders a proven options trading edge?
No, The Market Taker's Edge does not provide a statistically demonstrated edge for individual options traders. The book's most specific examples of edges are those of market makers, and it offers little specificity on edges for market takers. It is useful mainly as background on option market operations from a trading-floor, casino-style perspective.
How can options traders try to get better prices by middling the market?
Middling the market means entering an order so that the market maker can assume it is getting some edge, enticing it to trade favorably off the bid or offer. The Market Taker's Edge also suggests that significantly unbalanced bid and offer sizes can sometimes indicate whether market makers prefer to buy or sell at midmarket. The book advises trading in high liquidity and avoiding opens and closes, but it presents these as practical guidelines rather than statistically tested methods.
How is options trading different from gambling, and how do market makers think about volatility?
Options trading, as described in The Market Taker's Edge, differs from gambling in that experienced traders think like a casino rather than like a gambler, exploiting the nuances of a game of chance rather than predicting the future. Market makers typically know the volatility of the bid and the offer down to a tenth of a volatility point, along with theoretical values. The author argues the volatility market is inefficient because many participants are not trading volatility, and that volatility tends to revert to its mean.
What are the limitations of The Market Taker's Edge as a guide to options trading?
The Market Taker's Edge has several limitations: it mostly explains how equity options work rather than statistically analyzing the profitability and reliability of option trading strategies. It focuses on market maker edges, gives little specificity on market taker edges, and is ambivalent about prediction, for example describing volume and open interest analysis as helping make "more informed decisions about the future" without predicting it. Its examples may also exclude commissions, fees, margin, interest, taxes, and other transaction costs that affect trade outcomes.