The option trader s guide to probability volatility and timing phần 10 pps

Strategy Reviews 523 Call Ratio Backspread Strategy: Sell lower strike calls and buy a greater number of higher strike calls (the ratio must be less than .67). Market Opportunity: Look for a market where you anticipate a sharp rise with increas- ing volatility; place as a credit or at even. Maximum Risk: Limited. [(Number of short calls × difference in strikes) × 100] – net credit (or + net debit). Maximum Profit: Unlimited to the upside above the upside breakeven. Upside Breakeven: Higher strike + [(difference in strikes × number of short calls) ÷ (number of long calls – number of short calls)] – net credit (or + net debit). Downside Breakeven: Lower strike + (net credit ÷ number of short calls). No downside breakeven exists if the trade is entered with a net debit. FIGURE C.20 Call Ratio Backspread Put Ratio Backspread Strategy: Sell higher strike puts and buy a greater number of lower strike puts (the ratio must be less than .67). Market Opportunity: Look for a market where you anticipate a sharp decline with in- creased volatility; place as a credit or at even. Maximum Risk: Limited. [(Number of short puts × difference in strikes) × 100] – net credit (or + net debit). Maximum Profit: Limited to the downside (as the underlying can only fall to zero) below the breakeven. Upside Breakeven: Higher strike – (net credit ÷ number of short puts). No upside breakeven exists if the trade is entered with a new debit. Downside Breakeven: Lower strike – [(number of short puts × difference in strikes) ÷ (number of long puts – number of short puts)] + net credit (or – net debit). FIGURE C.21 Put Ratio Backspread ccc_fontanills_appc_511-526.qxd 12/17/04 4:45 PM Page 523 524 THE OPTIONS COURSE Long Butterfly Strategy: Buy lower strike option, sell 2 higher strike options, and buy a higher strike option with the same expiration date (all calls or all puts). Market Opportunity: Look for a range-bound market that is expected to stay between the breakeven points. Maximum Risk: Limited to the net debit paid. Maximum Profit: Limited. (Difference between strikes – net debit) × 100. Profit exists between breakevens. Upside Breakeven: Highest strike – net debit. Downside Breakeven: Lowest strike + net debit. FIGURE C.22 Long Butterfly Spread Long Condor Strategy: Buy lower strike option, sell higher strike option, sell an even higher strike option, and buy an even higher strike option with the same expiration date (all calls or all puts). Market Opportunity: Look for a range- bound market that is expected to stay be- tween the breakeven points. Maximum Risk: Limited to the net debit paid. Maximum Profit: Limited. (Difference between strikes – net debit) × 100. Profit exists between breakevens. Upside Breakeven: Highest strike – net debit. Downside Breakeven: Lowest strike + net debit. FIGURE C.23 Long Condor Spread ccc_fontanills_appc_511-526.qxd 12/17/04 4:45 PM Page 524 Strategy Reviews 525 Long Iron Butterfly Strategy: Buy a higher strike call, sell a lower strike call, sell a higher strike put, and buy a lower strike put with the same expiration date. Market Opportunity: Look for a range-bound market that you anticipate to stay between the breakeven points. Maximum Risk: Limited. (Difference between strikes × 100) – net credit. Maximum Profit: Limited to the net credit received. Profit occurs between the breakevens. Upside Breakeven: Strike price of middle short call + net credit. Downside Breakeven: Strike price of middle short put – net credit. FIGURE C.24 Long Iron Butterfly Spread Calendar Spread Strategy: Sell a short-term option and buy a long-term option using at-the-money options with as small a net debit as possible (use all calls or all puts). Calls can be used for a more bullish bias and puts can be used for a more bearish bias. Market Opportunity: Look for a range- bound market that is expected to stay be- tween the breakeven points for an extended period of time. Maximum Risk: Limited to the net debit paid. Maximum Profit: Limited. Use software for accurate calculation. Breakeven: Use options analysis software for accurate calculation. FIGURE C.25 Calendar Spread ccc_fontanills_appc_511-526.qxd 12/17/04 4:45 PM Page 525 526 THE OPTIONS COURSE Diagonal Spread Strategy: Sell a short-term option and buy a long-term option with different strikes and as small a net debit as possible (use all calls or all puts). •A bullish diagonal spread employs a long call with a distant expiration and a lower strike price, along with a short call with a closer expiration date and higher strike price. •A bearish diagonal spread combines a long put with a distant expi- ration date and a higher strike price along with a short put with a closer expiration date and lower strike price. Market Opportunity: Look for a range-bound market that is expected to stay between the breakeven points for an extended period of time. Maximum Risk: Limited to the net debit paid. Maximum Profit: Limited. Use software for accurate calculation. Breakevens: Use options analysis software for accurate calculation. FIGURE C.26 Diagonal Spread Collar Spread Strategy: Buy (or already own) 100 shares of stock, buy an ATM put, and sell an OTM call. Try to offset the cost of the put with the pre- mium from the short call. Market Opportunity: Protect a stock hold- ing from a sharp drop for a specific period of time and still participate in a modest increase in the stock price. Maximum Risk: Initial stock price – put strike + net debit (or – net credit). Maximum Profit: (Call strike – initial stock price) – net debit (or + net credit). Breakeven: Initial stock price + [(put premium – call premium) ÷ number of shares]. FIGURE C.27 Collar Spread ccc_fontanills_appc_511-526.qxd 12/17/04 4:45 PM Page 526 APPENDIX D Success Guides FIVE MINUTE SUCCESS FORMULA: A QUICK METHOD FOR FINDING PROMISING TRADES 1. Look for stocks that are up (+) or down (–) at least 30 percent in value for the day. • You are looking for good momentum trades (where fear and greed are really driving the market). 2. From these, choose those with volume greater than 300,000 shares for the day. • Greater than 1 million shares a day is better; 10 million is best. • Look for volume spikes (market moves generally begin or end on volume spikes). • Call your broker twice a day to check on potential movers (call a half hour after the market opens and 15 minutes prior to market close). 3. Try to find out/ask your broker why each of these stocks is moving. • Usually movement is based on really good news or really bad news, including: • Earnings releases. • Earnings upgrades/downgrades. • New product announcements. 527 ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 527 • New agency approvals. • Stock splits. • Merger announcements. • Friendly or hostile takeovers. • Litigation. • Accounting irregularities. • No news (can mean insider buying/selling). • Good reasons can indicate big moves. • Takeovers that are done deals produce little movement and are generally not good plays. 4. Determine which of these stocks has options. • Forget those stocks that don’t have any options. • Consider only those stocks that have liquid options available. • If none exist, try again tomorrow. 5. Choose a low cost/low risk strategy. • A good goal is to find trades that cost less than $100 for each position. • Cheapest play for an up move? Buy calls, bull call spreads, or call ratio backspreads. • Cheapest play for an down move? Buy puts, bear put spreads, or put ratio backspreads. • Cheapest play for a neutral move? Straddles, strangles, or long syn- thetic straddles. • Calculate the maximum risk, maximum reward, and upside and downside breakevens for each possible position to find the trade with the best probability of profitability. 6. Find out/ask your broker how many block trades (institu- tional trades of more than 5,000 shares in size) have traded in these stocks. • Choose only those stocks that have 10 or more block trades on a volume of greater than 300,000 shares for the day. 7. Find out/ask your broker how many blocks are trading on the upticks or downticks (i.e., how many institutions are buying or selling). • Blocks trading on upticks—stock is moving higher. • Blocks trading on downticks—stock is moving lower. 528 THE OPTIONS COURSE ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 528 8. Select your entry strategy. • Put the trade on in the last 15 minutes before the market closes (provides the best fills and prices). • Buy options with at least 90 days till expiration (six months or more is even better). • Consider multiple positions so that you can eventually create a free trade. • If you miss the first big move, try to position yourself for the rebound (wait for one “ugly” day, one reversal from the top or bottom, and then place the trade). 9. Select your exit strategy. • General Rule: You should exit the trade 30 days prior to expira- tion, unless the profit on the trade depends on a short option ex- piring OTM. • If you hold multiple positions, sell off half when they double in value to produce a free trade. Ride the free trade to maximize profits. • In an up move, if the stock breaks 20 percent in price from a new high, then close out the position. • In a down move, if the stock breaks 20 percent in price from a new low, then close out the position. RULES FOR TRADING SUCCESS 1. Use a reliable and knowledgeable broker who offers a balance between low commission rates and fast and accurate fills. 2. Research all aspects of a trade using your favorite techniques— fundamental and technical analysis—as well as sentiment and broad market analysis, and scheduled and breaking news. 3. Know what you are trying to do: Define your goals. Select your time frame and availability. Create a risk graph for your position. 4. Look for trades with a reward/risk ratio that is greater than 2 to 1. 5. Buy low volatility and sell high volatility. 6. Do not leg into or out of a spread. Place all sides of the trade at the same time as a single order 7. Write down all orders and read them to your broker to make sure you call your orders in correctly. Success Guides 529 ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 529 8. To get the price you want, the best time to place your order is at the end of the day about 15 minutes before the close. 9. Risk no more than 5 percent of your trading account on any one trade. 10. Risk no more than 50 percent of your total trading account at any one time. 11. Keep a record of all your trades and review them periodically. 12. Review all your trades every six months, especially the ones you lost money on; identify bad trading habits/patterns, and try not to repeat them! 530 THE OPTIONS COURSE TABLE D.1 Market Acronyms AAF—asset allocation fund AAGR—average annual growth rate AAR—average annual return ABS—automated bond system AD Line—advance/decline line ADR—American Depositary Receipt ADX—Average Directional Movement Index AGI—adjusted gross income AMEX—American Stock Exchange AMT—Alternative Minimum Tax AON—all or none APR—annual percentage rate APV—adjusted present value APY—annual percentage yield AR—accounts receivable ARM—adjustable rate mortgage ASX—Australian Stock Exchange ATM—at-the-money ATP—arbitrage trading program ATR—average true range BIC—bank investment contract BIS—Bank for International Settlements BOP—balance of payments BOT—balance of trade BP—basis point CAPEX—capital expenditure CAPM—capital asset pricing model CAPS—convertible adjustable preferred stock CBOE—Chicago Board Options Exchange CBOT—Chicago Board of Trade CCE—cash and cash equivalents CCI—Commodity Channel Index CD—certificate of deposit CEO—chief executive officer CFA—chartered financial analyst CFO—chief financial officer CFP—certified financial planner CFPS—cash flow per share CFTC—Commodity Futures Trading Commission COGS—cost of goods sold COO—chief operating officer CPA—certified public accountant CPI—consumer price index CPM—cost per thousand CSI—Commodity Selection Index CUSIP—Committee on Uniform Securities Identification Procedures DAT—direct-access trading DD—due diligence DI—disposable income DJIA—Dow Jones Industrial Average DJTA—Dow Jones Transportation Average DJUA—Dow Jones Utility Average DMI—Directional Movement Index DPSP—deferred profit sharing plan DRIP—dividend reinvestment plan EAFE—European, Australasian, Far East Equity Index EBIT—earnings before interest and taxes EBITDA—earnings before interest, taxes, depreciation, and amortization ECN—electronic communication network EDGAR—Electronic Data Gathering Analysis and Retrieval EMA—exponential moving average ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 530 Success Guides 531 TABLE D.1 (Continued) (continues) EPS—earnings per share ERISA—Employee Retirement Income Security Act ESO—employee stock option ETF—exchange-traded fund FAD—funds available for distribution FASB—Financial Accounting Standards Board FDIC—Federal Deposit Insurance Corporation FFO—funds from operations FIFO—first in, first out FHLMC—Federal Home Loan Mortgage Corporation (Freddie Mac) FNMA—Federal National Mortgage Association (Fannie Mae) FOMC—Federal Open Market Committee FRA—forward-rate agreement FRB—Federal Reserve Board FRS—Federal Reserve System GAAP—generally accepted accounting principles GARP—growth at a reasonable price GDP—gross domestic product GIC—guaranteed investment certificate GNMA—Government National Mortgage Association (Ginnie Mae) GO—general obligation bond GSE—government-sponsored enterprise GTC—good till canceled order HOLDRS—Holding Company Depositary Receipts HTML—hypertext markup language IFCI—International Finance Corporation Investable Index IPO—initial public offering IRA—individual retirement account IRR—internal rate of return ISO—International Organization for Standardization ITM—in-the-money IV—implied volatility JSE—Johannesburg Stock Exchange KCBT—Kansas City Board of Trade LBO—leveraged buyout LEAPS—long-term equity anticipation securities LIFO—last in, first out LLC—limited liability company LP—limited partnership MA—moving average MACD—moving average convergence/divergence MEM—maximum entropy method MER—management expense ratio MIPS—Monthly Income Preferred Securities MIT—market if touched MPT—modern portfolio theory MSCI—Morgan Stanley Capital International NASD—National Association of Securities Dealers NASDAQ—National Association of Securities Dealers Automated Quotations NAV—net asset value NMS—normal market size NOI—net operating income NPV—net present value NSO—nonqualified stock options NYSE—New York Stock Exchange OBV—on-balance volume OI—open interest OID—original issue discount OPEC—Organization of Petroleum Exporting Countries OTC—over-the-counter OTM—out-of-the-money PDF—portable document format P/E—price-earnings ratio PEG—price/earnings to growth POP—public offering price PPI—producer price index QQQ—ticker symbol for Nasdaq 100 Trust R&D—research and development REIT—real estate investment trust RIC—return on invested capital ROA—return on assets ROE—return on equity ROI—return on investment RPI—Retail Price Index RSI—Relative Strength Index SAI—Statement of Additional Information SAR—stop and reverse ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 531 532 THE OPTIONS COURSE TABLE D.1 (Continued) SEC—Securities and Exchange Commission SEMI—Semiconductor Equipment and Materials International SEP—simplified employee pension SIC—Standard Industrial Classification SIPC—Securities Investor Protection Corporation SMA—simple moving average SOES—small order execution system SOX—Philadelphia Semiconductor Index S&P—Standard & Poor’s SPDRs—Standard & Poor’s Depositary Receipts (ETF) SSR—sum of squared residuals SV—statistical volatility SWIFT—Society for Worldwide Interbank Financial Telecommunication TPO—time price opportunity TRIN—trading Index TSE—Toronto Stock Exchange UN—United Nations VIX—CBOE Market Volatility Index VPT—volume price trend VXN—Nasdaq Volatility Index WSE—Winnipeg Commodity Exchange XD—ex-dividend XR—ex-rights XY—ex-warrants YTD—year-to-date YTM—yield to maturity ccc_fontanills_appd_527-532.qxd 12/17/04 4:45 PM Page 532 [...]... Commission (SEC) Commission created by Congress to regulate the securities markets and protect investors 552 GLOSSARY security A trading instrument such as a stock, bond, and short-term investment selling short The practice of borrowing a stock, future, or option from a broker and selling it because the investor forecasts that the price of a stock is going down Same as short selling sentiment analysis... performs excessive trading in a customer s account to increase commissions This is deemed illegal by the SEC and exchange rules, since the registered representative is not seeking improved returns and does not have the customer s interests in mind class of options Option contracts of the same type (call or put), style, and underlying security clearinghouse An institution established separately from the. .. intent to exercise The long position exercises and the short position is assigned The long position has the right to exercise; if the trader chooses to exercise, the short position must oblige at -the- money (ATM) When the strike price of an option is the same as the current price of the underlying instrument at -the- opening order An order that specifies execution at the opening of the market or else it is... one party to sell a stock at a given price and on a specified date They are similar to existing futures contracts for gold, crude oil, bonds, and stock indexes Unlike actual stock, there is no ownership or voting rights contained in an SSF slippage The cost of the trade that is lost due to commissions and because of the spread between the bid price and ask price Traders try to keep slippage to a minimum,... sell stock that is good until the trader cancels it go short To sell securities, options, or futures gross domestic product (GDP) The total value of goods and services produced in a country during one year It includes consumption, government purchases, investments, and exports minus imports guts A strangle where the call and the put are in -the- money hammering the market The intense selling of stocks by... brought together to buy and sell stocks stock split An increase in the number of a stock s shares that results in decreasing the par value of each share stops Buy stops are orders that are placed at a specified price over the current price of the market Sell stops are orders that are placed with a specified price below the current price straddle A position consisting of a long (or short) ATM call and a... indicator An indicator based on the observation that as prices increase, closing prices tend to accumulate ever closer to the highs for the period Its goal is to identify where the price closes relative to the high and low for the day stock A share of a company s stock translates into ownership of part of the company stock exchange or stock market An organized marketplace where buyers and sellers are... long stock A short put and a long call synthetic short call A short put and a short stock or future synthetic short put A short call and a long stock or future synthetic short stock A short call and a long put synthetic straddle Futures and options combined to create a delta neutral trade synthetic underlying A long (or short) call together with a short (or long) put 554 GLOSSARY Both options have the. .. indicating the time for an immediate sale spread (1) The difference between the bid and the ask prices of a security Glossary 553 (2) A trading strategy in which a trader offsets the purchase of one trading unit against another Standard & Poor s Corporation (S& P) A company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S& P indexes stochastic... year) resulting in either a profit or a loss index A group of stocks that can be traded as one portfolio, such as the S& P 500 Broad-based indexes cover a wide range of industries and companies, and narrowbased indexes cover stocks in one industry or economic sector index options Call options and put options on indexes of stocks are designed to reflect and fluctuate with market conditions Index options allow . position s in- tent to exercise. The long position exercises and the short position is assigned. The long position has the right to exercise; if the trader chooses to exercise, the short position. (Continued) SEC—Securities and Exchange Commission SEMI—Semiconductor Equipment and Materials International SEP—simplified employee pension SIC—Standard Industrial Classification SIPC—Securities Investor. increase commissions. This is deemed illegal by the SEC and exchange rules, since the registered representative is not seeking improved re- turns and does not have the customer s interests in