457 Tools of the Trade Microsoft Corp Daily 2.19.2004 30 29 28 27 26 25 24 23 2003 Mar 2004 Apr May Jun Jul Aug Sep Oct Nov Dec Jan 22 Feb 250000 200000 150000 100000 50000 VOL(in 1000s) ©2004 Pinnacor Inc FIGURE 18.2 High-Low-Close Bar Chart (Source: Optionetics © 2004) control However, when the bears seize a stock, the chartist is looking to see if the stock is closing near the low price of the day For example, on the MSFT chart, during the decline in mid-October, the stock was finishing most trading sessions near the lows of the day, which was a sign that bears were firmly in control of MSFT during that time The third type of chart that has become popular among traders is the Japanese candlestick chart A candlestick is composed of two parts known as the body and the shadows The body represents the range between the opening and closing prices The shadow is the thin vertical line that can project outward above or below the body and represents the full price range for the stock, index, or futures contract As a result, if there were no prices outside the range of the open to close, then there would be no shadows If the market closed above the opening price, the body is often colored green or left blank (white) If the price closes below the opening price, the body is colored black or red The colors will vary from one 458 THE OPTIONS COURSE charting software package to the next, but green and red seem to be the most common This color-coding of the body makes it easy to immediately see if the market closed above or below the opening price for the given time period An OHLC bar gives you the same information, but the colorcoding of the candlestick bar can be a bit more convenient Figure 18.3 provides an example of a six-month candlestick chart using Microsoft rendered in black, white, and grey CHARTS, VOLUME, AND VOLATILITY A visual look at a chart can also give important information regarding a stock’s volatility and, for that reason, it is extremely important to option traders Since the length of each bar in an OHLC chart is determined by the high and low prices of the day, short bars suggest that the stock is Daily 2.19.2004 Microsoft Corp 30 29 28 27 26 25 2003 Aug 2004 Sep Oct Nov Dec Jan 24 Feb 250000 200000 150000 100000 50000 VOL(in 1000s) ©2004 Pinnacor Inc FIGURE 18.3 Six-Month Candlestick Chart (Source: Optionetics © 2004) Tools of the Trade 459 exhibiting low volatility In that case, the trading ranges between the daily high and low prices are small On the other hand, when the bars are longer, it means that there is a bigger difference between the highs and lows of the day Therefore, longer bars suggest greater volatility Most charts will also plot volume underneath the price area Volume refers to the total activity in the underlying asset during the course of a day, week, month, and so on For a stock, the volume refers to the number of shares traded To some traders, volume is the single most important indicator used in technical analysis When a stock is rising and volume increases, it suggests that buyers are actively bidding the price higher and shorts are running for cover Strong volume during an advance is considered a bullish sign On the other hand, when volume swells during a decline, bears are driving prices lower, bulls are in pain, and the action of the stock is considered poor Therefore, studying volume gives the analyst a better sense of whether the bulls or bears are in control of the stock Volume is the total number of shares associated with a specific stock or market Also known as turnover, it reflects the number of shares bought or sold relative to a specific security For instance, if you purchase 100 shares of Microsoft, the volume of that trade is equal to 100 Volume is considered during daily time periods For instance, on Wednesday, February 18, 2004, total volume on the Nasdaq Stock Market equaled 1,777,995,664 shares Therefore, daily volume is generally defined as the number of shares traded in one day and can be considered for one individual stock, an options contract, or an entire market On a chart, volume is plotted as a histogram such as can be seen in Figures 18.2 and 18.3 Tall bars suggest heavy volume while short bars indicate periods of low trading volume COMPUTER SOFTWARE When I started trading, the charts we had available to us were newspapers or other print publications Today, however, charting software makes the process extremely fast and easy While there are a large number of great packages out there, we will just mention the three that our students seem to use most often: The Optionetics Platinum site, ProfitSource and Advanced GET from eSignal Optionetics Platinum site is a web-based computer software program designed for options traders Access is available for an annual fee Once inside the site, traders can perform a host of options related studies including creating hypothetical trades, plotting volatility charts, back-testing strategies, viewing historical prices and implied volatility levels, monitoring put/call 460 THE OPTIONS COURSE ratios, initiating trade searches based on specific parameters, and plotting risk graphs Many of the case study examples in this book were created using Optionetics.com Platinum ProfitSource is a market analysis program that combines a fully featured technical analysis suite with a comprehensive set of special market direction tools such as Elliott wave, trend filters, and gap filters These tools enable the user to adopt a rule-oriented approach to trading In addition, it has the ability to scan for potentially profitable opportunities such as Wave and Wave trades, a state-of-the-art “Walk Through Mode” for learning how to apply concepts such as Elliott wave, alerts functionality for price, indicator and Elliott wave parameters, and a complete portfolio management package ProfitSource can be used in multiple markets including stocks, indexes, futures, and foreign exchange and gives the user access to international markets Advanced GET from eSignal has also gained popularity among options traders It is a graphical charting package that gives traders access to a full set of technical analysis tools, specialty tools and indicators based on Elliott waves and Gann theory, and also one of the most complete sets of standard studies available in the market today Many options traders use these three software packages to enhance their ability to confidently use options strategies PUTTING IT ALL TOGETHER In order to get a better understanding of how traders combine trading tools to create a promising trade, let’s work through a simple example The first thing we need to employ is a method of finding stocks that are expected to make a strong directional move to the upside or the downside In this case, we are looking for an explosive move higher There are several tools on Platinum that help us find stocks, but for this example we will use the Candlestick I tool This tool searches for stocks based on candlestick formations (There is a wide array of different candlestick formations that go well beyond the scope of this book Traders interested in the topic are encouraged to visit Optionetics.com and look through the article archives for a complete discussion of the various patterns.) In this case, we chose the Bullish Patterns search using stocks that were trading above $12.50 and that had volume above 300,000 Once a list of stocks appears, we need to look at various price charts and implied volatilities To keep things simple, suppose we find a bullish stock and decide to buy a long call When buying a call, we want the implied volatility to be below the average IV for at least six months Remember, when IV is low, the Tools of the Trade 461 options are cheaper After eyeballing the charts, we found that Lehman Brothers (LEH) looked like a strong candidate Figure 18.4 is a chart of LEH on May 20, 2003 showing the candlestick pattern known as Red Candle + Doji that flagged the stock Not only did the stock form a bullish pattern known as a Harami, but it also bounced off support at its ascending trend line Once we find a stock that looks promising, we want to check IV to make sure it isn’t too high Figure 18.5 is an IV chart of the stock on May 20, 2003, the day it came up on the Candlestick I search We can see by looking at this chart that IV was definitely low on a historic basis This is important because the higher the IV, the more the option will cost IV also acts like elastic, stretching to extremes, but ultimately coming back to its mean If we buy a call and IV increases, it raises the price of the option Now that we have a stock picked out that fits our criteria, we can enter the data into Platinum to view the risk graph Before we actually enter the data into the Create Trade screen, we need to first decide which option strike and expiration month we want to test Of course, after this is entered into the graph, we can view it to see if the trade makes sense given our outlook and resources Since we are buying an option, we want to give the trade enough time FIGURE 18.4 Daily Chart of LEH (Source: Optionetics Platinum © 2004) 462 THE OPTIONS COURSE 40 30 ATM Implied Volatility 50 – 30 day = unk 30 – 60 day = 27.19% 60 – 90 day = unk >90 day = 30.73% Currently: 12/16 01/15 02/13 03/14 2003–05–20 04/11 FIGURE 18.5 IV Chart for LEH (Source: Optionetics Platinum © 2004) to work in our favor Mainly, we don’t want to hold long options that expire in less than 30 days because time erosion picks up the last month of an option’s life The stock closed the session at $66.04 and since we don’t normally want to use too far out-of-the-money options, let’s look at the October 70 call We choose the October expiry month because June and July are too close and there aren’t any August or September options on May 20 to choose from After entering the data into Platinum, we get the information shown in Figure 18.6 from the program This screen is just part of what Platinum tells us about the trade, but there is plenty to see from just this information First, we see that the model price is between our bid-ask spread, so we know that option isn’t overpriced Second, we can see our breakeven point at expiration It is important to remember that the breakeven point here is figured as of expiration Usually, we will see a profit well before this point This screen also gives us the Greeks and the specific option information The next thing we want to look at is the risk graph (Figure 18.7) This graph gives us a visual of what the profit or loss would be given a move in the stock and using different time frames Obviously, if the stock moves up in the short term, we will see higher profits than if it takes three months to occur Our initial debit was $340 in this trade for buying one long October 70 call By looking at the chart, we can see that 463 Tools of the Trade Lehman Brothers Holdings, Inc (LEH) Option Trade Log Date Position 2003-05-20 Bought Num OptSym Expire Strike Type Entry Bid/Ask Model IV % Vol 01 Days LEHIN OCT03 70 Call 3.4 3.2/3.4 3.314 28.1 2569 150 Entry DB Profit Max Profit $340.00 $–20.00 Unlimited Max Risk Delta (Shares) $–340.00 41.8 Gamma 3.2692 Vega Theta $16.46 $–1.53 Downside Breakeven Upside Breakeven Max Profit/Max Risk Max Profit/Debit 73.40 73.40 Unlimited% Unlimited% FIGURE 18.6 Trade Data for LEH Call (Source: Optionetics Platinum © 2004) 66.00 open 66.69 high 65.07 low 66.04 close +0.25 Today: 150 days left 100 days left 50 days left Expiry: days left 70 65 60 35 40 45 50 55 Stock Price 75 80 85 90 95 the stock would need to move to approximately $72 for our call option to double in price Another tool we can use to assess the trade is the implied volatility chart The IV chart shown in Figure 18.8 details the profits we would achieve on a move in IV alone This graph assumes the stock stays at the same price We can see that a rise in IV can affect the trade drastically, and that is why we want IV in our favor Before we enter the trade, we should have already decided on our exit points The price we decide to sell at should be based on our outlook and money management Remember that it’s always important to have a set exit point before entering a trade to take the emotion out of it An oft-used 04/07 04/17 Currently: 2003–05–20 04/30 05/12 –1,000 1,000 2,000 FIGURE 18.7 Risk Graph for LEH Call (Source: Optionetics Platinum © 2004) 464 THE OPTIONS COURSE Today: 150 days left 100 days left 50 days left Expiry: days left 30 ATM Implied Volatility – 30 day = unk 30 – 60 day = 27.19% 60 – 90 day = unk >90 day = 30.73% 04/07 04/17 Currently: 04/30 2003–05–20 05/12 –400 –300 –200 –100 100 200 FIGURE 18.8 IV Chart for LEH Trade (Source: Optionetics Platinum © 2004) exit strategy for a long call is to sell if the option loses half its value to the downside or when the option doubles in price to the upside Of course, we can always set stops once our price target is achieved to let our profits run, but the last thing we want to is see a profitable trade turn into a loser This trade did indeed work out well, with LEH shares moving up following this bullish sign As originally expected, the stock went higher and our option was at a double on June with the stock trading near $72.50 At this point, either the option could be closed or the trader could set a stop to make sure that if the stock were to move lower, the option would be sold before the profits were lost Keep in mind that buying long calls is a great way to use leverage, but it is also a high-risk one When the strategist identifies an explosive situation like in the Lehman Brothers example, he or she might want to consider other trades like bull call spreads, call ratio backspreads, or some of the other bullish strategies discussed in the earlier chapters of this book CONCLUSION Not all traders use charts or computers In fact, 20 years ago much of this information was either not available or extremely expensive So, traders not need to spend a lot of money on research and analytical tools A Tools of the Trade 465 high-speed Internet connection, a brokerage firm that specializes in options trading, and access to research can produce enough information to trade successfully Hopefully, this chapter has helped to expand your knowledge regarding the tools that are available and how a trader uses information to create a trade The example toward the end of the chapter explained how to find an explosive opportunity and how to analyze the situation to find the best options contract for the given strategy Not all successful traders use the same approach Through time, you will undoubtedly develop your own tools and methods for picking winning trades Hopefully, the chapters in this book are helping you along the way CHAPTER 19 Final Summary T his book has reviewed a variety of strategies that can be applied in various markets It has avoided trying to forecast market direction or analyzing charts with detailed market patterns, and has not referenced highly technical data or difficult-to-interpret fundamental information Although these trading tools may have their place in your trading arsenal, they are exhaustively studied in many other publications The purpose of this book is to focus on options trading strategies and to demonstrate how professionals trade without overanalyzing the markets When traders get bogged down in trying to process too much information, the result is what I often call “analysis paralysis.” I have tried to make the information contained in this book as straightforward as possible Learning to trade can be quite difficult and perplexing Each strategy has an infinite number of possibilities when applied to the markets Each trade is unique, and your task as a trader is to learn from your achievements and your mistakes There are no absolutes in trading However, I believe that you will be able to build a solid trading foundation based on the delta neutral strategies explored in this book This approach to trading comes from years of experience from my trading team and my own endeavors To become successful, it’s up to you to take a systematic approach to becoming a confident market player However, you must be willing to spend the time and energy it takes to study the markets if you want to learn how to trade successfully In late October of 1997, the Dow Jones Industrial Average dropped 554 points or percent By most people’s standards, this constitutes a 466 Trading Resources 501 The Wall Street Journal www.wsj.com The Wall Street Journal requires a small fee for its online subscription You’ll find all the bells and whistles on this comprehensive site that the Journal is famous for worldwide There is also an updated job and career search section with technical, professional, and management positions listed Zacks www.zacks.com Zacks is a very popular financial site that offers a variety of free and subscription services It provides access to research produced by more than 3,000 analysts and approximately 240 brokerage firms It also features a vast array of brokerage and equity research, screening, and advisory tools Check out the daily “Bull of the Day” and “Bear of the Day.” Analysis Tools iVolatility.com www.ivolatility.com An options-related web site that offers subscribers the ability to rank and search options based on different variables This site offers daily implied volatilities and catalogs this information in a powerful database Traders can utilize this database to scan for a variety of opportunities based on historical and implied volatility and to evaluate overbought/oversold options VectorVest www.vectorvest.com The VectorVest site provides services that integrate fundamental and technical analysis to sort, screen, rank, graph, and analyze more than 6,500 stocks, industry groups, and industry sectors for price, value, safety, timing, and more If you’re not ready for a subscription, you may want to take advantage of their free in-depth stock analysis service— just click on the “Free Stock Analysis” box on the upper left-hand corner of the home page screen Informative Sites Briefing www.briefing.com Briefing’s site has live market commentary, stock analysis, quotes and charts, sector ratings, and an economic calendar Other premium services are available 502 THE OPTIONS COURSE Daytraders www.daytraders.com A day trader’s paradise, full of news and resources Delayed quotes are supplied by Quote.com The trading strategies section has some wonderful commonsense information for all traders ICLUBCentral www.iclub.com Serves as an online clearinghouse for all the communicative and administrative needs of investment clubs including products and services targeted to both new and established investment clubs such as the National Association of Investors Corporation (NAIC) It recently acquired Doug Gerlach’s Investorama, a wonderfully comprehensive directory for investors Investor Guide www.investorguide.com Investor Guide is a tremendous resource for personal investing on the Web In addition to quotes and news, it has more than 1,000 responses to investment questions This excellent, comprehensive site focuses on investing, personal finance, and education It also runs the Hedgehog Investment Competition Have you ever wanted to create and manage your own $1 million hedge fund? Here’s your chance Investor Home www.investorhome.com The Investor Home page is a treasure trove of links, quotes, charts, research, profiles, and earnings estimates This site had won 12 honors and awards the last time we checked TheStreet www.thestreet.com Controversial analyst Jim Cramer hosts this extremely popular and influential site TheStreet.com’s engaging articles and perceptive market analyses no doubt help to shape the mass psychology of the marketplace World Wide Financial Network www.wwfn.com The World Wide Financial Network has an excellent variety of investor resources, including indexes, charts and quotes, extensive research tools, feature articles, and access to online brokers Overall, a great site Yahoo! finance.yahoo.com The Yahoo! Finance site has a wealth of information including top news headlines, market overviews, stock and index quotes, economic indicators, and a host of excellent articles on national and international business APPENDIX B Important Charts and Tables TABLE B.1 Option Expiration Month Codes Jan Calls Puts Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec A M B N C O D P E Q F R G S H T I U J V K W L X TABLE B.2 Strike Price Codes A B C D E F G H I 105 10 110 15 115 20 120 25 125 30 130 35 135 40 140 45 145 J K L M N O P Q R 50 150 55 155 60 160 65 165 70 170 75 175 80 180 85 185 90 190 S T U V W X Y Z 95 195 100 200 7.50 37.50 12.50 42.50 17.50 47.50 22.50 52.50 27.50 57.50 32.50 62.50 503 504 THE OPTIONS COURSE TABLE B.3 Option Delta Value Calls Puts Long At-the-Money Short Long Short +50 –50 –50 +50 +60 to +65 +70 to +75 +80 to +85 –60 to –65 –70 to –75 –80 to –85 –60 to –65 –70 to –75 –80 to –85 +60 to +65 +70 to +75 +80 to +85 +35 to +40 +25 to +30 +15 to +20 –35 to –40 –25 to –30 –15 to –20 –35 to –40 –25 to –30 –15 to –20 +35 to +40 +25 to +30 +15 to +20 In-the-Money Strike Strikes Strikes Out-of-the-Money Strike Strikes Strikes Important Charts and Tables 505 TABLE B.4 Option Quote Terms Data Definition Last The last price that the option traded for at the exchange For delayed quotes, this price may not reflect the actual price of the option at the time you view the quote Open The price of the first transaction of the current trading day Change The amount the last sale differs from the previous trading day’s closing price % Change The percentage the price has changed since the previous day’s closing price High The high price for the current trading day Low The low price for the current trading day Bid The bid is the highest price a prospective buyer (floor trader) is prepared to pay for a specified time for a trading unit of a specified security If there is a high demand for the underlying asset, the prices are bid up to a higher level Off-floor traders buy at the ask price Ask The ask is the lowest price acceptable to a prospective seller (floor trader) of the same security A low demand for a stock translates to the market being offered down to the lowest price at which a person is willing to sell Offfloor traders sell at the bid price Together, the bid and ask prices constitute a quotation or quote and the difference between the two prices is the bid-ask spread The bid and asked dynamic is common to all stocks and options 52-Week High The highest price the stock traded at in the past 52-week period 52-Week Low The lowest price the stock traded at in the past 52-week period Earnings per Share The bottom line (net pretax profit) divided by the number of shares outstanding Volume The total number of shares traded that day Shares Outstanding The total number of shares the company has issued Market Cap Shares outstanding multiplied by the closing stock price P/E Ratio Stock price divided by the earnings per share; P = price/ E = earnings per share Exchange This indicates where a company lists, or registers its shares (e.g., New York Stock Exchange) 506 THE OPTIONS COURSE TABLE B.5 Exchange-Traded Funds Exchange-Traded Fund Type Exchange-Traded Fund Description Market Representation DIAMONDS Diamonds Trust Series Dow Jones Industrial Average FITRS Fixed Income Exchange Traded Securities Various Treasuries HOLDRS Holding Company Depositary Receipts Very narrow industry sectors iShares Index Shares Various countries and market sectors QUBEs Nasdaq 100 Tracking Stock (QQQ) Nasdaq 100 Index Spiders Standard & Poor’s Depositary Receipts (SPDRS) Various Standard & Poor’s indexes StreetTracks State Street Global Advisor ETFs Various Dow Jones style indexes VIPERs Vanguard Index Participation Receipts Several Vanguard index funds Important Charts and Tables 507 TABLE B.6 Time Line of the Stock Market Year Key Event 1791 Brokers meet at an outdoor marketplace in Philadelphia to buy and sell securities issued by the new U.S government 1792 Merchants who used to meet under a buttonwood tree on Wall Street in New York City organize America’s first formal exchange with membership requirements, giving birth to the New York Stock Exchange (NYSE) 1829 Trading volume reaches 50,000 shares a day 1836 Trading moves inside, but the fixtures over the trading posts are still modeled after streetlights 1867 Edward Calahan invents the stock ticker, displaying current market prices with each company represented by a symbol based on Morse code—a tradition that continues today 1871 Continuous trading replaces the old roll call system, which gave investors just two chances to trade during the day; one in the morning and one in the afternoon Brokers are positioned by company in fixed places—the start of modern-day trading and specialists’ trading posts 1882 Charles Dow and Edward Jones start Dow Jones & Company and are the first to create an index measuring the activity of the New York Stock Exchange The original 11 companies in this first Dow Jones Index were Western Union, Pacific Mail Steamship, and nine railroads 1886 Trading volume hits million shares per day 1896 Dow Jones begins publishing a daily paper: The Wall Street Journal It also creates four averages to measure market performance as a whole These averages include the Dow Jones Industrial Average (DJIA), the Transportation Average, the Utility Average, and the Composite Average 1920–1929 After World War I, the stock market sees substantial gains during a long-term bull market 1929 On October 29, 1929, the rally of the 1920s ends when the stock market crashes, falling more than 12.8 percent in one day After the largest stock market rally in history, the market crashed 33 points from 263 to 230 1930–1944 Securities prices languish as the deepening global depression is followed by the outbreak of World War II In the last years of World War II, the American stock markets finally begin to recuperate (continues) 508 THE OPTIONS COURSE TABLE B.6 (Continued) Year Key Event 1945–1972 After the end of the war, the stock market rallies to new highs This rally continues, with some intermissions, until the early 1970s In 1972 the Dow Jones Industrial Average rises to 1,000 before falling back Volume increases from an average of million shares a day to about 15 million shares a day 1954 The Ford Foundation sells $657 million worth of Ford Motor Company stock, the largest secondary offering of stock up to that time 1957 Prior to 1957, the S&P Corporation calculated a weekly 480-stock average and a daily 90-stock average Spurred by advancing technology, S&P decides to calculate the S&P 500 Index on an hourly basis S&P believes that this index, which includes more stocks and a different mathematical formula than the Dow Jones Industrial Average, better reflects market movement 1964 The National Association of Securities Dealers (NASD) is reorganized to consolidate, regulate, and automate the over-the-counter (OTC) securities market where trades from around the world are made via computer and telephone 1971 The National Association of Securities Dealers Automated Quotation (NASDAQ) system officially opens, displaying quotes for more than 2,500 securities 1972–1982 During this period, known as the bear market of the 1970s, the stock market retreats This occurs as the oil crisis, inflation, and unemployment stifle the U.S and world economies 1973 The Chicago Board of Trade forms the first listed options exchange, the Chicago Board Options Exchange (CBOE) This exchange is quickly copied by other exchanges around the world 1987 The stock market crashes in October, sending the Dow nose-diving 22.6 percent The DJIA drops 508 points from 2,246 to 1,738 Program trading restrictions and automatic trading curbs are instituted in an attempt to prevent future crashes 1994 Online trading is launched over the Internet 1995 Andrew D Klein launches the first initial public offering (IPO) over the Internet for his microbrewery, Spring Street Brewing Company 2000 Dow Jones hits-all time high of 11,722 on January 14, 2000 Nasdaq peaks at 5,048 on March 10, 2000 509 Important Charts and Tables TABLE B.7 Popular Indexes Symbol Index $XAL Airline Index $ISSA AMEX Advance/Decline Issues $XAX AMEX Composite Index $XMI AMEX Major Market Index $XOI AMEX Oil & Gas $AVOL AMEX Volume $BTK Biotechnology Index $MNX CBOE Mini-NDX Index $DDX Disk Drive Index $COMP Dow Jones Composite Index $DJC Dow Jones Composite Index $INDU Dow Jones Industrial Average $DJI Dow Jones Industrial Index $DJT Dow Jones Transportation Index $DJU Dow Jones Utilities Index $FCHI France Cac-40 Index $FTSE FTSE-100 Index $GDAX Germany DAX Index $GNX Goldman Sachs Index $GSO GSTI Software Index $JPN Japan Index $VIX Market Volatility Index $MEX Mexico Index $CMR Morgan Stanley Consumer Index $CYC Morgan Stanley Cyclical Index $MSH Morgan Stanley High Tech Index $ISSQ Nasdaq Advance/Decline Issues $COMPQ Nasdaq Composite $IXCO NASDAQ High Tech Index $NDX Nasdaq 100 Index $QQV Nasdaq QQQ Volatility Index $VXN Nasdaq Volatility Index $QVOL Nasdaq Volume $XNG Natural Gas Index $ISSU NYSE Advance/Decline Issues Symbol Index $NYA $TRIN $XOI $DRG $BKX $BMX NYSE Composite Index NYSE Short-Term Trade Index Oil Index Pharmaceutical Index PHLX Bank Sector Index PHLX Computer Box Maker Sector PHLX Gold and Silver Index PHLX Oil Service Sector Index PHLX Semiconductor Sector Index PHLX TheStreet.com Internet PSE High Technology Index Russell 1000 Russell 2000 Russell 3000 S&P 100 Index S&P 500 Index S&P Barra Growth Index S&P Barra Value Index S&P Chemical Index S&P Insurance Index S&P MidCap 400 Index S&P Retail Index Securities Broker Dealer Index Semiconductor Index Toronto 35 Index TSE 100 Index Utility Sector Index Value Line Index (Geometric) Wilshire Composite Index 5-Year T-Note Index 10-Year T-Note Index 13-Week T-Bill Index 30-Year T-Bond Index $XAU $OSX $SOX $DOT $PSE $RUI $RUT $RUA $OEX $SPX $SGX $SVX $CEX $IUX $MID $RLX $XBD $SOX $TSE-TC $TOP-TC $UTY $XVG $WSX $FVX $TNX $IRX $TYX APPENDIX C Strategy Reviews TABLE C.1 Quick Option Strategy Reference Guide Strategy Trade Market Outlook Profit Potential Risk Potential Time Decay Effects Long call B1-C Bullish Unlimited Limited Detrimental Short call S1-C Bearish Limited Unlimited Helpful Covered call B100-U Limited Limited Helpful S1-C Slightly bullish to neutral Long put B1-P Bearish Limited Limited Detrimental Short put S1-P Bullish Limited Limited Helpful Covered put S100-U Slightly bearish to neutral Limited Unlimited Helpful Bull call spread B1-LC S1-HC Bullish Limited Limited Mixed Bear put spread S1-LP B1-HP Bearish Limited Limited Mixed Bull put spread B1-LP S1-HP Moderately bullish Limited Limited Mixed Bear call spread S1-LC BI-HC Moderately bearish Limited Limited Mixed Long straddle B1-ATM-C B1-ATM-P Volatile Unlimited Limited Detrimental Long strangle B1-OTM-C B1-OTM-P Volatile Unlimited Limited Detrimental (Continued) 511 512 THE OPTIONS COURSE TABLE C.1 (Continued) Market Outlook Profit Potential Risk Potential Time Decay Effects B100-U B2-ATM-P Volatile Unlimited Limited Detrimental Long synthetic straddle with calls S100-U B2-ATM-C Volatile Unlimited Limited Detrimental Ratio call spread B1-LC S2-HC Bearish/ stable Limited Unlimited Mixed Ratio put spread B1-HP S2-LP Bullish/ stable Limited Limited Mixed Call ratio backspread S1-LC B2-HC Very bullish Unlimited Limited Mixed Put ratio backspread S1-HP B2-LP Very bearish Limited Limited Mixed Long butterfly B1-LC/P S2-HC/P B1-HP/P Stable Limited Limited Helpful Long condor B1-LC/P S1-HC/P S1-HC/P B1-HC/P Stable Limited Limited Helpful Long iron butterfly S1-ATM-C B1-OTM-C S1-ATM-P B1-OTM-P Stable Limited Limited Helpful Calendar spread B1-LT-C/P S1-ST-C/P Same Strikes Stable Limited Limited Helpful Diagonal spread B1-LT-C/P S1-ST-C/P Different Strikes Stable Limited Limited Helpful Collar spread B100-U B1-ATM-P S1-OTM-C Volatile Limited Limited Helpful Strategy Trade Long synthetic straddle with puts B = Buy/S = Sell = Contract 100 = 100 shares U = Underlying stock C = Call option P = Put option HC = Higher strike call LC = Lower strike call HP = Higher strike put LP = Lower strike put ATM = At-the-money OTM = Out-of-the-money ITM = In-the-money LT = Long-term ST = Short-term 513 Strategy Reviews DETAILED STRATEGY REVIEWS Long Stock Strategy: Buy shares of stock Market Opportunity: Look for a bullish market where a rise in the price of the stock is anticipated Maximum Risk: Limited to the price of the stock as it falls to zero Maximum Profit: Unlimited as the stock price rises above the initial entry price FIGURE C.1 Long Stock Breakeven: Price of the stock at initiation Short Stock Strategy: Sell shares of stock Market Opportunity: Look for a bearish market where a fall in the price of the stock is anticipated Maximum Risk: Unlimited as the stock price rises Maximum Profit: Limited to the full price of the stock shares as they fall to zero Breakeven: Price of the stock at initiation FIGURE C.2 Short Stock 514 THE OPTIONS COURSE Long Call Strategy: Buy a call option Market Opportunity: Look for a bullish market where a rise above the breakeven is anticipated Maximum Risk: Limited to the amount paid for the call Maximum Profit: Unlimited as the price of the underlying instrument rises above the breakeven FIGURE C.3 Long Call Breakeven: Call strike + call premium Short Call Strategy: Sell a call option Market Opportunity: Look for a bearish or stable market where you anticipate a fall in the price of the underlying below the breakeven Maximum Risk: Unlimited as the stock price rises above the breakeven Maximum Profit: Limited to the credit received from the call option premium Breakeven: Call strike + call premium FIGURE C.4 Short Call Strategy Reviews 515 Long Put Strategy: Buy a put option Market Opportunity: Look for a bearish market where you anticipate a fall in the price of the underlying below the breakeven Maximum Risk: Limited to the price paid for the put premium Maximum Profit: Limited as the stock price falls below the breakeven to zero FIGURE C.5 Long Put Breakeven: Put strike – put premium Short Put Strategy: Sell a put option Market Opportunity: Look for a bullish or stable market where a rise above the breakeven is anticipated Maximum Risk: Limited as the stock price falls below the breakeven until reaching a price of zero Maximum Profit: Limited to the credit received from the put premium Breakeven: Put strike – put premium FIGURE C.6 Short Put ... Tools of the Trade 4 59 exhibiting low volatility In that case, the trading ranges between the daily high and low prices are small On the other hand, when the bars are longer, it means that there... professional trading career in 198 1 as a market 478 THE OPTIONS COURSE maker in equity options After seven years on the trading floor, she left the exchange to expand her trading program in the futures... Change The amount the last sale differs from the previous trading day’s closing price % Change The percentage the price has changed since the previous day’s closing price High The high price for the