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Trang 1Term of the Day - option contract
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a
specific amount of a given stock, commodity, currency, index, or debt, at a specified
price (the strike price) during a specified period of time For stock options, the amount is
usually 100 shares Each option contract has a buyer, called the holder, and a seller,
known as the writer If the option contract is exercised, the writer is responsible for
fulfilling the terms of the contract by delivering the shares to the appropriate party In the
case of a security that cannot be delivered such as an index, the contract is settled in cash
For the holder, the potential loss is limited to the price paid to acquire the option When
an option is not exercised, it expires No shares change hands and the money spent to
purchase the option is lost For the buyer, the upside is unlimited Option contracts, like
stocks, are therefore said to have an asymmetrical payoff pattern For the writer, the
potential loss is unlimited unless the contract is covered, meaning that the writer already
owns the security underlying the option Option contracts are most frequently as either
leverage or protection As leverage, options allow the holder to control equity in a limited
capacity for a fraction of what the shares would cost The difference can be invested
elsewhere until the option is exercised As protection, options can guard against price
fluctuations in the near term because they provide the right acquire the underlying stock
at a fixed price for a limited time risk is limited to the option premium (except when
writing options for a security that is not already owned) However, the costs of trading
options (including both commissions and the bid/ask spread) is higher on a percentage
basis than trading the underlying stock In addition, options are very complex and require
a great deal of observation and maintenance also called option
Subject: Two Financials Above Their Bollinger Bands
Two Financials Above Their Bollinger Bands
Commentary: Bollinger bands, one of the most popular indicators in technical analysis,
consist of three lines The first line, or center line, consists of a moving average; very often
a 21-period exponential moving average (EMA) The two other bands, or upper and lower
bands, are standard deviations of the center line For example, the most common
parameters of a Bollinger band setup are made up of a 21-period EMA, with bands at plus
(+) and minus (-) two standard deviations away
Trang 2How to Avoid Coming Up Short in Retirement
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Standard deviation is a statistical measure of volatility; empirically speaking, 95% of all data within a set will exist between 2 standard deviations of the mean (or average) That said, technical analysts use Bollinger bands to determine where a stock is trading in
relation to historical prices If a stock is trading at the high or low range of the four
standard deviation window, it can be reasonably assumed that the price will soon
reverse because it will only go above or below two standard deviations 5% of the time You can see by the example below that the majority of the time, prices will stay within the upper and lower bands
In periods of high volatility, the bands will widen, and the stock may trade above or below the upper or lower bands This is a sign that the stock has moved very far in a short period
of time Many technical analysts will look at this as a point of capitulation, and may prepare to enter a position awaiting a reversal It is important to note, though, that this may not happen right away, and it would be prudent to look for other indicators as well
Let's take a look at two companies that have experienced a large run-up in price over the past week, and are now trading above their upper Bollinger bands
Wells Fargo & Co (NYSE:WFC) - In the chart below, Wells Fargo has tried to break above and below the resistance and support set by the Bollinger bands before In the two-month period of March and April, the stock was range-bound, tagging the top and bottom
Trang 3lines twice each before trending down for almost three months The last two weeks has seen volatility increase drastically, as can be seen by the widening of the bands and a large spike in volume The stock managed to close above its upper band today, at $30.45,
indicating that the price closed high in relation to previous days Because this stock has a history of tagging its bands and reversing, traders may wish to enter a short position at this
overbought level Traders should protect themselves from a continued upward trend with a
stop-loss above today's high of $31.97
Citigroup (NYSE:C) - Citigroup also managed to close above its upper Bollinger band today at $21.12 on increased volume and volatility As you can see from its chart, the stock has not been one to range up and down off of the support and resistance set by the upper and lower bands In the period of May until mid-July, prices trended downward, tagging the bottom Bollinger band four times before coming up this past week Traders will be considering this move as either the start of an uptrend, or an increase in volatility Traders may want to place a buy stop above today's high of $22.21, and a sell-stop at the center line Should the price reverse, it can be expected that the downward movement will be large due to the increased volatility A break below the 21-period EMA will be a signal that this has happened Should the price trend upward, the buy stop at today's high will provide
a good entry point
Trang 4A Word Of Warning
As you can see in the Citigroup chart above, from mid-May until July, the price continued
to trend downward with the lower Bollinger band instead of bouncing up off of support Just because the price of a stock is touching a Bollinger band, this is no guarantee of a reversal in the short term
To learn more about this valuable technical analysis tool, be sure to check out The Basics
Of Bollinger Bands and Using Bollinger Band "Bands" To Gauge Trends