Volatility Index (QQV), 276–277volatility skews, 272–273volume, 186–187NASDAQ Composite Index ($COMPQ),7–8, 44, 47, 182, 189, 249NASDAQ QQQ, 27NASDAQ Stock Market, 29, 45, 49, 182Natenburg, S., 260Natural gas/natural gas prices, 150,235–236Natural straddles, 297Near-the-money options, 53, 103Neill, Humphrey B., 199Net credit, 103, 119Net debit, 88–90, 106–107, 121,130–131Neutral calendar spread, 84Neutral strategies/trades, 23, 274New Concepts in Technical TradingSystems (Wilder), 164, 263–264New Finance: The Case AgainstEfficient Markets, The (Haugen),134–135New high–new low index (NHNL),193–194New York Stock Exchange (NYSE):characteristics of, 1, 3–4, 49, 209Composite Index ($NYA), 182FXI, 24
market internals, 189–191, 195program trading, 152–153Tick Index ($TICK), 153–154trading volume, 45, 182–185web site, 25Nikkei Index, 2Normal distribution, 265Offsetting trades, 88, 95–96, 101, 104,106, 108Off-the-floor trading, xixO’Higgins, Michael, 159–160Oil:impact of, 149, 221, 228indexes, 16service industry, 81trades, 233–238Oil and gas index, 17Oil Service HOLDRs (OIH), 22, 27, 81,236–237Omaha, Bill, 194On-balance volume, 374–375OPEC (Organization of PetroleumExporting Countries), 150Open end fund, 135Open interest, 68, 217, 352Open market opportunities, 148Open-high-low-close (OHLC), 28, 258,262Opening price, 38, 65Opening transactions, 57, 76–77Optimism, market impact, 1, 29–30Optionetics, xi, xiv–xviii, 50, 177–179Optionetics.com, 37, 67Optionetics Platinum software, 69–70,253, 298, 300, 314Options, see specific types of optionsassignment, 50, 57–59, 78, 81, 84, 87,90, 101, 103–104, 110cash settlement and, 63–65chains, 67–69, 71, 352characteristics of, 50–51, 71contract, standard characteristics of,7, 56–57defined, 55exchange-traded funds (ETFs) and,137
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416Options (Continued)exercising, 53–54, 56, 63–65, 76, 87,95, 104expiration, 56, 69–70, 76–81, 84–87,89, 95–97, 109Greeks, 262history of, 47–50index, unique characteristics of,59–60index futures compared with,65–66long, 87, 131mechanics, 51–52most active, by volume, 62–63naked, see Naked optionspremiums, 261–262, 270price determinants, 52–56pricing models, 260–262quotes, 51, 67–69, 71ratio formulas, 339risk graphs, 68–71, 89–90, 102strategy reviews, 389–401strike price, 67, 76, 80–81, 83–85,88–89, 94, 98, 100–104, 107–108,270symbols, 67–69trading levels, 90–92U.S. exchanges, 49weeklys, 65Options Clearing Corporation (OCC),48, 57, 202–203Options Course, The (Fontanills), xviii,37, 50, 73Options Industry Council (OIC),48–49Options on S&P 500 ($SPX), xi,166Option Volatility and Pricing(Natenburg), 260Oracle (ORCL), 7Orders, types of, 349–350Order placement, option chains and,68Out-of-the-money (OTM) options,52–53, 59, 76–77, 80, 99, 114, 116,119–120, 122, 130, 274, 290–291,346
INDEX
Outperforming stocks, 253Overbought conditions, 201Overreactive markets, 135Ownership, 22–23, 49, 56, 74, 293Pacific Stock Exchange (PCX), stockoptions, 48Painting the tape, 189Pairs trading, 252–254Panic selling/panic sell-off, 163, 199,211Paper trading:benefits of, 181, 345–346, 355–356example of, 346–348Partial hedges, 282–283Passive investing, 135–136Passive mutual funds, 313Pengrowth Energy Trust (PGH),234–235Perfect hedges, 282–283Personal income, 147Pessimism, 31Pfizer (PFE), 4, 161Pharmaceuticals, 13, 222–223Philadelphia Stock Exchange (PHLX):Bank Sector Index ($BKX), 2, 14 ,108–109, 241–243Gold and Silver Mining Index($XAU), 14, 25, 63–64, 112–115,239–240Oil Service Index ($OSX), 233–234,236–238, 314sector indexes, 14Semiconductor Index ($SOX), 14, 17,227, 258stock options, 48Utility Sector Index ($UTY), 244Pin risk, 104Point and figure (PnF):charts, 229exit, 167–169Political elections, economic impact of,268Portfolio, generally:diversification, 221, 310–311,314–316insurance, 152
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417
Index
management, 136ranges, 316tilt, 333–334, 341PowerPacks, 233–234PowerShares:exchange-traded funds (ETFs),198Dynamic Small Cap GrowthPortfolio (PWT), 197–198Dynamic Small Cap Value Portfolio(PWY), 198Precious metals, 25–26, 239. See alsospecific precious metalsPremium(s):call options, 78, 85covered puts, 104–105long calls, 75options, generally, 52, 55put options, 94–95, 97, 99, 102–103short puts, 101straddles, 112strangles, 114Presidential election, 213, 215Price, generally:declines, 77, 83rallies, 82, 113swings, 262Price/earnings ratio (P/E), low, effectof, 196, 200Price-to-book ratios, 196–197,318Price-to-cash flow ratios, 196Price-to-dividend effect, 196Price-to-earnings (P/E) ratio, 135, 141,200Price-to-sales ratio, 197Price-weighted average, 329Price-weighted index, 332Price-weighted methodology, 328Private investors, 78Proactive adjustments, 289Probability, applications of, 171Producer Price Index (PPI), 144,146Profitability, 123, 175, 295, 340Profitable trades, percent, 171Program trading, 151–153
Protective puts, 92, 96–99, 110,275Publicly traded companies, 49Public participation phase, 248Pullbacks, 32, 39, 183Pure Momentum System, 250–252,316Put options:bear put spread, 106–108bull put spread, 101–104calendar spread, 108–110cash secured, 99characteristics of, 46, 50–51, 71,84–85, 92, 161, 217–218, 289,339collar spread, 127–128covered put, 104–105defined, 51historical perspectives, 48–49LEAPS, 49long puts, 93–97, 99, 101–103,109–111, 275, 391option chains, 66–68premiums, 55price determinants, 52protective puts, 96–99short positions, 74short puts, 96, 99–101skew, 274trading levels, 92volatility and, 282–284Put ratio backspreads, 123, 125–126,241, 243, 273, 275, 397Put-to-call ratio:all-exchange, 202equity-only, 201–202implications of, 200–201index, 202–205Qs, see NASDAQ 100 Index Trust(QQQQ)Qualcomm (QCOM), 328Quote(s):cash settlement and, 64–65mutual funds, 137options, 67–69, 71real-time, 68
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418Quote(s) (Continued)significance of, 37–39, 51, 66–68, 350vendors, 38Rallies, volume and, 183Random Walk Down Wall Street(Malkiel), 134Random walk theory, 134Range bar chart, 38Range-bound markets, 119Range-bound trading, 82, 87Rate indexes, 18Rate of change (ROC) indicator,171–175, 323, 385–386Ratio backspreads:calculation of, 126call, 275characteristics of, 123–127, 143put, 241, 243, 275volatility, 274Ratio spread, 127Real estate:bubble, 241sector, 240–241Real estate investment trusts (REITs),240–241RealNetworks (RNWK), 23Recession, 149Relative strength (RS), 317–318Relative strength index (RSI),381–382Retail:indexes, 16investors, 151sales, 144, 146sector, 222Retirement accounts, stock mutualfunds in, 30Retracement, 34Reversals, 273–274, 302Reversal trends, 249Reversing the trade, 319Reversion to the mean, 282Reward-to-risk ratio, 346Risk/reward analysis;calendar spreads, 86risk graphs, 68–71
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INDEX
Risk curve, 35Risk graphs:bear call spread, 79–80bear put spread, 106–107bull call spread, 89–90, 232bull put spread, 102, 237call calendar spread, 86–87call options, 82–83call ratio backspread, 124characteristics of, 35–36, 69–71collar spread, 128covered puts, 105long butterfly spread, 122–123long calls, 75, 98–99long puts, 94, 98–99long straddle, 112–113protective put, 96–97put ratio backspread, 126, 243short puts, 100short straddles, 118strangles, 114Risk management:assignment, 57–59diversification, 310–311, 314–316investments, 311–313overview of, 310–311, 325planning, importance of, 319–320pockets of strength, uncovering,316–318significance of, 175, 309, 325, 355trade management example,320–325trading and, 318–319trading levels, 90–91Risk managers, success factors, xiRisk mitigation, 101, 110Risk profile, 77–78, 300. See also Riskgraphs; Risk managementRisk/reward analysis, volatility and,274Risk/reward profile, 128, 307Risk/reward ratio:bear put spread, 107bull call spread, 103covered puts, 105–106iron butterfly spread, 119–120long butterfly spread, 122
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Index
put calendar spread, 108–110short straddle, 118straddles, 112, 115, 118strangle, 115Risk tolerance, 131Robustness, 176ROC-ADX system, 172–176, 187Roll, 98Rolling down, 98Rolling out, 98, 129Rolling up, 98Russell, Frank, 317Russell 2000 (IWM):adjustments, 288risk management, 317Small Cap Index ($RUT), 14, 196,328S&P Depositary Receipts (SPY):active investing illustration,136–138adjustments, 282, 288, 295–297,300–306characteristics of, 12, 19, 34–36, 162,333, 339diversification, 319energy-related stocks, 234exchange-traded funds (ETFs),295–297, 307–308hedging sectors with, 283Select Sector SPDRs, 21–22short call trades, 77–78trade management example, 324volatility and, 282Volex system, 166S&P 500:characteristics of, 143, 295,318index effect, 339–340sector breakdown, 334stocks, 21top 10 stocks, 333S&P 500 Index ($SPX):ATR indicator, 164characteristics of, 7, 13, 19, 27,31–34, 38, 47, 65–66, 68, 82,117–118, 120, 138, 141–142, 150,
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419168, 180, 196, 208, 249, 282,295–297, 300–306, 319, 328, 332,334, 340daily values, 165market internals, 335–336option premiums, 285options trades, 79portfolio tilt, 333relative value, 142seasonal trends/indicators,215sector analysis, 226volatility and, 259, 270–271, 273,281–283Volex system, 171S&P 500 Index Buy Write Index($BXM), 335–336S&P Mid-Cap 400 Index ($MID), 13, 34,142S&P 100 Index ($OEX):characteristics of, 13, 20, 34, 59, 172,201–204, 323, 328sector rotations, 224stock options, 48volatility, 284S&P Retail Index ($RLX), 328S&P 600 Small-Cap Index ($SML), 34,142Santa Claus rally, 215Scalise, George, 231Scholes, Myron, 48, 261Seasonality, 215–216Seasonal trends/indicators:January barometer, 213–215January effect, 214–215presidential election, 213, 215Santa Claus rally, 215significance of, 278–280Super Bowl indicator, 211–213Sector(s), see specific types ofsectorsanalysis, 254characteristics of, 9–10, 354indexes, 14–17, 47, 61neutral strategy, 252proxy, 294trading, see Sector trading
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420Sector trading, see specific industrygroups and sectorsbond investments, 244–247characteristics of, 8–9, 221compartmentalized market, 226–228energy-related stocks, 221–222,233–238exchange-traded funds, 221, 251–252financials, 241–243fundamental analysis combined withtechnical analysis, 221, 228–233gold, 238–240most active ETFs and indexes,228pairs trading, 252–254real estate, REITs, 240–241sector rotation, 221–226trading system, 249–251transportation, 222, 247–249utilities, 222, 243–244Securities and Exchange Commission(SEC), 48Select Sector:Energy Fund (XLE), 27, 32, 106–107,122, 130, 236, 244, 283, 334Financials (XLF) funds, 27, 127–128,241SPDR Funds, 27, 226, 271, 334–335Utility Fund (XLU), 272Selling climax, 185Selling decisions, 136Selling pressure, 97, 153, 185, 295Sell-offs, 138, 140Sell on opening order, 351Sell order, 35Sell signals, xiii, 43–44, 168, 229,319Sell stop order, 351Semiconductor HOLDRs (SMH), 22, 27,66–70, 73–75, 96–98, 216–218, 227,230–233Semiconductor Industry Association(SIA), 231Semiconductor sector, 17Semiconductors stocks, 47Sentiment analysis, 31, 199–200, 202,219, 367–368
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INDEX
Sentiment indicators:all-exchange put-to-call ratio, 202Commitments of Traders (COT ),208equity-only put-to-call ratio,201–202implications of, 198–200index put-to-call ratios, 202–205investment surveys, 207–208International Securities SentimentIndex (ISEE), 205–206, 282mutual funds, 209–211put-to-call ratios, 200–201put volume indicator, 205–207short interest, 208–209volatility, 280–282Shen, Frederick, 222Short calls, 57, 77–79, 81, 83, 85–87,129–130, 275, 390Short futures contracts, 65Short interest, 208–209Short positions, 39, 73Short puts, 74, 96, 99–101, 103, 109,391Short sales, 25, 34–37, 65–66, 74, 105,152, 166, 241Short sellers, 94Short shares, 275Short stock, 275, 389Short straddles, 117–118, 275, 394Short strangles, 117–118, 275, 395Short-term moving averages, 43Short-term notes, 26Short-term options, 84, 88, 131Short-term trades, 65Short-term trends, 42Sideways market, 117Sideways trading, 108, 110Simon Property Group (SPG), 241Simple moving average (SMA), 44,172–173, 323SINdex, 17“Sin” stocks, 17Size effect, 196Slow markets, 123Small-cap stocks, 32, 197–198, 214Small investors/traders, 208, 222
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Index
Smart money/smart money crowd, 202,204Software HOLDRs, 22Software programs, see OptioneticsPlatinum softwarecharting, 42, 45, 353options analysis, 22statistical volatility graphs, 267Sound trading systems, 178Speculative manias, 138Speculators, 1, 66, 74, 116, 208Spiders, 20, 34–35, 104, 162, 197,203Spot crude oil prices, 234Spreads:bear, 106–108bear call, 393bear put, 393bull, 101–104bull call, 392bull put, 392calendar, 108–110, 247call options, 79–81, 88–90characteristics of, 70, 92collar, 400defined, 51diagonal, 111, 129–131, 247, 400iron butterfly, 111, 119–121long butterfly, 111, 121–123ratio backspreads, 111, 123–127Standard & Poor’s (S&P):as information resource, 143, 228,335index committee, 339–340web site, 34Standard deviation, 253, 265–267Statistical volatility (SV), 266–268, 270,281, 284Stochastics, 379–381Stock(s), generally:characteristics of, 49–50funds, 210investments, 30, 315options, defined, 50price movement, 1, 12, 50, 52, 73splits, 4trading, basis of, 35
Page 421
421Stock exchanges, 7, 21, 137Stock market:crash (1987), 48, 273energy prices and, 150Stock Market Course, The(Fontanills/Gentile), xviii–xix, 37,50, 73Stock Traders Almanac, 214Stop-loss orders, 76, 81, 84, 137, 178,254Stop placements, 175Straddles:adjustments to, 292, 295–301, 303characteristics of, 70, 91, 111–113,119, 132, 135, 274–275, 293delta neutral, 117long, 111–113, 274, 289, 291, 394short, 117–118, 275, 294synthetic, xix, 297, 401types of, 394, 401uncovered, 91–92Strangles:characteristics of, 92, 114–115, 119,132, 241, 274–275delta neutral, 117long, 395short, 117–118, 275, 295types of, 395Strategy development, x–xistreetTRACKS Gold Shares ExchangeTraded Trust (GLD), 25,315Strike price:adjustments and, 288bear put spreads, 107–108butterfly spreads, 119, 123collar spreads, 127–128diagonal spreads, 129–130long butterfly spreads, 121, 123long straddles, 112put options, 94, 97–98, 101–104ratio backspreads, 124–126significance of, 50, 52–53, 57, 67–68,76, 80–81, 83–85, 87–89, 100, 132,290straddles, 115volatility and, 270, 272, 283–284
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422Success factors, 354Successful traders, 318–319Sun Microsystems (SUNW), 329Super Bowl indicator, 211–213Supply and demand, 167Support and resistance, 41–42Symbols, 66–68System trader, defined, 158System trading:defined, 158“Dogs of the Dow,” 159–162,180enhancement with Optionetics,177–179flexibility of, 158purpose of, 158–159, 179sample system development,171–176system development, 169–176system parameters, 158testing, 179–180testing design, 176–177Volex system, 162–169, 