93sale of, 90trading philosophy, 613volatility changes, 275, 487–488,496, 506volatility skew, 519–521, 529, 532,537, 549
Outright option purchase, implicationsof, 47–52Overbought market, 268, 342,366–367, 373–374, 537Overpriced futures, 352Overpriced options, 241, 355Overpriced stock, 67Oversold market, 267, 342, 366–367,372, 374Over-the-counter market:current, features of, 11–12historical perspective, 6–7neutral positions, 451–452Over-the-counter options, hedging,174–177Overvalued options, 443Overvalued stock, 294PaineWebber Corporation, 101, 610Pairs trading, 378, 424–425Panic selling, 291, 302Paperless trading, 59Parabolic stops, 596Parity, 15, 110, 195, 381, 387, 607Partial profits, 595Pay-later option, 176PC Quote, 579, 581Pennzoil, 9PERCS (Preferred Equity RedemptionCumulative Stock), 99–101Pfizer (PFE), 316Pharmaceutical ($DRG) sector, 308,310Phelps Dodge (PD), 409, 423–424Philadelphia Stock Exchange (PHLX):characteristics of, 9, 599Gold and Silver Index ($XAU), 410Utility Index ($UTY), 388, 422Philip Morris, 188Platinum, 32, 622Polaroid, 9, 55Pork bellies, 32, 64, 622Portfolio insurance, 119, 124–127,129, 177–185
INDEXPortfolio management, softwareprograms, 582Position delta, 445Postexpiration, historical analyses of,149–155Power Options, 581PowerAnalyzer, 581Preferred stock, 375–377Premium:put, 549short-term options, 558time value, 379–380, 396–398,409, 413, 539Price:distributions:bell curve, 521–522lognormal, 521–524normal, 521–522as indicator, 237–256quotes, futures options, 29–30technical analysis, 42–44Probability, volatility trading, 558–564Probability of rain indicator, 349Profitability:option volume and, 223–226volatility trading, 567TICKI day trading, 365–366Profit graphs:defined, 45function of, 45–47Program trading, 127–129, 358–359Progressive betting, 587–588Pullback, 234Put backspread, 98–99, 525–526Put-call ratio:computation of, 284, 286data, 286–289defined, 283–284equity-only, 284–285futures-only, 286futures options, 318–340index, 286interpretation of, 289–308, 349seasonal tendencies, 432
643
sector index options, 308–310trading individual stocks, 312–318trading summary, 339–340Put options:buying, 52–55defined, 3exercise and assignment of, 15LEAPS, 118–119naked index, 549overpriced, 452price influences, 36volume and, 190Put premium, 107Put ratio backspread, 530Put ratio spread, 94–95QQV, 263, 282Quaker Oats (OAT), 481–482Quote machines, 29–30, 123, 579Quote service, 29Quotrek, 578Ratio call write, 91Ratio spread:backspread, 95–98butterfly spread, 99call, 92–94characteristics of, generally, 193,461put, 94–95put backspread, 98–99volatility:delta position, 500–502profit and loss of, 501, 503–504,508, 510volatility skew, 482–483Ratio strategies:ratio spread, see Ratio spreadratio writing, 91–92RCA, 8Realtick TurboOptions, 580–581Regional Bank HOLDRS (RKH), 310Relative Beta, 160–163Retail Index ($RLX), 473–476
644
INDEX
Reversal arbitrage, 194Reverse volatility skew, 524, 530, 551Rho, 484, 493–494Risk:bear spread, 82bull spread, 78, 80credit spread, 84, 90intermarket spread, 380in long call/short stock, 52–54naked options, 90speculative trading, 594trading programs and, 128Risk-adjusted method, 591Risk-free interest rate, 493Roche, 252Round turn, 31Rumors, options volume and,198–199, 206Russell, Richard, 375Russell 2000 ($RUT), 310, 405–406Russell 2000 Index futures (RU),406Russian debt crisis, 256, 275St. Joe Minerals, 604, 606Salomon Brothers, 11, 451S&P, see Standard & Poor’sSanta Claus rally, 434Schwager, Jack, 597Sears, 8Seasonality, 277–281Seasonal tendencies:August, 425–430late-January buy point, 436–439late-October buy point, 434–436September-October, 430–434Secondary market, 7Sector index, 310, 379Sector options, 308–310Securities and Exchange Commission(SEC), 8, 236Seller:assignment positions, 20–21trading procedures, 12–14Selling teenies, 71–72
Sell-offs, 372, 543Sell signals:advance-decline line, 375moving averages, 341–344put-call ratio, 299, 302, 306,318–340seasonal tendencies, 432–433TICKI day trading , 361volatility and, 264–265Semiconductor Sector Index ($SOX),162–163, 285, 308–309, 310Serial options, 31–32, 88Service charge, 576Sheikh, The, 275Short exempt, 156Short stock:characteristics of, 121–122, 130,141–142equivalent, 108–111long call, 55–57Short strangle, 467Short-term option strategy, 557Short-Term Rate Index, 2Short-term trading:money management, 584options volume, impact on, 230,236–237overview of, 366Sideways trades, 349, 392Signal, 355SIGNAL, 29Silver, 32, 72–73, 338, 340Silver (COMEX), 622Silver (SI) futures, 338Single stock futures, 26–27, 111–112Skewing, volatility, see Volatility skewSmall-cap index, 407–408Small-cap stocks, 399, 401–402Software programs, 14, 102–103,190, 226, 349, 443, 580–583Soros, George, 275, 303Southern Pacific Railroad (RSP),199–200, 202–203Soybean futures, volatility, 33
INDEXSoybean meal, 622Soybean oil, 622Soybean options:CBOE listing, 11delta neutral trading, 447–448expiration date, 25, 28options volume, 236spreads and, 90volatility skew, 517, 553–554SPAN margin, 64, 94, 575–576Special-handling desk, 570–572Speculation:in expiration week, 143–148implied volatility analysis, 241–248options volume and, 192–194,235–236put-call ratio, 294, 314short-term options, 557–558trading philosophy, 611–612trading procedures, 592–596volatility skew and, 546Speculators, 137–138, 277Sperry Rand, 9Spreads:attractive, 89–90diagonal, 88–89vertical, 77–85, 525See also specific types of spreadsSPY (S&P SPDRS), 304Stale quotes, 30Standard & Poor’s (S&P) Comstock,579Standard & Poor’s 500, 2, 10Standard & Poor’s 500 Cash Index(SPX), 140, 178, 184–185,262, 266, 281, 285, 304,308, 354, 358, 403–408,434–436, 438, 623Standard & Poor’s 500 DepositoryReceipts (SPDRS), 10, 405Standard & Poor’s 500 futures,30–32, 119–120, 355expiration of, 130,intramarket spread, 378–379January effect, 399–409
645
Standard & Poor’s 500 options,159–160, 340, 518–519,550Standard & Poor’s 600 Small CapIndex fund (IJR), 406Standard & Poor’s Small Cap Index($SML), 406Standard deviation, 553, 555, 565–566Statistics, volatility trading, 558–564Stock Index Securities (SIS), 101–102Stock market crash:in 1987, 34, 58, 83, 125–127,141, 176, 256, 263, 272,278, 293, 295, 348, 352,426, 519, 548in 1989, 176–177, 256, 576Stock options, defined, 1. Seealso Call option; Put optionStock splits, 29, 118Stop loss, 358–359, 586, 593Stops:actual, 229–230, 595advantages of, 13, 227, 229Chandelier, 596closing stop, 224–225, 230, 596disadvantages of, 229good-until-canceled, 528intraday stop, 230mental stop, 224, 229–230, 542,573, 595–596money stop, 404–405moving averages and, 343parabolic, 596put-call ratio, 301stop loss, 358–359, 586, 593technical analysis and, 231–232trailing closing, 596trailing stop, 224–225, 229, 341,360, 435Straddle:buying, 57–59, 472–473, 532long, 98, 471–479, 511, 513–514,547naked, 99, 462
646
INDEX
Straddle (continued)probabilities, 559sale of, 73–77, 99, 453seasonal tendencies and, 426–428volatility and, 271–272, 280–281,506, 559, 562Strangle:naked, 461–462, 560sale, 463–464short, 467See also CombinationStrategy Zone, The, 288, 341, 430,460, 560, 578Strike price:defined, 3futures options, 28–29gamma neutral trading, 454as price influence, 35, 42seasonal tendencies, 433volatility and, 480Stub, tender offers, 605–606Sugar, 32, 326, 339, 622Sullivan, Joe, 8SUNS (Stock Upside Note Securities),101Super-trending trades, 596Supply and demand, 112, 381Support activities:brokers/brokerage, 572–576data vendors, 576–580order entry, 569–572software, 580–583Swissbank, 452–543Swiss franc (SF), 86–88, 336, 340, 623Sybase (SYBS), 82, 216–218, 613Syntex (SYN), 218–222Synthetic put, 56, 70Takeover rumors:impact of, 198–199, 201, 211,224, 286, 481implied volatility and, 469option volume, 200–201, 206, 212,222–223, 240–241, 244volatility skew and, 556
T-bill/T-bond/T-note, see Treasurybill; Treasury bond; TreasurynoteTechnical analysis, 42–44, 230, 334Technical Analysis of Stocks andCommodities, 434Technology stocks, 161–162Telecommunications Inc., 14Telefonos de Mexico (TMX), 260–262Telmex, see Telefonos de Mexico(TMX)Tender offers, 110, 605–608Terrorist attacks (9/11), market impactof, 306, 373Texas Instruments, 9, 160, 164Theoretical value, 102–103Theta, 484, 493, 51530-Year Bond Rate Index, 2Thomson McKinnon, 603Thorp, Edward, 585Three Com, 2093M Company (MMM), 316TICKI Indicator:day trading, 353, 355–366index arbitrage, 123, 128Time value premium, 379–380,396–398, 409, 413, 539Trading days, 402Trading floor, 570Trading gaps, 248–253, 598–599Trading halt, 274Trading methodology/philosophy,609–615actual trading examples, 597–609money management, 584–592speculative trading procedures,592–596Trading procedures, 12–14Trading systems:day-trading vehicles, 353–355fair value, 351–352intermarket spreads, 378–425seasonal tendencies, 425–439short-term, 366–377TICKI day trading, 355–366
INDEXTrading unit, 446Trailing stop, 151, 224–225, 229,341, 360, 435, 596Treasury bill (T-bill), 11, 67, 80, 94,107–108, 117, 173, 322, 493,632Treasury bond (T-bond), 4, 322, 326,340, 352, 378–379, 419–422,429, 532, 623Treasury note (T-note), 340, 422,623TRIN, see Arms IndexTurnaround Tuesday, 274Two-tier deal, 605UAL Corp. (UAL), 5, 470–471,549–550, 560–561Underlying security:defined, 3delta of, 40–41options as direct substitute for,105–116options as proxy for, 116–119types of, 1–3Underpriced futures, 352United Arab League, 256United Bioscience (UBS), 252U.S. Bond, 30-year, see TreasurybondU.S. Dollar Index, 322U.S. Shoe (USR), 210–213U.S. Surgical, 225, 234–235United Technologies (UTX), 316Unit of trading, 29Unit trusts, 10Upjohn, 9Uptick, 122Utility Index ($UTY), 2, 308, 310,379, 388, 422Utility stocks, intermarket spread,419–422Value Line futures, January effect,400–404
647
Value Line Index (VLE), 2, 9,378–379, 399, 402–404,406–408Vega, 455, 484, 491–493, 501–507,509–511, 513Vertical spread:bear spread, 81–83, 90, 525bull spread, 77–81, 83, 525, 575credit spread, 80, 83–85, 90defined, 77implications of, generally, 193, 525Volatility:direct trades, 281–282futures options and, 33HOG/HUG spread, 394index options, 27, 282–283intermarket spread, 421predicting, 442–444, 455–457seasonal tendencies, 277–281,426–428See also Historical volatility; Impliedvolatility; Volatility skewVolatility futures (VX):characteristics of, 177, 282contract details, 178–180options on, 184–185as portfolio insurance, 177–185problems with, 183–184protection strategies, 180–183Volatility Index (VIX), 27–28,178–183, 266–282, 429Volatility skew:calculation of, 553–555defined, 479, 568expected return analysis, 564–567forward, 519–520position biases, 550–553positive, 568reverse, 524, 530, 551, 568trading:negative skew, 530–547positive skew, 525–530price distributions, 521–525using probability and statistics in,558–564
648
INDEX
Volatility skew (continued)put ratio spread, 547–550types of, 516–521Volume, see Option volume, asindicatorVXN, 263, 282Wachtel, Larry, 148Wal-Mart (WMT), 316Walt Disney (DIS), 316Warrant trading, 375, 585–586Weighted put-call ratio, 291Wheat, 25, 31, 322, 340, 623Whipsaw, 530Wilshire index, 308Window dressing, 435Wire system, 570
Writer:default by, 8defined, 6Written options:best covered writes, 241covered call writing, 60–62defined, 59naked call writing, 69–73naked options, 62–64naked put writing, 64–69Xerox, 9Yield, 377Zero-coupon bond, 101
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