market spread, 381,386–388, 390Discount brokers, 573Discount rate, 494Disney (DIS), 169, 223, 602, 604Dispersion trade, 283Dividends, 7, 33, 36, 42, 107,117–118, 173, 388Dollar index, 340, 622Dollars per point, 29Dollar-weighted put-call ratio, 284,287Dow Jones (DJX), 285, 304, 308Dow Jones Industrial Average (DJIA),2, 54, 123–124, 274,355–356, 371, 426, 622Downtick, 156Downtrends, 258
INDEXDow Theory Letter (Russell), 375Drawdowns, 437DTN Wallstreet, 579Earnings reports, 43–44, 212, 224Eastman Kodak (EK), 9, 316, 349Economic indicators, 362Electronic entry system, 570–571Electronic futures broker, 30Electronic trading, 14–15, 30ELKS (equity-linked securities), 101E-mini futures (ES), 304, 402–404Emotional trades, 586, 596End-of-day quotes, 583End points, 40Equifax (EFX), 246Equity-only put-call ratio, 284–285,291, 293, 298, 302, 304Equity options, defined, 1Equity put-call ratio, 345–348Equity put options, 158Equity requirements, 62Equivalent futures position (EFP), 446Equivalent stock position (ESP), 446,449–451, 499Equivalent strategy, 409, 614–615Errors:restitution for, 14tracking, 174–175types of, 13–14eSignal, 579, 581Euro currency (EC), 337, 339, 622Eurodollar, 622futures options, 6, 11, 13put-call ratios, 338–340European-style options, 23, 381–389Event-driven straddle buy, 253Exchange fees, 577Exchange-traded funds (ETFs):characteristics of, 23historical perspective, 9–10intermarket spreads, 423January effect, 403list of, 617–619
635
put-call ratios, 308–310Exchanging physical for futures, 26Ex-dividends, 22, 33, 388Exercises:call options, 543cash options, 22–24mechanics of, 19–22overview of, 15–18prior to expiration, 22Exotic options, 175–176Expected investment, 566Expected return analysis, 558–559,564–567Expensive stock options, 238–241,525Expiration date:defined, 3–4exercising options and, 15–17futures options, 28index futures, 129–148individual stocks, effect on,155–157intrinsic value and, 15–16options volume and, 190–191,197–199out-of-the-money options, 15–16serial options, 31–32single stock futures, 27time remaining until, 33Exponential moving average, 367Exxon, 8Fair value, 35–36, 120–121, 124,351–352, 359–360Farmer’s Group, 198Federal Paperboard (FBO), 228,448–450, 460, 613Federal Reserve System, 138, 264,269, 375, 443–444, 493–494Feeder cattle, 621Fibonacci numbers, 587Financial newspapers, as informationresource, 581Firm trader, functions of, 13, 16–17
636
INDEX
First Alert, 581First day notice, 25–26Five-year note, 622FLEX options, 12Floor broker, 571–572Floor traders, 134, 611Fluor Corporation, 606Food and Drug Administration (FDA),248–249, 251–255, 490–491,565Ford, 9, 424Foreign exchange markets, 10Foreign stock markets, 2, 123–124,465Forward volatility skew, 519–520, 523Front-end tender, 605Fundamental analysis, 42–44Futures contracts:characteristics of, 2, 24–25defined, 2first day notice, 25–26limit moves, 112–116unit of trading, 29Futures equivalent, 379Futures Magazine, 28Futures-only put-call ratio, 286Futures options:calendar spread and, 86–87characteristics of, generally, 23–25commissions, 30–31cost of, 4–6defined, 2delta, 37–42electronic trading, 30exercise and assignment, 19–21expiration, 3–4, 28, 621–623fair value, 351–352first day notice, 25–26history of, 10–11price quotes, 29–30put-call ratio, 318–340serial options, 31–32single stock futures, 26–27,111–112strike price, 3, 28–29
terminology, 28–32terms, 621–623trading volume, 340unit of trading, 29volatility indices, 27–28Futures trader, option tradingprocedures, 12–14Futures trading, 26Gamma:advanced constructions, 514–516computation of, 626delta neutral, 499, 501–502, 504of the gamma, 514–515neutral positions, 454–455,508–511, 515volatility, 511, 514Gas:natural, 32, 324, 331–334, 340unleaded, 321, 339, 389–391,394, 396–397, 399, 622General Electric (GE), 316General Motors (GM), 99, 160, 164,316, 349, 424Genesis Financial Data Systems,580Genetech, 252Gensia Pharmaceuticals, 251,490–491Gerber (GEB), 21, 205–207,239–240, 242–243Gillette, 600–602Globex, 30, 358GNMA futures, 1Gold, generally:characteristics of, 32, 82, 93–94,319–321, 326, 339first day notice, 25–26historical volatility, 456stocks versus price, 380–381,409–414terms and expirations, 622trading philosophy and, 603–604volatility, implications of, 477,520
INDEXGold and Silver Index ($XAU), 2, 285,308, 310, 381Goldman Sachs, 11, 175, 451Good-until-canceled orders, 13, 528Grain futures, 90, 99, 257Grain options, 257–258, 528, 612Greeks:delta, 484, 486–491gamma, 495–514model of, 484–486overview of, 483–484, 495–498,626rho, 484, 493–494software programs, 580–581theta, 484, 493vega, 484, 491–493Grupo Tribasa (GTR), 233–234Guarantors, 8Gulf & Western, 9Gulf Oil, 598Handheld devices, 577–578Hang Seng Index, 465Hedge/hedging:delta neutral, 585index futures, 129–130intermarket, 615naked put writing, 68options volume and, 191–192over-the-counter options, 174–177put-call ratio, 284–285trading philosophy, 611volatility futures, 178–183volatility skewing, 507, 542, 546,550warrants, 585–586Herd mentality, 295Hewlett-Packard (HPQ), 316High-flying stocks, 54Historical volatility:characteristics of, generally, 34–35,79, 163–164, 282defined, 442gold, stock versus prices, 413
637
implied volatility compared with,457–460option volume, 241–242predicting, 283speculative trades, 243, 245, 248,593H. J. Heinz, 41Holder:bull spread and, 80defined, 16exercise and assignment, 22HOLDRS, 308, 310Home Shopping Network, 189Hong Kong Index, 2Hong Kong Option Index (HKO),465–470Hong Kong Stock Exchange, 465Horizontal spread, 86HUG/HOG spread, 389–399IBM stock, 3–4, 8, 26, 68, 75–76,85, 87, 111, 163, 175,188–189, 201, 253, 258–262,287, 316, 349, 378, 562–563,594, 610–611Illiquidity/illiquid options, 400, 594Implied volatility:day trading and, 355defined, 442–443, 456delta neutral trading, 445–449, 455,474–475historical volatility compared with,457–460implications of, generally, 34–35,79, 102, 164index options, 262–277market trends predictions, 256–283moving average, 241–244option volume and, 237–238,242–250, 253predicting, 442–444seasonal tendencies, 426–430skewing, see Volatility skewspeculative trades, 241–248, 593
638
INDEX
Implied volatility (continued)trading:buying, 471–483selling, 461–471trading gap predictions, 248–253trend predictions, 256–258Index arbitrage, 120–124Index equivalent, 379Index futures, effect on stock market:at expiration, 129–149generally, 119–129postexpiration, 149–157Index options:conversion to cash, 22–24cost of, 4–6defined, 2historical perspective, 9–10implied volatility of, 262–268list of, 617–619unit of trading, 29Index put-call ratio, 286, 290, 292,307–308, 348Individual investors, 584Inside traders, 191–192, 233Institutional brokers, 128–129, 294,297, 572Integrated Silicon, 189Intel (INTC), 189, 249, 316, 317Interdigitial Communications (IDC),247–248, 250Interest rates, implications of, 33, 36,42, 107–108, 111, 173, 237,420, 442–443, 454, 567Interindex spreading, 378Intermarket hedges, 615Intermarket quotient, 412–413Intermarket spread:European-style options, 23,381–389gold, stocks versus price, 380–381,408–414HUG/HOG spread, 389–399January effect, 399–408oil, stocks versus price, 414–419overview of, 378–381
pairs trading, 378, 424–425similar-sector index versus futures,422–424T-bonds, 30-year, 419–422utility stocks, 419–422Intermediate-term trading, 584Internal Revenue Service (IRS), 101In-the-money options:bull spread, 79buying, 50–52call backspread, 97credit spread, 84defined, 7delta of, 37–38, 40–41European-style options, 381–382,387exercise and assignment of, 15–17, 22HOG/HUG spread, 396index futures, 135–136, 137, 139,142–143, 145–146, 149intermarket spread, 379–380January effect, 405limit moves, 114options volume, 200, 227put-call ratio, 304short stock, 109–110, 116–117short-term, 227speculative trading, 594tradingphilosophy and, 605–606volatility and, 487–488, 496volatility skew, 538, 551volume and, 195Intraday market-reversal corollary,363–366Intraday stop, 230Intraday trading, 275Intramarket spreads, 378Intrinsic value, 15–16, 626Investor’s Business Daily, 28iShares, 10, 308–309, 405–407,418–419ITT Corporation, 201January effect, 399–408, 436Japanese stock market, 123–124
INDEXJapanese yen (JY), 336, 339, 340, 622Japan (JPN) Index, 2, 308, 310,385–386Johnson & Johnson (JNJ), 316Jumbo CBOE Volatility Index (VXB),178Jumbo Volatility Index (VIX), 178Junk bonds, 600Kassouf, Sheen, 585Kelly, J. L., Jr., 588Kelly System, 588–592Kerr McGee, 8Keynes, John Maynard, 374K-Mart, 8Kresge, 8, 18Large-cap index, 407–408Large-cap stocks, 399, 401–402Last trading day, 25Lattice, binomial model, 626–627LEAPS:as collars, 169–174European-style options, 385–386impact of, 4, 54–55, 68as long-term stock substitute,117–119puts, 118–119volatility and, 488, 493–494Leverages, 111, 188Limit moves, 112–116Limit orders, 13, 234, 594Liposome Technology (LIPO),254–255, 324Liquidation, 230Liquid option contracts, 286, 340Liquidity, 308Listed options, history of:Chicago Board Options Exchange(CBOE), 6–9exchange-traded funds (ETFs), 9–10,617–619futures options, 10–11index options, 9–10
639
over-the-counter market, 6–7,11–12Litigation, 386Live cattle, 32, 323, 339, 532, 621Live hogs, 324, 330, 339, 622Local maxima/minima, 290, 298,322, 342, 345, 414Lockheed-Martin (LMT), 316Loews, 9Lognormal distribution, 521–524,567Long call, 107Long-call-short-put option, 115Long futures, 130Long options, as stock protection:buying call options, 55–57buying put options, 52–55Long puts, 70Long-Term Capital Management(LTCM) Hedge Fund Crisis,256, 275Long-term options, see LEAPSLotus Corporation, 201Lumber futures, 112–116, 622McDonald’s (MCD), 9, 316McMillan Analysis Corp., 18,287–288, 367Marathon Oil, 598Margin:call, generally, 275defined, 24, 111rates, 575requirement, 62, 138, 358, 391,507–508, 530, 575rules, 8Market conditions, significance of,352, 455, 550Market corrections, 430–432, 595Market declines, 306–307Market makers, 8, 16, 71, 156–157,191–192, 215, 381–384, 387,451–452, 594Market not held orders, 13Market on close orders, 13, 139–140
640
INDEX
Market orders, 13, 109, 595Market reversals, 363–364, 372Market Wizards (Schwager), 597Martin Marietta, 599–600, 602Matsushita, 223Maxtor, 189MCA/United Artist, 223Mental stop, 224, 229–230, 542,573, 595–596Merck (MRK), 9, 316Mexico Index, 2Micron Tech, 189Microsoft (MSFT), 26, 106, 108, 111,189, 312–315, 456Midcap 400 Index (MID), 101–102Milken, Mike, 600Mini-Value Line (MV), 402–405Momentum oscillators, 366–367Money management, 225, 230–232,294, 519Money stop, 404–405Morgan Stanley, 11, 175, 424, 451Morgan Stanley High Tech Index(MSH), 308–310Motorola (MOT), 213–216, 250Moving average:crossover system, 343exponential, 367implications of, generally, 341–350implied volatility, 241–244put-call ratio, 289, 298, 340techniques, overview, 341–35020-day, 237–238, 240Muni Bond Index, 2Municipal bonds, 378–379, 622Mutual funds, 375Naked call writing, 69–73Naked options:characteristics of, generally, 461,575implied volatility, 469selling, 18, 83–84, 469volatility, 508writing, 62–64
Naked put writing:characteristics of, 64–67, 107philosophy, 67–68protection strategies, 68–70Nasdaq, 109Nasdaq100 Index (NDX), 282, 308,310, 622Nasdaq 100 Tracking Stock (QQQ),10, 13, 263, 282, 285,295–296, 307, 310Natural Gas Sector Index ($NGX),308, 310, 422NCR Corp., 88–89NeoPharm Inc. (NEOL), 565–566Net cost of switching, 117–118Neutral positions:keeping, 450–454types of, 452–454See also GreeksNew York Stock Exchange (NYSE),10, 102, 131, 139, 356, 366,577Nick the Greek, 587Niederhoffer, Victor, 275Nifty 50 stocks, 54–55Nikkei 225 Index, 385–386Nikkei stock average, 622No-cost collar, 169–170Normal distribution, 521–522Northwest Airlines, 9Novell, 189NQLX, 27Occidental Petroleum (OXY), 598–599OEF, 304, 405–406OEX:arbitrage, 130–137call exercise, 543–544characteristics of, generally, 23–24,34, 83–85day-trading vehicles, 353–355defined, 132futures fair value and, 351–352hedging, 137–142, 161–162
INDEXimplied volatility and, 256,262–268, 270–271, 443–444,457–458, 532index futures expiration, 143–149insurance protection, 164–166market reversals, 363–364probabilities, 560–561put-call ratios, 292–293, 299–307,318–319, 324, 433seasonal tendencies, 426–429, 436short-term trading, 368–369speculative trades, 593volatility, impact on, 267–283volatility skew, 518, 532, 534–540,543–544, 550–553Oil:crude, 32, 322, 339, 340,414–419, 532, 621heating, 64, 322, 340, 389–391,394, 398–399stocks versus price, 414–419Oil & Gas Index ($XOI), 236, 308,311, 414–419Oil Index, 2Oil options, 257–258, 332Oil Service ($OSX) sector, 308, 311Oil Service HOLDRS (OIH), 418OneChicago, 27Opening sell transaction, 20Opening settlement, 131–132Open interest, 12Optimism, 616Option calculators, 583Option Clearing Corporation (OCC),8, 19, 21, 176Option Evaluator, 583Option Master, 583Option modeling:access to, 102–103applications, generally, 102–103,107–108binomial model, 626–629Black-Scholes model, 625–626Option premium, 250, 265, 453Option price, see Price; Strike price
641
Option Pro, 581Options:cost of, 4–6defined, 1electronic trading, 14–15exercise and assignment, 15–24as insurance policy, 157–168listed, see Listed optionsprice influences, 32–37, 42technical analysis, 42–44terminology, 3–4trading procedures, 12–14types of, 3See also specific types of optionsOption strategies:buying put and call options, 57–59long options as stock protection,52–57option models, 102–103outright option buying, 47–52profit graphs, 45–47ratio strategies, 91–102selling options, 59–77spreads, 77–90Option Strategist, 529Option trading philosophy, 609–615Option volume, as indicator:analysis of, 190–202average, 188, 191, 226–227examples of:American Cyanamid (ACY),203–205Cap Cities ABC, 223Chipcom (CHPM), 207–210Disney (DIS), 223Gerber (GEB), 205–207,239–240Matsushita, 223MCA/United Artist, 223Motorola (MOT), 213–216, 250Southern Pacific Railroad,199–200, 202–203Sybase (SYBS), 216–218Syntex (SYN), 218–222U.S. Shoe (USR), 210–213
642
INDEX
Option volume, as indicator (continued)exceptions to, 235–237in-the-money options, 227out-of-the-money options, 227profitability, 223–226quantity, 188–190significance of, 187–188speculative volume, 227stop orders, 227, 229–23520-day moving average, 237–238,241Option Vue, 581–582Options Laboratory, 583optionstrategist.com, 288, 341, 460,560, 578Orange juice, 28, 32–33, 113, 322,340, 622Order desk, 571–572Order entry, 14–15, 30, 569–572Oscillators:intraday monitoring, 369–374seasonal tendencies, 432short-term trading system, 366–368Out-of-the-money options:backspread, 99–100bull spread, 81, 227buying, 49–51call backspread, 97–98covered call writing, 64, 69delta of, 37–41diagonal spread, 89exercise and assignment of, 15–17implied volatility, 283, 462as insurance, 158, 165, 168options volume, 208, 227probabilities, 561–562put-call ratio, 303ratio spread, 