URE C.24 LongIron Butterﬂy Spread
Maximum  Proﬁt: Limited  to  the  net  creditreceived. Proﬁt occurs between the breakevens.
Upside Breakeven: Strike price of middle short call + net credit.
Downside Breakeven: Strike price of middle short put – net credit.
Calendar Spread
Strategy: Sell  a  short-term  option  and  buy  along-term  option  using  at-the-money  optionswith  as  small  a  net  debit  as  possible  (use  allcalls or all puts). Calls can be used for a morebullish  bias  and  puts  can  be  used  for  a  morebearish bias.
Market  Opportunity: Look  for  a  range-bound  market  that  is  expected  to  stay  be-tween  the  breakeven  points  for  an  extendedperiod of time.
Maximum Risk: Limited to the net debit paid.
FIGURE C.25Calendar Spread
Maximum Proﬁt: Limited. Use software for accurate calculation.
Breakeven: Use options analysis software for accurate calculation.
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Diagonal Spread
Strategy: Sell a short-term option and buy along-term option with different strikes and assmall a net debit as possible (use all calls orall puts).
• A  bullish  diagonal  spread employs  along  call  with  a  distant  expiration  and  alower  strike  price,  along  with  a  short  callwith  a  closer  expiration  date  and  higherstrike price.
FIGURE C.26 DiagonalSpread
• A bearish diagonal spread combines a long put with a distant expi-ration date and a higher strike price along with a short put with a closerexpiration date and lower strike price.
Market Opportunity: Look for a range-bound market that is expected tostay between the breakeven points for an extended period of time.
Maximum Risk: Limited to the net debit paid.
Maximum Proﬁt: Limited. Use software for accurate calculation.
Breakevens: Use options analysis software for accurate calculation.
Collar Spread
Strategy: Buy (or already own) 100 shares ofstock, buy an ATM put, and sell an OTM call.Try to offset the cost of the put with the pre-mium from the short call.
Market  Opportunity: Protect  a  stock  hold-ing from a sharp drop for a speciﬁc period oftime and still participate in a modest increasein the stock price.
FIGURE C.27 CollarSpread
Maximum Risk: Initial stock price – put strike + net debit (or – net credit).
Maximum  Proﬁt: (Call  strike  –  initial  stock  price)  –  net  debit  (or  +  netcredit).
Breakeven: Initial stock price + [(put premium – call premium) ÷ numberof shares].
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APPENDIX D
SuccessGuides
FIVE MINUTE SUCCESS FORMULA: A QUICK METHOD FOR FINDING PROMISING TRADES
1. Look for stocks that are up (+) or down (–) at least 30 percent
in value for the day.
• You are looking for good momentum trades (where fear and greed
are really driving the market).
2. From  these,  choose  those  with  volume  greater  than  300,000
shares for the day.
• Greater than 1 million shares a day is better; 10 million is best.
• Look  for  volume  spikes  (market  moves  generally  begin  or  end  on
volume spikes).
• Call  your  broker  twice  a  day  to  check  on  potential  movers  (call  ahalf  hour  after  the  market  opens  and  15  minutes  prior  to  marketclose).
3. Try  to  ﬁnd  out/ask  your  broker  why  each  of  these  stocks  is
moving.• Usually movement is based on really good news or really bad news,
including:
• Earnings releases.• Earnings upgrades/downgrades.• New product announcements.
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• New agency approvals.• Stock splits.• Merger announcements.• Friendly or hostile takeovers.• Litigation.• Accounting irregularities.• No news (can mean insider buying/selling).
• Good reasons can indicate big moves.
• Takeovers  that  are  done  deals  produce  little  movement  and  are
generally not good plays.
4. Determine which of these stocks has options.
• Forget those stocks that don’t have any options.
• Consider only those stocks that have liquid options available.
• If none exist, try again tomorrow.
5. Choose a low cost/low risk strategy.
• A  good  goal  is  to  ﬁnd  trades  that  cost  less  than  $100  for  each 
position.
• Cheapest play for an up move? Buy calls, bull call spreads, or call
ratio backspreads.
• Cheapest  play  for  an  down  move?  Buy  puts,  bear  put  spreads,  or
put ratio backspreads.
• Cheapest play for a neutral move? Straddles, strangles, or long syn-
thetic straddles.
• Calculate  the  maximum  risk,  maximum  reward,  and  upside  anddownside  breakevens  for  each  possible  position  to  ﬁnd  the  tradewith the best probability of proﬁtability.
6. Find  out/ask  your  broker  how  many  block  trades  (institu-tional trades of more than 5,000 shares in size) have tradedin these stocks.
• Choose only those stocks that have 10 or more block trades on a
volume of greater than 300,000 shares for the day.
7. Find out/ask your broker how many blocks are trading on theupticks or downticks (i.e., how many institutions are buyingor selling).
• Blocks trading on upticks—stock is moving higher.
• Blocks trading on downticks—stock is moving lower.
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8. Select your entry strategy.
• Put  the  trade  on  in  the  last  15  minutes  before  the  market  closes
(provides the best ﬁlls and prices).
• Buy  options  with  at  least  90  days  till  expiration  (six  months  or
more is even better).
• Consider multiple positions so that you can eventually create a free
trade.
• If  you  miss  the  ﬁrst  big  move,  try  to  position  yourself  for  the rebound  (wait  for  one  “ugly”  day,  one  reversal  from  the  top  orbottom, and then place the trade).
9. Select your exit strategy.
• General  Rule: You  should  exit  the  trade  30  days  prior  to  expira-tion, unless the proﬁt on the trade depends on a short option ex-piring OTM.
• If  you  hold  multiple  positions,  sell  off  half  when  they  double  invalue  to  produce  a  free  trade.  Ride  the  free  trade  to  maximizeproﬁts.
• In an up move, if the stock breaks 20 percent in price from a new
high, then close out the position.
• In a down move, if the stock breaks 20 percent in price from a new
low, then close out the position.
RULES FOR TRADING SUCCESS
1. Use  a  reliable  and  knowledgeable  broker  who  offers  a  balance 
between low commission rates and fast and accurate ﬁlls.
2. Research  all  aspects  of  a  trade  using  your  favorite  techniques—fundamental and technical analysis—as well as sentiment and broadmarket analysis, and scheduled and breaking news.
3. Know what you are trying to do: Deﬁne your goals. Select your time
frame and availability. Create a risk graph for your position.
4. Look for trades with a reward/risk ratio that is greater than 2 to 1.
5. Buy low volatility and sell high volatility.
6. Do not leg into or out of a spread. Place all sides of the trade at the
same time as a single order
7. Write  down  all  orders  and  read  them  to  your  broker  to  make  sure
you call your orders in correctly.
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8. To get the price you want, the best time to place your order is at the
end of the day about 15 minutes before the close.
9. Risk  no  more  than  5  percent  of  your  trading  account  on  any  one
trade.
10. Risk no more than 50 percent of your total trading account at any
one time.
11. Keep a record of all your trades and review them periodically.12. Review all your trades every six months, especially the ones you lostmoney on; identify bad trading habits/patterns, and try not to repeatthem!
TABLE D.1 Market Acronyms
AAF—asset allocation fundAAGR—average annual growth rateAAR—average annual returnABS—automated bond systemAD Line—advance/decline lineADR—American Depositary ReceiptADX—Average Directional Movement
Index
AGI—adjusted gross incomeAMEX—American Stock ExchangeAMT—Alternative Minimum TaxAON—all or noneAPR—annual percentage rateAPV—adjusted present valueAPY—annual percentage yieldAR—accounts receivableARM—adjustable rate mortgageASX—Australian Stock ExchangeATM—at-the-moneyATP—arbitrage trading programATR—average true rangeBIC—bank investment contractBIS—Bank for International SettlementsBOP—balance of paymentsBOT—balance of tradeBP—basis pointCAPEX—capital expenditureCAPM—capital asset pricing modelCAPS—convertible adjustable preferred
stock
CBOE—Chicago Board Options ExchangeCBOT—Chicago Board of TradeCCE—cash and cash equivalentsCCI—Commodity Channel Index
CD—certiﬁcate of depositCEO—chief executive ofﬁcerCFA—chartered ﬁnancial analystCFO—chief ﬁnancial ofﬁcerCFP—certiﬁed ﬁnancial plannerCFPS—cash ﬂow per shareCFTC—Commodity Futures Trading
CommissionCOGS—cost of goods soldCOO—chief operating ofﬁcerCPA—certiﬁed public accountantCPI—consumer price indexCPM—cost per thousandCSI—Commodity Selection IndexCUSIP—Committee on Uniform SecuritiesIdentiﬁcation Procedures
DAT—direct-access tradingDD—due diligenceDI—disposable incomeDJIA—Dow Jones Industrial AverageDJTA—Dow Jones Transportation AverageDJUA—Dow Jones Utility AverageDMI—Directional Movement IndexDPSP—deferred proﬁt sharing planDRIP—dividend reinvestment planEAFE—European, Australasian, Far East
Equity Index
EBIT—earnings before interest and taxesEBITDA—earnings before interest, taxes,depreciation, and amortizationECN—electronic communication networkEDGAR—Electronic Data Gathering
Analysis and Retrieval
EMA—exponential moving average
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TABLE D.1 (Continued)
EPS—earnings per shareERISA—Employee Retirement Income
Security ActESO—employee stock optionETF—exchange-traded fundFAD—funds available for distributionFASB—Financial Accounting Standards
Board
FDIC—Federal Deposit Insurance
Corporation
FFO—funds from operationsFIFO—ﬁrst in, ﬁrst outFHLMC—Federal Home Loan Mortgage
Corporation (Freddie Mac)FNMA—Federal National Mortgage
Association (Fannie Mae)FOMC—Federal Open Market CommitteeFRA—forward-rate agreementFRB—Federal Reserve BoardFRS—Federal Reserve SystemGAAP—generally accepted accounting
principles
GARP—growth at a reasonable priceGDP—gross domestic productGIC—guaranteed investment certiﬁcateGNMA—Government National MortgageAssociation (Ginnie Mae)
GO—general obligation bondGSE—government-sponsored enterpriseGTC—good till canceled orderHOLDRS—Holding Company Depositary
Receipts
HTML—hypertext markup languageIFCI—International Finance Corporation
Investable IndexIPO—initial public offeringIRA—individual retirement accountIRR—internal rate of returnISO—International Organization for
Standardization
ITM—in-the-moneyIV—implied volatilityJSE—Johannesburg Stock ExchangeKCBT—Kansas City Board of TradeLBO—leveraged buyoutLEAPS—long-term equity anticipation
securities
LIFO—last in, ﬁrst out
LLC—limited liability companyLP—limited partnershipMA—moving averageMACD—moving averageconvergence/divergenceMEM—maximum entropy methodMER—management expense ratioMIPS—Monthly Income Preferred
SecuritiesMIT—market if touchedMPT—modern portfolio theoryMSCI—Morgan Stanley Capital
International
NASD—National Association of Securities
Dealers
NASDAQ—National Association of
Securities Dealers AutomatedQuotationsNAV—net asset valueNMS—normal market sizeNOI—net operating incomeNPV—net present valueNSO—nonqualiﬁed stock optionsNYSE—New York Stock ExchangeOBV—on-balance volumeOI—open interestOID—original issue discountOPEC—Organization of PetroleumExporting Countries
OTC—over-the-counterOTM—out-of-the-moneyPDF—portable document formatP/E—price-earnings ratioPEG—price/earnings to growthPOP—public offering pricePPI—producer price indexQQQ—ticker symbol for Nasdaq 100
Trust
R&D—research and developmentREIT—real estate investment trustRIC—return on invested capitalROA—return on assetsROE—return on equityROI—return on investmentRPI—Retail Price IndexRSI—Relative Strength IndexSAI—Statement of Additional InformationSAR—stop and reverse
(continues)
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TABLE D.1 (Continued)
SEC—Securities and Exchange
Commission
SEMI—Semiconductor Equipment andMaterials InternationalSEP—simpliﬁed employee pensionSIC—Standard Industrial ClassiﬁcationSIPC—Securities Investor Protection
Corporation
SMA—simple moving averageSOES—small order execution systemSOX—Philadelphia Semiconductor 
Index
S&P—Standard & Poor’sSPDRs—Standard & Poor’s Depositary
Receipts (ETF)SSR—sum of squared residuals
SV—statistical volatilitySWIFT—Society for Worldwide Interbank
Financial Telecommunication
TPO—time price opportunityTRIN—trading IndexTSE—Toronto Stock ExchangeUN—United NationsVIX—CBOE Market Volatility IndexVPT—volume price trendVXN—Nasdaq Volatility IndexWSE—Winnipeg Commodity ExchangeXD—ex-dividendXR—ex-rightsXY—ex-warrantsYTD—year-to-dateYTM—yield to maturity
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Glossary
ABC  wave Elliott  wave  terminology  for  a  three-wave  countertrend  price  move-ment. Wave A is the ﬁrst price wave against the trend of the market. Wave B is acorrective wave to Wave A. Wave C is the ﬁnal price move to complete the coun-tertrend price action.
adjustment The process of buying or selling instruments to bring a position deltaback to zero and increase proﬁts.
All Ordinaries Index The major index of Australian stocks. This index repre-sents  280  of  the  most  active  listed  companies  or  the  majority  of  the  equity capitalization (excluding foreign companies) listed on the Australian Stock Ex-change (ASX).
American Stock Exchange (AMEX) A private, not-for-proﬁt corporation, locatedin  New  York  City,  that  handles  approximately  one-ﬁfth  of  all  securities  tradeswithin the United States.
American-style option An option contract that can be exercised at any time be-tween the date of purchase and the expiration date. Most exchange-traded optionsare American-style.
amortization The paying off of debt in regular installments over a period of time.
analyst Employee of a brokerage or fund management house who studies com-panies and makes buy and sell recommendations on their stocks. Most specializein a speciﬁc industry.
annual  earnings  change  (percent) The historical earnings change between themost recently reported ﬁscal year earnings and the preceding year earnings.
annual  net  proﬁt  margin  (percent) The  percentage  that  the  company  earnedfrom gross sales for the most recently reported ﬁscal year.
annual  percentage  rate  (APR) The  cost  of  credit  that  the  consumer  pays,  ex-pressed as a simple annual percentage.
annual rate of return The simple rate of return earned by an investor for eachyear.
533
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GLOSSARY
annual report A report issued by a company to its shareholders at the end ofthe  ﬁscal  year,  containing  a  description  of  the  ﬁrm’s  operations  and  ﬁnancialstatements.
annuity A  series  of  constant  payments  at  uniform  time  intervals  (for  example,periodic interest payments on a bond).
appreciation The increase in value of an asset.
arbitrage The simultaneous purchase and sale of identical ﬁnancial instrumentsor commodity futures in order to make a proﬁt, where the selling price is higherthan the buying price.
arbitrageur An individual or company who takes advantage of momentary dis-parities  in  prices  between  markets  to  lock  in  proﬁts  because  the  selling  price  ishigher than the buying price.
ascending  triangle A  sideways  price  pattern  with  two  converging  trend  lines;the top trend line is relatively ﬂat (resistance), while the bottom trend line (sup-port) is rising. This is generally considered a bullish formation, since most of thetime it will break out to the upside.
ask The lowest price of a speciﬁc market that market makers, ﬂoor brokers, orspecialists are willing to sell at.
assignment When the short option position is notiﬁed of the long position’s in-tent  to  exercise.  The  long  position  exercises  and  the  short  position  is  assigned.The long position has the right to exercise; if the trader chooses to exercise, theshort position must oblige.
at-the-money (ATM) When the strike price of an option is the same as the cur-rent price of the underlying instrument.
at-the-opening  order An  order  that  speciﬁes  execution  at  the  opening  of  themarket or else it is canceled.
auction market A market in which buyers enter competitive bids and sellers en-ter  competitive  offers  simultaneously.  Most  stock  and  bond  markets,  includingthose on the NYSE, function this way.
automatic exercise The automatic exercise of an in-the-money option at expira-tion by the clearing ﬁrm.
Average  Directional  Index  (ADX) Developed  by  Welles  Wilder,  the  ADX  indi-cates the degree in which a security is trending. It is a normalized index that usesthe components of the Directional Movement Indicator (DMI). It is typically calcu-lated for a 14-period time frame and does not usually move into extreme ranges.The ADX indicates a trending market when the indicator is rising and a nontrend-ing market when the indicator is falling. Standard use of the ADX includes the fol-lowing: an ADX line rising above 20, signals a trending market, while an ADX linefalling below 40, signals the start of a nontrending environment.
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535
back months The futures or options on futures months being traded that are fur-thest from expiration.backspread A spread in which more options are purchased than sold and whereall options have the same underlying asset and expiration date. Backspreads areusually delta neutral.back-testing The testing of a strategy based on historical data to see if the re-sults are consistent.balance sheet A ﬁnancial statement providing an instant picture of a ﬁrm’s or in-dividual’s ﬁnancial position; lists assets, liabilities, and net worth.bar chart A chart composed of a vertical bar in the center that shows the pricerange for the period, as well as a horizontal hash mark that identiﬁes the openingprice. By reviewing the chart alone, a trader can determine the high and low tradesfor the time period designated on the chart.bear An  investor  who  believes  that  a  security  or  the  market  is  falling  or  is  ex-pected to fall.bear call spread A strategy in which a trader sells a lower strike call and buys ahigher strike call to create a trade with limited proﬁt and limited risk. A fall in theprice of the underlying asset increases the value of the spread. Net credit transac-tion; maximum loss = difference between the strike prices less net credit; maxi-mum gain = net credit.bear market A declining stock market over a prolonged period of time, usuallycaused by a weak economy and subsequent decreased corporate proﬁts.bear put spread A strategy in which a trader sells a lower strike put and buys ahigher strike put to create a trade with limited proﬁt and limited risk. A fall in theprice of the underlying asset increases the value of the spread. Net debit transac-tion;  maximum  gain  =  difference  between  strike  prices  less  the  net  debit;  maxi-mum loss = net debit.
bid The highest price at which a ﬂoor broker, trader, or dealer is willing to buy asecurity or commodity for a speciﬁed time.
bid and asked The bid (the highest price a buyer is prepared to pay for a tradingasset)  and  the  asked  (the  lowest  price  acceptable  to  a  prospective  seller  of  thesame security) together comprise a quotation or quote.
bid-asked spread The difference between bid and asked prices.
bid up When demand for an asset drives up the price paid by buyers.
block  trade A  trade  so  large  (for  example,  5,000  shares  of  stock  or  $200,000worth of bonds) that the normal auction market cannot absorb it in a reasonabletime at a reasonable price.
blow-off top A steep and rapid increase in price followed by a steep and rapiddrop in price. This indicator is often used in technical analysis.
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GLOSSARY
blue-chip stock A stock with solid value, good security, and a record of dividendpayments or other desirable investment characteristics with the best market capi-talization in the marketplace. Many times these stocks have a record of consistentdividend  payments,  receive  extensive  media  coverage,  and  offer  a  host  of  otherbeneﬁcial investment attributes. This term is derived from poker, where blue chipshold the most value. On the downside, blue-chip stocks tend to be quite expensiveand often have little room for growth.board  lot The  smallest  quantity  of  shares  traded  on  an  exchange  at  standardcommission rates.Bollinger  bands Speciﬁc types of envelopes that use expanding and contract-ing  values  employed  as  a  lagging  indicator.  This  is  accomplished  by  setting  theenvelope lines above and below the moving average equal to a value that varieswith price. Commonly used settings for Bollinger bands include the 20-period ex-ponential moving average, plus or minus two standard deviations, to create theenvelope channels.bond Financial instruments representing debt obligations issued by the govern-ment  or  corporations  traded  in  the  futures  market.  A  bond  promises  to  pay  itsholders periodic interest at a ﬁxed rate (the coupon), and to repay the principal ofthe loan at maturity. Bonds are issued with a par or face value of $1,000 and aretraded based on their interest rates—if the bond pays more interest than availableelsewhere, its worth increases.breakeven (1) The point at which gains equal losses; (2) the market price that astock or futures contract must reach for an option to avoid loss if exercised; for acall,  the  breakeven  equals  the  strike  price  plus  the  premium  paid;  for  a  put,  thebreakeven equals the strike price minus the premium paid.break  out A  rise  in  the  price  of  an  underlying  instrument  above  its  resistancelevel or a drop below the support level.broad-based index An index designed to reﬂect the movement of the marketas a whole (for example, the S&P 100, the S&P 500, and the Amex Major MarketIndex).broker An individual or ﬁrm that charges a commission for executing buy andsell orders.bull An investor who believes that a market is rising or is expected to rise.bull call spread A strategy in which a trader buys a lower strike call and sells ahigher strike call to create a trade with limited proﬁt and limited risk. A rise in theprice of the underlying asset increases the value of the spread. Net debit transac-tion; maximum loss = net debit; maximum gain = difference between strike pricesless the net debit.bull  market A  rising  stock  market  over  a  prolonged  period  of  time,  usuallycaused by a strong economy and subsequent increased corporate proﬁts.
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Glossary
537
bull put spread A strategy in which a trader sells a higher strike put and buys alower strike put to create a trade with limited proﬁt and limited risk. A rise in theprice of the underlying asset increases the value of the spread. Net credit transac-tion; maximum loss = difference between strike prices less net credit; maximumgain = net credit.butterﬂy spread The sale (or purchase) of two identical options, together withthe purchase (or sale) of one option with an immediately higher strike, and oneoption with an immediately lower strike. All options must be the same type, havethe same underlying asset, and have the same expiration date.buy on close To buy at the end of a trading session at a price within the closingrange.buy on opening To buy at the beginning of a trading session at a price within theopening range.buy stop order An order to purchase a security entered at a price above the cur-rent offering price, triggered when the market hits a speciﬁed price.CAC 40 Index A broad-based index of 40 common stocks on the Paris Bourse.calendar spread A spread consisting of one long option with a far off expirationmonth and one short option with 30 to 45 days until expiration. Both options mustbe the same type and have the same exercise price.call option An option contract which gives the holder the right, but not the oblig-ation,  to  buy  a  speciﬁed  amount  of  an  underlying  security  at  a  speciﬁed  pricewithin a speciﬁed time in exchange for paying a premium.call premium The amount a call option costs.candlestick chart Chart that includes the price range for the day, as well as theopening  and  closing  price.  A  candlestick  bar  includes  a  “body”  bounded  by  theopen and close for the period and “shadows” which extend above and below thebody to the high and low prices for the period. When the “body” of the candlestickis dark (or red in color charts), the closing price was below the opening. When thebody of the candlestick is white (or green in color charts), the closing price washigher than the opening.cancel (CXL) order An order is used to eliminate a prior order that has not yetbeen executed. A canceled order must be communicated by a trader to the brokerand such an order is not executed or conﬁrmed until the ﬂoor broker reports backthat the trader is out of the trade. Understand that once an order has been ﬁlled, itcannot be canceled, so a CXL order is really only a request to cancel. Therefore,you should not assume an order has been canceled just because you enter a re-quest to do so—wait for the conﬁrmation.capital The amount of money an individual or business has available.capital  gain The  proﬁt  realized  when  a  capital  asset  is  sold  for  a  higher  pricethan the purchase price.
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GLOSSARY
capitalization Refers to the current value of a corporation’s outstanding sharesin dollars.
capital loss The loss incurred when a capital asset is sold for a lower price thanthe purchase price.
capped-style option An option with an established proﬁt cap or cap price.
cash account An account in which the customer is required to pay in full for allpurchased securities.
cash  dividend A  dividend  paid  in  cash  to 