An index gauges theperformance of a group of stocks, rather than shares of just one company.Some indexes are designed to track entire markets, such as Japan’s Nikkeior Germany’s DAX Index. Other indexes are used to track very specific areas of the equity markets, such as the PHLX Bank Sector Index or theAMEX Airline Index. As we will see, many of these indexes can be usednot only to track the performance of the stock market, but also to tradethe market using futures, exchange-traded funds, and options.Prior to putting money on the line, however, traders should understand the investment vehicles well. Successful index traders share manythings in common, and two of the most basic are an understanding of theirtrading vehicles along with background knowledge about the index market. This is the purpose of the first few chapters of this book—to provideinformation about index-based securities along with their correspondingmarkets. In later chapters, we’ll introduce the technical and fundamentaltools that trigger trading actions.Index: A group of stocks that can be traded as one portfolio, such asthe S&P 500. Broad-based indexes cover a wide range of industriesand companies, and narrow-based indexes cover stocks in one industry or economic sector.
THE FIRST MARKET AVERAGESIndexes are not new. In fact, Charles Dow developed the first market average, the Dow Jones Railroad Average, in 1884. At the time, the railway wasthe most important industry of the day. Dow created the railroad averagein order to simplify the process of viewing the performance of shareprices of the companies in that industry. In other words, rather than looking at the daily price changes of each individual stock in the market,Charles Dow published the average closing prices of the most activelytraded railway companies. Since its inception more than a century ago,the railroad average has changed and is now known as the Dow JonesTransportation Average ($TRAN). It is still with us today, but now it includes airline, air freight, railroad, and trucking companies.Chances are, you’ve heard about the Dow Jones Industrial Average(a.k.a. “the Dow”) on your nightly television news program. The Dow, theworld’s second index, was first published in the Customers’ AfternoonLetter (the predecessor to today’s Wall Street Journal) in 1896. This industrial average was designed to give investors a better sense of what was
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
Page 3
A Look Back
3
happening with stocks outside the railroad sector. In the late nineteenthcentury, the Dow Jones Industrial Average included the leading industrialcompanies of the day. Today it is still a widely watched barometer for thestock market. According to the publishers of the Wall Street Journal’swebsite (www.wsj.com), the stated objective of the Dow is to “representU.S.–listed equities, excluding transportation and utility stocks.”The Dow: Used as an overall indicator of market performance, theDow Jones Industrial Average (also referred to as “the Dow”) is composed of 30 blue-chip stocks that are traded daily on the New YorkStock Exchange (see Figure 1.1).Ticker symbols: Stocks that trade on the exchanges are identiﬁedby ticker symbols. Stocks that trade on the New York Stock Exchangehave symbols with one, two, or three letters. For example, the symbolfor Ford is F, General Motors is GM, and Bank of America is BAC. Thesesymbols are used to view quotes, create charts, and place orders. Indexes also have ticker symbols. However, most quote services don’trecognize an index symbol unless it is preceded by a dollar sign. Forexample, the symbol for the Dow Jones Industrial Average is $INDUand the symbol for the Dow Jones Transports is $TRAN.
FIGURE 1.1 Dow Jones Industrial Average (Source: www.ProﬁtSource.com)
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
4
Page 4
THE INDEX TRADING COURSE
WHAT DID THE MARKET DO TODAY?What are people talking about when they ask about “the market”? Whatdo traders mean when they ask, “What did the market do today?” More often than not, when one of our friends, students, or colleagues inquiresabout the market, they are referring to the Dow Jones Industrial Average.The latest value of the Dow is quoted widely in the financial press andnightly on the evening news.So what do the daily readings from the Dow tell us? While the Dowonce included 12 stocks, through the years the list was expanded to 30.Today, 28 Dow stocks trade on the New York Stock Exchange (NYSE) andtwo—Intel (INTC) and Microsoft (MSFT)—trade on the NASDAQ. Themost recent changes to the Dow took place in April 2004, when Pfizer(PFE), Verizon (VZ), and American International Group (AIG) replacedEastman Kodak (EK), AT&T (T), and International Paper (IP).Therefore, today, the Dow is not really an “industrial” average. It is anindex consisting of financial, technology, and pharmaceutical stocks,along with stocks from a mixed set of industry groups. By gauging the performance of these 30 blue chip stocks, the Dow is a daily marker for theAmerican economy.Blue chip stock: Derived from the game of poker, where blue chipscarry the highest value, the term refers to large, mature, dominantcompanies that dominate their business ﬁeld and pay consistent dividends. These stocks are often considered less risky than shares ofsmaller companies because they have less chance of running into serious ﬁnancial trouble or going bankrupt.
At the same time, while the Dow Jones Industrial Average is used as abarometer for the stock market, it is no longer a simple average. WhenCharles Dow created it, he simply added the closing prices of 12 stocksand divided by 12 (appropriately referred to as the divisor) to get the average. Today’s average consists of 30 stocks, but the average is fashionedfrom a slightly different construction. Rather than computing a straightforward average, using a modified divisor helps to ensure continuity in theaverage after mergers, stock splits, and dividends. As we see in later chapters, both dividends and stock splits will lower the value of a stock, and anindex must account for these changes to the stock price.The 30 stocks in the index, their weightings, and the divisor areshown in Table 1.1. Notice that the higher-priced stocks command agreater weighting within the Dow Jones Industrial Average (it is sometimes criticized for that reason).
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
Page 5
5
A Look Back
TABLE 1.1 The 30 Stocks of the Dow Jones Industrial Average as ofMay 17, 2006Current Divisor = 12.49Symbol
Name
Last Price
Weight
AA
Alcoa, Inc.
33.64
2.36%
AIG
American International Group Inc.
64.05
4.49%
AXP
American Express Co.
52.98
3.71%
BA
Boeing Co.
86.40
6.06%
C
Citigroup
49.54
3.47%
CAT
Caterpillar Inc.
77.64
5.42%
DD
E.I. Du Pont de Nemours & Co.
44.68
3.13%
DIS
Walt Disney Co.
30.35
2.13%
GE
General Electric Co.
34.79
2.44%
GM
General Motors Corp.
25.53
1.79%
HD
Home Depot Inc.
38.45
2.70%
HON
Honeywell International Inc.
43.24
3.03%
HPQ
Hewlett-Packard Co.
31.11
2.18%
IBM
International Business Machines
82.16
5.76%
INTC
Intel Corp.
19.06
1.34%
JNJ
Johnson & Johnson
60.25
4.22%
JPM
JP Morgan Chase and Co. Inc.
44.32
3.11%
KO
Coca-Cola Co.
43.84
3.07%
MCD
McDonald’s Corp.
34.70
2.43%
MMM
3M Company
86.76
6.08%
MO
Altria Group Inc.
71.75
5.03%
MRK
Merck & Company Inc.
35.12
2.46%
MSFT
Microsoft Corp.
23.01
1.61%
PFE
Pﬁzer Inc.
24.90
1.75%
PG
Procter & Gamble Co.
56.04
3.93%
T
AT&T
25.77
1.81%
UTX
United Technologies Corp.
65.19
4.57%
VZ
Verizon Communications Inc.
31.70
2.22%
WMT
Wal-Mart Stores Inc.
48.07
3.37%
XOM
Exxon Mobil Corp.
61.96
4.34%
Source: Dow Jones.
ccc_fontanills_001-010_ch01.qxd
6
6/27/06
8:19 AM
Page 6
THE INDEX TRADING COURSE
In sum, the Dow Jones is a price-weighted index of 30 stocks. We discuss a variety of innovative methods used to create indexes, such as theDow, in a later chapter.
DOW THEORYAlthough named for him, Charles Dow did not invent Dow theory. It isbased on many of his thoughts and ideas and the use of his first two averages: the transports and industrials. Basically, Dow theory is a tool forgauging whether the stock market is in a bear cycle (a prolonged period offalling prices) or a bull cycle (a sustained period of rising prices) by considering whether the two averages are moving together. According to Dowtheorists, in order for a market advance or decline to have staying power,the two averages must confirm each other’s rise and fall.The following explanation comes from the Dow Jones web site(www.dowjones.com):If the industrials reach a new high, the transports would need toreach a new high to “confirm” the broad trend. The trend reverseswhen both averages experience sharp downturns at around thesame time. If they diverge—for example, if the industrial averagekeeps climbing while the transports decline—watch out! The underlying fundamentals of the theory hold that the industrials make andthe transports take. If the transports aren’t taking what the industrials are making, it portends economic weakness and market problems, Dow theorists maintain.For example, Dow Theory gave a bearish trading signal in September1999 when the industrial average rose to new highs but the transportationaverage did not. Check out the divergence in Figure 1.2. See how the Dowline hits a new high, but the Transports line does not. This so-called “nonconfirmation” is precisely what the Dow theorists expect to see when abull market reaches a turning point. The Transports did not “take” whatthe industrials “make.”Dow theory is discussed later in this book in more detail. For now,the reader should come away with an idea of how an index or a groupof indexes can be used in developing an outlook for the market. Stateddifferently, Dow theory gives a precise signal based on the price actionof two indexes. It is not ambiguous and doesn’t require any guesswork.When trading, this type of clear signal has important advantages. Mostsignificant, it takes the emotion out of the trading decision, which, as
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
Page 7
A Look Back
7
FIGURE 1.2 Chart of INDU and TRAN (Source: www.ProﬁtSource.com)
we see later in the book, is exactly what trading systems are designedto do.
THE NASDAQ AND THE S&P 500 INDEXWhile the Dow Jones Industrial Average is probably the most widelywatched market index, the NASDAQ Composite Index ($COMPQ) is aclose second. This index consists of all the stocks trading on the NASDAQStock Market, which includes shares in thousands of different companies.However, large-cap technology stocks such as Intel (INTC), Oracle(ORCL), and Microsoft (MSFT) dominate the NASDAQ. Therefore, theperformance of the NASDAQ is often associated with the performance ofAmerica’s leading technology companies. Table 1.2 shows the top components of the NASDAQ in October 2005.While the Dow and the NASDAQ are the two indexes most widelywatched by the mainstream, the S&P 500 Index ($SPX) is the most important to investors. It includes 500 of the largest companies trading onthe U.S. stock exchanges. On the one hand, the S&P 500 is a benchmarkfor the performance of the U.S. stock market. It is the index that manyprofessional investors try to “beat.” At the same time, it has some of the
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
8
Page 8
THE INDEX TRADING COURSE
TABLE 1.2 Top Stocks of theNASDAQCompany
Symbol
MicrosoftQualcommIntelAppleAmgenCiscoeBayDell ComputersComcastOracleStarbucksSymantecSears HoldingsGenzymeYahoo
MSFTQCOMINTCAAPLAMGNCSCOEBAYDELLCMCSAORCLSBUXSYMCSHLDGENZYHOO
most actively traded futures and options contracts. Therefore, compared to the Dow and the NASDAQ, the S&P 500 Index is of greater interest to investors and traders. Nevertheless, all three are important andworth watching.
SECTOR TRADINGIf the Dow Jones Railroad Average was the world’s first stock market index, the first average was really a sector index. In contrast to the DowJones Industrial Average—which is widely considered a benchmark for“the market”—the Transports track the performance of a specific sector.Today, traders have a wide array of sector index products to trade. In addition to transportation stocks, examples include energy, financials, technology, and health care.Furthermore, specific sectors can be broken down into industrygroups. For example, technology consists of software, semiconductors,and the other industry groups inventoried in the following list. Simi-
ccc_fontanills_001-010_ch01.qxd
6/27/06
8:19 AM
A Look Back
Page 9
9
larly, financials can be compartmentalized into insurance, real estate,banks, and investment services. The other sectors (energy, health care,basic materials, etc.) can also be broken down into specific industrygroups.FinancialsBanksMajor banksRegional banksInsuranceNonlife insuranceFull-line insuranceInsurance brokersProperty and casualty insuranceReinsuranceLife insuranceReal EstateReal estate holding and developmentReal estate investment trustsBrokersAsset managersConsumer financeSpecialty financeInvestment servicesMortgage financeTechnologyComputer servicesSoftware servicesInternetSoftwareComputer hardwareElectronic office equipmentSemiconductorsTelecommunications equipment
ccc_fontanills_001-010_ch01.qxd
10
6/27/06
8:19 AM
Page 10
THE INDEX TRADING COURSE
CONCLUSIONToday, index traders have the ability to trade, not just the entire marketthrough indexes like the Dow Jones Industrial Average, but also specificsectors and industry groups. Subsequent chapters discuss specific indexproducts as well as options. For now, it’s important to understand thatsome of the strategies discussed in this book are related to the market andthe major averages, such as the Dow. However, other strategies involvespecific sectors and industry groups. In addition, some indexes can beused to track and trade international markets.The world of index trading provides traders with a wealth of opportunities—way too many for any individual to monitor or track. For that reason, the next few chapters not only explain the different index productsbut also narrow down the list to help the reader focus on a handful of themore interesting and actively traded index investments available today.
ccc_fontanills_011-028_ch02.qxd
6/27/06
8:21 AM
Page 11
CHAPTER 2
The IndexMarket Today
I
n the early 1980s, options traders only had one index to choose. Today, the number of available index products is overwhelming. In addition, traders can choose to trade not only popular indexes like theDow Jones Industrial Average, but a large number of exchange-tradedfunds (ETFs) as well. With hundreds of indexes available, finding thebest contract to trade can at first seem quite daunting. That’s why it’s important to understand that each index or ETF is unique and will, therefore, behave differently from others. Sometimes the differences aresubtle. Other times, the differences are significant and can impact theway the investment behaves from one day to the next. For that reason, itmakes sense to understand each product and what factors influence itsperformance.This chapter kicks off the discussion of specific trading tools by providing readers with a working list of tradable index and exchange-tradedproducts available today. It is designed to give an overview of the indexmarket, and to help narrow down the discussion in order to give readers amanageable list of tradable products.Therefore, readers are encouraged to read through the entire chapter,but not dwell on the large number of indexes. Rather than try to keeptrack of them or trade them all, which would be impossible, readersshould make note of the most actively traded indexes and exchangetraded funds listed near the end of this chapter and later in Chapter 11.These investments are used in the majority of the trading strategies discussed throughout this book.
11
ccc_fontanills_011-028_ch02.qxd
6/27/06
12
8:21 AM
Page 12
THE INDEX TRADING COURSE
THE INDEX MARKETAn index measures the performance of a group of stocks. As previouslymentioned, the first index was developed more than 100 years ago whenCharles Dow computed the average price of a handful of railroad stocksand called it the Dow Jones Railroad Average. The idea was to develop abarometer that might be used to track the daily movements in the keystocks of the day. If the average increased in value, it was a sign that stockprices rose that day. However, when the average fell, the decline indicatedthat stocks lost value during that day of trading.Today, averages are used in the same way, but there are thousands ofdifferent indexes, or averages. Each is unique in some respect and eachindex changes over time. For instance, as we saw in Chapter 1, the DowJones Industrial Average ($INDU) includes 30 of the largest companieswith shares listed on the U.S. exchanges. It is continually being changedand modified to ensure that it includes America’s leading companies. Acommittee at Dow Jones & Company (publishers of the Wall Street Journal) meets periodically to determine which companies should be added toor deleted from the Dow Jones Industrial Average. For instance, in a milestone event in 1999, Microsoft (MSFT) and Intel (INTC) became the firstNASDAQ stocks within the Dow Jones Industrial Average. Adding the twotechnology giants to the 105-year-old index reflected the increasing importance of technology within the U.S. economy.
What Is the Index Effect?Changes to an index, like the S&P 500 Index, can make a stock price move,and move fast. For example, when a company is added to the S&P 500 Index, the share price will often rise. The reason for the large price move isthat many fund companies and other institutions try to mimic the performance of various indexes. These are called index funds. For example,there are a large number of funds that hold the same stocks as the S&P 500Index. Examples include the Vanguard S&P 500 Index Fund, which is one ofthe largest mutual funds in existence today, as well as the S&P 500 Depositary Receipts, one of the largest exchange-traded funds today.When the Standard & Poor’s committee decides to add a new company to its index, the news triggers a ﬂurry of buying in the company’sshares. Basically, all of the funds and other portfolios that try to mimicthe index are forced to buy the stock. This sudden increase in demandcauses the share price to rise. Academics refer to this phenomenon as the“index effect.”
ccc_fontanills_011-028_ch02.qxd
The Index Market Today
6/27/06
8:21 AM
Page 13
13
In addition, the Dow today includes large pharmaceutical companieslike Merck (MRK) and Johnson & Johnson (JNJ); financials such as Citigroup (C) and JP Morgan Chase (JPM); and Exxon Mobil (XOM), the largeoil company. Therefore, although it is still called the “industrial average,”today’s Dow includes a variety of stocks from a diverse set of industrygroups and serves as a barometer for large U.S. stocks. In this way, theperformance of the Dow reflects the performance of not just one or twoindustry groups but the market as a whole.Other indexes also measure the performance of the stock market as awhole. The S&P 100 ($OEX) is one of the more popular indexes for options traders. The OEX measures the performance of 100 of the largeststocks trading on the U.S. exchanges. In addition, the S&P 100 Index wasthe first index to have listed options. It became an extremely popular trading vehicle for index traders and was one of the most actively traded contracts during the 1980s.The S&P 500 ($SPX) is also a broad measure of the U.S. stock market.It has one of the more actively traded options contracts today. While theOEX includes 100 stocks, the S&P 500, as its name indicates, consists of500 stocks. Standard & Poor’s created the OEX and the SPX, as well ashundreds of other market indexes. In addition, they make regular changesto these indexes to ensure that they include the largest, most dominantcompanies in the United States.The NASDAQ 100 ($NDX) is an index consisting of 100 of the largestnonfinancial stocks listed on the NASDAQ exchange. Therefore, it offers agauge of the most important companies trading on the NASDAQ. Sincelarge technology stocks dominate the NASDAQ, the NDX is often used totrack and trade the technology sector.It’s important to note, however, that many traders prefer to trade themini-NASDAQ 100 Index ($MNX) rather than the NASDAQ 100 Index. Themini-NASDAQ is equal to 1/100th of the NDX. Therefore, when the NDX isnear 1,500, the mini index will be trading near 150. The lower value hassome important advantages when trading options; this is discussed inmore detail in later chapters.The Chicago Board Options Exchange (CBOE) offers options on all ofthe broad-based indexes. For example, the Dow Jones Industrial Index($DJX) is an index that holds the same stocks as the Dow Jones IndustrialAverage. However, the DJX is equal to 1/100th of the Dow. So when the industrials are near 10,000, the Dow Jones Industrial Index will be tradingfor roughly 100.While the Dow and the S&P 500 are barometers for the performanceof large companies, other indexes have been created to track the performance of smaller companies. The S&P Mid-Cap 400 Index ($MID) is apopular tool for tracking medium-size companies. The Russell 2000
ccc_fontanills_011-028_ch02.qxd
6/27/06
8:21 AM
Page 14
14
THE INDEX TRADING COURSE
Small-Cap Index ($RUT) is the most widely watched barometer for theperformance of smaller companies. In fact, indexes have been createdaround very specific areas of the market based on size, growth characteristics, dividend yields, and a host of other factors. A complete list ofother market indexes is included in Appendix A.
Sector IndexesA number of indexes have been created to track specific sectors. For example, the Philadelphia Stock Exchange (PHLX) lists a family of sector indexes. The exchange lists a semiconductor ($SOX), a gold and silvermining ($XAU), and a bank ($BKX) index, among others. Table 2.1 lists allof the sector index options that are included in the PHLX.The American Stock Exchange (AMEX) also lists a variety of indexes
TABLE 2.1 PHLX Sector Index OptionsIndex
Ticker
PHLX/KBW Bank IndexKBW Capital Markets IndexKBW Insurance IndexKBW Mortgage Finance IndexKBW Regional Banking IndexPHLX Defense SectorSMPHLX Drug SectorSMPHLX Europe SectorSMPHLX Gold/Silver SectorSMPHLX Housing SectorSMPHLX Oil Service SectorSMPHLX Semiconductor SectorSMPHLX Utility SectorSMPHLX World Energy IndexSMSIG Cable, Media & Entertainment IndexTMSIG Casino Gaming IndexSIG Coal Producers IndexTMSIG Footware & Athletic IndexTMSIG Investment Managers IndexTMSIG Oil Exploration & Production IndexTMSIG Semiconductor Capital Equipment IndexTMSIG Semiconductor Device IndexTMSIG Specialty Retail IndexTMSIG Steel Producers IndexTMTheStreet.com Internet SectorWellspring Bioclinical Trials IndexTM
BKXKSXKIXMFXKRXDFXRXSXEXXAUHGXOSXSOXUTYXWESCQSGVSCPFSQSMQEPXSEZSDLRSQSTQDOTWHC
ccc_fontanills_011-028_ch02.qxd
6/27/06
8:21 AM
Page 15
15
The Index Market Today
TABLE 2.2 AMEX Sector Index OptionsAMEX Index
Ticker
AMEX Airline IndexAMEX Biotechnology IndexAMEX Computer TechnologyAMEX Defense IndexAMEX Disk Drive IndexAMEX Gold Bugs IndexAMEX Natural Gas IndexAMEX Oil IndexAMEX Pharmaceutical IndexAMEX Securities Broker/Dealer IndexDeutschebank EnergyInteractive Week Internet IndexMini-NASDAQ 100 IndexMorgan Stanley Commodity RelatedMorgan Stanley Consumer Index OptionsMorgan Stanley Cyclical Index OptionsMorgan Stanley Technology IndexNASDAQ Biotech IndexNASDAQ 100 IndexSPADE Defense Index
XALBTKXCIDFIDDXHUIXNGXOIDRGXBDDXEIIXMNXCRXCMRCYCMSHNBINDXDXS
for options trading. The AMEX Airline Index ($XAL), the AMEX Biotechnology Index ($BTK), and the AMEX Gold Bug Index ($HUI) are examples. Table 2.2 lists the tradable sector indexes that are included on theAmerican Stock Exchange.The Chicago Board Options Exchange (CBOE) is the largest exchangefor index options trading. In addition to trading the market indexes suchas the S&P 500, the Dow Jones Industrial Index, the S&P 100 Index, andthe mini-NASDAQ 100 Index, the exchange lists options on a variety of industry or sector products. Table 2.3 shows the sector indexes with optionslisted on the Chicago Board Options Exchange.In July 2005, the CBOE introduced 12 new PowerPacks Indexes. Eachindex was created to track a specific sector or industry group. The 12 newindexes are “designed by the CBOE to provide investors with a comprehensive set of trading tools to manage the risk of, or gain exposure to, adiversified group of stocks in certain industry groups,” according to aJune 23, 2005, press release.* Each index consists of 25 large and actively*“CBOE Introduces New Family of Sector Indexes, Power Packs, Futures and Options to Launch Friday, July 8,” Chicago Board Options Exchange web site(www.cboe.com), June 23, 2005.
ccc_fontanills_011-028_ch02.qxd
6/27/06
8:21 AM
Page 16
16
THE INDEX TRADING COURSE
TABLE 2.3 CBOE Sector Index OptionsCBOE Indexes
Ticker
CBOE Gold IndexCBOE Internet IndexCBOE Oil IndexCBOE Technology IndexGSTI Computer HardwareGSTI Internet IndexGSTI Multimedia NetworkingGSTI Semiconductor IndexGSTI Software IndexGSTI Services IndexGSTI Composite IndexMS Retail IndexMS Biotech IndexMS Oil Services IndexMS Multinational Company Index
GOXINXOIXTXXGHAGINGIPGSMGSOGSVGTCMVRMVBMGONFT
traded stocks from one specific industry group. For example, the PowerPacks Banks Index ($PVK) includes 25 stocks from the banking sector.Table 2.4 lists the 12 new trading vehicles, which include biotech, gold, oil,retail, and technology indexes.The International Securities Exchange (ISE), which is the one of thenewest U.S.–based options exchanges, also lists several sector indexesTABLE 2.4 CBOE PowerPack IndexesPowerPack Indexes
Ticker
CBOE PowerPacks Banks Index
PVK
CBOE PowerPacks Biotech Index
PVP
CBOE PowerPacks Gold Index
POU
CBOE PowerPacks Internet Index
PVL
CBOE PowerPacks Iron & Steel Index
PVF
CBOE PowerPacks Oil Index
POY
CBOE PowerPacks Oil Service Index
PVO
CBOE PowerPacks Pharmaceuticals
PVU
CBOE PowerPacks Retail
RPY
CBOE PowerPacks Semiconductor
PVU
CBOE PowerPacks Technology
PVC
CBOE PowerPacks Telecom Index
POQ
ccc_fontanills_011-028_ch02.qxd
6/27/06
8:21 AM
Page 17
17
The Index Market Today
(see Table 2.5). The family of ISE indexes started trading in 2005 and includes a homebuilder’s index, an oil and gas index, and a gold index. TheSINdex holds a basket of so-called “sin” stocks, which are shares ofcompanies involved in industries such as gaming, alcoholic beverages,and tobacco.Obviously, the list of available sector indexes has become quite large.See Appendix A for a complete list of sector indexes, where they arelisted, and how many stocks are within each index. It is impossible totrack and trade them all. Therefore, traders need to focus on the index options with the greatest amount of liquidity or that meet a specific need.For example, if the strategist wants to track the semiconductor sector, either the PHLX Semiconductor Index ($SOX) or the GSTI Semiconductor Index ($GSM) will work. However, when trading, one index clearlyoffers important advantages over the other—namely, the options on theSOX are much more active and liquid. Later, we describe an even betterway to capture changes in the chip sector.
International IndexesAlthough not as prevalent, there are a few international indexes