Covered position, 25–26Covered write:with convertible securities, 111–118description of, 31enhancing returns and, 92–95selling volatility and, 49–50as strategy, 27–28Credit spread:condors, 85–88debit spread compared to, 84description of, 73as multi-option strategy, 39in puts, 66See also Vertical credit spreadCrude oil, 60Customer satisfaction, 192Cutting losses, 157–158
Equivalent shares, 115Equivalent strategies, 34–38European style, 11–12Exercise price, 2Exercising options, 11–12Exiting:long positions, 175trades, 150–151Expiration, 11
DataVue service, 190Debit spread:credit spread compared to,84description of, 73psychological factors, 74–76uses of, 73–74See also Vertical debit spreadDecision making, 152Deep in-the-money options, 122–124Delphi System (Borland), 189–190Delta, 19–20, 141, 142Delta-neutral position, 21, 45Delta-neutral trading, 54–55Direct access brokerage, 81Directional trading, 18, 73, 76Downside strategy, 57–59Duration, 71
Gamma, 20, 141–142General Electric, 164Genesis Microchip, 162Gold market, 60–62, 63, 91Gold/silver index (XAU), 47, 48, 49,50Graham, Jim, 110–111, 176Grains, seasonal patterns in, 55–59Grand bottom, 176Greeks, 19–21, 141–143
Early-exercise premium, 131Eastman Kodak, volatility history,43–44Emotions, controlling, 154–156Empirical distribution, 138Employees, 193Engineering, 191–192
Fair value, 40, 51Fair value calculators, 133“Fast market conditions,” 157Forchione, Paul, 141–143, 191Forest Labs, 102, 103Forward contract, 2Frank, Scott, 190Funnel analogy, 17–18Futures options prices, modeling,145–146
Halliburton, 94, 95Hedging:position, 22, 33stock portfolio, 124–125Historical volatility, 46Historical volatility chart:Halliburton, 94Microsoft, 120Horizontal debit spread,106Horizontal spread:balancing factors and,139overview of, 76–77in sideways market, 78–82
ccc_yates_indx_213-218.qxd 6/4/03 1:37 PM Page 215
215
Index
IBM, 164, 185Implied volatility (IV):calculating, 134as deﬁnitive parameter for price,140description of, 44–45, 46prices and, 147–148put and call, 106–107Index option, 124–125Inﬂection point, 37–38Institutional trading, 5Intermonth volatility, 138–139In-the-money option:description of, 8at expiration, 11time decay curve, 16time value and, 9Intrinsic value, 7–8, 9–10Investor’s Daily newspaper, 188,189IV, see Implied volatility (IV)Johnson & Johnson, 98, 99Just-in-the-money option, 71LEAPS (Long-term Equity AnticipationSecurities), 95–98, 119, 122Learning from mistakes, 156–158Legging, 81Leptokurtosis, 137–138Let’s Talk software, 188Leverage, 3Life, ﬁtting trading into, 158–159Limit order, 152Listed option, 4–6Logarithm, 128Lognormal distribution, 128Long call, 26–27Long call with short stock, 30, 31Long in market, 6, 7Long position, exit rules for, 175Long put, 30–31, 32Long put with long stock, 33–34, 35Long straddle, 39–40Long-term Equity AnticipationSecurities, see LEAPS (Long-termEquity Anticipation Securities)
Making a market, 5, 21Margin requirement, 29, 151–152Market:commodities, 62–63as having mind of its own,153making, 5, 21rhythm of, 125sideways, 78–82trending, strategies for, 76–77trends in, 153–154See also Volatile marketMarket maker, role of, 21–22Market order, 152, 157Married put, 33–34, 35McMillan, Lawrence, 69–70Mean reversion tendency of volatility,45Mesler, Donald T., 117MetaStock program, 190Microsoft, 120, 121Millennium Pharmaceuticals, 112–114Mistakes, learning from, 156–158Modula 2, 188–189Monte Carlo simulation, 128–129Moral aspects of trading, 159Multi-option strategies, 39–41Multiplier, 6Nabisco, 106Naked position, 25–26Naked strangle, 47, 48–49Naked writing, 64Nasdaq, 167Natural gas, 60, 61Nearby option, 13, 70–73Net zero expected return,40News, listening to, 152–153Nike, 167Normal probability distribution,128Numerical methods, 128–130Offsetting option trades, 10Open interest, 22–24OpScan service, 108, 190
ccc_yates_indx_213-218.qxd 6/4/03 1:37 PM Page 216
216Options:nonlinear performance curve of,70overview of, 2–4response to changing conditions,18–21special properties of, 14Options analysis software:limitations of, 144–146prices, checking, 146–147Options Clearing Corporation, 5Options pricing models:Black model, 133Black-Scholes model, 130–132as calendar-day based, 183limitations of, 144–146numerical methods, 128–130overview of, 127–128true delta and gamma, 143–144using, 150volatility and, 133–134volatility skew and, 134–136OptionVue 5 software:development of, 189–190high volatility projection, 122probability calculator, 86, 87OptionVue IV software, 189OptionVue Plus software, 189OptionVue Research, 190OptionVue software, 186OptionVue Systems International:history of, 189, 193OpScan service, 108web site, 110Orange juice options, 51, 52, 53,59–60Out-of-the-money option:description of, 3, 8, 9time decay curve, 17Over-the-counter (OTC) option, 4Paper trading, 149–150Parabolic formula, 136Parity:put/call, 139–141trading at, 10Patterns, 153–154
INDEX
Paying dues, 152Performance graph:combining positions, 36–38, 114,116horizontal debit spread, 78long call, 26–27long call with short stock, 30,31long put, 31, 32long put with long stock, 34, 35option, 14–15put backspread, 92, 93short covered call, 28short covered put, 32, 33short naked call, 29–30short naked put, 33, 34single-option strategies, 34–35vertical and horizontal debit spreads,77Performance requirement, 29Portfolio manager, 150Premium, 3Preparation for trading, 149–154Price:checking, 146–147volatility and, 64–67Price jump, 138–139Protective put, 33–34, 35ProVue software, 187, 188, 189Psychological factors:comfort level, 152in directional trading, 74–76,142–143emotions, 154–156Put backspread, 91–92,93Put/call parity, 139–141Put option:description of, 6in the money, 8out of the money, 8QQV, 183Quotations, 12–14Ratio spread, 104Reading about options trading, 149
ccc_yates_indx_213-218.qxd 6/4/03 1:37 PM Page 217
217
Index
Resources on options, 154Retracement, playing, 168Reverse conversion, 140Rho, 20Rhythm of market, 125Risk:covered writing and, 93tolerance for, 142–143, 152RJ Reynolds, 106Roll model, 131Seasonal patterns:grains, 55–59natural gas, 60, 61orange juice, 59–60Selling a straddle, 23–24Sell-off:best strategy for, 165–166VIX spike as stopping, 179–182Seminars, 149Short, going, 6–7Short covered call, 27–28Short covered put, 31–32, 33Short entry signal, 173–175Short naked call, 29–30Short naked put, 32–33, 34Sideways market and horizontalspread, 78–82Simple call purchase, 102, 104Single-option strategies:equivalent, 34–38long call, 26–27long call with short stock, 30,31long put, 30–31, 32long put with long stock, 33–34,35overview of, 26short covered call, 27–28short covered put, 31–32, 33short naked call, 29–30short naked put, 32–33, 34Skew, volatility, 60–63, 134–139Software, options analysis, 144–146.See also speciﬁc productsSoybeans, 55–59Speculator, 5
Spread, 73, 102–103, 165. See alsoCredit spread; Debit spreadSpread order, 80–81Sprint PCS, 163Standardizing options contract, 5Starting small, 150, 151Statistical volatility (SV), 46,133Stock portfolio, hedging, 124–125Stop level, 161Straddle, 23–24, 39–40, 51–52Strangle, 47, 48–49, 51Strategies:covered combo, 119–122covered write, 27–28deﬁnition of, 25downside, 57–59equivalent, 34–38multi-option, 39–41selecting, 101–104for sell-off, 165–166for trending markets, 76–77upside, 57See also Single-option strategiesStrike price, 2, 3Strubbe, Geert, 190–191Style, 11–12Success rate, 111Sun Microsystems, 89SV (statistical volatility), 46,133Swing trading using patternrecognition, 161–169Synthetic, 98–99Takeover:alerts in options market of, 107–111playing, 105–107Taleb, Nassim, 70Talking about trading, 158–159Tandem Computers, 185–186Theta, 20, 141–142Time decay, 15–18, 50–51, 69–70Time value, 7, 8–10Timing market, see Volatility index(VIX) reversalsTolerance for risk, 142–143, 152
ccc_yates_indx_213-218.qxd 6/4/03 1:37 PM Page 218
218Tools, 150Top, VIX as indicator of, 173, 175Trading software, 12–13Trending markets, strategies for,76–77Trends, 153–154Trester, Kenneth, on psychologicalbattleﬁeld, 155–156Trial and error, 152True delta and gamma, 143–144Underlying asset, 2Upside strategy, 57Value Line, 111–112Value Line Convertibles Survey,118Value of options, 7–10Vega, 20, 142Vertical credit spread, 44, 82–84Vertical debit spread, 66, 72, 74,75Vertical spread, 73, 76–77VIX spike as stopping market sell-off,179–182VIX (volatility index), 183–184. See alsoVolatility index (VIX) reversalsVolatile market:covered combo strategy, 119–122deep in-the-money options, 122–124index options and, 124–125investing in, 118–119Volatility:intermonth, 138–139options pricing models and, 133–134overview of, 43–44price and, 64–67sensitivity to, 18unpredictability of, 145See also Volatile marketVolatility index (VIX), 183–184
INDEX
Volatility index (VIX) reversals:absolute levels, 175bottom reversals, 173, 175as bottom signal, 170–171exiting long positions, 175instruments to trade, 176, 179overview of, 176, 179time frame for, 176timing market using, 169–171top reversals, 169–171Volatility position, short compared tolong, 53Volatility skew:causes of, 136–139options pricing models and, 134–136overview of, 60–63Volatility trading:buying low volatility, 50–54delta-neutral, 54–55overview of, 41, 44–46seasonal patterns in grains, 55–59selling high volatility, 47–50takeovers, playing, 105–107tools of, 46–47Volume, 22V-trade, see Volatility tradingVXN, 184Wasserstrom, Steve, 187Web sites:articles and trading tips, 154OptionVue System, 110Value Line, 118Wendy’s International, 115–116Weyerhaeuser, 106–107, 108, 109,110Whaley, Robert E., 183Willamette, 106–107, 108, 109Wise, Paul, 191Yates model, 131–132
<|end|>