in a declining market) to follow an open position and lock in profits.
trendline: A straight line defining a price trend. Up trendlines connectthe lows of several price bars while down trendlines connect the highs ofprice bars.glossary 221
triangle: A longer term (approximately a month or more on a dailychart) consolidation/continuation pattern in which prices progressivelyconverge in a series of lower highs and higher lows.
TRIN indicator: Compares advancing issues/declining issues to the upvolume/down volume ratio.
triple bottom: A reversal pattern consisting of three price troughs atroughly the same price level. The implication is that by failing to movethrough such levels after three attempts, the market is meeting signifi-cant support and could reverse. See also triple top, double bottom, anddouble top.
triple top: A reversal pattern consisting of three price peaks at roughlythe same price level. The implication is that by failing to move throughsuch levels after three attempts, the market is meeting significant resist-ance and could reverse. See also double top.
true range: A volatility calculation developed by Welles Wilder thatmodifies the standard range calculation by accounting for gaps betweenprice bars. True range is defined as the largest value (in absolute terms)of today’s high and today's low (the standard daily range calculation);today’s high and yesterday’s close; and today’s low and yesterday's close.
Average true range (ATR) is simply a moving average of true rangecalculated over N days. True range and average true range are commonvolatility measurements.
two-step pullback: A combination of two pullbacks, where the secondpullback tests the level of the first pullback. See pullback.
uncovered: See naked.
underlying: This is the asset specified in an option contract, which, ex-cept in the case of cash-settled options, is transferred upon exercise ofthe option contract. With cash settled options, only cash changes hands,based on the current price of the underlying.
vega: The sensitivity of an option’s theoretical price to changes involatility. It is the dollar amount of gain or loss, per contract, you shouldtheoretically experience if volatility goes up one percentage point.
volatility: A measure of the amount by which an asset has fluctuated,or is expected to fluctuate, in a given period of time. Assets with greatervolatility exhibit wider price swings and their options are higher in pricethan less volatile assets. 
 
 
 
 
 
 
i
glossary
volume: The number of shares or contracts traded in a particularmarket in a given time period (usually day). See also liquidity and openinterest.
weighted moving average: See moving average.
whipsaw: When price repeatedly thrashes above and below a movingaverage (or support or resistance level) triggering multiple false tradingsignals. The same term applies to indicators that behave similarly (e.g.,when an oscillator like the relative strength index (RSI) repeatedlymoves above and below its overbought or oversold level).
wide-range day bar: A high-volatility price bar, that is, one whoserange is much greater than the preceding price bars (or alternately, onewith a range much greater than the average range over an N-day period).
write: An investor who sells an option contract not currently held (sell-ing the option short) is said to have written the option.ABC/Capital Cities, 27
Advisors, 181-182
American-style options, 70, 115, 183,207
AOL/Time Warner, 108
Apple Computer, 87
Arbitrage, index, 123-124, 125
At-the-money (ATM), 67, 78, 105, 207
Back-spread trade, 165-166, 179BancOne, 87Barnett, Phil, 197Bear call spread, 81, 82, 83, 95, 204,207Bear put spread, 136, 137, 207Bear spreads, 138, 207Bell curve model, 42, 59, 84Beta, 129Blackjack analogy (card-counting),41-42, 65Bristol-Myers Squibb Co., 169-170Broad market indexes, playing,111-122Brodsky, William, 201Broker(s), 4, 11-12, 22, 51, 116-117,136, 169-172, 182-188discipline and, 169-172discount firms, 184-185full-service firms, 184-185institutional investors, 11-12,116-117, 136role at CBOE, 22, 27selecting (questions to ask), 186and traders, 4
Buffett, Warren, 27, 177, 191
Bull-call spread, 70, 81, 82, 83, 134,204, 208
Bullish spread, 133
Bull put spread, 208
Bull spread, 78, 80, 81, 133, 138,208
Butterflies, 98, 103, 104, 105, 149,208. See also Iron butterflies
Capital Cities Broadcasting, 27Capital preservation, 87Capital stretching, 47-48Cash-secured puts, 92-97, 143, 144Centennial Technologies, Inc., 48Chicago Board Options Exchange(CBOE), 2, 7-13, 21-22, 24-28,60, 111, 119, 187, 194-195, 200,201-202broker role, 22, 27catalysts (two) for surge indemand for seats, 24chairman, 201changes in, 8, 201-202educational information, 187elastic membership, 24exchange consolidation, 194-195floor of, 7-13, 21-22hybrid environment, 21-22issues/volume, 60, 111, 194, 200key players, 22, 27local traders, 22market makers and DPMs, 22, 27,28 
224 ~—sindex
Chicago Board Options Exchange(CBOE) (Continued)open-outcry auction marketplace,4, 21-22, 29-30, 35, 113-114,160professional traders, 22seats, 8, 24, 25web site, 119Churning, 33Clearing firm, 25CMGI Inc., 131Collar trades, 150, 151Commissions, 26, 105Condors, 98, 105, 209Contra-party risk, 112Corrections, 190, 209Covered call strategy, 71, 72, 75Covered LEAP. See LEAP (long-termequity anticipation security)Covered write strategy, 75, 77Curbs/limits, 125
Day trader, 43, 63, 163, 206. See alsoTrader(s)retail investor vs. professionals,63strict definition, 163Day-trading firm (building a team),155-172Dell options, 12Delta, 67, 210Derivatives, OTC (over-the-counter),34Designated primary market maker(DPM), 8, 23, 27-31, 171. Seealso Market makersCBOE creating, 28example: trading customer'sorder going against your ownbest interest, 31-32facilitating large/small orders, 29Diagonal call spread, 138Diamonds, 75, 122, 141, 142Discipline, importance of, 10-11, 86,87, 88, 161, 169-172
Dow Corning, 48
Dow Jones, 75, 122, 123, 130, 131,141, 142, 191
Downside, playing, 49-52
Early exercise, 115ECN Primex, 201Economic factors influencingmarket, 19Economy, new vs. old, 130, 148,189-206Education, 186-188, 203-204Electronic communication networks(ECNs), 9-10, 57, 160-161, 171,195, 199, 201European-style options, 70, 100, 114,116, 140, 142, 211Exchanges:CBOE (see Chicago BoardOptions Exchange (CBOE))curbs/limits, 125seats/membership, 23-24Exit strategy, 81Expiration cycle, 55Extrinsic value, 77
Fair value, 124, 211
“Fat Brain” management, 9, 156
Fidelity Insight, 181
Financial institutions, largeproprietary indexes, 130
Financial news shows, 83-84
Financial stocks, 114
First Call, 83
First Options of Chicago (clearingfirm), 25
Fraud, 48
Friction, 202
Front-spread trade, 166
Fundamental analysis, 63, 65, 84
Funds, 34, 192
Game plan, importance of, 67-68,87, 164Goldman Sachs, 31, 130, 201 
 
“Greater fool” theory, 122Gut meter, 84
-Haugh, Dan, 171
Haugh, Thomas, 17-18, 170, 171,197
Hellman, Craig, 197
Herd mentality, 189-190, 191, 192
Hewlett Packard, 39-40, 42
High-tech stocks, 19, 58, 80, 95, 102,106, 148, 192, 193, 205
IBM, 4-7, 18, 192Index arbitrage, 123-124Index options, 49, 96, 111-132, 141Nasdaq Index options (NDX), 96OEX index options, 111, 114,115-116, 117, 119, 120, 123,183, 184playing a trading range for, 49SPX options, 111, 114, 117, 120,140Information edge/availability, 83-84,161, 162-165Inside information, 162Institutional investors/brokers,11-12, 116-117Insurance (put option), 53International Securities ExchangeCISE), 197, 201Internet, 19, 192, 199, 200, 202, 206Internet/high-tech stocks, 19, 58, 80,95, 102, 106, 148, 192, 193, 205In-the-money (ITM), 55, 70, 77, 213Intrinsic value, 77, 213Inverted hockey stick, 179Investment/investing:clubs, 68retail (see Retail investors)us. trading, 61, 62, 158what changes, what stays thesame, 189-206Iron butterflies, 98, 102, 104, 120,139, 149, 204iTradem (tool), 197, 198, 199
index 225
iTradem.com, 17, 158, 171, 200iTradempro.com, 198
January effect, 140Johnson & Johnson, 86
Knight Trimark (NITE), 186, 200Kobren, Eric M., 181
Lead Market Makers (LMMs), 23.See also Market makers
LEAP (long-term equity anticipationsecurity), 72-77, 121, 131,145-148
Leverage, 23, 25, 206
Levitt, Arthur, 162
Liquidity, increased, 203
Lucent Technologies, 192-193
Lurie, Dick, 16, 17
Lynch, Peter, 60-61
Margin, 167, 214Margin call, 52-53, 205Margin interest, 51Market:changing, 9, 10, 189, 200corrections/downturns, 94, 95downside, playing the, 49-52indexes, 111-122key players, 22not letting it “tell you what todo,” 167old us. new economy, 130, 148,189-206open access to all participants,203Market makers, 11-12, 19, 22-45,171, 196advantages coming withresponsibility of, 23designated primary market maker(DPM), for each stock, 23institutional customers and, 11-12leverage, 23, 63-64not a zero-sum game, 62226 ~—s index
Market makers (Continued)public/customers (not competingwith), 64* Regulation T exemption, 3-4, 23,167two-sided market obligation, 3-4,22, 36, 62, 64Market research/homework, 61, 68,154, 180Mercury Trading Group, 8, 19, 25,27, 29, 131, 155-172, 176brokers, 170daily volume, 27us. day-trading firms, 162locations (San Francisco/NewYork/Chicago), 8, 156number of employees, 158origin of name, 25Microsoft, 27, 53-54MicroStrategy Inc. (MSTR), 136-139,145Momentum investing, 61Money management, 89, 145Morgan Stanley, 130, 201
Najarian, Dr. John, 2-3, 16-17, 29, 61Najarian, Jon:breaking into the markets, 1-7education on the floor, 17-19football, 1-2, 13-17making of a trader, 1-20trading firms, 22 (see alsoMercury Trading Group; PTISecurities & Futures)Najarian, Peter, 17, 36-37, 159Najarian, Tristen, 193Naked/uncovered, 70, 98, 117, 216Nasdaq indexes, 75, 96, 120, 122,129, 130-131, 191National Best Bid and Offer (NBBO),185Near-term calls, 146, 216
October panic factor, 140OEX index options, 114, 115-116,117, 119, 120, 123, 183, 184
Off-exchange, 1121010WallStreet.com, 181, 182, 187Open-outcry auction marketplace, 4,21-22, 29-30, 35, 113-114, 160Options Clearing Corporation (OCC),25-26, 33Options Price Reporting Authority(OPRA), 176Options trading. See also Trader(s);Tradingadvantages of, 19-20, 47-68avoiding margin calls on stock,52-53changes/directions in, 8, 206educational sources for, 203-204expiration cycle, 55game plan, importance of, 67-68,87, 164holding until expiration, 65indexes, 111-122insurance analogy, 53, 54lagging stocks, 201leverage inherent in, 206making a living at, 44-45moving odds in your favor, 41naked option, 117no guarantee of return, 20not zero-sum game, 62one options contract equals 100shares of stock, 47playing the downside, 49-52premium, 41, 42, 67, 119, 217,218pricing models, 57, 178profit taking, 65-66range trading strategy, 49, 98,102, 139, 140, 220research/homework phase of, 61,68, 154, 180retail investors and, 19-20, 24,43-44, 57, 61, 69, 199, 205risk control/management, 20, 48selling (defined), 71sophisticated trades, 48-49speculators, 206stretching capital, 47-48time component of, 44, 48, 55, 56,72, 74, 220volatility and, 44, 57-58“when to do what and why,”133-154Oracle, 87, 147Out-of-the-money (OTM), 52, 55, 69,77, 95, 217Over the counter (OTC), 34-35, 112,113
Paper trade, 88Payment for order flow, 185-186Plan, importance of, 67-68, 87, 164Positions, evaluating/managingexisting, 145-147, 154Premium, 41, 67, 119, 217, 218Pricing models, 56, 178Primary market makers. SeeDesignated primary marketmaker (DPM)Procter & Gamble, 190-191, 194Professional trader, 22, 26, 86, 126,148. See also Market makers;Trader(s)Protective put, 150PTI Capital Management LLC, 18PTI Securities & Futures, 151, 157,158, 171, 172, 187, 200Put options, 52, 98Put spread, 89, 90, 96bear, 136, 137, 207bull, 208selling, 96
Quotes, 173-177delivery methods, 175live/streaming, 174options, 174Web sites, 174
Range trading strategy, 49, 102, 140
Registered investment advisors(RIAs), 181
Regulation T exemption, 3-4, 23, 167
Research, 86
index 227
Retail investors:arbitrage (not recommended for),126index trading, 126, 128, 129options, 19-20, 24, 43-44, 57, 61,69, 199, 205positions, evaluation of, 148vs. professionals, 20, 62speculator role, 22time horizon, 62Reversal (a hedged transactionknown as), 17, 218Risk:management, 45, 48, 89and return, 44, 120, 145tolerance, 69uncovered options and, 72volatility a measure of, 58
Salomon Smith Barney, 130SciMed LifeSystems, 31-32Selling too soon vs. staying in toolong, 149-150Seminars, 186-188Short, 49, 90, 219Short side of the market, playing,89-109Short squeeze, 51, 119Slippage, 124Software, 177-180Specialists, 23, 162, 171Spider (S&P Depository Receipts),75, 120-121, 122Spread, 69-70, 72, 89, 98, 119, 141,143, 149, 219back and front, 165-169, 179bear, 138, 207bear call, 81, 82, 83, 95, 204, 207bear put, 136, 137, 207bull, 78, 80, 81, 133, 138, 208bull-cail, 70, 81, 82, 83, 134, 204,208bull put, 208butterfly, 98, 103, 104, 105, 149,208diagonal call, 138 
 
228 ~—sindex
Spread (Continued)front/back, 165-169long/short side, 89, 98put, 89, 90, 96time, 74, 220SPX options, 111, 114, 117, 120, 140SPY, 121, 122Standard & Poor’s (S&P), 130indexes, 78, 130S&P 500 futures contract, 111,116SPX options, 111, 114, 117, 120,140State Street Bank, 121Stock, borrowing. See ShortStock ownership, selling puts aspartial surrogate for, 91Stock repair, 152Straddle, 103, 104, 106, 107, 149, 219Strangle, 107-108Strike prices, 57, 80, 102, 152,153-154, 220Suarez, Mike, 37
Tails, 84, 220Technical analysis, 102, 144Technology, 8, 9, 18, 21-22, 24, 64,194, 195-196, 201electronic communicationnetworks (ECNs), 9-10, 57,160-161, 171, 195, 199, 201electronic exchanges, 206option pricing models and, 56,178quotes (delivery methods),175-176software, 177-180Technology stocks. See Internet/high-tech stocks3Com’s Palm Computing spin-off,192Time (and options trading), 44, 48,55, 56, 72, 74, 220buying, 55, 72selling, 72
Time decay, 56, 71, 145, 146Time horizon, 62, 64-65, 185Time-spread strategy, 74, 220Time Warner, 108Tools/resources, 64, 173-188advisors, 181-182brokers, 182-188education, 186-188professional, 64quotes, 173-177software, 177-180Trader(s):attributes, 10-11average (“doesn’t cut it on thetrading floor”), 23backing, 161basic rules (three), 43discipline, 10-11, 86, 87, 88, 161,169-172passion/commitment, 160-162professional, 22, 26, 86, 126, 148(see also Market makers)reasonable income for, 24stamina, 11Trading. See also Options tradingvs, gambling, 38us. investing, 61, 62, 158simulated, 45
VIX (Volatility Index), 117, 118, 119,129
Volatility, 44, 57, 96, 129, 143, 149,158, 165, 193, 221, 222
Washed sale rule, 87Waste Management, 87What-if scenarios, 179WhisperNumber.com, 161Xerox, 43, 87 ©
Yahoo, 76, 78, 84-85, 102-103Year-end, 87
Zero-sum theory, 62, 123<|end|>