By studying the daily reactions of speciﬁc markets to ______________,you  can  begin  to  forecast  which  strategy  can  be  used  to  make  thelargest potential proﬁt.Answer: D—All of the above (interest rates, seasonal changes, gov-ernment reports).Discussion: Seasonal patterns, economic reports, and changes in in-terest rates are all factors to consider when studying the day-to-dayaction  in  the  markets  and  developing  options  strategies.  Ultimately,these are the factors that can trigger market volatility and end long-term trends.
13. Name  three  ways  you  can  spot  potentially  proﬁtable  investments
when shopping in a retail store.Answer:
1. What products are hot.
2. Which products have the most store shelf exposure.
3. Which products a clerk says are literally ﬂying off the shelf.Discussion: A simple way to look for investment opportunities is topay more attention to what is happening in your local area. Visitingretail  stores,  for  example,  and  understanding  what  consumers  arebuying can sometimes help uncover the next great investment.
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14. Name four ways to spot potential investments in your everyday life.
Answer:
1. When you are driving around, take notice of companies and fran-chises where you get a good deal as to price, quality, and quantity.
2. Critique what you already own.
3. Ask your children what’s hot and what’s not.
4. Look around where you work for popular products and services.Discussion: The  day-to-day  trends  in  your  local  area  often  reﬂectbroader trends throughout the economy. A question to ask is, “Who ismaking money and is there a way for me to proﬁt as well?”
15. Data service providers can relay information in which three ways?
Answer: Real-time, delayed, and end-of-day.Discussion: Many  active  traders  use  real-time  quote  services  totrade. However, the cost of real-time quotes can be quite high. Alter-natively, traders can use delayed or end-of-day data, which are a bitslower but also less expensive.
16. True  or  False:  If  you  are  going  to  sit  in  front  of  a  computer  all  day
long, then you don’t really need real-time feeds.Answer: False.Discussion: Day trading requires real-time quotes. Obviously, end-of-day data will not work because day trading attempts to capture pricemovements  throughout  the  trading  day.  Delayed  quotes  will  be  tooslow. So for those traders who have decided to spend the day in frontof  the  computer,  it  makes  sense  to  pay  extra  fees  and  get  real-timedata feeds to be as competitive as possible.
17. ______________ was born from the Financial News Network (FNN),
which was watched widely by the investment community.Answer: B—CNBC.Discussion: CNBC, now the most watched ﬁnancial television newschannel, originated from the Financial News Network.
18. The  best  investments  have  ______________,  which  should  be  moni-
tored over both a short and a long period of time.Answer: C—Momentum.
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Discussion: Prices move in trends. Momentum is a sign that a trendis healthy and is likely to have staying power. The best investmentswill therefore have positive momentum. The best shorting opportuni-ties will have downward momentum.
19. An  increase  in  a  stock’s  ______________  signals  movement  and  a
good opportunity for investment.Answer: B—Volume.Discussion: Volume  is  the  engine  that  makes  an  investment  go.  Ifthere  is  no  volume  behind  an  advance  or  decline,  the  trend  is  lesslikely to have staying power. Rising volume during a stock’s advanceis a possible sign of an attractive investment opportunity.
20. The  best  investments  have  a  reasonable  ______________  relative  to
the industry average.Answer: C—P/E.Discussion: Valuations  are  an  important  consideration  when  look-ing  for  stock  purchases.  A  high  price-earnings  (P/E)  ratio  is  a  signthat  shares  might  be  overvalued.  Therefore,  investors  will  want  toensure that the stock’s P/E is reasonable compared to other compa-nies in the industry.
21. Name six ways to spot potential proﬁt-making stock opportunities.
Answer:
1. Stocks with greatest percent rise in volume.
2. Stocks with an increase in price greater than 20 percent.
3. Stocks with a decrease in price greater than 20 percent.
4. Stocks  with  strong  (buying)/weak  (selling)  earnings  per  share
(EPS) growth.
5. Stocks with strong (buying)/weak (selling) relative strength.
6. Stocks making new 52-week highs or new 52-week lows.Discussion: Technical-oriented traders rely heavily on price and vol-ume data. By studying patterns and relationships, these traders canincrease the odds of entering into winning trades. In that respect, thesix situations listed have stood the test of time.
22. A low-priced market trades for less than ______________.
Answer: B—$20.
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Discussion: Stocks  trading  for  less  than  $20  are  considered  low-priced for options trading purposes.
23. Why is it easier to make money on low-priced markets?
Answer: D—All of the above (make a high return faster, have lessinvested to lose, play more stocks with less money).Discussion: An  investor  with  a  ﬁxed  amount  of  money  to  investcan  generate  better  returns  with  low-priced  stocks  because  (1)with lower-priced stocks each dollar move represents a larger per-centage  move,  (2)  there  is  less  invested  to  lose,  and  (3)  you  canparticipate  in  a  greater  number  of  different  stocks  with  the  sameamount of money.
24. The theory behind ______________, the basis of a mutual fund, is thata larger group of stocks will even out the chances of winning in thelong run.Answer: C—Both A and B (diversiﬁcation and a broad portfolio).Discussion: A  mutual  fund  is  a  large  pool  of  money  that  invests  indifferent types of securities. For example, a stock mutual fund holdsa  portfolio  of  stocks.  The  beneﬁts  are  that  mutual  funds  allow  in-vestors to spread their investments across a broad range of securitiesand therefore offer diversiﬁcation.
25. Momentum  investors  are  much  more  ______________  oriented  than
mutual fund investors or money managers.Answer: A—Short-term.Discussion: Momentum investing is an aggressive short-term trad-ing  style  that  is  much  more  active  than  mutual  fund  investing.  It involves much short-term buying and selling. In most cases, mutualfund  investors  buy  shares  and  hold  those  shares  over  the  longterm.
26. A long-term indicator of momentum can be measured by looking for a
change in price of a stock over the previous ______________.Answer: F—Both C and D (60 and 90 days).Discussion: Technical analysts look at indicators over different timeframes, but 60 and 90 days are common for longer-term momentumindicators.
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27.
28.
If  a  stock  has  increased  or  decreased  in  price  more  than______________ since yesterday, this can be used to indicate a mo-mentum investment.Answer: D—20 percent.Discussion: A rule of thumb when looking at daily price moves in astock  is  20  percent.  A  gain  of  20  percent  or  more  suggests  strongupward  momentum.  A  decline  of  20  percent  or  greater  is  a  sign  ofpowerful downside momentum.
If a stock trades less than ______________ shares daily, try to avoid itin short-term trading.Answer: B—300,000.Discussion: Illiquid and thinly traded stocks rarely make suitable in-vestments for short-term trading. Traders generally want to focus onstocks  that  see  volume  of  300,000  shares  or  more  each  day.  Thegreater the volume, the better the stock for trading purposes.
29. To apply the contrarian approach, look at the ______________ list toﬁnd stocks that have made major moves down (50 percent or greater)and then look for a rebound.Answer: B—Price Percentage Losers.Discussion: Use the Price Percentage Losers list to ﬁnd stocks thathave  fallen  too  far,  too  fast.  If  a  stock  is  down  50  percent  or  more,there  is  a  strong  chance  that  it  is  due  to  rebound.  This  would  be  acontrarian  approach  because  it  is  betting  against  the  momentum  ofthe stock.
30. The blow-off bottom may have occurred when a stock is coming off a
new ______________.Answer: C—Low price with high volume.Discussion: Blow-off  bottoms  occur  when  a  stock  falls  sharplyand investors panic. High volume is a sign that a blow-off has oc-curred. At that time, the stock will come off a low price and beginto move higher.
MEDIA ASSIGNMENT
The  purpose  of  the  latest  media  assignment  is  to  ﬁnd  a  source  of  stockcharts  and  perform  some  simple  analysis.  Recall  that  charts  are  really
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windows  for  viewing  the  past  price  patterns  of  stocks,  futures,  and  in-dexes. They can provide quick information and, although chart reading isgenerally  considered  the  domain  of  technical  analysts,  almost  all  in-vestors use charts in one form or another. In addition, with today’s onlinecharting  capabilities,  applying  indicators  like  moving  averages  is  free,quick and simple. In the end, the reader should be able to:
• Access stock charts.• Create daily, weekly, and monthly charts for stocks like IBM, Exxon-
Mobil, and General Electric.
• Create  similar  charts  for  the  Dow  Jones  Industrial  Average  and  the
S&P 500.
• Apply moving averages and other indicators.• Draw trend lines as well as identify support and resistance areas.
VOCABULARY DEFINITIONS
Bar  chart: Sometimes  called  the  open-high-low-close  (OHLC)  chart,  itgraphs the open, high, low, and settlement prices for a speciﬁc tradingsession over a given period of time.
Blow-off  bottom: A  sharp  and  dramatic  fall  in  price  accompanied  byheavy  trading  volume.  This  often  occurs  when  sellers  have  thrown  inthe towel and the investment is due to head higher. It is also known ascapitulation.
Blow-off top: A steep and rapid increase in price followed by a steep andrapid drop in price. This is an indicator seen in charts and used in techni-cal analysis of stock price and market trends.
Capitulation: When investors en masse have completely given up hopeon  an  investment  or  market.  Capitulation  often  occurs  on  heavy,  panic-type selling, and is followed by a major advance in the investment or mar-ket. It is also known as a blow-off bottom.
Contrarian: An  investor  who  continually  bets  against  the  crowd.  Thecontrarian believes that the majority of investors are wrong about the di-rection of a market or investment at major turning points and that there-fore it pays to invest in a manner contrary to popular opinion.
Data  feed: An  electronic  source  of  information  that  delivers  quotes,news, and other research to a user’s computer. Traders rely on data feedsto deliver current prices, news, and charts.
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Diversiﬁcation: Spreading  one’s  assets  across  a  wide  variety  of  invest-ments  within  a  portfolio  to  minimize  the  impact  of  any  one  security  onoverall portfolio performance and to reduce the overall risk.
Fund manager: An individual responsible for the day-to-day investmentdecisions of a mutual fund. Fund managers often receive a performance-based incentive fee for handling the fund.
Fundamental  analysis: A  type  of  investment  analysis  that  focuses  oncompany-speciﬁc  facts  from  ﬁnancial  statements  like  the  balance  sheetand  annual  reports.  Earnings,  sales,  assets,  management,  products,  andmarkets are also considered important. This type of analysis is used to de-termine whether a stock or group of stocks is overvalued or undervaluedrelative to the current market price.
Momentum: The  tendency  for  the  underlying  asset  to  move  in  trends,higher or lower. As inertia takes hold, sometimes the move can begin toaccelerate. When this happens, the asset has strong price momentum.
Moving average: Added to stock charts, these indicators represent aver-age price over time. By averaging prices, the indicator can smooth or elim-inate the ﬂuctuations in data and assist in identifying trends.
Moving average convergence/divergence (MACD): Created by GeraldAppel, MACD is a technical chart indicator based on moving averages. It ap-pears on charts as two lines. Crossovers of these two lines generate buy andsell trading signals. Alternatively, some traders plot MACD as a histogram.
Mutual fund: A pooled investment that holds a portfolio of securities. In-vestors can buy into the pool by purchasing shares. Mutual funds special-ize in different types of investments—growth stocks, conservative stocks,bonds, and so on.
On  balance  volume  (OBV): A  tool  for  viewing  trends  with  respect  tovolume.  Developed  by  Joseph  Granville,  the  indicator  measures  thebuying and selling pressure by looking at daily volume during a stock ormarket’s advance or decline. The math behind the indicator is straightfor-ward. If a stock ﬁnishes the day higher, the volume is added to the runningtotal; but if a stock ﬁnishes the day lower, the day’s volume is subtracted.Traders want to see OBV moving in the same direction (conﬁrming the ex-isting direction).
Price-earnings  (P/E)  ratio: The  price  of  a  stock  divided  by  its  annualearnings. Price-to-earnings ratios are often used to determine if a stock isunder- or overvalued.
Real-time data: A source of information that is updated live and changesinstantaneously  as  prices  change  in  the  marketplace.  Real-time  data  isusually provided for a fee.
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Seasonal  patterns:  A  consistent  but  short-lived  rise  or  drop  in  marketactivity that occurs due to predictable changes in climate or calendar.
Sentiment analysis: The study of market psychology. The goal is to de-termine whether traders and investors are predominantly bullish or bear-ish  toward  the  stock  market.  In  general,  analysts  consider  excessiveamounts of bullish sentiment to indicate short-term market tops. Highlevels of bearish sentiment often occur near market bottoms.
Technical analysis: A method of evaluating securities by analyzing statis-tics generated by market activity, such as past prices and volume. Techni-cal analysts do not attempt to measure a security’s intrinsic value.
Volume: The amount of trading activity associated with a given securityduring  a  period  of  time.  Stock  volume  is  measured  in  shares,  and  op-tions volume is based on number of contracts. In addition, volume canbe  computed  over  different  time  frames,  such  as  hours,  days,  weeks,months, or years.
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CHAPTER 18
Toolsof theTrade
SUMMARY
This  chapter  discusses  some  of  the  tools  available  for  the  stock  and  op-tions  trader,  including  charts,  software  programs,  seminars,  and  tradingweb sites. Option traders need to develop a working knowledge of techni-cal, fundamental, and sentiment analysis, as well as understand how op-tions  work.  Although  studying  books  can  help  traders  become  moreknowledgeable, it often takes time and practice to successfully learn themore subtle details of trading. 
Although a new trader does not need to learn how to use every toolavailable,  certain  tools  help  ﬂatten  the  learning  curve.  For  example,  theOptionetics web site has a number of free tools, including articles, charts,and  option  information.  Other  tools,  like  Optionetics  Platinum,  Proﬁt-Source, and Advanced GET from eSignal, might also provide much neededhelp as you integrate options into your trading approach.
This  chapter  provides  a  brief  example  of  how  these  tools  can  beused  to  ﬁnd  explosive  trading  opportunities.  If  you  are  new  to  the option  trading  game,  then  choose  a  few  strategies  that  you  feel  willwork best for you and learn them inside and out. Too many traders get“analysis  paralysis”  when  they  try  to  use  too  many  tools  or  technical indicators to ﬁnd a trade.
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QUESTIONS AND EXERCISES
1. True or False: A trader can never use too many tools to make trading
decisions.
2. Name some of the tools that are available for the options trader.
____________________________________________________________
____________________________________________________________
3. True  or  False:  A  new  trader  should  learn  and  implement  every
strategy available.
4. Which of the following are chart types used by traders of stocks and
options?
A. Line.
B. Bar.
C. Candlestick.
D. All of the above.
5. Name some of the tools the Optionetics Platinum site can provide for
a trader.
____________________________________________________________
____________________________________________________________
MEDIA ASSIGNMENT
Take a free tour of the Optionetics web site, as well as the Platinum site.Optionetics.com  is  free  of  charge  and  has  an  abundance  of  articles  andtools that can be accessed. Although Platinum has a fee, check out the 14-day  free  trial  to  access  the  potentials  of  this  innovative  site.  By  viewingthese two sites, a trader can start to work with data that can be systemati-cally gathered and used time and time again to make proﬁts. Many tradershave a daily ritual of visiting the Optionetics web site to garner informa-tion about the options game from its staff of writers.
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VOCABULARY LIST
Bar chart
Candlestick chart
Line chart
SOLUTIONS
Put/call ratio
Volume
1. True or False: A trader can never use too many tools to make trading
decisions.Answer: False.Discussion: Though it is important to have various tools at your dis-posal, using too many can create confusion. When a trader becomesoverwhelmed with analysis tools, he or she may ﬁnd it hard to decidewhich factors to follow, and that makes decision making tough.
2. Name some of the tools that are available for the options trader.
Answer: Internet sites, seminars, software programs, brokers andCNBC.Discussion: Some tools are free and some have a cost. Though manytraders have become successful without paying for extra services andtools,  using  these  tools  can  often  cut  the  learning  curve  down  sub-stantially. A carpenter could probably build a house with a hammerand handsaw, but it’s a lot easier to use more efﬁcient tools.
3. True  or  False:  A  new  trader  should  learn  and  implement  every
strategy available.Answer: False.Discussion: Though a new trader should gain a basic understandingof the various strategies available, it is best to narrow trading choicesdown  to  a  few  strategies.  This  way  a  trader  can  gain  specializedknowledge that will create consistent proﬁts rather than trying to bea jack-of-all-trades.
4. Which  of  the  following  are  chart  types  used  by  traders  of  stocks
and options?Answer: D—All of the above (line, bar, candlestick).Discussion: Traders  tend  to  form  their  own  opinions  of  what  chartswork best for them. Though line charts aren’t as popular as they once
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were, there still are traders who choose to use this simple charting tool.Bar charts and candlestick charts are the most popular styles used to-day because they paint a broader picture of the action of the stock.
5. Name some of the tools the Optionetics Platinum site can provide for
a trader.Answer: Stock charts, implied volatility charts, historic option data,option search tools, stock search tools and risk graphs.Discussion: Though a trader does not need Platinum to become suc-cessful, it deﬁnitely helps speed up the process. Platinum offers toolsthat  enable  traders  to  search  through  millions  of  single  option  orcombination trades in just a matter of seconds. It also provides riskgraph  analysis  of  your  own  personal  trades,  implied  volatility  rank-ings tailored to any option you choose, a trade selection matrix thatallows you to match trades with your market preferences, access toeasy paper trading through portfolio management with nightly e-mailof proﬁt/loss performance, and historical back-testing capabilities onoptions going back more than two and a half years.
MEDIA ASSIGNMENT
There are many web sites and books available that will provide informa-tion  about  trading  options  and  stocks.  The  Optionetics  site  is  one  ofthese and is free, including a discussion board where traders can shareideas  and  ask  questions.  By  studying  the  information  available  on  theOptionetics site, you’ll become familiar with a variety of tools for yourtrading arsenal.
Though it requires a fee, the Platinum site is a tool that many optionstraders say they simply cannot live without. The Platinum web site providesoption traders with a variety of powerful tools including:
• End-of-day options price, volume, and open interest data for indexes,
stocks, and futures.
• End-of-day options Greeks for all puts and calls.• Option trade portfolio tracking and proﬁt/loss calculations.• Implied and historical volatility information and charts.• Stock ranking tools.• Option search tools.• Extensive option analysis tools.• Complete back-testing of all trades and Platinum functions.
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Option trades can be saved online and named along with a text de-scription.  Trades  can  have  any  combination  of  stock  options  and  longand short positions. Saved trades can be edited, copied, and sorted. Inaddition, end-of-day trade performance can be e-mailed each evening tothe trader. Option Greeks can be computed for the entire trade as wellas each leg, and online trade data can be transferred to other productslike Excel.
Platinum offers powerful visual features by allowing the graphical analy-sis of proﬁt-and-loss risk caused by stock price changes, Greek delta varia-tions, and sensitivity to implied volatility changes. The trade probability ofproﬁt and most likely expected proﬁt are also computed on a daily basis.
Some of the key volatility variables and options data that can be plottedinclude implied volatility (IV), statistical volatility (SV), stock price, volume,put/call ratio, option skew charts, and IV/SV charts for many different timeframe combinations.
The stock ranking and option search tools offer the user a high degreeof ﬂexibility. Stocks can be ranked using up to 35 different ranking crite-ria. Many of the rankings are precomputed daily and put online for easyaccess. These rankings can be saved online in 10 user lists and can be ac-cessed  in  other  Platinum  tool  sets.  The  option-searching  feature  cansearch a single stock’s option chain for option trades as well as traversemultiple stocks in lists simultaneously. Multiple option trading strategiescan also be searched using a variety of different search parameters.
Risk graphics of any trade can be computed for different criteria. Forback-testing tasks, the web site can operate at any trading date in the pasttwo  and  a  half  years.  This  includes  all  charts,  option  tables  of  data,searches, and risk graphics. In addition, users can enter trades in the pastand see how they have evolved to the present. As they enter these tradesthey have the ability to save them and close them out on their close date.I encourage those of you new to Platinum to try out the free tour toget a deeper understanding of the software’s capabilities. If you are a newuser and there is a feature you are confused about, be sure to utilize thecontext  help  facility,  which  is  available  on  virtually  every  screen  in  thesystem. The Platinum site makes it easy to integrate these powerful toolsinto your own trading.
VOCABULARY DEFINITIONS
Bar chart: A chart that graphs the high, low, and settlement prices for a spe-ciﬁc trading session over a given period of time. Also called an OHLC chart.Candlestick chart: A type of charting that uses a body and shadow foreach trading period. Like a bar chart, the open, close, high, and low pricesare found in each candlestick.
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Line chart: A type of chart that uses only the close of each period. Thistakes out much of the noise found in the daily movement, but these detailsare often important to a technical trader.Put/call ratio: The amount of puts traded on a security compared to theamount of calls. This is a contrarian indicator that helps traders ﬁnd possi-ble tops and bottoms for a stock or index.Volume: The amount of shares bought and sold on a stock exchange.
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CHAPTER 19
FinalSummary
SUMMARY
Traders are constantly bombarded with a multitude of ways to trade stocksand  options,  leaving  many  traders  unsure  of  where  to  start.  Optioneticsteaches that a systematic approach, used with discipline, can create solidtrading proﬁts. Though options traders can beneﬁt from directional strate-gies, traders can also proﬁt without the need to predict market directionusing delta neutral strategies.
In the beginning, new traders need to focus on learning just a couple ofthe  strategies  and  master  them.  As  your  experience  increases,  along  withyour  success  rate,  you  then  can  add  a  wider  variety  of  strategies.  Tradersneed to use proper risk management and money management, allowing lim-ited mistakes to be made. Make sure you use only money that you can affordto lose. In addition, you should not invest all your trading capital at one time.This  chapter  provides  a  trading  matrix  that  can  be  used  to  narrowdown the appropriate strategies given the level of implied volatility and atrader’s view for the stock. Options provide a number of strategies that canbe implemented in any type of market environment. However, it is up tothe trader to decide what strategies ﬁt the given market scenario.
This chapter also discusses the investing philosophies of some of themost  successful  investors  throughout  investing  history.  Though  these  in-vestors looked more long-term for their trades, we can learn from their dis-ciplined approaches and viewpoints. Diversiﬁcation was a common theme,as was having a thorough understanding of the investment. The key to suc-cess  in  trading  stocks  or  options  is  to  take  emotion  out  of  the  equation.
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This may be tough to do; however, by choosing