
1836
1867
1871
1882
1886
1896
Key Event
Brokers meet at an outdoor marketplace in Philadelphia to buy and sell securities issued by the new U.S. government.
Merchants who used to meet under a buttonwood tree on Wall Street in New York City organize America’s ﬁrst formal exchange with membership requirements, giving birth to the New York Stock Exchange (NYSE).
Trading volume reaches 50,000 shares a day.
Trading moves inside, but the ﬁxtures over the trading posts are still modeled after streetlights.
Edward Calahan invents the stock ticker, displaying current market prices with each company represented by a symbol based on Morse code—a tradition that continues today.
Continuous trading replaces the old roll call system, which gave investors just two chances to trade during the day; one in the morning and one in the afternoon. Brokers are positioned by company in ﬁxed places—the start of modern-day trading and specialists’ trading posts.
Charles Dow and Edward Jones start Dow Jones & Company and are the ﬁrst to create an index measuring the activity of the New York Stock Exchange. The original 11 companies in this ﬁrst Dow Jones Index were Western Union, Paciﬁc Mail Steamship, and nine railroads.
Trading volume hits 1 million shares per day.
Dow Jones begins publishing a daily paper: The Wall Street Journal. It also creates four averages to measure market performance as a whole. These averages include the Dow Jones Industrial Average (DJIA), the Transportation Average, the Utility Average, and the Composite Average.
1920–1929 After World War I, the stock market sees substantial gains during a 
long-term bull market.
1929
On October 29, 1929, the rally of the 1920s ends when the stock market crashes, falling more than 12.8 percent in one day. After the largest stock market rally in history, the market crashed 33 points from 263 to 230.
1930–1944 Securities prices languish as the deepening global depression is 
followed by the outbreak of World War II. In the last years of World War II, the American stock markets ﬁnally begin to recuperate.
(continues)
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TABLE B.6 (Continued)
Year
Key Event
1945–1972 After the end of the war, the stock market rallies to new highs. This 
rally continues, with some intermissions, until the early 1970s. In 1972 the Dow Jones Industrial Average rises to 1,000 before falling back. Volume increases from an average of 1 million shares a day to about 15 million shares a day.
The Ford Foundation sells $657 million worth of Ford Motor Company stock, the largest secondary offering of stock up to that time.
Prior to 1957, the S&P Corporation calculated a weekly 480-stock average and a daily 90-stock average. Spurred by advancing technology, S&P decides to calculate the S&P 500 Index on an hourly basis. S&P believes that this index, which includes more stocks and a different mathematical formula than the Dow Jones Industrial Average, better reﬂects market movement.
The National Association of Securities Dealers (NASD) is reorganized to consolidate, regulate, and automate the over-the-counter (OTC) securities market where trades from around the world are made via computer and telephone.
The National Association of Securities Dealers Automated Quotation (NASDAQ) system ofﬁcially opens, displaying quotes for more than 2,500 securities.
1954
1957
1964
1971
1972–1982 During this period, known as the bear market of the 1970s, the stock market retreats. This occurs as the oil crisis, inﬂation, and unemployment stiﬂe the U.S. and world economies.
1973
1987
1994
1995
2000
The Chicago Board of Trade forms the ﬁrst listed options exchange, the Chicago Board Options Exchange (CBOE). This exchange is quickly copied by other exchanges around the world.
The stock market crashes in October, sending the Dow nose-diving 22.6 percent. The DJIA drops 508 points from 2,246 to 1,738. Program trading restrictions and automatic trading curbs are instituted in an attempt to prevent future crashes.
Online trading is launched over the Internet.
Andrew D. Klein launches the ﬁrst initial public offering (IPO) over the Internet for his microbrewery, Spring Street Brewing Company.
Dow Jones hits-all time high of 11,722 on January 14, 2000. Nasdaq peaks at 5,048 on March 10, 2000.
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Important Charts and Tables
509
TABLE B.7 Popular Indexes
Symbol
Index
Symbol
Index
Biotechnology IndexCBOE Mini-NDX IndexDisk Drive Index
Airline IndexAMEX Advance/Decline IssuesAMEX Composite IndexAMEX Major Market IndexAMEX Oil & Gas
Dow Jones Industrial IndexDow Jones Transportation IndexDow Jones Utilities IndexFrance Cac-40 IndexFTSE-100 Index
$XAL$ISSA$XAX$XMI$XOI$AVOL AMEX Volume$BTK$MNX$DDX$COMP Dow Jones Composite Index$DJCDow Jones Composite Index$INDU Dow Jones Industrial Average$DJI$DJT$DJU$FCHI$FTSE$GDAX Germany DAX Index$GNX$GSO$JPN$VIX$MEX$CMR Morgan Stanley Consumer Index$CYC$MSH$ISSQ$COMPQ Nasdaq Composite$IXCO NASDAQ High Tech Index$NDX$QQV$VXN$QVOL Nasdaq Volume$XNG$ISSU
Goldman Sachs IndexGSTI Software IndexJapan IndexMarket Volatility IndexMexico Index
Morgan Stanley Cyclical IndexMorgan Stanley High Tech IndexNasdaq Advance/Decline Issues
Nasdaq 100 IndexNasdaq QQQ Volatility IndexNasdaq Volatility Index
Natural Gas IndexNYSE Advance/Decline Issues
$NYA$TRIN$XOI$DRG$BKX$BMX
$XAU$OSX$SOX
$DOT$PSE$RUI$RUT$RUA$OEX$SPX$SGX$SVX$CEX$IUX$MID$RLX$XBD$SOX$TSE-TC$TOP-TC$UTY$XVG$WSX$FVX$TNX$IRX$TYX
NYSE Composite IndexNYSE Short-Term Trade IndexOil IndexPharmaceutical IndexPHLX Bank Sector IndexPHLX Computer Box MakerSectorPHLX Gold and Silver IndexPHLX Oil Service Sector IndexPHLX Semiconductor SectorIndexPHLX TheStreet.com InternetPSE High Technology IndexRussell 1000Russell 2000Russell 3000S&P 100 IndexS&P 500 IndexS&P Barra Growth IndexS&P Barra Value IndexS&P Chemical IndexS&P Insurance IndexS&P MidCap 400 IndexS&P Retail IndexSecurities Broker Dealer IndexSemiconductor IndexToronto 35 IndexTSE 100 IndexUtility Sector IndexValue Line Index (Geometric)Wilshire Composite Index5-Year T-Note Index10-Year T-Note Index13-Week T-Bill Index30-Year T-Bond Index
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APPENDIX C
StrategyReviews
TABLE C.1 Quick Option Strategy Reference Guide
Strategy
Trade
Long call
Short call
B1-C
S1-C
Covered call
B100-U
Long put
Short put
S1-C
B1-P
S1-P
Covered put
S100-U
Bull call spread
Bear put spread
Bull put spread
Bear call spread
B1-LCS1-HC
S1-LPB1-HP
B1-LPS1-HP
S1-LCBI-HC
ProﬁtPotential
RiskPotential
Time DecayEffects
Unlimited
Limited
Detrimental
Limited
Limited
Unlimited
Helpful
Limited
Helpful
Limited
Limited
Limited
Limited
Limited
Detrimental
Helpful
Unlimited
Helpful
MarketOutlook
Bullish
Bearish
Slightly bullish to neutral
Bearish
Bullish
Slightly bearish to neutral
Bullish
Limited
Limited
Mixed
Bearish
Limited
Limited
Mixed
Moderately bullish
Moderately bearish
Limited
Limited
Mixed
Limited
Limited
Mixed
Long straddle
Long strangle
B1-ATM-C VolatileB1-ATM-P
B1-OTM-C VolatileB1-OTM-P
Unlimited
Limited
Detrimental
Unlimited
Limited
Detrimental
(Continued)
511
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TABLE C.1 (Continued)
Strategy
Trade
Long synthetic straddle with puts
Long synthetic straddle with calls
B100-UB2-ATM-P
S100-UB2-ATM-C
B1-LCS2-HC
B1-HPS2-LP
S1-LCB2-HC
S1-HPB2-LP
B1-LC/PS2-HC/PB1-HP/P
B1-LC/PS1-HC/PS1-HC/PB1-HC/P
S1-ATM-CB1-OTM-CS1-ATM-PB1-OTM-P
B1-LT-C/PS1-ST-C/PSameStrikes
B1-LT-C/PS1-ST-C/PDifferentStrikes
B100-UB1-ATM-PS1-OTM-C
Ratio call spread
Ratio put spread
Call ratio backspread
Put ratio backspread
Long butterﬂy
Long condor
Long iron butterﬂy
Calendar spread
Diagonal spread
Collar spread
B = Buy/S = Sell1 = 1 Contract100 = 100 sharesU = Underlying stockC = Call option
MarketOutlook
ProﬁtPotential
RiskPotential
Time DecayEffects
Volatile
Unlimited
Limited
Detrimental
Volatile
Unlimited
Limited
Detrimental
Bearish/stable
Bullish/stable
Limited
Unlimited
Mixed
Limited
Limited
Mixed
Very bullish
Unlimited
Limited
Mixed
Very bearish
Limited
Limited
Mixed
Stable
Limited
Limited
Helpful
Stable
Limited
Limited
Helpful
Stable
Limited
Limited
Helpful
Stable
Limited
Limited
Helpful
Stable
Limited
Limited
Helpful
Volatile
Limited
Limited
Helpful
P = Put optionHC = Higher strike callLC = Lower strike callHP = Higher strike putLP = Lower strike put
ATM = At-the-moneyOTM = Out-of-the-moneyITM = In-the-moneyLT = Long-termST = Short-term
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Strategy Reviews
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DETAILED STRATEGY REVIEWS
Long Stock
Strategy: Buy shares of stock.
Market Opportunity: Look for a bullish mar-ket where a rise in the price of the stock is an-ticipated.
Maximum  Risk: Limited  to  the  price  of  thestock as it falls to zero.
Maximum Proﬁt: Unlimited as the stock pricerises above the initial entry price.
Breakeven: Price of the stock at initiation.
Short Stock
Strategy: Sell shares of stock.
Market Opportunity: Look for a bearish mar-ket where a fall in the price of the stock is an-ticipated.
Maximum  Risk: Unlimited  as  the  stock  pricerises.
Maximum  Proﬁt: Limited  to  the  full  price  ofthe stock shares as they fall to zero.
Breakeven: Price of the stock at initiation.
FIGURE C.1 LongStock
FIGURE C.2 ShortStock
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Long Call
THE OPTIONS COURSE
Strategy: Buy a call option.
Market Opportunity: Look for a bullish mar-ket where a rise above the breakeven is antici-pated.
Maximum  Risk: Limited  to  the  amount  paidfor the call.
Maximum  Proﬁt: Unlimited  as  the  price  ofthe  underlying  instrument  rises  above  thebreakeven.
Breakeven: Call strike + call premium.
Short Call
Strategy: Sell a call option.
Market  Opportunity: Look  for  a  bearish  orstable market where you anticipate a fall in theprice of the underlying below the breakeven.
Maximum  Risk: Unlimited as the stock pricerises above the breakeven.
Maximum Proﬁt: Limited to the credit receivedfrom the call option premium.
Breakeven: Call strike + call premium.
FIGURE C.3 Long Call
FIGURE C.4 Short Call
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Strategy Reviews
Long Put
Strategy: Buy a put option.
Market Opportunity: Look for a bearish mar-ket where you anticipate a fall in the price ofthe underlying below the breakeven.
Maximum Risk: Limited to the price paid forthe put premium.
Maximum  Proﬁt: Limited  as  the  stock  pricefalls below the breakeven to zero.
Breakeven: Put strike – put premium.
Short Put
Strategy: Sell a put option.
Market Opportunity: Look for a bullish or sta-ble market where a rise above the breakeven isanticipated.
Maximum  Risk: Limited  as  the  stock  pricefalls below the breakeven until reaching a priceof zero.
Maximum Proﬁt: Limited to the credit receivedfrom the put premium.
Breakeven: Put strike – put premium.
515
FIGURE C.5 Long Put
FIGURE C.6 Short Put
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Covered Call
Strategy: Buy the underlying security and sellan OTM call option.
Market Opportunity: Look for a slightly bull-ish to neutral market where a slow rise in theprice of the underlying is anticipated with littlerisk of decline.
Maximum Risk: Limited below the downsidebreakeven as it falls to zero.
FIGURE C.7 CoveredCall
Maximum Proﬁt: Limited. [Short call premium+ (short call strike – price of long underlying asset) × 100].
Breakeven: Price of the underlying at initiation – short call premium.
Covered Put
Strategy: Sell the underlying security and sellan OTM put option.
Market  Opportunity: Look  for  a  slightlybearish  or  stable  market  where  a  decline  orstability in the price of the underlying is antici-pated with little risk of the market rising.
Maximum  Risk: Unlimited  above  the  upsidebreakeven.
FIGURE C.8 CoveredPut
Maximum Proﬁt: Limited. [Short put premium+ (price of underlying asset at initiation – put option strike) × 100].
Breakeven: Price of the underlying at trade initiation + short put premium.
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Strategy Reviews
Bull Call Spread
Strategy: Buy  a  lower  strike  call  and  sell  ahigher  strike  call  with  the  same  expirationdates.
Market Opportunity: Look for a bullish mar-ket where you anticipate a modest increase inthe price of the underlying above the price ofthe short call option.
FIGURE C.9 Bull CallSpread
Maximum Risk: Limited to the net debit paidfor the spread.Maximum Proﬁt: Limited. [(Difference in strikes – net debit) × 100].
Breakeven: Lower (long) call strike price + net debit.
Bear Put Spread
Strategy: Buy  a  higher  strike  put  and  sell  alower  strike  put  with  the  same  expirationdate.
Market  Opportunity: Look  for  a  bearishmarket  where  you  anticipate  a  modest  de-crease in the price of the underlying asset be-low the strike price of the short put option.
Maximum Risk: Limited to the net debit paid.
Maximum  Proﬁt: Limited.  [(Difference  instrikes – net debit) × 100].
Breakeven: Higher (long) strike – net debit.
FIGURE C.10 Bear PutSpread
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Bull Put Spread
Strategy: Buy  a  lower  strike  put  and  sell  ahigher  strike  put  with  the  same  expirationdate.
Market Opportunity: Look for a bullish mar-ket  where  you  anticipate  an  increase  in  theprice of the underlying asset above the strikeprice of the short put option.
Maximum  Risk:strikes – net credit) × 100].
Limited. 
[(Difference 
in
FIGURE C.11 Bull PutSpread
Maximum  Proﬁt: Limited  to  the  net  credit  received  when  the  marketcloses above the strike price of the short put option.
Breakeven: Higher (short) strike – net credit.
Bear Call Spread
Strategy: Buy  a  higher  strike  call  and  sell  alower  strike  call  with  the  same  expirationdate.
Market  Opportunity: Look  for  a  bearishmarket where you anticipate a decrease in theprice of the underlying asset below the strikeprice of the short call option.
Maximum Risk: Limited. [(Difference in strikes– net credit) × 100].
Maximum Proﬁt: Limited to the net credit.
FIGURE C.12 BearCall Spread
Breakeven: Lower (short) strike price + net credit.
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Strategy Reviews
Long Straddle
Strategy: Purchase  an  ATM  call  and  an  ATMput  with  the  same  strike  price  and  the  sameexpiration date.
Market Opportunity: Look for a market withlow  implied  volatility  options  where  a  sharpvolatility increase is anticipated.
Maximum Risk: Limited to the net debit.
FIGURE C.13 LongStraddle
Maximum  Proﬁt: Unlimited  to  the  upsideand  limited  to  the  downside  (as  the  underlying  can  only  fall  to  zero).Proﬁt  requires  sufﬁcient  market  movement  but  does  not  depend  onmarket direction.
Upside Breakeven: ATM strike price + net debit.
Downside Breakeven: ATM strike price – net debit.
Short Straddle
Strategy: Sell  an  ATM  call  and  an  ATM  putwith the same strike price and the same expi-ration date.
Market  Opportunity: Look  for  a  wildlyvolatile  market  where  you  anticipate  a  periodof low volatility.
Maximum  Risk: Unlimited  to  the  upside  andlimited to the downside (as the underlying canonly fall to zero) beyond the breakevens.
FIGURE C.14 ShortStraddle
Maximum Proﬁt: Limited to the net credit. Proﬁt is possible if the marketstays between the breakevens.
Upside Breakeven: ATM strike price + net credit.
Downside Breakeven: ATM strike price – net credit.
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Long Strangle
Strategy: Buy  an  OTM  call  and  an  OTM  putwith the same expiration date.
Market  Opportunity: Look for a stable mar-ket  where  you  anticipate  a  large  volatilityspike.
Maximum Risk: Limited to the net debit paid.
Maximum Proﬁt: Unlimited to the upside andlimited to the downside (as the underlying canonly fall to zero).
THE OPTIONS COURSE
FIGURE C.15 LongStrangle
Upside Breakeven: Call strike price + net debit.
Downside Breakeven: Put strike price – net debit.
Short Strangle
Strategy: Sell  an  OTM  call  and  an  OTM  putwith the same expiration date.
Market  Opportunity: Look  for  a  wildlyvolatile market where you anticipate a drop-offinto a very stable market with low volatility.
Maximum  Risk: Unlimited  to  the  upside  andlimited to the downside (as the underlying canonly fall to zero).
FIGURE C.16 ShortStrangle
Maximum  Proﬁt: Limited  to  the  net  credit.  Proﬁt  occurs  when  the underlying trades between the breakevens.
Upside Breakeven: Call strike price + net credit.
Downside Breakeven: Put strike price – net credit.
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Strategy Reviews
521
Long Synthetic Straddle
Market Opportunity: Look for a market withlow volatility where you anticipate a volatilityincrease resulting in stock price movement ineither direction beyond the breakevens.
Long Stock and Long Puts
Strategy: Buy 100 shares of underlying stockand buy 2 long ATM puts.
Maximum Risk: Net debit of options + [(Priceof underlying stock at initiation – option strikeprice) × number of shares].
FIGURE C.17 LongSynthetic Straddle
Maximum  Proﬁt: Unlimited  above  the  upside  breakeven  and  limited  asthe underlying falls to zero below the downside breakeven.
Upside Breakeven: Price of the underlying at initiation + net debit ofoptions.Downside Breakeven: [(2 × option strike) – price of the underlying atinitiation] – net debit of options.
Short Stock and Long Calls
Strategy: Sell 100 shares of underlying stock and buy 2 long ATM calls.
Maximum  Risk: [Net debit of options + (option strike price – price ofunderlying at initiation)] × number of shares.
Maximum  Proﬁt: Unlimited  above  the  upside  breakeven  and  limited  asthe underlying falls to zero below downside breakeven.Upside Breakeven: [(2 × option strike) – price of the underlying at initia-tion] + net debit of options.
Downside Breakeven: Price of the underlying at initiation – net debit ofoptions.
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Ratio Call Spread
Strategy: Buy  a  lower  strike  call  and  sell  agreater number of higher strike calls.
Market  Opportunity: Look  for  a  volatilemarket where you expect a slight decline or asmall rise not to exceed the strike price of theshort options.
FIGURE C.18 RatioCall Spread
Maximum  Risk: Unlimited  above  the  upsidebreakeven.Maximum  Proﬁt: Limited.  [Number  of  long  contracts  × (difference  instrike prices × 100) + net credit (or – net debit)].Upside  Breakeven: Lower  strike  +  [(difference  in  strikes  × number  ofshort  contracts)  ÷ (number  of  short  calls  –  number  of  long  calls)]  +  netcredit (or – net debit).
Ratio Put Spread
Strategy: Buy  a  higher  strike  put  and  sell  agreater number of lower strike puts.
Market  Opportunity: Look  for  a  marketwhere you expect a rise or slight fall not to ex-ceed the strike price of the short options.
FIGURE C.19 RatioPut Spread
Maximum Risk: Limited to the downside be-low the downside breakeven (as the stock canonly fall to zero). Lower strike – (difference instrikes × 100) – net credit (or + net debit).Maximum Proﬁt: Limited. (Difference in strike prices × 100) + net credit(or – net debit).Downside Breakeven: Higher strike – [(difference in strike prices × num-ber of short puts) ÷ (number of short puts – number of long puts)] – netcredit (or + net debit).
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Call Ratio Backspread
Strategy: Sell  lower  strike  calls  and  buy  agreater number of higher strike calls (the ratiomust be less than .67).
Market  Opportunity: Look  for  a  marketwhere you anticipate a sharp rise with increas-ing volatility; place as a credit or at even.
Maximum  Risk: Limited.  [(Number  of  shortcalls × difference in strikes) × 100] – net credit(or + net debit).
FIGURE C.20 CallRatio Backspread
Maximum Proﬁt: Unlimited to the upside above the upside breakeven.Upside  Breakeven: Higher  strike  +  [(difference  in  strikes  × number  ofshort calls) ÷ (number of long calls – number of short calls)] – net credit(or + net debit).
Downside Breakeven: Lower strike + (net credit ÷ number of short calls).No downside breakeven exists if the trade is entered with a net debit.
Put Ratio Backspread
Strategy: Sell  higher  strike  puts  and  buy  agreater number of lower strike puts (the ratiomust be less than .67).
Market  Opportunity: Look  for  a  marketwhere  you  anticipate  a  sharp  decline  with  in-creased volatility; place as a credit or at even.
Maximum  Risk: Limited.  [(Number  of  shortputs × difference in strikes) × 100] – net credit(or + net debit).
FIGURE C.21 PutRatio Backspread
Maximum Proﬁt: Limited to the downside (as the underlying can only fallto zero) below the breakeven.
Upside Breakeven: Higher strike – (net credit ÷ number of short puts).No upside breakeven exists if the trade is entered with a new debit.Downside Breakeven: Lower strike – [(number of short puts × differencein strikes) ÷ (number of long puts – number of short puts)] + net credit (or– net debit).
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Long Butterﬂy
Strategy: Buy  lower  strike  option,  sell  2higher  strike  options,  and  buy  a  higher  strikeoption with the same expiration date (all callsor all puts).
Market Opportunity: Look for a range-boundmarket  that  is  expected  to  stay  between  thebreakeven points.
Maximum Risk: Limited to the net debit paid.Maximum Proﬁt: Limited. (Difference between strikes – net debit) × 100.Proﬁt exists between breakevens.
FIGURE C.22 LongButterﬂy Spread
Upside Breakeven: Highest strike – net debit.
Downside Breakeven: Lowest strike + net debit.
Long Condor
Strategy: Buy lower strike option, sell higherstrike option, sell an even higher strike option,and buy an even higher strike option with thesame expiration date (all calls or all puts).
Market  Opportunity: Look  for  a  range-bound  market  that  is  expected  to  stay  be-tween the breakeven points.
Maximum Risk: Limited to the net debit paid.Maximum Proﬁt: Limited. (Difference between strikes – net debit) × 100.Proﬁt exists between breakevens.
FIGURE C.23 LongCondor Spread
Upside Breakeven: Highest strike – net debit.
Downside Breakeven: Lowest strike + net debit.
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Long Iron Butterﬂy
Strategy: Buy a higher strike call, sell a lowerstrike  call,  sell  a  higher  strike  put,  and  buy  alower strike put with the same expiration date.
Market Opportunity: Look for a range-boundmarket that you anticipate to stay between thebreakeven points.
Maximum Risk: Limited. (Difference betweenstrikes × 100) – net credit.
FIG