CallStrategy = Sell a call option.Market Opportunity = Look for a bearish or stable market where you anticipate a fall in the price of the underlying stock below the breakeven.Maximum Risk = Unlimited to the upside beyond the breakeven.Maximum Profit = Limited to the credit received from the call optionpremium.Breakeven = Call strike price + call option premium.Margin = Required. Amount subject to broker’s discretion.
Long PutStrategy = Buy a put option.Market Opportunity = Look for a bearish market where you anticipate a fall in the price of the underlying stock below the breakeven.Maximum Risk = Limited to the price paid for the put option premium.Maximum Profit = Unlimited to the downside beyond the breakeven.Breakeven = Put strike price – put option premium.Margin = None.
Short PutStrategy = Sell a put option.Market Opportunity = Look for a bullish or stable market where a riseabove the breakeven is anticipated.Maximum Risk = Unlimited to the downside beyond the breakeven.Maximum Profit = Limited to the credit received from the put optionpremium.Breakeven = Put strike price – put option premium.Margin = Required. Amount subject to broker’s discretion.
400
APPENDIXES
Covered CallStrategy = Buy the underlying security and sell an OTM call option.Market Opportunity = Look for a bullish to neutral market where a slowrise in the price of the underlying stock is anticipated with little risk ofdecline.Maximum Risk = Virtually unlimited to the downside below thebreakeven all the way to zero.Maximum Profit = Limited to the credit received from the short call option+ (short call strike price – price of long underlying asset) × value per point.Breakeven = Price of the underlying asset at initiation – short call premium received.Margin = Required. Amount subject to broker’s discretion.
Covered PutStrategy = Sell the underlying security and sell an OTM put option.Market Opportunity = Look for a bearish or stable market where a decline in the price of the underlying stock is anticipated with little risk ofthe market rising.Maximum Risk = Unlimited to the upside beyond the breakeven.Maximum Profit = Limited to the credit received on the short put option+ (price of the short underlying asset – put option strike price) × thevalue per point.Breakeven = Price of the underlying asset + short put premium received.Margin = Required. Amount subject to broker’s discretion.
Bull Call SpreadStrategy = Buy a lower strike call and sell a higher strike call with thesame expiration dates.Market Opportunity = Look for a moderately bullish market where youanticipate a modest increase in the price of the underlying above theprice of the short call option.Maximum Risk = Limited to the net debit paid for the spread.Maximum Profit = Limited [(difference in strike prices × value per point)– net debit paid].Breakeven = Lower call strike price + net debit paid.Margin = Required. Amount subject to broker’s discretion.
APPENDIX D. BASIC STRATEGY REVIEWS AND RISK GRAPHS
401
Bull Put SpreadStrategy = Buy a lower strike put and sell a higher strike put with thesame expiration date.Market Opportunity = Look for a moderately bullish market where youanticipate a modest increase in the price of the underlying asset abovethe strike price of the short put option.Maximum Risk = Limited [(difference in strike prices × value per point)– net credit].Maximum Profit = Limited to the net credit received when the marketcloses above the short put option.Breakeven = Higher put strike price – net credit received.Margin = Required. Amount subject to broker’s discretion.
Bear Put SpreadStrategy = Buy a higher strike put and sell a lower strike put with thesame expiration date.Market Opportunity = Look for a bearish market where you anticipate amodest decrease in the price of the underlying asset below the strikeprice of the short put option.Maximum Risk = Limited to the net debit paid.Maximum Profit = Limited [(difference in strike prices × value per point)– net debit paid].Breakeven = Higher put strike price – net debit paid.Margin = Required. Amount subject to broker’s discretion.
Bear Call SpreadStrategy = Buy a higher strike call and sell a lower strike call with thesame expiration date.Market Opportunity = Look for a moderately bearish market where youanticipate a slight decrease in the price of the underlying asset below thestrike price of the short call option.Maximum Risk = Limited [(difference in strike prices × value per point)– net credit].Maximum Profit = Limited to the net credit received.Breakeven = Lower call strike price + net credit received.Margin = Required. Amount subject to broker’s discretion.
402
APPENDIXES
Long StraddleStrategy = Purchase an ATM call and an ATM put with the same strikeprice and the same expiration.Market Opportunity = Look for a market with low volatility where youanticipate a sharp volatility increase.Maximum Risk = Limited to the net debit paid.Maximum Profit = Unlimited to the upside and downside beyond thebreakevens. Profit requires sufficient market movement but does not depend on market direction.Upside Breakeven = ATM strike price + net debit paid.Downside Breakeven = ATM strike price – net debit paid.Margin = None.
Short StraddleStrategy = Sell an ATM call and an ATM put with the same strike priceand the same expiration date.Market Opportunity = Look for a wildly volatile market where you anticipate a period of low volatility.Maximum Risk = Unlimited to the upside and the downside beyond thebreakevens.Maximum Profit = Limited to the net credit received. Profit is possible ifthe market stays between the breakevens.Upside Breakeven = ATM strike price + net credit received.Downside Breakeven = ATM strike price – net credit received.Margin = Required. Amount subject to broker’s discretion.
APPENDIX E. OPTION EXPIRATION MONTH CODES
403
APPENDIX E. OPTION EXPIRATION MONTH CODESJan
Feb
Mar
Apr
May
Jun
Calls
A
B
C
D
E
F
Puts
M
N
O
P
Q
R
Jul
Aug
Sep
Oct
Nov
Dec
Calls
G
H
I
J
K
L
Puts
S
T
U
V
W
X
404
APPENDIXES
APPENDIX F. STRIKE PRICE CODESA
B
C
D
E
F
G
H
I
5
10
15
20
25
30
35
40
45
105
110
115
120
125
130
135
140
145
205
210
215
220
225
230
235
240
245
305
310
315
320
325
330
335
340
345
405
410
415
420
425
430
435
440
445
505
510
515
520
525
530
535
540
545
605
610
615
620
625
630
635
640
645
705
710
715
720
725
730
735
740
745
J
K
L
M
N
O
P
Q
R
50
55
60
65
70
75
80
85
90
150
155
160
165
170
175
180
185
190
250
255
260
265
270
275
280
285
290
350
355
360
365
370
375
380
385
390
450
455
460
465
470
475
480
485
490
550
555
560
565
570
575
580
585
590
650
655
660
665
670
675
680
685
690
750
755
760
765
770
775
780
785
790
S
T
U
V
W
X
Y
Z
95
100
71/2
121/2
171/2
221/2
271/2
321/2
195
200
371/2
421/2
471/2
521/2
571/2
621/2
295
300
671/2
721/2
771/2
821/2
871/2
921/2
395
400
971/2
1021/2
1071/2
1121/2
1171/2
1221/2
495
500
1271/2
1321/2
1371/2
1421/2
1471/2
1521/2
595
600
1571/2
1621/2
1671/2
1721/2
1771/2
1821/2
695
700
1871/2
1921/2
1971/2
2021/2
2071/2
2121/2
795
800
2171/2
2221/2
2271/2
2321/2
2371/2
2421/2
APPENDIX G. VARIABLE OPTION DELTAS
405
APPENDIX G. VARIABLE OPTION DELTASAll options are provided a delta relative to the 100 deltas of the underlying security.If 100 shares of stock are equal to 100 deltas, then the corresponding options musthave delta values of less than 100. You can estimate an options delta as follows depending on the movement of the underlying stock.
CALLS
PUTS
OPTIONDELTAS
Long
Short
Long
Short
ATM
+50
–50
–50
+50
ITM1 Strike
+60 to +65
–60 to –65
–60 to –65
+60 to +65
2 Strikes
+70 to +75
–70 to –75
–70 to –75
+70 to +75
3 Strikes
+80 to +85
–80 to –85
–80 to –85
+80 to +85
OTM1 Strike
+35 to +40
–35 to –40
–35 to –40
+35 to +40
2 Strikes
+25 to +30
–25 to –30
–25 to –30
+25 to +30
3 Strikes
+15 to +20
–15 to –20
–15 to –20
+15 to +20
406
APPENDIXES
APPENDIX H. INTERMARKET RELATIONSHIPSInterest RatesRisingFallingStable
BondsFallingRisingStable
StocksFallingRisingUp/Stable
DollarRisingFallingStable
Note: If these relationships do not hold, then there is said to be a divergence. A good trader will look for reasons for a divergence and look foropportunities to make money under the circumstances.
APPENDIX I. LISTS AND TABLES
407
APPENDIX I. LISTS AND TABLESThe following tables are a source of information regarding the largest companiesalong with their standings in the major indexes and sectors.Largest NYSE Companies
Company
May 2000May 2000Market Cap NYSE AverageSymbol($bil.)Daily Volume
General Electric
GE
509.5
13,625,153
322.7
Exxon Mobil Corp.
XOM
290.7
4,368,871
193.9
Wal-Mart Stores
WMT
263.1
6,511,786
189.6
Citigroup Inc.
C
203.5
8,258,420
149.6
International BusinessMachines Corp.
IBM
196.7
5,706,291
214.8
Lucent Technologies
LU
187.7
9,303,896
149.7
American InternationalGroup
AIG
176.3
2,839,834
120.0
Merck & Co.
MRK
172.5
4,381,762
159.6
Pfizer Inc.
PFE
170.6
9,655,066
138.5
SBC CommunicationsInc.
SBC
150.5
4,860,943
100.2
Source: NYSE.
May 1999Market Cap($bil.)
408
APPENDIXESLargest Computer CompaniesCompany
Symbol
Microsoft Corp.
MSFT
Apple Computer Inc.
AAPL
Alph Microsystems
ALMI
Intel Corp.
INTC
AmerUs Life Holdings, Inc.
AMH
Concurrent Computer Corp.
CCUR
Convex Computer Corp.
CNX
Compaq Computer Corp.
CPQ
Dell Computer Corp.
DELL
Gateway 2000 Inc.
GTW
Hewlett Packard Co.
HWP
International Business Machines
IBM
Micron Electronics
MUEI
Silicon Graphics
SGI
Scientific Technologies
STIZ
Sun Microsystems
SUNW
Nasdaq Companies by SectorSector
Number of Companies
Computer Programming and Data Processing
569
Finance, Insurance, and Real Estate
963
Services
511
Retail/Wholesale Trade
547
Manufacturing
1,324
Transportation and Communications
345
Drugs
275
Computers and Office Equipment
161
Other
199
APPENDIX I. LISTS AND TABLES
409
Nasdaq Non-U.S. Companies by Global Market CapCompany
Symbol
Country
($Millions)
Toyota Motor Corp.
TOYOY
Japan
$129,316
Ericsson Telephone Co.
ERICY
Sweden
$61,920
Lvmh Moet Hennessy
LVMHY
France
$27,209
Canon, Inc.
CANNY
Japan
$27,034
NEC Corp.
NIPNY
Japan
$24,730
Reuters Group PLC
RTRSY
United Kingdom
$19,606
Fuji Photo Film
FUJIY
Japan
$19,041
Orange PLC
ORNGY
United Kingdom
$18,723
Tokio Marine and Fire Insurance
TKIOY
Japan
$17,608
Global Crossing
GLBX
Bermuda
$17,316
Nissan Motor Co. Ltd.
NSANY
Japan
$15,235
AB Electrolux
ELUX
Sweden
$14,968
Volvo AB SWE
VOLVY
Sweden
$13,742
Colt Telecom Group Plc
COLTY
United Kingdom
$13,370
Kirin Brewery Ltd
KNBWY
Japan
$12,867
ABB Ab-Spon Adr
ABBBY
Sweden
$12,955
Akzo Nobel NV
AKZOY
Netherlands
$12,236
Anglo AM CP So. Africa
ANGLY
South Africa
$12,158
Mitsui & Co. Ltd.
MITSY
Japan
$10,492
De Beers Cons. Mines
DBRSY
South Africa
$9,362
410
APPENDIXESTop 10 Initial Public Offerings—January–June 1999
Company
Symbol
United Pan-EuropeCommunications NV
Offering
Country
Underwriter
UPCOY
Broadband$576,928,000communications
Netherlands
GoldmanSachs/MorganStanley
Barnsandnoble.com
BNBN
Internetbookstore
$517,500,000
UnitedStates
GoldmanSachs
NorthpointCommunications
NPNT
Internetaccess
$414,000,000
UnitedStates
GoldmanSachs/MerrillLynch
Pinnacle Holdings,Inc.
BIGT
Wirelessequipment
$308,364,000
UnitedStates
BT Alex.Brown
Time WarnerTelecom
YWYC
Telecomservices
$289,800,000
UnitedStates
MorganStanley/LehmanBrothers
TC Pipelines
TCLPZ
Pipelines
$235,750,000
UnitedStates
GoldmanSachs
RhythmsNetConnections
RTHM
Internetaccess
$226,406,000
UnitedStates
MerrillLynch/SalomonBrothers
Onemain.com
ONEM
Internetservices
$215,050,000
UnitedStates
BT Alex.Brown
EToys Inc.
ETYS
Internetretailer
$191,360,000
UnitedStates
GoldmanSachs
MIH Ltd
MIHL
Cabletelevision
$187,830,000
B.V.I.
MerrillLynch
Source: Securities Data Corp.
Sector
APPENDIX I. LISTS AND TABLES
411
Top Mutual Fund Companies—One Year (1999)Fund
Symbol
Return (%)
PBGH New Opportunities
PBNOX
294.27
Ivy: European Opport/Adv
IEOVX
250.47
Ivy: European Opport/A
IEOAX
248.08
Ivy: European Opport/B
IEOBX
246.99
Dreihaus European Opport
DREOX
188.33
Deutsche Eur Eqty Gr/lst
MEUEX
184.16
Dreihaus Intl Discovery
DRIDX
180.37
Dresdner RCM Biotech/N
DRBNX
165.84
Nicholas-App Glbl Tech/I
NGTIX
158.49
PBHG Select Equity
PBHEX
154.27
Kopp Emerging Grth/Inst
KEGIX
151.02
Kopp Emerging Grth/A
KOPPX
150.21
Kopp Emerging Grth/C
KEGCX
148.71
Black Rock Itl Sm Cp/Ist
BISIX
145.19
Franklin Biotech Disc/A
FBDIX
144.61
412
APPENDIXESTop Mutual Fund Companies—Five Years (1995–1999)Fund
Symbol
Return (%)
Firsthand: Tech Value
TVFQX
56.83
Fidelity Sel: Electronics
FSELX
49.26
Rydex:OTC/Inv
RYOCX
47.49
PIMCO:Innovation/A
PIVAX
45.77
PIMCO:Innovation/B
PIVBX
45.23
PIMCO:Innovation/C
PIVCX
45.22
PBHG Select Equity
PBHEX
42.79
Fidelity Sel:Technology
FSPTX
41.97
Fidelity Sel:Computers
FDCPX
41.58
INVESCO Telcom/Inv
ISWCX
41.52
Calamos Growth Fund/A
CVGRX
41.03
First Amer:Tech Fd/Y
FATCX
40.69
Bridgeway: Aggressive Grth
BRAGX
40.63
First Amer:Tech Fd/RA
FATAX
40.33
INVESCO Tech/Inv
FTCHX
39.32
APPENDIX I. LISTS AND TABLES
413
Largest Nasdaq Companies as of June 30, 1999Company
Net Worth
Microsoft Corporation
$460,301,731,633
Cisco Systems
$205,836,908,430
Intel Corporation
$197,421,000,000
MCI WorldCom Inc.
$160,131,862,734
Dell Computer Corporation
$ 94,012,301,000
Oracle Corporation
$ 54,122,978,250
Sun Microsystems Inc.
$ 53,114,058,250
Yahoo!
$ 39,196,176,500
Amgen
$ 31,167,817,375
Comcast
$ 28,019,451,439
World Market Dollar Volume Growth 1990–1998Nasdaq
89
NYSE
33
London
26
Paris
24
German Stock Exchanges
12
414
APPENDIXESTop IndexesIndex
Symbol
Dow Jones Industrial Average
$INDU
Dow Jones Transportation Average
$TRAN
Dow Jones Utilities Average
$UTIL
Nasdaq 100 Index
$NDX
Nasdaq Composite Index
$COMPQ
NYSE Composite Index
$NYA
S&P 500 Stock Index
$SPX
S&P 400 MidCap Stock Index
$MID
S&P 100 Stock Index
$OEX
Nasdaq High Technology Index
$IXCO
PSE High Technology Index
$PSE
Morgan Stanley High Tech Index
$MSH
Semiconductor Index
$SOX
AMEX Major Market Index
$XMI
AMEX Composite Index
$XAX
Wilshire Composite Index
$WSX
Toronto 35 Index
$TSE-TC
TSE 100 Index
$TOP-TC
TSE 300 Composite Index
$TT-TC
Mexico Index
$MEX
10-Year T-Note Interest Rate (x.10)
$TNX
30-Year T-Bond Interest Rate (x.10)
$TYX
PHLX Gold and Silver Index
$XAU
AMEX Oil & Gas
$XOI
Value Line Index (Geometric)
$XVG
Russell 1000
$RUI
Russell 2000
$RUT
Russell 3000
$RUA
APPENDIX J. TYPES OF ORDERS
415
APPENDIX J. TYPES OF ORDERSType of Order
Description
At-Even Orders
Should be placed without a debit or a credit to the account. Thatmeans that you may have to wait until the market gets to the rightprices for your trade to be placed.
At-the-OpeningOrders
Should be executed at the opening of the market or should becanceled.
Day Orders
Remain good only for the duration of the trading day that it is entered.It is canceled at the end of the trading day, if not executed.
Good tillCanceled Orders
Remain in effect until executed, explicitly canceled, or the contractexpires.
Immediate orCancel Orders
Must be executed immediately in whole or part as soon as it isentered. Any part not executed is automatically canceled.
Fill-or-KillOrders
Must be executed immediately or by a specific date as a wholeorder. If not, the order is canceled.
Limit Orders
Specify a maximum buying price or a minimum selling price.
Limit Buy Orders
Must be executed below the current market price.
Limit Sell Orders
Must be executed above the current market price.
Market-on-OpenOrders
Must be executed during the opening of trading.
Market-on-CloseOrders
Must be executed during the closing of trading.
Market Orders
The most common type of order. Buying or selling securities at theprice given at the time the order reaches the market. This can bedifferent from the price on your broker’s screen. A market order mustbe executed at the best price the market has to offer. It is the onlyorder that guarantees execution.
Market-if-TouchedOrders
Combine market and limit orders, whereby the order becomes amarket order when the options or stock reach a specified price.
Market-if-TouchedBuy Orders
Become a buy market order when the options or underlying fallbelow the current market price.
Market-if-TouchedSell Orders
Become a sell market order when the options or underlying riseabove the current market price.
Stop Orders
Used to limit risk. They become market orders when the options orstock reaches a certain price.
Buy Stop Orders
Become a market buy order upon a trade at or above the specifiedprice.
Sell Stop Orders
Become a market sell order upon a trade at or below the specifiedprice.
Stop Limit Orders
An extension of stop orders where the activated order becomes alimit order instead of a market order.
416
APPENDIXES
APPENDIX K. EXCHANGES AND SECAmerican Stock Exchangewww.amex.comThe American Stock Exchange is comprised of companies that were too small to belisted on the New York Stock Exchange. Requirements include a pretax income of$750,000 in two of the last three years, stockholders equity of $4,000,000 and aminimum market capitalization of $3,000,000. The AMEX web site is quite extensive and offers quotes, news, and exchange information as well as excellent educational materials.
Chicago Board of Tradewww.cbot.com.The Chicago Board of Trade is primarily a futures and options exchange, where theDow Jones Industrial Averages (DJIA) futures trade. The CBOT also has a tradingsimulation through the Auditrade system. There is a charge of $10.00/month to participate in Auditrade’s simulated trading. This will allow you to practice trading using a fake account and real prices, until you get comfortable with the strategies andtheir results.
Chicago Board Options Exchangewww.cboe.comThe Chicago Board Options Exchange is the largest options exchange in the UnitedStates. Its web site offers news, new option listings, and exchange information onequities, options, and LEAPS. Specialization includes calls and puts on NYSEstocks, the S&P 500, U.S. Treasury bonds, and other indexes.
Nasdaqwww.nasdaq.comThe National Association of Securities Dealers Automated Quotations (Nasdaq)system is also known as the over-the-counter market where, via online computertransactions, OTC, and specific New York Stock Exchange–listed securities can bebought and sold through licensed securities brokers and dealers. It features the internationally acclaimed Nasdaq overview and the worldwide Nasdaq network ofNasdaq performance data. There are quotes, charts, graphs, ticker search services,and features such as the 10 most active share volumes, polling volumes, and mostactive advanced performances. A good site to set up portfolio tracking and stockscreening. An excellent site tour helps you get started.
APPENDIX K. EXCHANGES AND SEC
417
New York Stock Exchangewww.nyse.comThe New York Stock Exchange (NYSE), or the Big Board, is the world’s largest equities market with a capitalization of over $12 trillion. A tremendous amount of information is available about new and previously listed companies, with annualreports, research, publications, and news.
Pacific Stock Exchangewww.pacificex.comThe Pacific Stock Exchange (PCX) is the third most active stock exchange in thecountry and the third largest stock options exchange in the world. More than 2,600stocks, bonds, and other securities issued by publicly traded companies, as well asoptions on more than 550 stocks are traded on the PCX, along with a variety of indexes. Quotes on equities and options are delayed 20 minutes.
Philadelphia Stock Exchangewww.phlx.comThe Philadelphia Stock Exchange (PHLX) was founded in 1790 as the first organized stock exchange in the United States. The PHLX trades more than 2,800stocks, 700 equity options, 12 index options, and 100 currency options; 15-minutedelayed quotes and volatility charts are available, along with news, research, anddaily market analysis.
Securities and Exchange Commissionwww.sec.comThe Securities and Exchange Commission (SEC) has a lot of detailed securitiesrelated information. SEC reports of listed companies, investor guides, and EDGAR.The EDGAR database performs automated collection of corporate information andreports required to be filed with the SEC. In 1998, the SEC’s web site received aWebby award for Best Money/Business site.
418
APPENDIXES
APPENDIX L. MEDIA SOURCES AND WEB SITES GUIDES
MagazinesBarron’s: This outstanding magazine offers breaking and scheduled financial newsand commentary from the Wall Street Journal Interactive Edition, plus exclusive,weekday coverage from industry giant and pioneer Barron’s.Business 2.0: This insightful business magazine offers readers a host of market infoand data from the cyber world’s cutting edge.Business Week: This popular magazine has been around for a long time offering agreat selection of business news and commentary.Fortune 500 Magazine: This well-written magazine site offers lists of top company performers, industry medians, and of course the famous Fortune 500. Top analysts give an inclusive analysis of the unique Fortune 500 macro view of financialevents.Investor’s Business Daily—Option Guide: Another exceptional biweekly publication to