Increasing Alpha with Options: Trading Strategies Using Technical Analysis and Market Indicators

223 Pages·2010·3.33 MB·English

by  Scott H. Fullman(auth.)

INCREASING
ALPHA WITH
OPTIONS
ffirs.indd i 7/29/10 7:40:51 AM
INCREASING
ALPHA WITH
OPTIONS
Trading Strategies Using Technical
Analysis and Market Indicators
S H. F , CMT
COTT ULLMAN
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Copyright © 2010 by Scott H. Fullman. All rights reserved.
Increasing Alpha is a trademark of Fullman Technologies, Inc.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the
accuracy or completeness of the contents of this book and specifi cally disclaim any implied
warranties of merchantability or fi tness for a particular purpose. No warranty may be created
or extended by sales representatives or written sales materials. The advice and strategies con-
tained herein may not be suitable for your situation. You should consult with a professional
where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or
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ISBN 978-1-576-60365-9 (cloth); 978-0-470-87910-8 (ebk); 978-0-470-93673-3 (ebk);
978-0-470-93674-0 (ebk)
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Technical analysis involves learning from history and experience in
order to project into the future. I therefore dedicate this book to the late
William H. Fullman, Jr., Sandie Fullman, James Boyd Taylor, and Doris
J. Taylor, who my wife and I have learned countless lessons from, and to
our children Jonathan William Fullman and Daniel Scott Fullman, who
we have taught and loved using those life experiences.
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Contents
Acknowledgments xi
Introduction xiii
1 Why Technical Analysis? 1
Bases 3
Fundamentals vs. Technicals 6
Tops 8
2 The Basics of Technical Analysis 13
Understanding Chart Types 13
Trend Properties 16
The Trend Is Your Friend 18
Volatile or Negative Markets 20
Primary and Secondary Trends 20
First Strategy 22
Put Hedges 24
Implied Volatility 24
Seasonal Trends 25
Cyclical Trends 25
Moves within Moves 27
Nontrends 28
Understanding the Properties of Trends 29
3 Trends and Their Ends 33
Elliott Waves and Common Trend Analysis 34
Nesting Patterns 37
Continuation Patterns 38
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viii Contents
Continuation or Reversal? 39
Opposing Reversal Patterns 41
4 Building Strategies around Reversal and
Continuation Patterns 45
Spotting Reversal and Continuation Patterns 45
Confi rming Patterns Using Different Time Frames 45
Building Pattern-Based Strategies 49
More Complex Patterns: The Double Top 51
Continuation Patterns 56
An Amazon.Com Example 59
5 Oscillators 63
Oscillator Types 64
Stochastic Oscillator 66
Commodity Channel Index 67
Bollinger Bands 68
6 Oscillators and Strategies 71
Technical Indicators 73
Relative Performance 76
Finding the Strongest or Weakest Stocks 78
Money Flow and On-Balance Volume 81
7 Relative Performance 83
Look at the Board 85
8 ETF Strategies 89
Pairs 94
9 Effi cient Pricing—Mostly 99
Exploiting Small Pricing Ineffi ciencies 99
10 The Subprime Mortgage Crisis and Options 107
Managing Delta 108
Delta Relationships of Stocks and Options 109
11 The Other Greeks 115
Other Products 117
Ex-Dividend Trades 118
Getting Information from the Exchange Floor 119
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CONTENTS ix
12 When Conditions Change 121
Routine Changes 121
The Extremes 123
Meet the New Rules 125
13 The Changing Environment 129
Controlling Risk, Fixing Problems 130
Using Global Markets 134
14 Using Options to Protect Capital 137
What Doesn’t Work 137
Single Security Hedges 138
Collar Hedges for Long Stock Positions 142
Other Hedges for Offsetting High Volatility Levels 144
Stock Replacement Therapy 148
15 Hedging the Broad Portfolio 157
Reducing Hedge Costs 161
Pairing Up 164
Hedging Short Portfolios 165
Other Hedge Types 168
16 When to Invest, When to Trade 171
Investors and Investment Markets 171
Trading an Investment Trend 172
The Trading Market 177
Japanese Candlesticks 182
Other Investment and Trading Opportunities 184
Upcoming Events 185
Mergers and Acquisitions 187
17 All About Resources 189
Abundance of Resources 189
Bloomberg Professional Service 189
MetaStock Professional Service 192
SuperCharts, Worden Brothers, and Others 193
Chart Books 193
Scanning Techniques 193
Options Resources 198
Other Helpful Resources from Bloomberg 198
iVolatility 198
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x Contents
Resources for Smaller Funds 200
Risk and Position Monitoring 203
Different Funds, Different Vendors 206
Other Information Sources 207
Appendix: Information Sources 209
Index 211
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Acknowledgments

M y wife, Deborah, her understanding with the time consuming writing
and editing deadlines.
M ichael Ham, a colleague that has taught me much and who reviewed
my work and been there to bounce questions off of.
I ngrid Case, who edited the book and made insightful changes and
suggestions.
Steven Isaacs, project manager at Bloomberg Press, for all of his help
in producing this work.
T he CEOs of WJB Capital Group, Craig Rothfeld and Michael
Romano, for their support in both writing this book and the work I do
for the fi rm and its clients each and every day.
Adam Futterman, head of derivatives trading, and the derivatives
trading team at WJB Capital Group for their insight on what clients are
looking for today.
J ohn Roque and Adolfo Rueda, our technical team, for their insights
and inspiration.
My colleagues at WJB Capital for all of their efforts and conversa-
tions that led me to the decision to write this book.
J ohn and Debbie Cirenza, Ray Dempsey, Michael Eisenberg, and
Carl Romick for their never ending input on the trading pits.
M y friends and associates at the Market Technicians Association
(MTA), with whom I frequently consult in respect to the markets and
forms of analysis.
M y many friends, colleagues, and associates at the options exchanges
and in the industry, whom I have learned a lot from and shared ideas with
over the years.
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Introduction
Welcome to the world of twenty - fi rst – century investing, a world
of intertwined derivative products, analysis methods, and global mar-
kets in which countries ’ politics, currencies, debt, and equities all
interact.
In this new world of investing, managers deal with a variety of dynam-
ics, products, analyses, and risk controls. As ever, professional managers
concern themselves with resource availability and cost as they chase above -
b enchmark performance and profi ts — called a lpha — and compete against
other managers for new investment dollars. Many investment managers
focus on performance during most of their waking hours.
I n doing so, they seek to balance risk against the possibility of
reward. Investment managers have always done this, of course, but the
job grew more complicated during the 1990s, when hedge funds and
mutual funds grew increasingly popular. The latter part of the decade,
particularly in the United States, was characterized by impressive mar-
ket performance, the result of growth in technology and the Internet, as
well as fi nancial service sector expansion. Hedge and mutual funds paid
top managers attractive compensation, which helped increase both the
number of funds and the competition among them.
Hedge and mutual funds examined every aspect of their businesses,
trying to maximize growth and performance. Many developed new tech-
niques. Some of these resulted from new products, such as exchange -
t raded funds (ETF). Others came from new analysis applications, such
as pair trades that are derived from quantitative comparisons of two or
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