The Index Trading Course

447 Pages·2006·9.09 MB·English

by  George A. Fontanills, Tom Gentile, Frederic Ruffy

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More Praise for
The Index Trading Course
and
The Index Trading Course Workbook
“George and Tom have done it again! They’ve created another comprehen-
sive resource for traders, this time thoroughly covering the index market.
The sector and broad market indexes are ideal vehicles for the many spe-
cific options strategies taught by these trading experts. Both new and ex-
perienced traders will find plenty of valuable techniques here.”
—Price Headley, Founder, BigTrends.com
“There are few people in the entire country who come to the financial
marketplaces with the type of pedigree George Fontanills brings. He is not
only an incredibly gifted and accomplished trader in his own right, with a
passion for the mechanics and strategies that drive trading success, but he
also combines it with a fervor to teach those strategies to thousands of in-
dividuals across the world each and every year. The Index Trading Course
and The Index Trading Course Workbook—George’s most recent addi-
tions to his ever-expanding library—represent another of his ‘must reads’
for anyone involved in the marketplace at all.”
—Laurence J. Pino, Founder and CEO
Dynetech Corporation
“Fontanills and Gentile have once again demonstrated why they are so
respected in the field of options trading. Because indexes represent
such a volume of transactions, second only to the foreign exchange
markets, they present characteristics that these experts have very
deftly managed to take advantage of to create some new and exciting
trading systems. A thought-provoking read for anyone looking for some
fresh trading ideas.”
—John Paul Drysdale
Founder and Managing Director
The Hubb Organisation (www.hubb.com)
“Any investor or trader who utilizes equity options today will find this
practical, logical, and highly usable index trading course by two acknowl-
edged industry experts to be the perfect guide to expanding your skills
and knowledge into this fast-growing but still underutilized segment of the
options world.”
—Albert H. Brinkman Jr., Director
Equity Derivatives Marketing
Philadelphia Stock Exchange (PHLX)
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The Index
Trading
Course
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Founded in 1807, John Wiley & Sons is the oldest independent publishing
company in the United States. With offices in North America, Europe, Aus-
tralia, and Asia, Wiley is globally committed to developing and marketing
print and electronic products and services for our customers’ professional
and personal knowledge and understanding.
The Wiley Trading series features books by traders who have survived
the market’s ever changing temperament and have prospered—some by
reinventing systems, others by getting back to basics. Whether a novice
trader, professional, or somewhere in-between, these books will provide
the advice and strategies needed to prosper today and well into the future.
For a list of available titles, visit our web site at www.WileyFinance.com.
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Copyright © 2006 by George A. Fontanills, Tom Gentile, and Richard Cawood. All rights
reserved.
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 any form or by any means, electronic, mechanical, photocopying, recording, scanning,
or otherwise, except as permitted under Section 107 or 108 of the 1976 United States
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[phone], fax [phone], or online at http://www.wiley.com/go/permissions.
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 specifically disclaim any
implied warranties of merchantability or fitness for a particular purpose. No warranty may
be created or extended by sales representatives or written sales materials. The advice and
strategies contained 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 profit or any other commercial damages, including but not limited to special, incidental,
consequential, or other damages.
For general information on our other products and services or for technical support,
please contact our Customer Care Department within the United States at [phone],
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Library of Congress Cataloging-in-Publication Data:
Fontanills, George A.
The index trading course / by George A. Fontanills and Tom Gentile ; with a
foreword by Frederic Ruffy.
p. cm.— (Wiley trading series)
Includes index.
ISBN-13 978-0-471-74597-6 (cloth)
ISBN-10 0-471-74597-9 (cloth)
1. Stock price indexes. 2. Stock options. 3. Stock price forecasting.
4. Stocks—Prices. I. Gentile, Tom, 1965- II. Title. III. Series.
HG4636.F65 2006
332.64'5—dc22
2006005660
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
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This book is dedicated to Ruth Cawood
who inspires us all to live up to our full potential.
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Contents
Foreword ix
Acknowledgments xv
About the Authors xvii
CHAPTER 1 A Look Back 1
CHAPTER 2 The Index Market Today 11
CHAPTER 3 Trading the Market 29
CHAPTER 4 Understanding Options 47
CHAPTER 5 Basic Strategies Using Call Options 73
CHAPTER 6 Basic Strategies Using Put Options 93
CHAPTER 7 Complex and Advanced Strategies 111
CHAPTER 8 Catalysts 133
CHAPTER 9 System Trading 157
CHAPTER 10 Getting an Edge with Indicators 181
CHAPTER 11 Sector Trading 221
CHAPTER 12 Tracking and Trading Volatility 257
CHAPTER 13 Making Adjustments 287
CHAPTER 14 Risk Management 309
vii
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viii CONTENTS
CHAPTER 15 Important Index Facts and Strategies 327
CHAPTER 16 Getting Started 343
APPENDIX A Important Tables and Lists 357
APPENDIX B Focus on Technical Analysis 373
APPENDIX C Option Strategy Reviews 389
Index 403
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Foreword
hortly after I heard George Fontanills and Tom Gentile speak at an
options trading course in the year 2000, I quickly realized that they
Sshared my passion for trading. At the time, the Internet boom was
going full throttle and this particular hotel conference room in Silicon Val-
ley was packed full of enthusiastic listeners. There being no empty seats, I
stood in the back, listening as well.
George Fontanills took the stage. After an introduction, he listed off
and explained various strategies that were working well in the volatile
markets of the time. Among the trades, he outlined a scenario for the NAS-
DAQ 100 Index Trust (QQQQ), or “Qs,” that had profit potential regardless
of directional bias. It made money whether the NASDAQ went higher or
lower. Since it happened just before the great tech wreck, a time when
even Aunt Mildred had her portfolio tilted towards high-technology stocks,
the trade suggestion proved extremely insightful at the time.
Prior to that, I had worked on an options trading desk of an institu-
tional firm in New York, so options were not new to me. However, some of
the strategies were. In a nutshell, Tom and George were taking advanced
concepts used by market makers on the options exchange trading floor
and presenting them in a format that individual investors could easily use
and understand. Many of these strategies involved stock options, but oth-
ers were applied to the index market. As an index trader, I found it fasci-
nating. I began working with their system, Optionetics, shortly thereafter.
Six years later, I was excited to hear about The Index Trading Course.
Although the bookstore shelves are lined with investment books, a quality
book about index options trading has clearly been missing. After reading
the first draft, I am convinced that Tom Gentile and George Fontanills have
put together another winner. I think the reader will come away with sev-
eral things from this book, and these are the same things I have been fortu-
nate enough to learn through my association with the authors.
ix