Table Of Content

ptg From the Library of Melissa Wong Volatile Markets Made Easy ptg From the Library of Melissa Wong This page intentionally left blank ptg From the Library of Melissa Wong Volatile Markets Made Easy Trading Stocks and Options for ptg Increased Profits Guy Cohen From the Library of Melissa Wong Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistants: Myesha Graham, Pamela Boland Operations Manager: Gina Kanouse Digital Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Alan Clements Managing Editor: Kristy Hart Project Editors: Chelsey Marti and Anne Goebel Copy Editor: Language Logistics, LLC Proofreader: Kathy Ruiz Indexer: Lisa Stumpf Senior Compositor: Gloria Schurick Manufacturing Buyer: Dan Uhrig ©2009 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trade- marks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, ptg without permission in writing from the publisher. Printed in the United States of America First Printing May 2009 ISBN-10: 0-13-513841-8 ISBN-13: 978-0-13-513841-0 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educación de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Cohen, Guy. Volatile markets made easy : trading stocks and options for increased profits / Guy Cohen. p. cm. ISBN 978-0-13-513841-0 (hardback : alk. paper) 1. Options (Finance) 2. Investments. I. Title. HG6024.A3C647 2009 332.63’2283—dc22 2008046557 From the Library of Melissa Wong This book is dedicated to those who want to make money from trading. ptg From the Library of Melissa Wong This page intentionally left blank ptg From the Library of Melissa Wong Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiv About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xv Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xvii chapter 1 Introduction to Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Definition of an Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Calls and Puts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Right Versus Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Fixed Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Expiration Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 The Valuation of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Intrinsic and Time Value for Calls . . . . . . . . . . . . . . . . . . . . . . . . . .6 ptg Intrinsic and Time Value for Puts . . . . . . . . . . . . . . . . . . . . . . . . . .6 Why Trade Options? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Advantages of Trading Options . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Risk Profile Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Long Call Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Short Call Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Long Put Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Short Put Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 The Four Basic Risk Profiles Summarized . . . . . . . . . . . . . . . . . .19 Options in the Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Option Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Expiration Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Strike Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Option Ticker Symbols . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Open Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Placing Your Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Other Market Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Learning Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 From the Library of Melissa Wong viii Volatile Markets Made Easy chapter 2 Trends and Flags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 A Common Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Benefits of this Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Trending Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 What Is a Trend? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 The Challenge with Moving Averages . . . . . . . . . . . . . . . . . . . . . .32 Trendlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Consolidating Chart Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Bull Flag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Bear Flag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Flags Within the Context of a Trend . . . . . . . . . . . . . . . . . . . . . . . .38 Managing Your Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Rounded Tops and Flag Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Cup and Handle—Two Patterns in One . . . . . . . . . . . . . . . . . . . . . . .51 Finding Flag Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 ptg Learning Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 chapter 3 Options and the Greeks . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 Delta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 Why Does Speed Matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Delta Neutral Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Leverage and Gearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Delta Neutral Trading for Hedging . . . . . . . . . . . . . . . . . . . . . . . .65 Delta with Puts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Gamma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Theta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Vega . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Implied Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 Theoretical Option Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84 Rho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91 Learning Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 From the Library of Melissa Wong Contents ix chapter 4 Straddles and Strangles . . . . . . . . . . . . . . . . . . . . . . . . . . .93 Straddles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 Strike Price Position and Trade Bias . . . . . . . . . . . . . . . . . . . . . . .94 Strangles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Factors Affecting Straddles and Strangles . . . . . . . . . . . . . . . . . . . .98 Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 Straddles Versus Strangles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 News Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104 Time Decay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 Straddle Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 Stock Chart Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 Breakeven Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 Managing the Trade with a Trendline to Maximize Profit . . . . . . .120 Time Stops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122 NICE Strangles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123 October 23, NICE Strangle Risk Profile . . . . . . . . . . . . . . . . . . .124 ptg October 23, NICE Strangle Delta Profile . . . . . . . . . . . . . . . . . . .125 October 23, NICE Strangle Gamma Profile . . . . . . . . . . . . . . . . .126 October 23, NICE Strangle Theta Profile . . . . . . . . . . . . . . . . . . .126 October 23, NICE Strangle Vega Profile . . . . . . . . . . . . . . . . . . .127 Other Factors to Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Adjusting Trades and Gamma Trading . . . . . . . . . . . . . . . . . . . .129 Inside Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132 Strike Pinning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132 Learning Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133 chapter 5 Ratio Backspreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135 Call Ratio Backspreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135 Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150 Greeks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150 Put Ratio Backspreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153 Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .166 Greeks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .166 Learning Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168 From the Library of Melissa Wong

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I read this book after his earlier book "Options Made Easy" ,which paved the way to get more out of this book. In adition to the well presented standard fare in options books, the author also addresses the psychological aspects which can be half the battle when trading. The examples presented were b
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