Trading by Numbers
Contents
1. E TRADE recognizes that education is a WWI LEY T d key factor for financial success Trading by Ty Ya ing Numbers is a valuable resource for individual investors looking to use technical analysis and options as a risk management tool MICHAEL CURCIO President E TRADE Securities LLC TRADING BY NUMBERS SCORING STRATEGIES FOR EVERY MARKET RICK SWOPE aw W SHAWN HOWELL Trading by Numbers Founded in 1807 John Wiley Sons is the oldest independent publish ing company in the United States With offices in North America Europe Australia and Asia Wiley is globally committed to developing and market ing print and electronic products and services for our customers profes sional 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 you re a novice trader a 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 Trading by Numbers Scoring Strategies for Every Market RICK SWOPE W SHAWN HOWELL WILEY John Wiley Sons Inc Copyright O 2012 by Rick Swope and W Shawn Howell All rights reserved Published by John Wiley amp Sons Inc2. decisions that a new driver has to process foot on the brake hand on the wheel turn the ignition key release when the engine engages shift into drive check rear and side mirrors and the list goes on Each of these decisions is a discrete point of thought and decision for a new driver On the other hand an experienced driver will perform all the same steps but without a conscious thought assigned to any of them In fact the experienced driver may go through all of these steps while loading the dog into the car and taking a phone call The teen driver is operating entirely within the reflective system mode whereas the experienced driver operates within the automatic system Market Scoring 3 Now consider what might happen if the teen driver chooses to go with her intuition rather than thinking through each step She may do her very best with all good intentions but without rules guidelines and experience she ll very likely meet trouble in short order As a new driver she needs structure and rules As she applies those guidelines her experience will grow and she ll develop an automatic system that she can rely on for most of her driving activities Of course new situations will arise such as icy roads which will require new rules and some period of reflective system decisions But these too will eventually lead to a new level of experience and a return to the automatic system of driving New traders are not at all unlike our ne
3. make up the technical analysis Beyond the relatively simple concepts there is a seemingly endless supply of more advanced technical indicators and concepts The key point we re mak ing here is that the salient aspects of technical analysis aren t depen dent on arcane and complex concepts they rest on the basics With fundamental analysis there are various financial and ac counting metrics that feed into a complete analysis Furthermore it is incumbent upon the trader to calculate how these metrics will ulti mately translate into price After all profit or loss from a trade is en tirely a function of the difference between the purchase price and the sales price So although it is often useful to understand the fundamen tal dynamics behind the company in question the trader still must de cide how that will influence the stock price Let s suppose that you ve looked at the price earnings to growth PEG ratio debt to total capi tal and return on assets What are the magnitude direction and timing of the influence on the stock price of these metrics Compare that to a simple candlestick chart that shows green candles with rising volume The candlestick chart gives a simpler and more immediate indication that the buyers are in control for a short term uptrend 3 Technical analysis is more responsive for short term traders When a trader is choosing the correct balance between funda mental and technical analysis she needs to co
4. 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 800 762 2974 outside the United States at 317 572 3993 or fax 317 572 4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products visit our web site at www wiley com Library of Congress Cataloging in Publication Data Swope Rick 1964 Trading by numbers scoring strategies for every market Rick Swope and W Shawn Howell p cm Wiley trading series Includes index ISBN 978 1 118 11507 7 cloth ISBN 978 1 118 22438 0 ebk ISBN 978 1 118 23753 3 ebk ISBN 978 1 118 26245 0 ebk 1 Electronic trading of securities 2 Stocks 3 Risk management I Howell W Shawn 1968 II Title HG4515 95 896 2012 332 63 2042 dc23 2011042684 Printed in the United States of America 10098 765 43 2 1 I have learned that a true teacher is characterized by who they are rather than what they do This book is dedicated to teachers and mentors My parents having invested their lives in teaching generations My professional mentors Dr Richard M Wyskida and R Wayne Penrod are amon
5. start anywhere and jump around at will If you already understand ba sic directional strategies feel free to start with straddles and strangles in Chapter 8 The point is that each strategy mostly stands alone so there s no requirement to take them in the order presented On the few occasions where we do reference other material we include the chapter reference for you to easily review You ll notice that we liberally apply stories to the strategies especially in the introductions Our style of teaching is to establish a common un derstanding of concepts from other life experiences and then draw the parallels to the trading strategy While not perfect we hope it better ac complishes our goal of making this text more usable Finally we want to thank our model albeit fictitious trader Frank for serving as the exam ple of the strategies in action By seeing examples of the strategy played out we trust you ll gain a better appreciation of when to use or forgo the various options available to you CHAPTER 1 Market Scoring It is not enough to do your best you must know what to do and then do your best W Edwards Deming any sports enthusiasts consider October 25 1964 the date of one of the most embarrassing moments in sports During a game against the San Francisco 49ers Minnesota Vikings defensive end Jim Marshall had the good fortune to scoop up a fumble He then ran 66 yards for the end zone and threw the ball away
6. surfer knows that as good as you may T rends are to the trader what waves are to the surfer You never see a 9 10 TRADING BY NUMBERS be there will be waves that take you under the swell That s when you remember that you re riding to ride another day As a trader you should approach the market very much as the surfer approaches the ocean Start with small easy trends The ride might not be as exhilarating but the wipeouts won t be as painful either It never ceases to amaze us how often new traders want to trade something like a far out of the money call in a highly volatile stock because they think they re going to win the market lottery If you re patient and prudent you ll get to the point where you can confidently take larger risks for greater potential profit Along the way learn to read the story of the market so you can identify the trends as they begin to develop Then you ll be positioned to ride the trend for maximum gain and know when it s time to jump off and look for the next opportunity TREND SCORING SYSTEM A good scoring system should start by identifying key parameters to be scored The system should include enough parameters to provide for a strong score but limit the number to ensure that the system is usable More is not necessarily better and will only make the system too burdensome to use in practice Second an effective scoring system should attempt to re duce the influence of user bias This is best acc
7. work with Thanks also to Chris Young and Chris Larkin who have supported us through a terrific partnership And a special thanks to the Frank behind our model trader throughout the text Frank Tirado Without the outstanding team of partners surrounding us we would still be looking up at the top of the fencepost Writing a book is a long and tedious process When you begin you re staring at several hundred blank pages that are waiting to be filled The team at Wiley makes that process manageable and even enjoyable Laura Walsh was the one who first spotted our potential as authors we re in debted to her for taking that chance Judy Howarth has been an encour agement along the way as we ve fed her a chapter at a time and welcomed her feedback No acknowledgment is complete without a special thanks to our fam ilies and friends The long hours on the laptop missed schedules impa tience and distracted attention are not borne by the authors alone Dani Swope and Shelly Howell have continued to run quarterback for all the plays that Rick and Shawn have neglected this year They are truly our sup port Caleb Swope and Will Howell are the best sons a couple of guys could Wi a book manuscript is finally completed nobody feels more XII ACKNOWLEDGMENTS ask for they will be fine young men indeed Katie Howell and Tori Swope are two peas in a pod They may very well rule the world one day Finally thanks to you the reader fo
8. 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 oth erwise except as permitted under Section 107 or 108 of the 1976 United States Copyright Act without either the prior written permission of the Publisher or authorization through payment of the appropriate per copy fee to the Copyright Clearance Center Inc 222 Rosewood Drive Danvers MA 01923 978 750 8400 fax 978 646 8600 or on the Web at www copyright com Requests to the Publisher for permission should be addressed to the Permissions Department John Wiley amp Sons Inc 111 River Street Hoboken NJ 07030 201 748 6011 fax 201 748 6008 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 con tained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author
9. R 2 Trend Scoring We always say Ride to ride another day We go out there with the attitude that we re going to do it in a way that we can do it again tomorrow Laird Hamilton world champion big wave surfer surfer jump on a board in flat water because he has a gut feeling that a wave will develop He waits until the wave starts to develop and then positions himself to catch the best part of the wave for the longest ride However when the wave starts to crash he jumps off to get ready for the next wave Take particular care to notice what the surfer does and doesn t do First of all a new surfer isn t going to ride the big waves of Hawaii s North Shore He starts with the one or two foot waves and moves up as his skills and experience grow He always waits for the wave to tell him when to start the ride The wave begins to develop and the surfer s goal is to identify the wave as early as possible by reading the water He doesn t anticipate where the wave will be at some future time or convince himself that a wave should be where it s not Once he starts his ride he stays on for as long as the wave will allow Eventually the wave breaks apart and the surfer moves on to the next wave He doesn t pick a spot near the shore where he thinks the wave should crash and then only jump off at that predetermined location During the ride he s constantly watching and feeling the water and making adjustments as necessary And every
10. g the best Those who serve with passion Lisa Phelan Lisa Colson and more Mentors for eternity Mike Schmid and Joe Donohue come to mind Teachers from the ages C S Lewis and G K Chesterton Rick Swope This book is dedicated to my family To my parents Thank you for the double dose of the teacher gene and for your enduring and unfaltering confidence that my abilities are limitless The life lessons you taught me are woven throughout this book and hopefully will enrich many others lives as they ve enriched my own To my wonderful children Katie and Will You both have brought me immeasurable joy You have incredible adventures ahead lives to live stories to tell and gifts to share with the world Remember follow your passion trust your inner voice and stay a child at heart To my wife Shelly You ve been my unswerving advocate cheerleader advisor partner friend and copilot on our amazing journey thus far In a life filled with countless blessing the gift that is you our bond our children and our life is without equal W Shawn Howell Contents Acknowledgments Introduction CHAPTER 1 Market Scoring Intuition Can Be High Tuition The Role of Technical Analysis CHAPTER 2 Trend Scoring Trend Scoring System 10 27 CHAPTER 3 Volatility Scoring Volatility Overview Volatility Scoring System Know That You Don t Know 28 34 42 CHAPTER 4 Protecting Your Position Seven Ke
11. ial public offering IPO in 1999 On the first day of trad ing traders gave it a market capitalization shares outstanding multiplied by the share price of 11 billion From a technical perspective the stock had extraordinary strength coming out of the gate However the company lost 12 million on zero revenue during the year prior to its IPO There is hardly a clearer example of a significant disconnect between stock price performance and company performance Five Benefits of Technical Analysis over Fundamental Analysis 1 Technical analysis is real time One of the key sources of fundamental analysis information for most traders and investors is the quarterly earnings report Of course there are other reports and news releases that may be issued more fre quently but the quarterly news tends to be dominant Based on events and performance of the previous quarter the company compiles their results and that becomes the basis of the quarterly report Now con sider that by the time you read the report several months or longer may have passed since the occurrence of those events In other words the key reports that you rely on for fundamental analysis are lagging the events that drive the reports by weeks or months Compare the time lag that is inherent to fundamental analysis with the real time nature of technical analysis Technical analysis starts with price and volume which dynamically update with each trade As a trade occurs the p
12. in celebration Unfortunately he had crossed into the wrong end zone and scored a safety for the opposing 49ers My first inkling that something was wrong was when a 49er player gave me a hug in the end zone commented Marshall after the game Best efforts in sports as well as in trading the markets are noble but not always fruitful Jim Marshall had the necessary skills and certainly put forth his best effort but he lost sight of his position and ended up on the losing side of the play A trader who does his best will memorize 50 candle patterns run fundamental and technical screens at the start of every trading day and hold his own in any discussion about the merits of Fibonacci retracements versus Elliott waves To be sure there are prerequisite skills that a trader should master before entering the markets but knowing which skills to master and how to use those skills to manage your position can mean the difference between winning and losing 2 TRADING BY NUMBERS INTUITION CAN BE HIGH TUITION Let s begin with the obvious question Why do we need a market scoring system Of course we ll describe and develop the system in the following chapters but we should start with a purpose Is it really important to set a structure to our analysis of the markets rather than follow our instinct and intuition Following only intuition can be costly in the markets because our intuition isn t always reliable in the face of a multi
13. nnot Market Scoring 7 effectively manage risk without an understanding of the basics of tech nical analysis This is partly due to the fact mentioned earlier that technical analysis is real time whereas fundamental analysis has a built in time lag Information flows too quickly these days for you to ex pect that you can respond to news or shifting fundamentals before the rest of the market Technical analysis is a real time monitoring system to alert you when it s time to exit the trade A proper analysis of price will give you support and resistance levels that serve as your price tar gets for both profit and loss If the trade moves against you you have a precise point at which you ve determined in advance that you ll exit the trade for a limited loss Risk management based on technicals then becomes a binary de cision If your analysis tells you that support is at 40 and your exit stop order is at 38 then anything above 38 keeps you in the trade If the stock is trading at 38 01 you don t worry and fret over your next move you stay in the trade At 38 you don t start to rationalize why you should or shouldn t exit the trade You have a plan based on an analysis of the charts and you execute without hesitation Without technical analysis that precise price at which you exit a trade to limit your losses is little more than a guess Technical Analysis Tells a Story When you look at a price chart your first goal should be
14. nsider her trading time horizon As a general rule the longer the time horizon for the trade the more important fundamental analysis is In contrast the value of TRADING BY NUMBERS fundamental analysis diminishes as the time horizon shortens Very short term day traders the scalpers rarely if ever use fundamental analysis Earnings per share growth really has no influence on where the stock price will be in 15 minutes Therefore technical analysis is the primary tool for determining strategy and execution for very short term traders Please don t misunderstand that long term traders and investors then should use fundamental analysis to the exclusion of technical analysis Though day traders find little use for fundamental analysis the other end of the time horizon is different Long term traders and investors can use technical analysis very effectively to complement their fundamental views As we noted earlier technicals can help with the question of timing when to buy or sell a long term position After identifying a trade candidate through fundamental analysis technical analysis can focus on the best timing for executing the trade Technical analysis shows what traders are doing not just what they re saying The old saying Pay attention to what they do not what they say is never more true than in the markets Words are cheap but actions reveal the truth more accurately Today s market is full of news pro grams a
15. ntify key support and resistance levels price gaps trends and trading patterns that serve as guides to signal your buying and selling points In vestors and traders who use fundamental analysis for decision making ex perience the same issue A company that pays a high dividend or reports a high return on equity is not guaranteed a rising stock price Nevertheless you have a reasonable expectation that your analysis will lead to improved success over random stock picking The best way to think about your analysis both technical and fundamental is to liken it to a Lego set Most readers are familiar with the small plastic Lego pieces Each piece contains a small discrete bit of information color size and shape Taken alone that information is of little benefit The real value in the Lego piece is seen when many different pieces are assembled together and they take the shape of a dragon or castle The best Lego shape is made when the right pieces come together to tell a story even if all the pieces aren t used Price candles moving averages volume and other technical metrics are your Lego pieces Deciding which pieces to use and how to fit them together is your challenge Through market scor ing we re providing you with an assembly guide to help you choose the right pieces and fit them together Once you see the shape that the market is building the story you ll be ready to execute the correct strategy for trading success CHAPTE
16. omplished by using binary scores when possible A binary score yields a yes no answer rather than a subjective answer For example consider the following two approaches to determining whether the price is in an uptrend or downtrend 1 Rate the strength of the trend a Very weak b Weak Neutral Strong Very strong og 2 Rate the strength of the trend a Red candle close lower than the moving average b Green candle close lower than the moving average c Neutral candle doji or spinning top d Red candle close higher than the moving average e Green candle close higher than the moving average You can easily see that the first approach could have widely varying answers depending on who is making the assessment Two traders may look at the same chart but arrive at different conclusions if the analysis
17. pplication CHAPTER 14 Index Options Getting to Know the Strategy Strategy in Action Strategy Execution CHAPTER 15 Butterfly Spreads Getting to Know the Strategy Strategy in Action Strategy Management Strategy Application CHAPTER 16 Iron Condors Getting to Know the Strategy Strategy in Action 149 153 160 160 162 168 171 173 175 176 179 183 184 190 191 193 197 198 204 204 207 208 210 212 213 218 218 x CONTENTS Strategy Management 221 Strategy Application 223 APPENDIX Strategy Profit and Loss Diagrams 227 About the Authors 231 Index 233 Acknowledgments like a turtle on a fencepost than the author You realize that you didn t get there through your own efforts alone We d like to ac knowledge some important people who have helped us to the top of our fencepost We re grateful to our professional colleagues who invested their time and energy into reviewing the manuscript for technical accuracy These in clude Jim Bittman Marty Kearney Peter Lusk and Russell Rhoads from the Chicago Board Options Exchange CBOE Options Institute We also appreciate the review from our friend and colleague Dan Gramza of Gramza Capital Management Our sincere thanks go to our business partners through whom we re able to teach multitudes of traders and investors These include the Op tions Industry Council and E TRADE A big thanks to Kat and Diana the best event gurus we could
18. r The proper amount with the correct application can do wonders Too much will leave you with a burnt mess THE ROLE OF TECHNICAL ANALYSIS Because we re going with the premise that gut feeling and best intentions are inadequate for traders and investors we have to recognize that addi tional tools of analysis are required The primary set of tools that we ll use 4 TRADING BY NUMBERS falls under the category of technical analysis Technical analysis simply refers to the analysis of price volume and derivative patterns and indica tors This differs from fundamental analysis which focuses on the health and performance of the underlying company The balance between the two may be thought of in this way Fundamental analysis helps you decide what to buy and sell technical analysis helps you decide when to buy and sell Many people will argue that technical analysis is redundant to funda mental analysis because the two should be fairly well aligned That may be true to a certain extent but there are often great divergences between them A company that is performing well from a fundamental standpoint may have a very weak stock price and vice versa The economist John Maynard Keynes is said to have warned investors that although markets do tend toward rational positions in the long run the market can stay irra tional longer than you can stay solvent An example we often cite is Webvan former ticker symbol WBVN Webvan had its init
19. r trusting us to present you with the best trading and investing education We don t take that trust lightly and we hope you find the information contained in these pages worthy of your time Rick Swope W Shawn Howell Introduction to write a book that we wished was available when we started our trading careers As hard as it may be to believe now it wasn t too long ago that a new trader pretty much had two choices for learning the markets 1 Find an experienced trader who would let you shadow his ev ery move or 2 open an account and hope you had equity left over after you learned all the painful and expensive lessons Sure there have always been the in depth books that cover various trading topics in excellent de tail but most never seemed to have that practical edge the kind of edge that takes the material from the realm of the academic to the realm of being real life applicable Trading by Numbers is our attempt to provide the necessary depth for understanding the markets and strategies while still maintaining a level of practicality that allows you to try these strategies on your own tomorrow We wanted to provide you with a user s manual rather than a reference book The material is presented in two main sections The first four chapters lay out an approach to adding structure to your analysis The two key mar ket dimensions that every trader must understand are trend and volatility Chapter 1 sets the stage for anal
20. rice and volume instantly reflect the new infor mation For that reason technical analysis is a much more responsive analysis for the trader Price and volume trading activity are expected Ol Market Scoring to reflect all that the market knows about a company s news expecta tions performance and so on Although an individual trader may not know about pending litigation poor sales geographic instability or any of the other factors that may be influencing a company s fundamen tal position the market as a whole will absorb and process this infor mation and reflect the collective consensus through the price charts In effect the fundamental analysis of the market as a whole becomes distilled into real time technical analysis for the individual trader 2 Technical analysis can be simpler The bread and butter of technical analysis is price and volume Price simply reflects the current price that a buyer and seller agree on for the trade Volume is typically a cumulative number that resets after each trading session When a buyer agrees to purchase 1 000 shares from a seller the transaction is complete and the total volume for that day rises by 1 000 shares These concepts are very simple and straight forward Beyond price and volume there are a handful of relatively simple technical concepts such as price gaps support resistance and trends These help the trader determine price direction momentum and other key factors that
21. rticles web sites and trading rooms that have no lack of opin ions and analyses from all corners A CEO will appear on a market interview program and give his top three reasons why his company s stock should outperform the market Gurus abound who offer a bullish or bearish assessment of a stock price in rapid fire succession In short everyone has something to say about XYZ s stock price The beauty of technical analysis is its dispassionate delivery of facts Every program on TV may be talking about reasons why XYZ stock should be falling but if the charts continue to show an uptrend with sustaining volume then the fact remains that buying pressure ex ceeds selling pressure Never lose sight of an important tenet of mass media programming Market shows are in business to make money through building their audience which then commands greater ad rev enue Market programs are not successful because you become more successful as a trader Therefore your success in the markets is in cidental to their success That may be a harsh reality but it is real ity nevertheless If the program can capture your attention work your emotions and connect with you as a trader the information and analy ses they offer are secondary The best analysis for your trade is up to you Technical analysis is essential for managing risk There aren t too many soapboxes that we ll jump on but this is one of them We firmly believe that traders and investors ca
22. to answer a simple question Who is in control The answer to that question will be 1 buyers 2 sellers or 3 nobody If buyers are in control of the trading we expect to see prices generally trending higher Likewise a downtrend indicates that sellers are in control If neither is in control prices trend sideways in a channel The degree to which these trends are in place and the level of volatility within the trends is what we want to discern from our analysis This is the key information that a market scoring system will help you quantify Please recognize that pulling the story out of the charts doesn t allow you to predict the future You ll be sorely disappointed if you have the expectation that the proper analysis in sufficient quantities will tell you where prices will be in a week a month or a year The story tells you what has happened how it happened and what is happening right now As traders we all deal with the hard right edge of the chart the uncertainty of tomorrow Past and current activity help to serve as a guide for price direction and momentum but risk management is always crucial to your success Key strategies for managing risk are presented in later chapters So if the future can t be gleaned with certainty from technical analy sis does that invalidate its use Absolutely not The primary purpose of technical analysis is to protect not predict Technical analysis helps you 8 TRADING BY NUMBERS ide
23. tude of market data Let s look at a simple question The following question is not complex so read it and answer as quickly as you can A bat plus a ball costs 1 10 The bat is 1 00 more than the ball How much does the ball cost If you re like many people your first response your intuition will lead you to respond with 10 as the cost of the ball However if the ball is 10 and the bat is 1 00 more then the sum of the two is 1 20 not 1 10 Therefore the ball must cost 5 and the bat is 1 05 for the correct total of 1 10 In their bestselling book Nudge Improving Decisions About Health Wealth and Happiness Richard Thaler and Cass Sunstein refer to two distinct ways of processing information the automatic system and the re flective system The automatic system is rapid and feels instinctive and it does not in volve what we associate with the word thinking When you duck because a ball is thrown at you unexpectedly get nervous when your airplane hits turbulence or smile when you see a cute puppy you are using your auto matic system The reflective system is more deliberate and self conscious You use the reflective system when you are asked How much is 411 times 37 People speak their native language using their automatic system and tend to struggle to speak another language using their reflective system Many readers will doubtless relate to having a teen driver in the house hold Consider the myriad
24. w driver Good intentions and underdeveloped intuition are not enough to navigate today s markets Con sider just a few of the many decisions that a trader needs to process e Which product to trade Stock ETF option e Which chart style to use Line candlestick bar e What time horizon on the chart Intraday daily weekly e Which technical indicators to include e How much fundamental analysis to add e What risk management parameters to use e How to execute the opening and closing trades Failing on any one of these decision points may result in a losing trade Imagine how the failure rate increases when a trader fails on multiple lev els Although having a structured approach to the markets doesn t guaran tee success it does help to ensure that the appropriate level of reflective system is applied where the automatic system isn t sufficient A flawed approach that many traders take is to overload the analy sis This is the best effort strategy that is based on the belief that if a little is good more must be better If you find value in the 50 day and 200 day simple moving averages then you assume you ll make better decisions by adding the 100 day exponential moving average along with stochas tics Besides you really feel like you re making progress and putting forth your best effort when you grind through studying various technical trad ing strategies It s better to think of your analysis like lawn fertilize
25. ys to Risk Management Success Three Legs of Managing Risk Setting Stops Safety in Numbers 44 54 63 66 67 CHAPTER 5 Covered Calls Getting to Know the Strategy Strategy in Action viii Strategy Management Strategy Application CHAPTER 6 Long Calls Getting to Know the Strategy Strategy in Action Strategy Management LEAPS Strategy Application CHAPTER 7 Long Puts Getting to Know the Strategy Strategy in Action Strategy Management Speculative Puts Collars Strategy Application CHAPTER 8 Straddles and Strangles Getting to Know the Strategy Strategy in Action Straddle Strategy Management Strategy in Action Strangle Strategy Application CHAPTER 9 Debit Spreads Getting to Know the Strategy Strategy in Action Strategy Management Strategy Application CHAPTER 10 Cash Secured Puts Getting to Know the Strategy Strategy in Action CONTENTS 71 76 1 81 85 91 92 95 101 101 102 104 107 110 111 118 119 122 124 125 131 132 135 136 141 145 145 147 Contents Strategy Management Strategy Application CHAPTER 11 Credit Spreads Getting to Know the Strategy Strategy in Action Strategy Management Strategy Application CHAPTER 12 Horizontal Spreads Getting to Know the Strategy Strategy in Action Strategy Management Strategy Application CHAPTER 13 Diagonal Spreads Getting to Know the Strategy Strategy in Action Strategy Management Strategy A
26. yzing trend and volatility by examining the role of technical analysis Chapter 2 discusses trends and how to quantify them for your trading decisions We want to be clear that we re not ascrib ing a level of precision that doesn t exist in the markets Rather the goal of scoring is to help you remove emotion and opinion from the process so that you can take an honest look at what the market is trying to tell you Chap ter 3 follows with a structured quantified approach to market and trade candidate volatility The result of both chapters will be a two dimensional score that will help you choose the appropriate strategy Chapter 4 is a stand alone chapter discussing risk and how to manage it in an uncertain market In our view managing risk is perhaps the most important discipline you can master in the markets For many traders we T he genesis of this book came from a very simple concept We wanted xiv INTRODUCTION recommend starting with Chapter 4 if you are not inclined to read a book through in sequence The second major grouping of the book begins with Chapter 5 and con tinues through to Chapter 16 Each of these chapters deals with a different strategy We start with some of the simpler strategies such as covered calls in Chapter 6 and move on to more complex strategies like the iron con dor in Chapter 16 While we generally have sequenced these according to complexity and the order in which many traders naturally learn them you can
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