Index 
Stock index hedging strategies (continued) 
hedging price-weighted index, 547,548 
how many shares to buy, 547-552 
institutional strategies, 556 
POT system of NYSE, 555-556 
profitability, 552-554 
trade execution, 554-556 
market baskets, 531-537 
dividends, inverse correlation of to premium 
value, 534-537 
execution risk, 560 
futures fair value, 533-534 
risk, 560-561 
tracking error, 538,561, 571-572 
"mini-index," creating, 566-574 (see also Stock index 
hedging strategies, index, simulating) 
program trading, 537-547 
adjusted volatility, 539 
arbitrage approach, 537 
hedging with index calls, 545-547 
hedging with index puts, 543-545 
hedging portfolios with index options, 541-543 
market risk, removing, 538 
portfolio hedge, 539-541 
tracking error, 538, 561, 571-572 
volatility versus Beta, 538-539 
summary, 577-578 
tracking error, trading, 57 4-577 
collateral requirements, 577 
Stock indices, 493-500 
Stock options: 
basic properties of, 1-35 
definitions, 3-35 
definition, 3-35 
Stock price and option price, relationship between, 
7-9 
Stock prices, distribution of, 783-811 
distribution, 789-795 
"big" picture, 790 
fat tails, 790-792, 810 
inflection points, 792-793 
normal, 780-795 
risk of too conservative estimate of stock price 
movement, 796 
summary, 796-797 
Elliott Wave theory, 796 
expected return, 809-810 
lognormal distribution, 783-789 
options, pricing of, 798 
probability of stock price movement, 798-809 
Brownian motion, 806 
calculation mechanisms, 803-805 
cumulative density function (CDF), 806 
delta, 805 
"ever" probability calculator, 805-806 
Monte Carlo analysis, 806, 807-809 
probability calculator, 798-799 
summary, 810-811 
volatility, prediction of, 799-803 
sigma, 783-784 
volatility buyer's rule, 787-789 
volatility, misconceptions about, 783-787 
standard deviations, 783-786 
what this means for option traders, 795-796 
Stock splits, symbols for, 27 
997 
Stock trading and futures trading, difference between, 
508,512 
Stop order, 33 
Stop-limit order, 33-34 
Straddle: 
buying, 282-288 (see also Put buying) 
equivalent stock position follow-up, 312-313 
follow-up action, 308-312 
"legging out," 310 
risk large, 308, 314 
rolling up/down, 310 
in volatility trading, 824, 825, 829 
sale of, 302-320 
covered, 302-305 
uncovered, 305-307 
selecting write, 307-308 
selling, LEAPS and, 402-403 
starting out with protection in place, 313-314 
strangle (combination) writing, 315-320 
credits, using, 320 
definition, 315 
deltas, 318-319 
excess trading, avoiding, 319-320 
margin requirements, 317-318 
Straddle calendar spread, 348-350 (see also Spreads 
combining calls and puts) 
Straddle/strangle buying and selling, effects on of 
implied volatility changes, 766-767 
Strangle, 281 
buying, 288-291 
definition, 315 
in volatility trading, 824, 825, 828-829 
strangle (combination) writing, 315-320 (see also 
Straddle) 
Strategy, best, 932-937 
investor as dominant force in determining strategy, 
938 
market attitude and equivalent positions, 932-934 
mathematical ranking, 936-937 
strategies to be avoided, 933 
summary, 937 
volatility trading, 932-933 
Strategy summary, 943-944