272 Technical Analysis of Stock Trends
it is the general public that buys (rather than sells) options should suggest some syllogistic 
reasoning to the reader.
With these facts firmly fixed in mind, let us put options in their proper perspective 
for the general investor. Options have a number of useful functions, such as offering the 
trader powerful leverage. With an option, he can control much more stock than by the direct 
purchase of stock—his capital stretches much further. So options are an ideal speculative 
instrument (Exaggerated leverage is almost always a characteristic of speculative 
instruments.), but they can also be used in a most conservative way—as an insurance 
policy. For example, a position on the long security side may be hedged by the purchase of 
a put on the option side. (This is not a specific recommendation to do this. Every specific 
situation should be evaluated by the prudent investor with professional assistance as to its 
monetary consequences.)
The experienced investor may also use options to increase yield on his portfolio of 
securities. He may write covered calls or naked puts on a stock to acquire it at a lower cost 
(e.g., he sells out of the money put options. This is a way of being long the stock; if the stock 
comes back to the exercise price, he acquires the stock. If not, he pockets the premium.)
There are numerous tactics of this sort that may be played with options. Played because, 
for the general investor, the options game can be disastrous, as professionals are not 
playing. They are seriously practicing skills the amateur can never hope to master. Many 
floor traders, indeed, would qualify as idiot savants—they can compute the “fair value” 
of options in their heads and make money on price anomalies of 1/16, or, as they call 
it, a “teenie.” For perspective, the reader may contemplate a conversation the editor had 
with one of the most important options traders in the world who remarked casually that 
his fortune was built on teenies. The reader may imagine at some length what would be 
necessary for the general investor to make a profit on anomalies of 1/16. (EN10: The advent 
of digital pricing has given market makers and specialists even more flexibility to beat the investor 
by shaving spreads, theoretically, to $0.01.)
This does not mean the general investor should never touch options; it just means he 
should be thoroughly prepared before he goes down to play that game. In options trading, 
traders speak of bull spreads, bear spreads, and alligator spreads. The alligator spread is 
an options strategy that eats the customer’s capital in toto.
Among these strategies is covered call writing. This strategy is touted as being an 
income producer on a stock portfolio. There is no purpose in writing a call on a stock in 
which the investor is long—unless that stock is stuck in a clear congestion phase that is not 
due to expire before the option expires. Besides, if the stock is in a downtrend, it should 
be liquidated, but to write a call on a stock in a clear uptrend is to make oneself beloved of 
the broker, whose good humor improves markedly with account activity and commission 
income. The outcome of a covered call on an ascending stock is that the writer (you, dear 
reader) has the stock called at the exercise price, losing his position and future appreciation, 
not to mention costs. The income is actually small consolation, a sort of booby prize—a 
way of cutting your profits while increasing your costs. Nevertheless, covered writes are 
justified and profitable in some cases.
Quantitative analysis
The investor should be aware of another area of computer and investment technology 
that has yielded much more dramatic and profitable results, but that is in a model-driven 
market—namely, the options markets. Quantitative analysts, those who investigate and 
trade the options markets, are a breed apart from technical analysts. In an interesting