282 Technical Analysis of Stock Trends Having correctly analyzed market trends, your action results in an increase in portfolio value from $418,000 to $429,375. You could have accomplished the same result by buying and selling bonds and stocks, but not without tax consequences and the attendant transaction headaches. The use of futures to accomplish your goals allowed you to implement your trading plan without disturbing your existing portfolio. Perspective Although there can be no argument about the importance of CBOT® DJIASM Index futures— they are markets of enormous usefulness and importance—there can also be no doubt the futures novice should thoroughly prepare himself before venturing into these pits. In such a highly leveraged environment, mistakes will be punished much more severely than an error in the stock market. By the same token, ignorance of this vital tool is the mark of an investor who is not serious about his portfolio, or who is less intense in his investment goals. “They” (the infamous “they”) use all the weapons at their disposal; so should “we.” Options on Dow Index futures The buyer of this instrument has the choice, or the right, to assume a position. It is his option to do so—unlike a futures contract in which he has an obligation once entered. There are two kinds of options: calls (the right to buy the underlying instrument) and puts (the right to sell). Also, options can be bought (long) or sold (short) like futures contracts. A long call option on Dow Index futures gives the buyer the right to buy one futures contract at a specified price which is called the “exercise” or “strike” price. A long put option 12000 11800 11600 11400 11200 11000 10800 10600 10400 10200 1600 1200 800 400 11/1999 12/1999 00 2/2000 /DI200006 LAST-Daily 02/24/2000 Created with TradeStation www.TradeStation.com Figure 17.4 Dow–Jones Futures and Options. A put purchased at the arrow on the break would have protected patiently won gains over the previous 11 months. The increase in the value of the put can be seen as futures track declining Dow cash. A theoretical drill, but theoretical drills precede actual tactics in the market.