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