47 lines
3.5 KiB
Plaintext
47 lines
3.5 KiB
Plaintext
271Chapter seventeen: A summary an d concluding comments
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3. Enable processing of a hitherto unimaginable degree. An unlimited number of stocks
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may be analyzed. Choosing those to trade with a computer will be dealt with in
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Chapter 21, Selection of Stocks to Chart.
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4. Allow the investor to trade on ECNs or in electronic marketplaces where there are no
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pit traders or locals to fiddle with prices.
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Advancements in investment technology, part 1:
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developments in finance theory and practice
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Numerous pernicious and useless inventions, services, and products litter the internet
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and the financial industry marketplace; but modern finance theory and technology are
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important and must be taken into consideration by the general investor. This chapter will
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explore the minimum the moderately advanced investor needs to know about advances
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in theory and practice. And it will point the reader to further resources if he desires to
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continue more advanced study.
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Instruments of limited (or non) availability during the time of Edwards and Magee
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included exchange traded options on stocks, futures on averages and indexes, options
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on futures and indexes, and securitized indexes and averages, as a partial list of only the
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most important instruments. Undoubtedly, one of the most important developments of
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the modern era is the creation of trading instruments that allow the investor to trade and
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hedge the major indexes. Of these, the instruments created by the Chicago Board of Trade
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(CBOT
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®) are of singular importance. These are the CBOT® DJIASM Futures and the CBOT®
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DJIASM Futures Options, which are discussed in greater detail at the end of this chapter.
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(EN9: Not so singular, perhaps. Probably of greater importance to readers of this book are the AMEX
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iShares, particularly DIA, SPY, and QQQ, which are instruments (ETFs) that offer the investor
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direct participation in the major indexes as though they were stocks.)
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General developments of great importance in finance theory and practice are found in
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the following sections.
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Options
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From the pivotal moment in 1973 when Fischer Black (friend and college classmate) and his
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partner, Myron Scholes, published their—excuse the usage—paradigm-setting Model, the
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options and derivatives markets have grown from negligible to trillions of dollars a year.
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The investor who is not informed about options is playing with half a deck. The subject,
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however, is beyond the scope of this book, which hopes only to offer some perspective on
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the subject and guides to the further study necessary for most traders and many investors.
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Something in the neighborhood of 30% or more of options expire worthless. This is
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probably the most important fact to know about options. (There is a rule of thumb about
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options called the 60–30–10 rule: 60% are closed out before expiration, 30% are “long at
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expiration,” meaning they are worthless, and 10% are exercised.) Another fact to know
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about options occurred in the Reagan Crash of 1987; the money puts bought at $0.625 on
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October 16 were worth hundreds of dollars on October 19—if you could get the broker to
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pick up the telephone and trade them. (The editor had a client at Options Research, Inc.
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during that time who lost $57 million in three days and almost brought down a major
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Chicago bank; he had sold too many naked puts.)
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The most sophisticated and skilled traders in the world make their livings (quite
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sumptuous livings, thank you) trading options. Educated estimates have been made that
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as many as 90% of retail options traders lose money. That combined with the fact that by far |