12
continued on p. 4
LINDA ALEXANDER
RASCHKE ELDER, MD
and
many
Lawrence McMillan Tom DeMark more!
Founder & President Founder
McMillan Analysis Corp. Market Studies, Inc.
a Production of
• Learn new markets and securities to trade from forex
MoneyShow | Githler Center | 1258 North Palm Ave.
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CONTENTS
eSignal
RS of Houston
Art director: Laura Coyle Dan Keegan is from Rochester, New York and earned an economics
lcoyle@futuresandoptionstrader.com degree from Marquette University in 1977. After graduation, Keegan moved
to Chicago and soon began working at the Chicago Board Options Exchange
President: Phil Dorman (CBOE). The CBOE was only four years old when Keegan began working at a
pdorman@futuresandoptionstrader.com
series of several jobs both on and off the trading floor. In 1982, Keegan began
trading on the CBOE floor with backing from legendary adventurer Steve
Publisher,
Ad sales East Coast and Midwest:
Fossett who made his fortune backing young traders like Keegan. After more
Bob Dorman than 20 years as an independent floor trader, Keegan has become an options
bdorman@futuresandoptionstrader.com educator and advisor. He frequently guest lectures in options at Marquette
University, is an advisor for i2i Analytics, and a regular contributor to finan-
Ad sales cial trade publications. Keegan is the co-founder and director of options for
West Coast and Southwest only: the Chicago School of Trading. He and his wife Lesly live in Hinsdale, Ill. with
Allison Chee their three children.
achee@futuresandoptionstrader.com
Jim Graham (advisor@optionvue.com) is the product
Classified ad sales: Mark Seger manager for OptionVue Systems and a registered investment
seger@futuresandoptionstrader.com advisor for OptionVue Research.
he two-bar breakout
Sizing matters up
An intelligent position sizing strategy
can help minimize losses and extract the
full potential out of the strategy.
Although the trade setup only uses the
most recent two bars of market data, it
proved to be robust — and quite prof-
itable when combined with dynamic
position sizing.
STRATEGY SUMMARY
LEGEND: Net profit — Profit at end of test period, less commission •
Exposure — The area of the equity curve exposed to long or short positions, Profitability Trade statistics
as opposed to cash • Profit factor — Gross profit divided by gross loss •
Payoff ratio — Average profit of winning trades divided by average loss of
Net profit: $453,934.00 No. trades: 4,884
losing trades • Recovery factor — Net profit divided by max. drawdown • Net profit: 45.39% Win/loss: 38.74%
Max. DD (%) — Largest percentage decline in equity • Longest flat days Exposure: 1.86% Avg. gain/loss: 0.08%
— Longest period, in days, the system is between two equity highs • No.
trades — Number of trades generated by the system • Win/Loss (%) — The Profit factor: 1.21 Avg. hold time: 2.44
percentage of trades that were profitable • Avg. trade — The average prof- Payoff ratio: 1.77 Avg. profit (winners): 2.08%
it/loss for all trades • Avg. winner — The average profit for winning trades
• Avg. loser — The average loss for losing trades • Avg. hold time — The
Recovery factor: 4.67 Avg. hold time (winners): 3.78
average holding period for all trades • Avg. hold time (winners) — The Drawdown Avg. loss (losers): -1.18%
average holding time for winning trades • Avg. hold time (losers) — The
Max. DD: -6.56% Avg. hold time (losers): 1.60
average holding time for losing trades • Max. consec. win/loss — The max-
imum number of consecutive winning and losing trades Longest flat days: 388 Max. consec. win/loss: 10/14
Bonds:
Market
30-year T-bonds (US), 10-year T-note (TY), Eurodollar
lowing study tracks the strategy of the “Turtles,” a (ED)
group trained by legendary traders Richard Softs: Coffee (KC), cocoa (CC), sugar #11 (SB), cotton (CT)
Dennis and Bill Eckhart in the 1980s. The Turtles Currencies: Swiss franc (SF), Euro (EC), British pound (BP),
were used to conduct an experiment about Japanese yen (JY), Canadian dollar (CD)
whether it was possible to teach people to become Stock indices: S&P 500 (SP)
successful traders. Metals: Gold (GC), silver (SI), copper (HG)
One trading system salesmen recently argued Energy: Crude oil (CL), unleaded gas (RB), heating oil (HB)
that it is “nonsense” and a “specious argument” to Source: Way of the Turtle: The Secret Methods that Turned Ordinary People into
suggest trend-following rules must adapt to Legendary Traders (McGraw-Hill, 2007).
changing market conditions.
Others argue a trend-following
system does not simply self-adapt FIGURE 1 — TRADE EXAMPLES — TURTLE SYSTEM
but needs continued monitoring The original Turtle strategy sold short in cocoa futures in January 1970 and exited at a
and refining. Some well-known profit in March.
trend-followers have indeed stated
they still trade the same system as
when they started out 30 or 40
years ago. But what do those man-
agers really mean?
an two traders both make money trading volatil- The long-short debate
C ity if one of them is short while the other is long? A common approach to trading volatility is the options
At first glance, that seems unlikely
because options trading is a zero-sum
game. When you place a trade, someone takes the
other side and only one of you will succeed at expi-
FIGURE 1 — DECEMBER CORN FUTURES
By entering a long options straddle on December corn futures,
you are betting corn either rallies above the upper breakeven
ration.
point or below the lower breakeven point by expiration. Traders of
However, both traders might be profitable if they the opposite position — a short straddle — will benefit if corn
adjust the position correctly. Establishing a trading trades in between these thresholds. However, either position can
position with an edge is always helpful, but proper- ultimately be profitable if adjusted correctly.
ly managing that position is more important. The
following examples use options straddles (same-
strike, same-month puts and calls) on corn futures
to demonstrate this point.
Parabolic SAR developer Welles Wilder estimated occur roughly 30 percent of the time.
with credit
spreads
Market: Options on the S&P 500 index
(SPX).
Bearish signal
When price crosses below yester-
day’s parabolic SAR value, enter a
bear call credit spread as follows:
Execution: All entries occur at the close when price cross- STRATEGY SUMMARY
es yesterday’s parabolic SAR value. The system may hold
both bullish and bearish positions at the same time. Initial capital: $10,000
However, duplicate signals are ignored until a position clos- Net gain: $13,250
es. Percentage return: 133%
Option trades were executed at the average of the bid and Annualized return: 22.6%
ask prices at the daily close, if available; otherwise, theoret- No. of trades: 82
ical prices were used. The standard deviation was calculat- Winning/losing trades: 70/12
ed with a probability calculator using the implied volatility Win/loss: 85%
(IV) of the at-the-money call in the relevant month. Each Avg. trade: $161.59
spread held five contracts per “leg.” Commissions were $5 Largest winning trade: $1,580.00
per trade plus $1 per option ($20 per spread). No commis- Largest losing trade: -$2,340.00
sions were included when a spread expired worthless. Avg. profit (winners): 447.93
Avg. loss (losers): -1,508.75
Test data: The system was tested using options on the Avg. hold time (winners): 36
S&P 500 index (SPX). Avg. hold time (losers): 19
Max consec. win/loss: 29/2
Test period: Jan. 12, 2004 to Nov. 20,
2009.
LEGEND:
Net gain — Gain at end of test period.
Test results: Figure 3 shows the per-
Percentage return — Gain or loss on a percentage basis.
formance of the system, which gained
Annualized return — Gain or loss on a annualized percentage basis.
$13,250 (133 percent) in six years, a 22.6-
No. of trades — Number of trades generated by the system.
percent annual return. In the test’s first four
Winning/losing trades — Number of winners and losers generated by the system.
years, the strategy had a winning percent-
Win/loss — The percentage of trades that were profitable.
age of 93 percent. But in the final 18
Avg. trade — The average profit for all trades.
Largest winning trade — Biggest individual profit generated by the system.
Option System Analysis strategies are tested Largest losing trade — Biggest individual loss generated by the system.
using OptionVue’s BackTrader module (unless
Avg. profit (winners) — The average profit for winning trades.
otherwise noted).
Avg. loss (losers) — The average loss for losing trades.
If you have a trading idea or strategy that Avg. hold time (winners) — The average holding period for winning trades (in days).
you’d like to see tested, please send the trad- Avg. hold time (losers) — The average holding period for losing trades (in days).
ing and money-management rules to
Max consec. win/loss — The maximum number of consecutive winning and losing trades.
Advisor@OptionVue.com.
Fidelity Investments (www.fidelity.com) has interactive trading tool; traders of all abilities are welcome
launched a new online stock research center to help to access the site with a valid email address. Visitors find
investors identify trading and investment ideas by deliver- valuable information, endorsed by major exchanges, and
ing independent expert insights about emerging opportuni- presented by veteran educators. Articles, research reports,
ties, popular stock screening strategies, stocks most fre- podcasts, live and archived Webinars, newsletters, blogs,
quently bought and sold online by Fidelity customers, and RSS news feeds, and special offers are regularly updated.
emerging topics on the Web. These new enhancements,
combined with Fidelity’s current research offering, allow Trading software provider NinjaTrader has
customers to understand what is happening in real-time announced a partnership with Steve Nison’s
across a wide variety of sources, including some top finan- Candlecharts.com. Nison has selected NinjaTrader
cial blogs. The research center can be used to find emerging (www.ninjatrader.com) as his preferred trading platform
trends and opportunities among the most active stocks in for the Nison Candle Scanner (NCS). The scanner allows
the market; set predefined expert stock screening criteria traders to use NinjaTrader to uncover candlestick patterns
that customers can fine-tune, save, and use; read expert in real time in any market. NCS users can apply Nison’s
analysis; track financial events such as earnings and splits; custom candlestick filter conditions in NinjaTrader’s pow-
track upgrades and downgrades; and search for investment erful Market Analyzer. NCS provides updated condition
topics on the Web. The stock research center is available to alerts to traders in real time to identify intraday and daily
all investors while expanded lists and intraday trading data trade setups. NinjaTrader makes it easy for traders to react
are available only to Fidelity customers. Fidelity offers quickly to these trade setups through its SuperDOM and
access to premium content on a subscription basis, and will chart-based order execution features. The orders can be sub-
be adding additional providers on an ongoing basis. mitted to NinjaTrader’s worldwide network of supporting
brokerages for futures, forex, and equities markets.
CQG, the order execution, charting, and analytics
provider for global electronically traded futures markets, TopCommodityBrokers.com — an interactive com-
has expanded its direct market access to include the modity/futures broker directory and educational and social
Australian Securities Exchange (ASX), an operator of elec- networking Web site — is now up and running. This Web
tricity and natural gas futures and options markets in site gives commodity brokers the ability to upload a profile
Australia and New Zealand. CQG customers will have photo and video, include a professional bio, connect
access to trade ASX’s Australian feed barley, Australian instantly with potential clients via Skype, link to their com-
sorghum, Australian milling wheat, and western Australian pany Web site and external blog, add detailed information
wheat contracts and the Mini S&P/ASX 50, 200, and 200 about their organization, services and specialties, upload
Property Trust indexes. These contracts are available on their company logo, and allow potential clients and fellow
both the CQG Trader and CQG Integrated Client advanced brokers to follow them on Twitter and Facebook. Registered
trading platforms. companies will be listed within the Top Commodity
In addition, CQG has launched a Certified API Partner Brokers searchable database. TopCommodityBrokers.com is
Program. CQG API Partner Certification provides program- targeted to commodity brokers as well as investors. The site
mers, developers, and vendors the opportunity to become also has a Community Blogosphere with a variety of topics
Certified API Partners with CQG. CQG certification indi- including interviews with commodity brokers, broker com-
cates the partner has demonstrated expertise in working missions, commodity broker trade shows, career classifieds,
with either the CQG Data API or the CQG Trading API. and weekly commentaries.
Certified CQG API Partners will enjoy a host of benefits
including joint marketing exposure, discounts on CQG sys- United-ICAP — a leader in technical analysis-based
tems, membership in a private social network, and access to price risk assessment for institutional hedgers and profes-
Level III support and CQG developers. For more informa- sional energy traders — has launched new product offer-
tion, visit www.cqg.com. ings and a revamped Web site (www.united-icap.com). The
new site offers a suite of customizable tools and technical
Futures Truth Magazine and Chicago-based analysis including daily, weekly, and monthly reports and
Trader Kingdom have partnered, sharing viable content emails, larger in-depth topical reports, live daily and week-
such as access to Webinars, articles, newsletters, podcasts, ly Webcasts, and full analyst support to discuss any of the
and blogs to enhance subscriber experiences. Futures Truth report contents, investment ideas, or methodologies.
Magazine subscribers are now able to access Trader
Kingdom Webinars from the Futures Truth Web site Note: The New Products and Services section is a forum for industry
businesses to announce new products and upgrades. Listings are adapted from
(www.futurestruth.com). Systems trading experts now
press releases and are not endorsements or recommendations from
have greater reach to present strategies to education seek- the Active Trader Magazine Group. E-mail press releases to
ers. Trader Kingdom (www.traderkingdom.com) is an editorial@futuresandoptionstrader.com. Publication is not guaranteed.
Options Watch: Vanguard value ETF components (as of Nov. 30) Compiled by Tristan Yates
The following table summarizes the expiration months available for the 20 top holdings of the Vanguard Value ETF (VTV). It also shows each
stock’s average bid-ask spread for at-the-money (ATM) December options. The information does NOT constitute trade signals. It is intended only
to provide a brief synopsis of potential slippage in each option market.
spread as %
June
April
Dec.
Feb.
Jan.
July
Jan.
Jan.
May
Stock of underlying
Stock Ticker price Call Put price
Exxon Mobil Corp. XOM X X X X X X 75.07 0.03 0.03 0.04%
Coca Cola Co. KO X X X X X X 57.20 0.03 0.03 0.05%
Proctor & Gamble Co. PG X X X X X X 62.35 0.03 0.03 0.05%
Chevron Corp. CVX X X X X X X 78.04 0.03 0.05 0.05%
Verizon Communications Inc. VZ X X X X X X 31.46 0.02 0.02 0.06%
Johnson & Johnson JNJ X X X X X X 62.84 0.03 0.05 0.06%
JP Morgan Chase JPM X X X X X X 42.49 0.03 0.03 0.07%
Goldman Sachs Group Inc. GS X X X X X X 169.66 0.10 0.14 0.07%
ConocoPhilips COP X X X X X X 51.77 0.04 0.04 0.07%
AT&T Inc. T X X X X X X 26.94 0.02 0.03 0.08%
Wells Fargo & Co. WFC X X X X X X 28.04 0.02 0.02 0.08%
Intel Corp. INTC X X X X X X 19.20 0.02 0.01 0.08%
Bank of America BAC X X X X X X 15.85 0.01 0.02 0.09%
Merck & Co. MRK X X X X X X X X 36.21 0.04 0.03 0.09%
Pfizer Inc. PFE X X X X X X 18.17 0.02 0.02 0.10%
General Electric Co. GE X X X X X X 16.02 0.02 0.02 0.11%
United Technologies UTX X X X X X X 67.24 0.10 0.09 0.14%
3M Co. MMM X X X X X X 77.44 0.13 0.11 0.15%
Walt Disney Co. DIS X X X X X X 30.22 0.08 0.09 0.27%
Citigroup Inc. C X X X X X X 4.11 0.02 0.01 0.33%
Legend:
Call: Three-day average difference between bid and ask prices for the front-month ATM call.
Put: Four-day average difference between bid and ask prices for the front-month ATM put.
Bid-ask spread as % of underlying price: Average difference between bid and ask prices for front-month, ATM call, and put divided by the underlying’s closing price.
Legend
day moves, 20-day moves, etc.) show the per- larger than all the past readings, while a read-
Volume: 30-day average daily volume, in thou- centile rank of the most recent move to a certain ing of 0 percent means the current reading is
sands (unless otherwise indicated). number of the previous moves of the same size smaller than the previous readings. These fig-
OI: Open interest, in thousands (unless other- and in the same direction. For example, the ures provide perspective for determining how
wise indicated). rank for 10-day move shows how the most relatively large or small the most recent price
10-day move: The percentage price move from recent 10-day move compares to the past twen- move is compared to past price moves.
the close 10 days ago to today’s close. ty 10-day moves; for the 20-day move, the rank Volatility ratio/rank: The ratio is the short-term
20-day move: The percentage price move from field shows how the most recent 20-day move volatility (10-day standard deviation of prices)
the close 20 days ago to today’s close. compares to the past sixty 20-day moves; for divided by the long-term volatility (100-day stan-
the 60-day move, the rank field shows how the dard deviation of prices). The rank is the per-
60-day move: The percentage price move from most recent 60-day move compares to the past
the close 60 days ago to today’s close. centile rank of the volatility ratio over the past
one-hundred-twenty 60-day moves. A reading 60 days.
The “rank” fields for each time window (10- of 100 percent means the current reading is
This information is for educational purposes only. Futures & Options Trader provides this data in good faith, but it cannot guarantee its accuracy or timeliness. Futures & Options
Trader assumes no responsibility for the use of this information. Futures & Options Trader does not recommend buying or selling any market, nor does it solicit orders to buy
or sell any market. There is a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.
22 December 2009 • FUTURES & OPTIONS TRADER
OPTIONS RADAR (as of Nov. 30)
MOST-LIQUID OPTIONS*
Indices Symbol Exchange Options Open 10-day move / 20-day move / IV / IV / SV ratio —
volume interest rank rank SV ratio 20 days ago
S&P 500 index SPX CBOE 143.4 1.74 M 0.20% / 0% 5.74% / 89% 21.6% / 17.1% 21.6% / 19.1%
S&P 500 volatility index VIX CBOE 142.2 2.40 M 4.92% / 14% -20.14% / 97% 105.5% / 112.5% 80.6% / 100.9%
Russell 2000 index RUT CBOE 43.0 524.9 -1.12% / 40% 3.01% / 40% 30.6% / 24.1% 29.1% / 25.3%
E-Mini S&P 500 futures ES CME 34.1 161.8 0.30% / 7% 5.98% / 93% 21.7% / 20% 21.9% / 21.3%
Nasdaq 100 index NDX CBOE 19.0 191.5 -1.18% / 14% 6.02% / 88% 23.2% / 17.6% 22.8% / 19%
Stocks
Bank of America BAC 135.7 4.20 M -0.81% / 0% 8.71% / 100% 43.1% / 39.5% 46.5% / 47.3%
Citigroup C 124.4 9.14 M 1.48% / 30% 0.49% / 9% 50.9% / 35.9% 51.7% / 53.2%
Apple Inc AAPL 83.3 998.0 -2.22% / 43% 6.05% / 42% 32.2% / 24.3% 29.9% / 29.9%
Microsoft MSFT 73.8 1.85 M -0.74% / 100% 6.06% / 53% 24.9% / 19.2% 24.8% / 25.5%
Research in Motion RIMM 72.7 792.7 -7.66% / 33% -1.43% / 2% 55.8% / 46.3% 45.1% / 35.8%
Futures
Eurodollar ED CME 190.1 4.94 M -0.01% / 0% 0.03% / 9% 115.7% / 51.8% 110.9% / 38.8%
10-year T-notes TY CME 58.5 665.8 0.84% / 39% 0.93% / 45% 6.4% / 4.5% 7.7% / 6%
Corn C CME 41.6 583.2 6.92% / 100% 14.04% / 79% 35.4% / 44.8% 40.2% / 50.3%
E-Mini S&P 500 futures ES CME 34.1 161.8 0.30% / 7% 5.98% / 93% 21.7% / 20% 21.9% / 21.3%
Sugar SB ICE 21.1 377.8 -0.35% / 7% -0.75% / 21% 43.4% / 39.6% 46.5% / 50.2%
VOLATILITY EXTREMES**
Indices - High IV/SV ratio
S&P 100 index OEX CBOE 11.0 92.1 0.52% / 0% 5.89% / 93% 21% / 15.9% 20.7% / 16.5%
Nasdaq 100 index NDX CBOE 19.0 191.5 -1.18% / 14% 6.02% / 88% 23.2% / 17.6% 22.8% / 19%
Russell 2000 index RUT CBOE 43.0 524.9 -1.12% / 40% 3.01% / 40% 30.6% / 24.1% 29.1% / 25.3%
S&P 500 index SPX CBOE 143.4 1.74 M 0.20% / 0% 5.74% / 89% 21.6% / 17.1% 21.6% / 19.1%
Dow Jones index DJX CBOE 5.5 205.7 0.73% / 7% 6.51% / 98% 19.3% / 15.6% 18.7% / 16.9%
LEGEND:
Options volume: 20-day average daily options volume (in thousands unless otherwise indicated).
Open interest: 20-day average daily options open interest (in thousands unless otherwise indicated).
IV/SV ratio: Overall average implied volatility of all options divided by statistical volatility of underlying instrument.
10-day move: The underlying’s percentage price move from the close 10 days ago to today’s close.
20-day move: The underlying’s percentage price move from the close 20 days ago to today’s close. The “rank” fields for each time window (10-day moves, 20-day
moves) show the percentile rank of the most recent move to a certain number of previous moves of the same size and in the same direction. For example, the “rank”
for 10-day moves shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, the “rank” field shows how the most
recent 20-day move compares to the past sixty 20-day moves.
Delivery period (delivery dates): The specific time Naked (uncovered) puts: Selling put options to collect
period during which a delivery can occur for a futures con- premium that contains risk. If the market drops below the
tract. These dates vary from market to market and are deter- short put’s strike price, the holder may exercise it, requiring
mined by the exchange. They typically fall during the you to buy stock at the strike price (i.e., above the market).
month designated by a specific contract — e.g. the delivery
period for March T-notes will be a specific period in March. Near the money: An option whose strike price is close
to the underlying market’s price.
Diagonal spread: A position consisting of options with
different expiration dates and different strike prices — e.g., Open interest: The number of options that have not
a December 50 call and a January 60 call. been exercised in a specific contract that has not yet expired.
EVENTS
Event: International Traders Expo Event: The 17th Forbes Cruise for Investors
Date: Feb. 13-16 Date: March 18-30
Location: Marriott Marquis Hotel, New York, N.Y. Location: Crystal Symphony, Sydney to Auckland
For more information: www.tradersexpo.com For more information: Go to
www.moneyshow.com/events/Investment_Cruises.asp
Event: 26th Annual Risk Management Conference
Date: March 7-9 Event: The World MoneyShow Vancouver 2010
Location: The Ritz-Carlton Golf Resort, Naples, Fla. Date: April 6-8
For more information: Visit www.cboe.com/rmc Location: Hyatt Regency Vancouver
For more information: Go to
Event: 35th Annual International www.moneyshow.com/events/World_MoneyShows.asp
Futures Industry Conference
Date: March 10-13 Event: FIA/FOA International Derivatives Expo
Location: Boca Raton Resort & Club, Fla. Date: June 8-9
For more information: Go to www.futuresindustry.org Location: The Brewery, Chiswell Street, London
For more information: Go to www.idw.org.uk
Time spread: Any type of spread Now look at the variance of a more
that contains short near-term options widely distributed set of numbers: 2, 9,
and long options that expire later. Both and 16:
options can share a strike price (calen-
dar spread) or have different strikes {(2-9)2 + (9-9)2 + (16-9)2}/3 =
(diagonal spread). (49 + 0 + 49)/3 = 32.67
Time value (premium): The The more varied the prices, the high-
amount of an option’s value that is a er their variance — the more widely
function of the time remaining until distributed they will be. The more var-
TRADE
TRADE SUMMARY
P/L
Date Contract Entry price Initial stop Initial target IRR Exit Date Point % LOP LOL Length
11/182/09 TYZ09 119-14 120-26 118-09 .84 120-26 11/26/09 -1-12 -1.15% 10/32 -1-12 6 days
Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit
during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).
TRADE
Initial stop: Exit if SPY falls below FIGURE 2 — RISK PROFILE — LONG CALLS
today’s low of 110.71. Buying ITM calls is an easy and cheap way to exploit brief rallies.
RESULT
THIS
THISMONTH’S
MONTH’SADVERTISERS
ADVERTISERS