The Index Trading Course Workbook: Step-by-Step... (PDF) (2024)

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ffirs.qxd 9/12/06 2:37 PM Page iThe IndexTrading CourseWorkbook

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ffirs.qxd 9/12/06 2:37 PM Page iiFounded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia, and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding.The Wiley Trading series features books by traders who have survivedthe market’s ever changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional, or somewhere in-between, these books will providethe advice and strategies needed to prosper today and well into the future.For a list of available titles, visit our web site at www.WileyFinance.com.

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ffirs.qxd 9/12/06 2:37 PM Page iiiThe IndexTrading CourseWorkbookStep-by-Step Exercises andTests to Help You MasterThe Index Trading CourseGEORGE A. FONTANILLSTOM GENTILEJohn Wiley & Sons, Inc.

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ffirs.qxd 9/12/06 2:37 PM Page ivCopyright © 2006 by George A. Fontanills, Tom Gentile, and Richard Cawood. All rightsreserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, or authorizationthrough payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the webat www.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc.,111 River Street, Hoboken, NJ 07030,(201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and specifically disclaim anyimplied warranties of merchantability or fitness for a particular purpose. No warranty maybe created or extended by sales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. Neither the publisher nor author shall be liable for any lossof profit or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.For general information on our other products and services or for technical support,please contact our Customer Care Department within the United States at (800) 762-2974,outside the United States at (317) 572-3993 or fax (317) 572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books. For more information about Wileyproducts, visit our web site at www.wiley.com.ISBN-13 978-0-471-74598-3ISBN-10 0-471-74598-7Printed in the United States of America.10 9 8 7 6 5 4 3 2 1

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ffirs.qxd 9/12/06 2:37 PM Page vTo Ruth Cawoodwho inspires us all to live up to our full potential.

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ffirs.qxd 9/12/06 2:37 PM Page vi

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ftoc.qxd 9/12/06 2:39 PM Page viiContentsIntroduction ixCHAPTER 1 A Look Back 1CHAPTER 2 The Index Market Today 15CHAPTER 3 Trading the Market 27CHAPTER 4 Understanding Options 41CHAPTER 5 Basic Strategies Using Call Options 59CHAPTER 6 Basic Strategies Using Put Options 73CHAPTER 7 Complex and Advanced Strategies 85CHAPTER 8 Catalysts 97CHAPTER 9 System Trading 109CHAPTER 10 Getting an Edge with Indicators 123CHAPTER 11 Sector Trading 141CHAPTER 12 Tracking and Trading Volatility 155vii

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ftoc.qxd 9/12/06 2:39 PM Page viiiviii CONTENTSCHAPTER 13 Making Adjustments 165CHAPTER 14 Risk Management 177CHAPTER 15 Important Index Facts and Strategies 185CHAPTER 16 Getting Started 193APPENDIX Frequently Asked Questions 203

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flast.qxd 9/12/06 2:39 PM Page ixIntroductionThe Index Trading Course Workbook is designed to supplement its com-panion manual by offering concise summaries and practical exercises tohelp put your new knowledge into action. The “Media Assignments” areparticularly useful in this regard. Be sure to run through each chapter inthis workbook as you complete The Index Trading Course in order to re-inforce the material.There are two major reasons why you should increase your indexknowledge. First, these market barometers are an important means for un-derstanding big-picture trends along with more subtle market action. Andsecond, it’s simply about trading. Index-based products provide traderswith an opportunity to capitalize on broad market and sector moves, leav-ing behind individual company risk. While there are no guarantees that awhole group of related companies won’t be investigated by the SEC forbad accounting practices, we feel the chance of that is substantially lowerthan for a single company. Sector investing is where fundamental, techni-cal, and sentiment analysis can really excel.The Index Trading Course begins with a little index history à laCharles Dow, and then transitions to widely followed indexes in today’smarkets. Along the way, we investigate index construction, market trends,and general industry group coverage. The workbook reinforces yourknowledge of core stock market indexes along with the sector offeringsfrom a variety of financial entities. You also have the opportunity to incor-porate foundational technical techniques into your analysis. Regardless ofthe complexity of indicators you use down the road, you can never movetoo far away from the basics.The Index Trading Course quickly moves toward trading applicationswith coverage of index-based products, including exchange-traded funds(ETFs), index options, and ETF options. These different securities areused throughout the remainder of the text with appropriate trading strate-gies. Optionetics’ low-risk, high-reward philosophy permeates the strategyix