John Wiley & Sons, 2005
by George A. Fontanills and Richard Cawood

CONTENTS

Preface ix
Acknowledgments xiii
About the Author xv
Introduction 1
CHAPTER 1 Options Trading: A Primer 5
CHAPTER 2 The Big Picture 16
CHAPTER 3 Option Basics 42
CHAPTER 4 Basic Trading Strategies 76
CHAPTER 5 Introducing Vertical Spreads 130
CHAPTER 6 Demystifying Delta 164
CHAPTER 7 The Other Greeks 175
CHAPTER 8 Straddles, Strangles, and Synthetics 187
CHAPTER 9 Advanced Delta Neutral Strategies 234
CHAPTER 10 Trading Techniques for Range-Bound Markets 265
CHAPTER 11 Increasing Your Profits with Adjustments 311
CHAPTER 12 Choosing the Right Broker 330
CHAPTER 13 Processing Your Trade 347
CHAPTER 14 Margin and Risk 371
CHAPTER 15 A Short Course in Economic Analyses 382
CHAPTER 16 Mastering the Market 403
CHAPTER 17 How to Spot Explosive Opportunities 415
CHAPTER 18 Tools of the Trade 453
CHAPTER 19 Final Summary 466
APPENDIX A Trading Resources 485
APPENDIX B Important Charts and Tables 503
APPENDIX C Strategy Reviews 511
APPENDIX D Success Guides 527
Glossary 533
Index 557

PREFACE

Most new investors and traders, whether they are beginners or professionals, usually lose money for two reasons. First, they do not have a grasp of how the markets really work. Second, they are under too much stress when they trade because they fear losing money.

Many times, traders liquidate good trades too quickly or have no idea when to take profits. But learning to trade successfully is not an impossible task. This book is designed to build your knowledge base of the markets to a professional level and to provide you with strategies that make money in the marketplace. My trading program is the result of many years of trading experience, as well as many years of research and development, all in the pursuit of developing the optimal methodologies to trade the stock, options, and futures markets.

Students often ask me how I got started as a full-time investor. Perhaps like you, I was looking for an opportunity that would allow me to achieve my financial dreams after a long road of despair. After attending high school in Miami, I felt a college career was necessary to become successful. Although I questioned what success really meant to me and whether college would bring me that success, I settled on the University of Florida in Gainesville for the wrong reasons. It was close to home and all my friends were going there.

One day, after just a few semesters, I woke up having difficulty breathing. I went to the university clinic and was told I had a mild case of pneumonia. After a week of useless medications, my breathing troubles increased. Finally X-rays were taken, and at the age of 18, I was diagnosed with Hodgkin’s disease, a form of cancer. There is no news that can be more devastating to a young person and his family.

Perhaps the hardest thing I had to face was the loss of my physical prowess. Until that time, I was in exceptional shape, working out every day and participating in lots of sports. Over the next year, I was hospitalized and had to undergo chemotherapy treatments and radiation therapy. Throughout this dark time, I continued my studies at a community college.

At this point, I realized that life was too short to waste time, and that I needed to work as hard as I could to achieve everything I wanted to do. As my resolve to succeed took flight, I coined the phrase, “Out of adversity comes inspiration.”

I slowly recovered and went on to attend New York University, graduating with honors with a bachelor’s degree in accounting. I subsequently earned my CPA license and joined a large accounting firm. However, after spending several years in public accounting, I once again felt disillusioned. I needed something more. I applied and, to my surprise, was accepted at Harvard Business School. After two grueling years (but something I would do again without hesitation), I graduated.

Here I was, a bright and energetic young man with an MBA from the finest business school in the world with countless job offers others would never dream of turning down. But somehow I just couldn’t get excited about any of the positions, no matter what they paid me. I had already traveled down that road and knew that it led to a dead end. Instead, I decided to go into business for myself.

Driven by my need for a more rewarding career, I started my first business. It failed. Strike one. Undaunted, I started a second business, which never even got off the ground. Strike two. On my third attempt—an attempt to strike gold in the real estate business—I realized that I could actually be good at something. Working with some wealthy individuals in Massachusetts, I was just able to keep my head above water. I would find great real estate deals and they would put up the money to buy them. Subsequently, I would get a small piece of each deal.

Unfortunately, I forgot one thing: I needed to eat and pay the rent without the benefit of a consistent salary. Finally, the day came when my landlord (one of my partners) came to collect my rent and I had no money to pay it. I hedged as best I could and asked him to give me a little more time. He turned me down, adding that he was going to throw me out regardless of how much money I made him in the past. I was shocked. At first I thought he was kidding around. But with a stern look on his face, he proved me wrong, stating unequivocally, “One day you will thank me for teaching you this lesson.” At the time, I cockily replied that I’d be much happier with a wheelbarrow full of money. In hindsight, I realize that he was probably referring to my favorite personal proverb about finding inspiration in adversity. However, he is still waiting for me to thank him.

Crushed and downhearted, I went to my parents to borrow money to eat and live. Being a Harvard MBA and having to borrow money from your parents is very demoralizing. Having to listen to “Why don’t you get a real job?” not only from them but from others made me decide to give corporate life another shot.

Soon after, I found a consulting job that lasted a whole 30 days. It was supposed to be a permanent job. But as I was being fired, I was told I had the wrong attitude. In fact, they said much more than that, but most of it could never be printed. Unfortunately, they were right. I did have the wrong attitude. I just didn’t want to work for anyone but myself. I returned to real estate and started looking for new projects, but this time I was determined to control them. In this roundabout way, I was first introduced to the concept of an option. A real estate option allowed me to control a piece of property with very little cash for a specific period of time. As I later learned, stock and futures options are very similar.

My first deal was exciting. I found a great apartment complex going into foreclosure and convinced the owner I could buy the property. In fact, I had no cash at all. Even worse, my credit was destroyed and my shiny BMW had been repossessed. Since I was approximately $50,000 in debt, I did what I had to do: I convinced an investor to put up the option money and split the profits after the property was sold. I made a nice $35,000 profit on that deal—finally, a success.

After a series of profitable deals, the bottom fell out of the real estate market. There was no money available anywhere. Once again, I was left with a big question mark as to what I should be doing with my life. Luckily, serendipity intervened. One day, I received a small advertisement in the mail for a book on futures trading. Although I had no clue as to what futures trading was all about, I ordered the book. What struck me most were tales about making large amounts of money in a short period of time using very little cash. This sounded very similar to what I had been doing with real estate.

Why had I never learned any of this when I attended Harvard Business School? How could the great “boot camp of capitalism” neglect to teach me about futures markets? My interest was now piqued. I picked up a few more books. I began to watch the markets. I even played with a few introductory strategies; but although I found them interesting, they were not very profitable. My first big mistake was to convince my investment partners that we should begin trading by hiring experienced professionals. In less than 30 days, these so-called professionals lost about 30 percent of our capital. This was an extremely poor way to inspire confidence in my investors. I decided to fire everyone and learn to do it myself. I knew that I could lose at least 30 percent without even trying (even more if I really tried). I was determined to make a profit, and the trick was to get a competitive edge. That much I did learn at Harvard. To be successful, you need to have an edge.

I began to analyze where I could find this edge, focusing my attention on using computers to garner information faster than others did. I gained experience as a trader, even learning how to write my own computer programs. Eventually, this long and eventful journey gave birth to Optionetics. Today, I teach this system to individuals all over the world. Hopefully, this book will enable you to develop a better understanding of the markets and will assist you in learning how to profitably trade. In my opinion, there is no better lifestyle than that of a successful trader.