FOT0409 M 5

April 2009 • Volume 3, No.
FUTURES: Trading
wedge reversals p. 10
DOUBLE-DUTY
BACKSPREADS: CRUDE OIL
Outright trade, repair finding legs? p. 34
strategy p. 14
MONTH-END
options system p. 22
Q1 FUTURES
volume light p. 28
CONTENTS
Options Trading System Lab

The end-of-month options trade . . . . . .22
Buying calls on the S&P 500 futures on the last
day of each month.
By Steve Lentz and Jim Graham
Futures Snapshot . . . . . . . . . . . . . . . . . . . . . .24

Momentum, volatility, and volume
statistics for futures.
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Options Radar . . . . . . . . . . . . . . . . . . . . . . . . .25
Market Movers . . . . . . . . . . . . . . . . . . . . . . . .6 Notable volatility and volume
Futures market roundup. in the options market.
Trading Strategies Futures & Options Watch

Trading wedge reversals . . . . . . . . . . . . . .10 COT extremes . . . . . . . . . . . . . . . . . . . . . . .26
Learn techniques for defining wedge formations A look at the relationship between commercials
and trading them as price action unfolds. and large speculators in U.S. futures markets.
By J. Mark Kinoff
Options Watch:
The comeback spread . . . . . . . . . . . . . . . .14 Energy stocks . . . . . . . . . . . . . . . . . . . . . . . . .26
Many investors are holding stocks with
unrealized losses. Here’s one options spread
that helps stocks recover losses fast.
By Alex Jacobson
continued on p. 4
2 April 2009 • FUTURES & OPTIONS TRADER

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CONTENTS
Futures & Options Calendar . . . . . . . . . . . .27
News
Futures volume lagging early in year . . . .28
Trading activity rebounds from earlier in the
year, but still lags year-ago levels.
New Products and Services . . . . . . . . . . . . .29 Options Trade Journal . . . . . . . . . . . . . . .34

A quick trip to Home Depot (HD) leaves us
Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . .30 wanting more.
References and definitions.
Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Futures Trade Journal . . . . . . . . . . . . . . .33
Catching an upswing in recently bubbling crude.
Have a question about something you’ve seen

in Futures & Options Trader?
Submit your editorial queries or comments to webmaster@futuresandoptionstrader.com.
Looking for an advertiser?

Click on the company name below for a direct link to the ad
in this month’s issue of Futures & Options Trader.
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CONTRIBUTORS
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services:

www.futuresandoptionstrader.com
Editor-in-chief: Mark Etzkorn

metzkorn@futuresandoptionstrader.com
Managing editor: Molly Goad

mgoad@futuresandoptionstrader.com
Senior editor: David Bukey

dbukey@futuresandoptionstrader.com
Alex Jacobson is an education officer of the
Contributing editor:
International Securities Exchange. From 1985 to 2000, he was
Keith Schap
with the Chicago Board Options Exchange (CBOE), most
Associate editor: Chris Peters recently as vice president of business development. During
cpeters@futuresandoptionstrader.com
his tenure at CBOE, Jacobson was instrumental in developing CBOE’s liai-
Editorial assistant and son to the brokerage community. He was also involved in the initial devel-
webmaster: Kesha Green
opment of the Options Industry Council and is a founding member of the
kgreen@futuresandoptionstrader.com
Options Institute. Prior to 1985, Jacobson was a broker and options trainer at
Art director: Laura Coyle Merrill Lynch, Pierce, Fenner and Smith, Inc. Jacobson is frequently quoted
lcoyle@futuresandoptionstrader.com
in the financial media and has taught at training schools of most major bro-
President: Phil Dorman kerage firms and several foreign derivatives exchanges. He is also a con-
pdorman@futuresandoptionstrader.com tributing author to the book Master Traders to be published by Wiley Trading
in late 2006. Jacobson has an M.B.A. in finance from DePaul University and
Publisher,
Ad sales East Coast and Midwest: a bachelor’s degree in finance from the University of Illinois. He can be
Bob Dorman reached at education@iseoptions.com.
bdorman@futuresandoptionstrader.com
Ad sales Steve Lentz (advisor@optionvue.com) is a well-estab-

West Coast and Southwest only: lished options educator and trader and has spoken all over the
Allison Chee
achee@futuresandoptionstrader.com
U.S., Asia, and Australia on behalf of the CBOE’s Options
Institute, the Options Industry Council, and the Australian
Classified ad sales: Mark Seger Stock Exchange. As a mentor for DiscoverOptions.com, he
seger@futuresandoptionstrader.com
teaches select students how to use complex options strategies and develop a
Volume 3, Issue 4. Futures & Options Trader is pub- consistent trading plan. Lentz is constantly developing new strategies on
lished monthly by TechInfo, Inc., 161 N. Clark St.,
Suite 4915, Chicago, IL 60601. Copyright © 2009 the use of options as part of a comprehensive profitable trading approach.
TechInfo, Inc. All rights reserved. Information in this
publication may not be stored or reproduced in any He regularly speaks at special events, trade shows, and trading group
form without written permission from the publisher.
organizations.
The information in Futures & Options Trader magazine
is intended for educational purposes only. It is not
meant to recommend, promote, or in any way imply
the effectiveness of any trading system, strategy, or Jim Graham (advisor@optionvue.com) is the product
approach. Traders are advised to do their own
research and testing to determine the validity of a trad- manager for OptionVue Systems and a registered investment
ing idea. Trading and investing carry a high level of
risk. Past performance does not guarantee future advisor for OptionVue Research.
results.
FUTURES & OPTIONS TRADER • April 2009 5

MARKET MOVERS
Commodities bounce
off February low, waver
The furious March rally that gave the U.S. stock market one
of its sharpest short-term rallies since the 1950s was mir-
rored in the commodity futures market, albeit more modest-
ly, which pushed to new lows in late February but rallied for
much of March before sagging again at the end of the
month. Many markets made sharp up moves April 2,
though.
The Rogers International Commodity TRAKRs pushed to
a nearly two-month high the week ending March 27 before
starting the following week sharply lower.
However, the stabilization or nascent strength in many
markets has not changed the volume picture in the futures
market, which picked up a bit in February but was still well
Source for all: TradeStation off levels from a year ago.
Treasuries
The most notable move of the past month occurred in U.S. Treasury
futures, which exploded to the upside on March 18 in reaction to
the Federal Reserve’s announcement it would buy up to $300 billion
of long-term Treasuries.
June 10-year T-notes (TYM08) leapt from around 121 to 126, sagged for several days,
then turned back up toward the end of the month.
Energy
Crude oil made a solid Metals
run off its February lows
to reach nearly $55/barrel in late Precious metals con-
March, but turned lower the week tinued to consolidate
ending April 3. May crude (CLK09) after their Feb. 20
hit $54.66 — its highest price since high, which saw
early January — on March 26 after April gold (GCJ09)
trading as low as $39.52 on Feb. 18. reclaim the $1,000 mark and May sil-
By April 2 the market had pulled ver (SIK09) trade above $14.50. By the
back below $48, then pushed above outset of April, gold had drifted
$50. down to around $920 and silver had
pulled back to around $13.

Grains
Grains continue to
be a mixed bag,
with most markets
making new lows
for the year in early March before
stabilizing to different degrees.
Corn (C) and soybeans (S)
showed the most strength after the
March bottom, while wheat and rice
continued to move mostly sideways.
Toward the end of March the entire
sector began to sag, however,
although corn and beans made
sharp up moves through April 2.
continued on p. 8

MARKET MOVERS continued
Softs
Coffee (KC) and cocoa (CC) pushed higher in the second
half of March while orange juice (OJ) perpetuated the rally it
established in late February. Sugar (SB) was the odd man out
in the sector, swinging mostly lower in March in very choppy trading after
being the strongest market in the group since last fall.
Meats
Pork bellies have recently
shown the most muscle in
the mostly consolidating
livestock market, with the May futures
(PBK09) rallying from 74.225 in late February
to as high as 92.000 on March 19 before
pulling back to around 83 toward the end of
the month. In early April they had rebound-
ed to 88.
Currencies
After nearly matching its
November 2008 high, dol-
lar index futures turned
lower in March, falling
from 90.25 on March 6 to 83.15 on March 20
— a nearly 8-percent drop — before bounc-
ing slightly higher.
Textiles
and fibers Stock indices
After barely moving The gloom that accompanied the stock market’s drop to fresh
in the beginning of lows at the beginning of March was followed by a fast and
the month, May cotton furious rally that took the E-Mini S&P 500 futures (ES) from
(CTK09) pushed to the upside for 662.50 on March 6 to as
much of March and ended the high as 830.50 on March 26
month with a flourish, gaining — a 25-percent leap that represented
more than 7 percent the last two the biggest gain in such a short span
days of the month to close at 46.47, since the 1950s.
and pushing even higher on April 1. A nearly 5-percent intraday decline
May lumber (LBK09) rallied 20 two days later on March 30 took a little
percent from its late-February low starch out of the move, but by April 2
of 149.80 to its late-March high of the June futures (ESM09) had climbed
179.80 before pulling back, then back above 830.00.
jumping again in early April to a
nearly two-month high above 180.
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TRADING STRATEGY
OPTIONS STRATEGIES
LAB
Trading wedge reversals

Chart patterns are usually easy to spot in hindsight but quite elusive in real time. Here are some
guidelines for identifying and trading wedge patterns as they form.
BY J. MARK KINOFF
Note: A version of this article originally appeared in the August wedge’s extended up and down trendlines intersect.
2004 issue of Active Trader magazine. A wedge differs from a symmetrical triangle in that both
its trendlines move in the same direction, up or down,
I n the broadest sense, markets go through two domi-

nant phases, range expansion and range contraction.
Range contraction is also called congestion or consoli-
dation. This phase is typified by price action that occurs
within a relatively narrow range. Expansion occurs when
while a triangle’s upper trendline slopes down and its
lower trendline slopes up. This characteristic of the wedge
gives a “tilt” to the pattern. An ascending wedge rises, or
tilts, upward, while the descending wedge falls or tilts
downward (Figure 1).
price moves dramatically in either direction, after which a An ascending wedge is made up of progressively higher
new “equilibrium” price level is established as price begins swing highs and higher swing lows. Conversely, the
another contraction phase. descending wedge is formed by a series of lower swing
For example, after a period of time in a contracted range, highs and lower swing lows. Wedges occur on all time
forces will enter the market and cause an order-flow imbal- frames, from the tick chart all the way up to the monthly
ance; the market will then expand to a different price level chart.
— either higher or lower depending on whether buyers or Figure 2 shows the switch from expansion to contraction
sellers have stepped up — that becomes the new perceived in the daily April 2004 gold futures (GCJ04). In this case the
equilibrium level. contraction phase takes the form of a descending wedge.
Wedges are congestion patterns that allow traders to Because the typical breakout of a wedge occurs counter to
position themselves to profit from an ensuing expansion the tilt of the wedge, this chart implies an upside reversal.
phase. The wedge, which closely resembles a symmetrical As the pattern progresses, it is possible to draw lines that
triangle, has converging trendlines that define the progres- define it, anticipate the reversal and place trade orders
sive price contraction. The apex is the point at which the accordingly.
Eye of the beholder

To be useful in actual trading, the
FIGURE 1 — WEDGES
wedge pattern — like any other chart
Unlike the opposing trendlines of the symmetrical triangle, both trendlines in a pattern — must be clearly defined.
wedge move up or down. Although it is easy to recognize a
wedge after the fact, some skill is
required to identify the pattern as it
develops.
One of the many lessons of the trad-
ing floor is to anticipate the expected
market action, form a plan and then
follow through on that plan. On most
days, locals (independent floor
traders) can “fade” the incoming order
flow (buying when the public is selling
and vice versa) and make money.
Locals often lose money on strongly

FIGURE 2 — EXPANSION AND CONTRACTION
trending days, which most often occur
when price moves out of a congestion The trend in the first portion of the chart represents an expansion phase. After
pattern such as a wedge. the market initially corrects to the downside, it enters a contraction phase,
As the market continues to drift swinging sideways to lower.
lower after the expansion phase, the
wedge takes shape (Figure 3) and
trendlines are drawn to define its
upper and lower boundaries.
First, draw an upper trendline from
the top of the highest swing high
before the contraction began to the top
of the next swing high. Once the upper
line is drawn and extended into the
future, determine whether a line that
connects at least two swing lows can be
drawn in a similar fashion. It is some-
times helpful to draw this line from the
most recent swing low backward to the
prior one, then extend the line forward
in time. It is important each trendline
connects a minimum of two price
points, as shown in Figure 3. Source: TradeStation
If the trendlines form a descending
wedge, then, knowing the price move information provided by the wedge will determine the
out of the wedge should be upward (against the slope of the trade management strategy.
wedge), you can set up a trade plan. The initial stop-loss will be triggered on a close five ticks
below the low of the signal bar. The low of signal bar 5 in
Trading the wedge pattern: Entry rules continued on p. 12
In Figure 3, points 1, 2, 3, and 4 repre-
sent the two sets of price points con-
nected by the wedge’s upper and FIGURE 3 — DESCENDING WEDGE
lower trendlines. An upside breakout The descending wedge contains two down-sloping trendlines. Each trendline in
of the pattern will trigger a long trade, a wedge should connect at least two price points.
which will be executed with a buy-
stop order.
After bar 4 forms, an initial buy stop
is placed five ticks above the high of
bar 3. If the contraction continues, the
stop is trailed lower, always placed
five ticks above the high of any subse-
quent bar that touches or exceeds the
line drawn from bar 2 to bar 3. For
example, after bar 5, the trailing buy
stop is moved to five ticks above the
high of bar 5. The high of bar 5 was
402, so the entry stop is placed at 402.5.
Two days after bar 5, a long trade is
triggered at bar X.
Trade management
and exit rules
Source: TradeStation
Once in a long position, the rest of the

TRADING STRATEGIES continued
FIGURE 4 — ADJUSTING THE STOP

To manage the trade, first determine
The stop-loss level is raised when price exceeds the halfway point to the target, the wedge’s height at its midpoint. The
which protects the position’s open profits. midpoint (labeled M) is the half-way
point in time between point 1 and the
apex (point 6). The range at M is $18
from the top to the bottom of the
wedge. That price range becomes the
basis of two calculations:
1. Add that value to the entry price

to determine the exit target.
2. Add half that value to the entry
price and move the protective
stop five ticks below the low of
the entry bar when that price
level is exceeded.
The target for this trade is $402.50 +

$18, or 420.50. We will move the pro-
tective stop five ticks below the entry
Source: TradeStation bar when the market rallies above
$411.50 (the entry price of 402.50 plus
half the wedge’s midpoint range, $9).
Figure 3 was $392.80. If the market were to close more than Figure 4 shows the long entry triggered at 402.50 and the
five ticks below that level ($392.30), we would exit the posi- initial stop-loss set at 392.30. Once the market breaches
tion on a “stop close-only” (SCO) order. If the exchange or 411.50, the stop is raised to five ticks below the low of the
your brokerage does not allow SCO orders, exit on the next entry bar.
open. Figure 5 is an example of a sell setup using the June E-
mini S&P 500. The market closed
FIGURE 5 — TRADE MANAGEMENT below the lower trendline without tak-
If you are trading one contract, take full profits at the predetermined target. If
ing out the low of bar 3, so the short
you are trading multiple contracts, take profits on half of the position and use a sell stop is placed five ticks below the
trailing stop for the rest. low of the signal (breakout) bar. The
target was hit the next day.
If you are trading a single position,
it is a good idea to take full profits at
the target level. If you are trading mul-
tiple positions, you can take profits on
half the position at the target and trail
a stop on the remainder.
Figure 6 illustrates an intraday trade
setup based on an ascending wedge,
which inverts the rules for trading a
descending wedge. A sell-stop entry
order is placed at 5,885 — five ticks
below the most recent low that
touched the lower trendline. The pro-
tective stop is placed five ticks above
the high of the entry bar. The midpoint
range of the wedge (140 ticks), which
is measured at half the time distance
between points 1 and 5, is used to cal-

FIGURE 6 — OPTIMAL TRADE
culate the target level (5,745, which is Price reversed downward out of this ascending triangle on a 60-minute chart of
the entry price minus the midpoint natural gas. Wedges should be treated the same way regardless of the time
range). The trade was initiated in the frame. This trade was entered and exited within a four-hour time window, thus
opening hour and exited within four avoiding overnight risk exposure.
hours.
A note on false breakouts

When false breakouts occur, what is
typically happening is a widening of
the wedge rather than a full-fledged
reversal. If this happens, simply take
the loss and look to re-enter when
another trade is signaled.
To combat the subjectivity of chart-
based analysis, traders need to use
precise rules defining pattern comple-
tion, stop placement and exit tech-
niques. The approach outlined here
provides this kind of framework for
trading wedge formations.
TRADING STRATEGY
OPTIONS STRATEGIES
LAB
The comeback spread

Adding an options backspread to a stock that’s underwater can accelerate a recovery
without adding downside risk
BY ALEX JACOBSON
A recent sketch on Saturday Night Live parodied

the financial crisis by featuring comedian Kenan
Thompson as an economist who simply pleaded
“fix it!” Given that many investment portfolios are down 40
percent or more since late 2007, everyone shares
more than just wait for portfolios to recover.
Options let investors create unique positions that they
can’t duplicate with stock or futures contracts. One way to
fix ailing positions is to add options backspreads by buying
lower-strike calls and selling twice as many higher-strike
Thompson’s sense of urgency. Investors have moved to the ones. These spreads typically don’t cost anything to exe-
sidelines, hoping that time may heal damaged positions. cute, lower a position’s downside breakeven price, and
However, in this market environment, investors need to do recoup losses even if the market rallies modestly.
Raising the Titanic

TABLE 1 — REPAIRING A BROKEN POSITION Suppose you bought XYZ stock
Both repair strategies relieve some pain, but they don’t address the biggest problems at $35 and thought it was a great
of owning a losing stock. buy. But when the broad market
500 shares of XYZ bought at $35. sank, XYZ fell to around $19
It now trades at just $22 with a new price target of $30. before rebounding to $22. Given
Original Possible Possible that the U.S. markets bounced
position: repair #1: repair #2: roughly 14 percent in mid-
Long 500 Sell 30-strike Sell 25-strike March, let’s assume you decide
shares of XYZ calls puts to hold the stock, believing XYZ
Repair income NA $500 $1,800 could hit $30 within a year.
Current unrealized loss -$6,500 -$6,000 -$6,200 As the stock fell to $22 from
Breakeven point $35 $34 $31.40 $35, your 500-share investment
Downside risk $17,500 $17,000 $28,200 lost $6,500. There are several
Strong rally ways to use options in an
Loss erases losses, attempt to recover losses, but
Strong rally reduced and stock which offers the best bang for
erases to $2,000 stays above 25 your buck?
Best-case scenario losses. from $6,500. short strike. One obvious choice is to sell
FIGURE 2 — HIDDEN RISKS OF SELLING PUTS

FIGURE 1 — STOCK VS. COVERED CALL Selling puts isn’t a good way to repair a losing stock posi-
tion, because you may have to buy more shares if the
If you’re sitting on stock losses, selling calls helps minimize
stock drops below the short put’s strike at expiration, which
the pain, but it can’t help you bounce back completely.
magnifies the problem.

TABLE 2 — ADDING A BACKSPREAD
Adding a backspread doesn’t add risk, but it can help a stock recover if it trades
calls against the position, creating a cov- between the two strike prices of $25 and $30. If XYZ rallies to $30 by expiration,
ered call. For example, you could sell the combined position will break even.
$30-strike calls that expire in one year for 500 shares of XYZ bought at $35. It now trades at just $22.
$1 each. This provides $1 of income from Position Long/short Debit/credit Unrealized loss
each call, but if XYZ rallies to $30, the
500 shares Long -$17,500 -$6,500
stock would effectively get called away
Add backspread:
at $31 ($30 strike + $1 premium) — still
Position Long/short Strike price Credit/debit
$4 below the entry price.
5 one-year calls Long 25 -$1,000
This scenario is helpful, but not ideal.
10 one-year calls Short 30 $1,000
Figure 1 compares the potential per-
Net cost: $0
share gains and losses of an outright pur-
New breakeven price: $30
chase of XYZ with a covered call at expi-
Downside risk: Same as
ration (blue and pink lines, respectively).
original investment.
If XYZ jumps 36 percent and exceeds the
30 short strike, the position’s overall loss
drops from $6,500 to $2,000. Again, the step reduces losses, $35 was a mistake. And selling $25 puts for $3.60 each
but the entire position still won’t break even. And the stock reduces the investment’s breakeven price to $31.40 if stock
does most of the work, rallying from $22 to $30; the short closes higher than the $25 put strike at expiration. However,
calls contribute only modestly to the rebound. Nonetheless, if XYZ trades below $25 at expiration, you will double a los-
selling calls can help rescue an underwater long position, ing position as you are forced to buy another 500 shares at
because even if XYZ doesn’t hit the $30 target price, you still $25 to deliver them to put holders. At this point, each new
keep the $1 premium collected from each contract. share costs $21.40 ($25 strike - $3.60 put premium), and the
Another way to recover losses is to sell puts. In the origi- entire 1,000-share position costs $28.20 ($28,200 overall).
nal example, XYZ trades at $22 with a price target of $30 Notice the combined position’s loss accelerates faster than
within a year. Given these assumptions, you could sell a the original investment’s (Figure 2).
$25-strike put that expires in one year continued on p. 16
for $3.60. This seems simple, but the
resulting position has hidden risks.
Figure 2 compares the potential per-
formance of stock only to the combined
stake.
First, buying 500 shares of XYZ at
Strategy snapshot
Strategy: Repair losing stocks with
backspreads.
Components: One long call, two
higher-strike short calls that expire at
the same time for every 100
underlying shares held.
Logic: Adding a backspread lowers
overall position’s breakeven price and
helps a losing position recover quickly.
Criteria: Enter the spread at no cost.
Expiration month and upper strike
depend on underlying forecast.
Best-casescenario: Underlying rallies
above long strike at expiration.
All underlying losses are recouped.
Worst-case scenario: Underlying
drops sharply.

TRADING STRATEGIES continued FIGURE 3 — UNDERLYING STOCK VS. SPREAD
Notice the spread’s maximum profit occurs at the 30 strike,
and it loses money above $35.
TABLE 3 — BACKSPREAD PERFORMANCE
Below $25, the position loses point-for-point with the
underlying; between $25 and $30, the position mitigates
losses; at $30 or above, the position breaks even, but
doesn’t earn a profit.
Combined position at expiration
XYZ price Stock Spread value Net position
20 -15 0 -15
21 -14 0 -14
22 -13 0 -13
23 -12 0 -12
24 -11 0 -11
25 -10 0 -10
26 -9 1 -8
27 -8 2 -6
28 -7 3 -4
29 -6 4 -2
30 -5 5 0
* At prices above $30, the net position does not change.
Table 1 lists the benefits and drawbacks of each

approach: original investment, selling calls, and selling term periods in retirement accounts, and they don’t want to
puts. Lowering your breakeven price by selling puts and sell them at these discounted prices.
(possibly) buying more shares might be a good idea, but it
is tough medicine. First, selling puts requires either a mar- Back to backspreads
gin account or $12,500 in cash in a retirement account. One As a repair strategy, selling calls or puts can be helpful, but
of the biggest challenges now is that not only has buying building a backspread is better. To explain why backspreads
power evaporated, but many retirement accounts have little are superior, let’s return to the original example: XYZ fell to
or no free cash. And most investors hold stocks for long- $22 after you bought 500 shares at $35. And despite this
decline, you still have a $30 one-year price target. The
FIGURE 4 — A FASTER RECOVERY repair objectives are as follows:
When you combine the positions, the spread boosts any
underlying gains between $25 and $30, and the 500 FIGURE 5 — REPAIRED POSITION
shares cover the additional short calls above $30.
The combined position resembles a covered call with a
25-30 bull call spread. Because the backspread can be
entered at no cost, downside risk doesn’t increase.

FIGURE 6 — GOOGLE INC.
Google has traded between $250 and $600 over the past year. If you bought Google at $500
• Lower the breakeven in August 2008, it fell 28 percent in the following six months, and traded at $358 on Feb. 19.
point to $30 (or
below).
• Spend no additional
money (excluding
transaction costs).
• Add no risk.
This may sound impos-

sible, but the following
steps are fairly simple.
First, buy 5 calls with a $25
strike that expire in one
year for $2 each ($1,000
total). Think of these 5 calls
as injecting another 500
shares into the position at
$25. Next, sell 10 calls with Source: eSignal
a $30 strike (and same expi-
ration) for $1 each ($1,000 total). The $1,000 received from above, the position breaks even, but doesn’t earn a profit.
selling 30-strike calls offsets the $1,000 spent when buying Let’s examine the backspread from another angle. Figure
25-strike calls, so the backspread costs nothing, except for 3 compares the potential gains and losses of the 500-share
transaction costs. Now the position is: investment with the options spread to repair it (blue and
red lines, respectively). Notice the spread’s maximum prof-
• 500 shares of XYZ it occurs at the 30 strike, and it loses money above $35.
• 5 long one-year $25 calls Figure 4 shows that when you combine the positions, the
• 10 short one-year $30 calls continued on p. 18
Table 2 lists the position’s details.

Note: Before entering a backspread,
make sure your account is approved to
trade spreads and covered calls. Such
approval is fairly easy to obtain even in
retirement accounts.
The overall position is easier to
understand if you break it down into
familiar chunks. Five of the short $30
calls are covered by the original 500
XYZ shares. The remaining short 30-
strike calls combine with the long 25-
strike calls to form a 25-30 bull call
spread. By creating a backspread with-
out spending money, you effectively
add another 500 shares to the position,
but they exist only between the prices
of $25 and $30.
The combined position breaks even if
the stock reaches or exceeds $30. Again,
think of it as two parts, each with an
upper limit of $30: a covered call and a
25-30 bull call spread. Table 3 shows
performances of the underlying shares,
the backspread, and the entire position,
according to XYZ’s price. Below $25,
the position loses point-for-point with
the underlying; between $25 and $30,
the position mitigates losses; at $30 or

TABLE 5 — INDIVIDUAL
COMPONENTS
This backspread mitigates losses
TABLE 4 — GOOGLE BACKSPREAD
between the 360 and 440 strikes and
To repair this losing Google trade, you could add a one-year 360-440 even manages to earn $20 if GOOG
backspread, which lowers the breakeven price to $430 from $500. rallies to $440 at expiration.
Google + combined
500 shares of GOOG bought at $500.
position at expiration
It traded at $358 on Feb. 19.
Spread Net
Position Long/short Debit/credit Unrealized loss
Price Stock value position
100 shares Long -$50,000 -$14,200
350 -150 0 -150
360 -140 0 -140
Add backspread:
380 -120 20 -100
Position Long/short Strike price Credit/debit
400 -100 40 -60
1 one-year calls Long 360 -$6,200
420 -80 60 -20
2 one-year calls Short 440 $6,200
440 -60 80 20
Net cost: $0
New breakeven price: $430 decisions will depend on the underly-
Downside risk: Same as ing’s price action and the timing of
original investment. any ex-dividend dates, days in which
the stock drops by the dividend
amount. If XYZ pays a dividend, the
spread boosts any underlying gains between $25 and $30, short 30 calls might be exercised early, which could affect
and the 500 shares cover the additional short calls above the covered call and bull call spread portions of the posi-
$30. Also, the original investment’s risk doesn’t change if tion.
XYZ drops below $25. Figure 5 highlights the combined Another twist: If the overall position is underwater in a
position’s risk profile. taxable account, it could create phantom income, meaning
you have to pay capital gains tax even if the entire position
Managing the trade has lost money. Suppose you repaired the original invest-
If expiration looms and XYZ approaches $30, consider exit- ment in XYZ and held it until expiration when XYZ closed
ing the spread portion of the position. Or consider holding at $29.40. Let’s also assume you sell the $25 calls for $4.30
the covered call (500 shares + 5 short $30 calls) to allow the each, and the $30 calls expire worthless. At this point, you
stock to be called away. As expiration approaches, these post a gain of $2,150 ($4.30 * 5 contracts * 100 shares), which
the IRS could tax at short-term rates if
FIGURE 7 — STOCK VS. BACKSPREAD ON GOOGLE it’s held in a taxable account.
Adding a backspread can really help a losing stock if it trades between the two Remember, you bought stock at $35,
strike prices. The combined position recoups losses twice as fast as simply so you still have an unrealized loss of
owning stock. $2,800 ($35 - $29.40 * 500 shares). The
only way to resolve this dilemma is to
sell the underlying stock or use a tax-
deferred retirement account.
Trade example
Figure 6 shows Google Inc. (GOOG) has
traded between $250 and $600 over the
past year. If you bought Google at $500
in August 2008, it fell 28 percent in the
following six months, and traded at
$358 on Feb. 19. To repair this position,
you could buy one January 2010 $360
call for $62 and sell two same-month
$440 calls for $31 each. Table 4 lists this
position’s details and shows the repair
spread costs nothing to enter.
The backspread lowers the position’s
breakeven point from $500 to $430.
Source: OptionVue
Table 5 lists each component’s value

FIGURE 8 — FIXING GOOGLE
The overall position contains a 360-440 bull call spread and a covered call,
based on GOOG’s price at expiration. At
which limit upside profits as the economic cost for doubling performance
$440 — the spread’s upper strike — the
between the two strikes.
combined position actually earns $20 per
share. Figure 7 compares the risk profiles
of the underlying shares to the repaired
investment (purple and green lines,
respectively). Figure 8 focuses exclusive-
ly on the repaired position. Again, the
backspread boosts performance between
the $360 and $440 strikes, and the overall
position contains a 360-440 bull call
spread and a covered call. These posi-
tions limit upside profits as the econom-
ic cost for doubling performance
between the two strikes.
Patching portfolios
If you have a diversified stock portfolio
that is underwater, you can help repair it
by adding a backspread in an exchange-
traded fund (ETF) that is highly correlat- Source: OptionVue
ed to it. Some possibilities include ETFs
for the S&P 500 (SPY), Dow Jones Industrial Average (DIA), from $358 on Feb. 19 to $500 within one year.
or Russell 2000 (IWM). Even if you can’t find a percent First, buy 100 shares of GOOG at $358 and sell one
match, the portfolio will likely recover somewhat if the January 2010 $500 call for $15.50. The call’s premium yields
broad market bounces back. continued on p. 20
These types of hedges became easi-
er to execute after portfolio-margining
rules were introduced in early 2007.
Under these rules, the underlying
stocks can cover the extra short call in
the backspread. If your portfolio is
currently down 30 percent — not an
uncommon situation in today’s mar-
ket — adding an ETF backspread will
reduce the entire portfolio’s breakeven
price. If you enter an at-the-money
(ATM) backspread, and the chosen
ETF rallies 10 percent within a year,
that gain — plus any gains in individ-
ual stocks — moves your portfolio
closer to breaking even.
Remember, repairing a losing stock
with a backspread doesn’t hedge
downside risk. It simply lowers the
overall breakeven price; you still face
losses if the market drops lower.
Starting from scratch

These types of options spreads help
remedy broken positions, but how do
they behave when you start from
scratch by purchasing stock and enter-
ing spreads simultaneously? To
answer this question, let’s again
assume you think Google can jump

TABLE 6 — COMPARING TWO TRADES

Related reading
Unlike the covered call, the backspread provides no downside cushion.
Alex Jacobson article: However, the backspread enhances performance if Google trades above the
“The hidden cost of credit spreads” long 440 strike.
Options Trader, May 2006.
GOOG traded at $358 on Feb. 19.
Why debit spreads are often a better
Covered call position
alternative to credit spreads.
Position Long/short Strike price Debit/credit
100 shares Long NA -$35,800
To download this article, visit 1 Jan. 2010 call Short 500 $1,550
http://www.ise.com/assets/files/Hidden
_Costs_of_Credit_Spreads.pdf
Downside risk: $34,250
Breakeven price: $342.50
Other articles
Max. upside price: $515.50
“Repairing a losing covered call”
Futures & Options Trader, May 2007.
Covered calls are rarely a lost cause, Stock + backspread
even if the stock falls. Before taking a Position Long/short Strike price Credit/debit
hit, consider these alternatives. 100 shares Long NA -$35,800
1 Jan. 2010 call Long 440 -$3,100
“Squeezing extra profits
2 Jan. 2010 calls Short 500 $3,100
from long calls”
Futures & Options Trader, May 2007.
These spreads can boost profit and Downside risk: $35,800
lower risk if you build them from an Breakeven price: $358
already-profitable long call. Max. upside price: $500
“Easing the pain:

Option repair strategies” FIGURE 9 — COVERED CALL VS. BACKSPREAD
Options Trader, May 2005.
It can be frustrating when the market Gains in both positions are capped if GOOG trades at (or exceeds) $500, but
doesn't go your way, but it doesn't the backspread doubles upside exposure between the strikes of $440 and
have to be painful. Two option “repair” $500.
strategies — a bear put spread and a
butterfly spread — can reduce an
unprofitable long put's risk and pre-
serve potential profitability.
You can purchase and

download past articles at
http://store.activetradermag.com
cash flow of 4.3 percent during an 11-

month period and pushes the
breakeven price down to $342.50. If
Google is trading at more than $500 at
expiration, the call will be exercised, so
the covered call’s maximum value is
$515.50.
Table 6 compares this covered call to
creating a $440-$500 backspread that
expires at the same time and costs noth- Source: OptionVue
ing to enter. Figure 9 compares the
potential gains and losses of the covered call and the back- combined position is worth $560, or $44.50 more than the
spread (purple and green lines, respectively). Unlike the covered call alone. Keep in mind you should exit the posi-
covered call, the backspread provides no downside cush- tion if Google trades near $500 as expiration approaches
ion. Gains in both positions are capped if GOOG trades at instead of waiting until the spread expires.
(or exceeds) $500, but the backspread doubles upside expo-
sure between the strikes of $440 and $500. At expiration, the For information on the author see p. 5.
20 February 2009 • FUTURES & OPTIONS TRADER

ads0908 7/15/08 1:28 PM Page 39
OPTIONS TRADING
TRADING SYSTEM
OPTIONS STRATEGY
OPTIONS SYSTEM
LAB LAB
LAB
The end-of-month options trade

Market: Options on the S&P 500 FIGURE 1 — RISK PROFILE — LONG CALL
futures.
The system buys an at-the-money call and holds it four trading days to take advantage
of the S&P 500’s tendency to rally at the end of the month. However, this trade from
System concept: Over the
February 2001 needed the March S&P 500 futures to rally 17 points just to break even.
past 11 years, the S&P 500 index
(SPX) gained an average of 0.24
percent on the first day of the
month, closing higher 63 percent
of the time. This pattern is tested
on stock index futures in the cur-
rent issue of Active Trader maga-
zine (see “Controlling risk in a
seasonal strategy,” May 2009).
The strategy buys the market on
the last trading day of the month
and exits up to four days later,
subject to various stop-loss rules.
Overall, the system was prof-
itable, although it suffered long
periods of large drawdowns.
This lab tests that idea with
call options as a substitute for
long futures contracts. (Each
futures option controls one
futures contract.) The options Source: OptionVue
strategy buys one at-the-money
(ATM) call in front-month S&P
500 futures (SP) on the last trad- FIGURE 2 — SYSTEM PERFORMANCE
ing day of the month; it closes the The seasonal monthly system lost 2.3 percent over the past eight years.
position four trading days later.
Figure 1 shows the first trade’s
potential gains and losses at entry
(Jan. 31, 2001) and four trading
days later (dashed and solid
lines, respectively). The March
S&P 500 futures (SPH01) closed
at 1373.50 on Jan. 31, and the sys-
tem purchased one March 1370
call with 16 days remaining to
expiration.
To simply break even, the
underlying must rally 17 points
(1.24 percent) during the trade,
assuming volatility doesn’t
change; otherwise, the position
will lose money. The trade’s odds
Source: OptionVue
of success are just 33 percent.

STRATEGY SUMMARY
LEGEND:
Net return – Gain or loss at end of test period.
Percentage return – Gain or loss on a percentage basis.
Initial capital: $30,000
Annualized return – Gain or loss on a annualized percentage basis. Net return: -$676
No. of trades – Number of trades generated by the system.
Winning/losing trades – Number of winners and losers generated Percentage return: -2.30%
by the system. Annualized return: -.03%
Win/loss – The percentage of trades that were profitable.
Avg. trade – The average profit for all trades. No. of trades: 98
Largest winning trade – Biggest individual profit generated by the Winning/losing trades: 47/51
system.
Largest losing trade – Biggest individual loss generated by the Win/loss: 48%
system.
Avg. trade: -$6.90
Avg. profit (winners) – The average profit for winning trades.
Avg. loss (losers) – The average loss for losing trades. Largest winning trade: $10,238.00
Avg. hold time (winners) – The average holding period for winning
Largest losing trade: -$7,762.00
trades (in days).
Avg. hold time (losers) – The average holding period for losing Avg. profit (winners): $3,053.16
trades (in days).
Max consec. win/loss – The maximum number of consecutive Avg. loss (losers): -$2,826.95
winning and losing trades. Avg. hold time (winners): 6
Avg. hold time (losers): 6
Trade rules: Max. consec. win/loss: 5/7
The strategy had
1. Buy one ATM, front-month the most trouble in
call at the close on the last the past eight months as the stock mar-
day of each month. ket collapsed. The system more than
2. Sell the call at the close on doubled its capital from January 2001
the fourth trading day of the to September 2008, but then lost all
next month. profits (and then some) from
September 2008 to March 2009.
Test details: Statistically, it should make money
• Daily closing prices were only 33 percent of the time, but it post-
used. Trades were executed ed gains more often than expected (48
at the bid and ask, when percent). This suggests it has a trading
possible. Otherwise, edge, although traders need to figure
theoretical prices were used. out how to manage the risk of its large
• Commissions were $5 plus drawdowns.
$1 per option trade. Finally, minimal commissions were
included, but larger fees and bad fills
Test data: System was tested on will likely affect performance.
options of the S&P 500 futures trading
at the CME. —Steve Lentz and Jim Graham of
OptionVue
Test period: Jan. 31, 2001 to March 5,
2009.
Option System Analysis strategies are

Test results: Figure 2 tracks the sys-
tested using OptionVue’s BackTrader
tem’s performance in the past eight
module (unless otherwise noted).
years. It remained profitable for much
of the period, but endured large draw- If you have a trading idea or strategy that
downs, including three periods when you’d like to see tested, please send the
the system’s capital lost more than 50 trading and money-management rules to
percent in a short time. Advisor@OptionVue.com.

FUTURES SNAPSHOT (as of March 27)
The following table summarizes the trading activity in the most actively traded futures contracts. The information does NOT constitute
trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility.
See the legend for explanations of the different fields. Volume figures are for the most active contract month in a particular market and
may not reflect total volume for all contract months.
Note: Average volume and open-interest data includes both pit and side-by-side electronic contracts (where applicable).
10-day move/ 20-day move/ 60-day move/ Volatility

Market Symbol Exchange Volume OI rank rank rank ratio/rank
E-Mini S&P 500 ES CME 2.79 M 2.63 M 8.15% / 20% 11.13% / 100% -8.13% / 15% .35 / 61%
10-yr. T-note TY CME 705.5 917.1 1.48% / 30% 2.58% / 94% -3.14% / 88% .41 / 92%
5-yr. T-note FV CME 366.4 794.3 0.81% / 13% 0.74% / 56% -0.96% / 46% .51 / 93%
E-Mini Nasdaq 100 NQ CME 366.3 255.7 7.53% / 27% 12.44% / 100% 4.15% / 38% .60 / 90%
Crude oil CL NYMEX 254.5 220.1 13.25% / 26% 17.02% / 53% 34.20% / 75% .31 / 92%
30-yr. T-bond US CME 238.5 659.9 1.67% / 55% 4.11% / 88% -9.18% / 90% .28 / 73%
Eurodollar ED CME 213.9 1.02 M 0.24% / 78% 0.15% / 37% -0.07% / 0% .22 / 88%
Mini Dow YM CME 207.0 56.5 8.12% / 30% 10.07% / 100% -10.16% / 24% .33 / 64%
Eurocurrency EC CME 198.5 134.3 3.13% / 31% 4.80% / 26% -5.33% / 38% .50 / 88%
E-Mini Russell 2000 TF CME 169.1 373.1 9.53% / 20% 10.40% / 75% -14.25% / 32% .41 / 70%
2-yr. T-note TU CME 136.4 421.4 0.07% / 25% -0.04% / 5% -0.72% / 78% .41 / 93%
Gold 100 oz. GC NYMEX 114.6 219.8 -0.52% / 8% -1.82% / 29% 6.36% / 27% .27 / 38%
Corn C CME 103.8 246.1 -0.36% / 0% 7.80% / 42% -2.32% / 14% .17 / 35%
Japanese yen JY CME 81.0 88.3 -0.08% / 9% -0.07% / 5% -7.93% / 87% .33 / 78%
Soybeans S CME 73.4 112.0 4.63% / 25% 5.16% / 27% -3.78% / 9% .34 / 73%
British pound BP CME 72.3 76.0 2.37% / 33% -0.12% / 0% -0.53% / 0% .41 / 92%
Natural gas NG NYMEX 69.5 88.8 -4.96% / 25% -10.98% / 35% -36.22% / 88% .24 / 67%
S&P 500 index SP CME 53.6 484.0 8.15% / 20% 11.15% / 100% -8.12% / 15% .35 / 61%
Sugar SB ICE 44.3 233.3 -2.02% / 9% -8.08% / 94% 11.78% / 46% .41 / 67%
Canadian dollar CD CME 39.8 61.4 3.14% / 33% 2.74% / 68% -0.83% / 5% .50 / 85%
Australian dollar AD CME 39.1 46.2 5.29% / 57% 7.14% / 74% 0.32% / 8% .63 / 90%
E-Mini S&P MidCap 400 ME CME 38.3 109.0 9.73% / 27% 11.25% / 74% -7.04% / 18% .48 / 80%
Soybean oil BO CME 37.6 93.8 7.46% / 77% 4.21% / 11% 0.00% / 0% .56 / 95%
Wheat W CME 35.4 101.1 -2.12% / 50% -2.72% / 11% -16.11% / 30% .52 / 100%
Swiss franc SF CME 33.8 31.3 3.97% / 82% 2.43% / 23% -7.34% / 49% .56 / 88%
RBOB gasoline RB NYMEX 28.3 37.2 9.98% / 44% 8.41% / 33% 68.07% / 84% .32 / 80%
Heating oil HO NYMEX 28.0 37.2 19.68% / 67% 13.04% / 71% 11.24% / 40% .42 / 95%
Soybean meal SM CME 25.5 47.8 2.57% / 9% 5.19% / 27% -4.54% / 3% .29 / 55%
Silver 5,000 oz. SI NYMEX 18.9 47.9 0.36% / 0% 1.17% / 2% 20.79% / 28% .37 / 70%
Nikkei 225 index NK CME 14.6 32.5 12.21% / 58% 17.07% / 81% -4.74% / 12% .57 / 95%
Live cattle LC CME 13.2 59.6 -0.38% / 17% -1.86% / 29% -1.83% / 8% .22 / 43%
Copper HG NYMEX 12.7 52.1 10.30% / 47% 19.34% / 85% 39.04% / 83% .32 / 80%
Crude oil e-miNY QM NYMEX 12.3 5.3 13.25% / 26% 17.02% / 52% 17.44% / 43% .32 / 92%
Lean hogs LH CME 11.4 46.9 -4.31% / 75% -0.70% / 7% 1.26% / 13% .28 / 28%
Mexican peso MP CME 11.0 40.4 1.32% / 0% 4.68% / 100% -2.41% / 2% .18 / 68%
Coffee KC ICE 8.9 53.7 5.17% / 33% 3.53% / 31% 7.72% / 72% .57 / 73%
Mini-sized gold YG CME 8.8 3.9 -0.59% / 8% -1.88% / 29% 6.35% / 27% .27 / 37%
U.S. dollar index DX ICE 6.4 20.9 -2.68% / 36% -2.92% / 27% 3.35% / 34% .60 / 90%
Cocoa CC ICE 6.2 42.9 8.06% / 22% 6.63% / 36% 1.74% / 6% .31 / 58%
Fed Funds* FF CME 5.2 55.7 0.01% / 13% 0.03% / 21% 0.02% / 0% .03 / 73%
Nasdaq 100 ND CME 3.9 25.1 7.53% / 27% 12.44% / 100% 4.15% / 38% .60 / 90%
Natural gas e-miNY QG NYMEX 2.5 4.8 -4.96% / 18% -10.98% / 35% -36.22% / 88% .24 / 67%
New Zealand dollar NE CME 2.3 14.3 8.66% / 45% 12.80% / 100% -0.94% / 2% .52 / 90%
E-Mini eurocurrency ZE CME 2.0 2.1 3.13% / 31% 4.80% / 26% -5.33% / 38% .50 / 88%
Dow Jones Ind. Avg. DJ CME 1.9 16.1 8.12% / 30% 10.07% / 100% -10.16% / 24% .33 / 65%
Mini-sized silver YI CME 1.7 2.1 0.43% / 0% 1.04% / 2% 20.74% / 28% .36 / 68%
Mini-sized soybeans YK CME 1.2 4.4 4.63% / 25% 5.16% / 27% -3.78% / 9% .34 / 73%
*Average volume and open interest based on highest-volume contract (May 2009).
Legend day moves, 20-day moves, etc.) show the percent means the current reading is larger than
Volume: 30-day average daily volume, in centile rank of the most recent move to a cer- all the past readings, while a reading of 0 per-
thousands (unless otherwise indicated). tain number of the previous moves of the cent means the current reading is smaller than
same size and in the same direction. For the previous readings. These figures provide
OI: Open interest, in thousands (unless other-
example, the rank for 10-day move shows perspective for determining how relatively
wise indicated).
how the most recent 10-day move compares large or small the most recent price move is
10-day move: The percentage price move to the past twenty 10-day moves; for the 20- compared to past price moves.
from the close 10 days ago to today’s close. day move, the rank field shows how the most Volatility ratio/rank: The ratio is the short-
20-day move: The percentage price move recent 20-day move compares to the past term volatility (10-day standard deviation of
from the close 20 days ago to today’s close. sixty 20-day moves; for the 60-day move, the prices) divided by the long-term volatility (100-
60-day move: The percentage price move rank field shows how the most recent 60-day day standard deviation of prices). The rank is
from the close 60 days ago to today’s close. move compares to the past one-hundred- the percentile rank of the volatility ratio over
The “rank” fields for each time window (10- twenty 60-day moves. A reading of 100 per- the past 60 days.
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.
OPTIONS RADAR (as of March 27)
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 214.3 1.15 M 7.85% / 20% 11.00% / 100% 38.4% / 46.1% 40.6% / 39.3%
S&P 500 volatility index VIX CBOE 66.5 800.9 -3.12% / 27% -11.46% / 41% 59.6% / 107.3% 87.4% / 124.7%
Russell 2000 index RUT CBOE 62.4 428.7 9.14% / 20% 10.28% / 63% 48.5% / 53.6% 46.6% / 41.3%
E-Mini S&P 500 futures ES CME 28.8 110.9 8.15% / 20% 11.13% / 100% 37.8% / 27.7% 41.1% / 25.7%
S&P 100 index OEX CBOE 21.1 63.7 7.99% / 20% 11.52% / 100% 37.3% / 43.9% 40.1% / 37.7%
Stocks
Citigroup C 461.3 3.56 M 47.19% / 10% 74.67% / 100% 148.6% / 300.7% 172.1% / 165.4%
General Electric GE 452.0 2.58 M 12.06% / 9% 26.67% / 100% 74.2% / 138.1% 91.6% / 82.7%
Bank of America BAC 387.0 1.95 M 27.43% / 17% 85.82% / 90% 130% / 235.7% 160.5% / 205.1%
Wells Fargo WFC 215.2 1.18 M 11.84% / 0% 28.84% / 83% 127.7% / 200.8% 129.6% / 148%
Apple Inc. AAPL 172.9 803.5 11.38% / 42% 19.64% / 90% 47.4% / 51.4% 48.6% / 45.3%
Futures
Eurodollar ED CME 331.1 5.39 M 0.24% / 100% 0.13% / 46% 57.1% / 56.5% 71.1% / 72.6%
Corn C CME 36.5 483.9 -0.36% / 0% 7.80% / 42% 44.4% / 34.5% 42.6% / 33.7%
Crude oil CL NYMEX 31.8 307.8 13.25% / 26% 17.02% / 53% 62.2% / 77.7% 76.9% / 74.1%
E-Mini S&P 500 ES CME 28.8 110.9 8.15% / 20% 11.13% / 100% 37.8% / 27.7% 41.1% / 25.7%
10-year T-note TY CME 23.6 114.4 1.48% / 30% 2.58% / 94% 8.1% / 10.7% 10.8% / 10.6%
VOLATILITY EXTREMES**
Indices - High IV/SV ratio
E-Mini S&P 500 ES CME 28.8 110.9 8.15% / 20% 11.13% / 100% 37.8% / 27.7% 41.1% / 25.7%
Euro index XDE PHLX 1.0 16.4 2.78% / 31% 4.89% / 35% 18.6% / 14.9% 19% / 16.7%
Yen index XDN PHLX 1.2 19.8 0.15% / 0% -0.24% / 8% 17.4% / 15.1% 17.3% / 13.6%
Indices - Low IV/SV ratio

S&P 500 volatility index VIX CBOE 66.5 800.9 -3.12% / 27% -11.46% / 41% 59.6% / 107.3% 87.4% / 124.7%
Banking index BKX PHLX 4.6 54.9 13.95% / 20% 20.70% / 73% 95.3% / 136.5% 95.5% / 114.4%
Housing index HGX PHLX 1.3 15.9 19.96% / 30% 24.55% / 100% 64.1% / 85.6% 62.9% / 77.7%
Oil Service index OSX PHLX 1.6 17.7 10.14% / 18% 10.47% / 59% 58.3% / 76.1% 63.9% / 75.7%
S&P 100 index OEX CBOE 5.0 38.6 7.99% / 20% 11.52% / 100% 35.7% / 44.7% 39% / 38.9%
Stocks - High IV/SV ratio

Arena Pharma ARNA 11.2 145.1 -11.59% / 36% 7.91% / 29% 288.1% / 127.2% 186.8% / 136%
Osiris Therapeutics OSIR 1.8 24.5 -20.57% / 100% -19.55% / 100% 85.1% / 54.2% 82.5% / 49.1%
Allergan AGN 10.6 31.8 13.77% / 55% 21.35% / 97% 65.7% / 46.2% 45.1% / 45.3%
General Motors GM 71.8 1.08 M 33.09% / 45% 60.89% / 86% 257.3% / 188.2% 129.8% / 113.2%
Yahoo YHOO 37.7 552.7 -2.44% / 100% -0.38% / 0% 66.4% / 50.1% 71.7% / 62.9%
Stocks - Low IV/SV ratio

Citigroup C 461.3 3.56 M 47.19% / 10% 74.67% / 100% 148.6% / 300.7% 172.1% / 165.4%
Manulife Financial MFC 1.5 13.1 19.88% / 11% 18.82% / 76% 78.5% / 157.7% 75% / 98.1%
General Electric GE 452.0 2.58 M 12.06% / 9% 26.67% / 100% 74.2% / 138.1% 91.6% / 82.7%
Hartford Financial HIG 27.4 218.1 33.66% / 20% 54.26% / 75% 146% / 268.6% 183.5% / 209.3%
Bank of America BAC 387.0 1.95 M 27.43% / 17% 85.82% / 90% 130% / 235.7% 160.5% / 205.1%
Futures - High IV/SV ratio

Soybean oil BO CME 7.8 56.1 7.46% / 77% 4.21% / 11% 341.5% / 37.1% 369.6% / 36.8%
Eurocurrency EC CME 3.9 24.8 3.13% / 31% 4.80% / 26% 19% / 12.9% 18.7% / 16.4%
E-Mini S&P 500 ES CME 28.8 110.9 8.15% / 20% 11.13% / 100% 37.8% / 27.7% 41.1% / 25.7%
Corn C CME 36.5 483.9 -0.36% / 0% 7.80% / 42% 44.4% / 34.5% 42.6% / 33.7%
British pound BP CME 1.2 8.9 2.37% / 33% -0.12% / 0% 18.4% / 14.6% 20.7% / 15.6%
Futures - Low IV/SV ratio

10-yr T-note TY CME 23.6 114.4 1.48% / 30% 2.58% / 94% 8.1% / 10.7% 10.8% / 10.6%
Heating oil HO NYMEX 1.3 3.3 19.68% / 67% 13.04% / 71% 60.3% / 76.6% 60.8% / 67.4%
30-year T-bond US CME 7.1 72.7 1.67% / 55% 4.11% / 88% 15% / 19% 19.9% / 16.9%
Crude oil CL NYMEX 31.8 307.8 13.25% / 26% 17.02% / 53% 62.2% / 77.7% 76.9% / 74.1%
Natural gas NG NYMEX 2.3 10.4 -4.96% / 25% -10.98% / 35% 62.4% / 69.4% 62% / 59.1%
* Ranked by volume ** Ranked by high or low IV/SV values.
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.

FUTURES & OPTIONS WATCH
FIGURE 1 — COT REPORT EXTREMES
COT extremes The largest positive readings represent markets in which net
commercial positions (longs - shorts) exceed net fund holdings in
The Commitments of Traders (COT) report is published each
March. By contrast, the largest negative values represent markets in
week by the Commodity Futures Trading Commission
which net fund holdings surpass net commercial positions.
(CFTC). The report divides the open positions in futures mar-
kets into three categories: commercials, non-commericals, and
non-reportable.
Commercial traders, or hedgers, tend to operate in the cash
market (e.g., grain merchants and oil companies that either
produce or consume the underlying commodity). Non-com-
mercial traders are large speculators (“large specs”) such as
commodity trading advisors and hedge funds — professional
money managers who do not deal in the underlying cash mar-
kets but speculate in futures on a large-scale basis. Many of
these traders are trend-followers. The non-reportable category
represents small traders, or the general public.
For a list of contract names, see “Futures Snapshot.” Source: http://www.upperman.com
Figure 1 shows the relationship between commercials and
large speculators on March 24. Positive values mean net com- Legend: Figure 1 shows the difference between net commer-
mercial positions (longs - shorts) are larger than net speculator holdings, based on cial and net large spec positions (longs - shorts) for all 45 futures
their five-year historical relationship. Negative values mean large speculators have markets, in descending order. It is calculated by subtracting the
current net large spec position from the net commercial position
bigger positions than the commercials. and then comparing this value to its five-year range. The formu-
In the British pound (BP), lumber (LB), and orange juice (OJ) futures, the differ- la is:
ence between commercials and large speculators is ranked highest among all a1 = (net commercial 5-year high - net commercial current)
futures markets, which is a bullish sign. On the other side, this difference is most b1 = (net commercial 5-year high - net commercial 5-year low)
negative in gasoline (RB), heating oil (HO), and platinum (PL) futures, which could c1 = ((b1 - a1)/ b1 ) * 100
be bearish. However, these differences are fairly small compared to recent months, a2 = (net large spec 5-year high - net large spec current)
which means the recent broad rally could have helped smooth any large discrepan- b2 = (net large spec 5-year high - net large spec 5-year low)
cies between the two categories. c2 = ((b2 - a2)/ b2 ) * 100
– Compiled by Floyd Upperman x = (c1 - c2)
Options Watch: Energy-sector stocks (as of March 31) Compiled by Tristan Yates
The following table summarizes the expiration months available for the top 21 stocks in the energy sector exchange-traded fund (XLE). It also
shows each stock’s average bid-ask spread for at-the-money (ATM) April options. The information does NOT constitute trade signals. It is intend-
ed only to provide a brief synopsis of potential slippage in each option market.
Option contracts traded

2009 2010 2011 Bid-ask spreads
Bid-ask
March
spread as %
Sept.
June
April
Aug.
Dec.
Dec.
Nov.
July
Jan.
Jan.
May
Oct.
Closing of underlying
Stock Ticker price Call Put price
ConocoPhillips COP X X X X X X 39.8 0.03 0.03 0.07%
Exxon Mobil Corp XOM X X X X X X 69.23 0.05 0.08 0.09%
Valero Energy Corp VLO X X X X X X 18.43 0.03 0.02 0.13%
Halliburton Company HAL X X X X X X 15.55 0.02 0.03 0.16%
Chevron Corp CVX X X X X X X 68.3 0.09 0.14 0.16%
Apache Corp APA X X X X X X 66.07 0.13 0.16 0.22%
Hess Corporation HES X X X X X X 55.48 0.13 0.13 0.23%
Occidental Petroleum Corp OXY X X X X X X 57.33 0.15 0.13 0.24%
Schlumberger Limited SLB X X X X X X 41.1 0.13 0.09 0.26%
Andarko Petroleum Corp APC X X X X X X 40.52 0.11 0.10 0.26%
EOG Resources, Inc EOG X X X X X X 57.13 0.16 0.15 0.27%
Devon Energy Corporation DVN X X X X X X 46.48 0.13 0.14 0.28%
XTO Energy Inc XTO X X X X X X 31.5 0.10 0.09 0.30%
Noble Energy NBL X X X X X X 55.58 0.19 0.15 0.30%
Murphy Oil Corp MUR X X X X X X 45.73 0.15 0.15 0.33%
Energy Select SPDR XLE X X X X X X X X X 43.36 0.15 0.14 0.33%
Marathon Oil Corporation MRO X X X X X X 27.08 0.10 0.09 0.35%
Southwestern Energy Co SWN X X X X X X 30.01 0.11 0.10 0.35%
Baker Hughes Inc BHI X X X X X X 28.73 0.10 0.13 0.39%
Chesapeake Energy Corp CHK X X X X X X 17.55 0.09 0.08 0.46%
National Oilwell Varco, Inc NOV X X X X X X 29.37 0.18 0.20 0.64%
Spectra Energy Corp SE X X X X 14.47 0.10 0.13 0.78%
Legend:
Call: Four-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.

FUTURES & OPTIONS CALENDAR APRIL/MAY
MONTH
April
Legend
1 FDD: April crude oil, natural gas, gold, 24 FND: May cotton futures (ICE)
silver, copper, aluminum, platinum, LTD: May T-bond, corn, wheat,
CPI: Consumer price index and palladium futures (NYMEX) soybeans, soybean products, oats, and
ECI: Employment cost index U.S.: Petroleum status report rough rice options (CME); May wheat
options (MGEX); May wheat options
FDD (first delivery day): 2 FND: April heating oil, RBOB gasoline, (KCBOT)
The first day on which deliv- and propane futures (NYMEX) U.S.: Natural gas storage
ery of a commodity in fulfill- U.S.: Natural gas storage
ment of a futures contract 25
can take place.
3 LTD: April live cattle options (CME);
May cocoa and U.S. dollar index 26
FND (first notice day): Also options (ICE); April currency options
known as first intent day, this 27 LTD: May natural gas, heating oil,
is the first day a clearing- 4 RBOB gasoline, gold, silver, copper,
house can give notice to a and aluminum options (NYMEX)
5 U.S.: Crop progress report
buyer of a futures contract
that it intends to deliver a 6 FND: April live cattle futures (CME) 28 LTD: May natural gas and April gold,
commodity in fulfillment of a FDD: April propane futures (NYMEX) silver, copper, aluminum, platinum,
futures contract. The clear- U.S.: Crop progress report and palladium futures (NYMEX)
inghouse also informs the
7 U.S.: Weekly weather report U.S.: Weekly weather report
seller.
FOMC: Federal Open 8 FDD: April heating oil and RBOB 29 FND: May natural gas futures (NYMEX)
gasoline futures (NYMEX) U.S.: Petroleum status report
Market Committee
U.S.: Petroleum status report 30 FND: May gold, silver, copper,
GDP: Gross domestic
product 9 LTD: May coffee and cotton options aluminum, platinum, palladium, corn,
ISM: Institute for supply (ICE) wheat, soybeans, soybean products,
management U.S.: Crop production report, world oats, and rough rice futures (CME);
agricultural production report, and May wheat futures (MGEX); May wheat
LTD (last trading day): The futures (KCBOT)
natural gas storage
first day a contract may LTD: May heating oil, RBOB gasoline,
trade or be closed out before 10 and propane futures (NYMEX); April live
the delivery of the underlying cattle futures (CME); May sugar futures
asset may occur.
11
(ICE); May lumber options (CME)
PPI: Producer price index 12 U.S.: Agricultural prices and natural
Quadruple witching Friday: 13 U.S.: Crop progress report gas storage
A day where equity options,
14 FDD: April live cattle futures (CME) May
equity futures, index options,
and index futures all expire. U.S.: Weekly weather report 1 FND: May sugar and orange juice
15 LTD: May platinum options (NYMEX); futures (ICE)
May sugar options (ICE) FDD: May crude oil, natural gas, gold,
APRIL 2009 silver, copper, aluminum, platinum,
U.S.: Petroleum status report
29 30 31 1 2 3 4 and palladium futures (NYMEX); May
5 6 7 8 9 10 11 16 LTD: May crude oil options (NYMEX) corn, wheat, soybeans, soybean
U.S.: Natural gas storage products, oats, rough rice futures
12 13 14 15 16 17 18
(CME); May coffee, sugar, cocoa, and
19 20 21 22 23 24 25 17 FND: April single stock futures (OC);
cotton futures (ICE); May wheat futures
May cocoa futures (ICE); May orange
26 27 28 29 30 1 2 (MGEX); May wheat futures (KCBOT)
juice options (ICE); April index and
equity options 2
MAY 2009 U.S.: Cattle on feed
3
26 27 28 29 30 1 2 18
3 4 5 6 7 8 9
4 FND: May pork bellies, heating oil,
19 gasoline, and propane futures (NYMEX)
10 11 12 13 14 15 16 U.S.: Crop progress report
20 U.S.: Crop progress report
17 18 19 20 21 22 23
21 LTD: May crude oil futures (NYMEX)
5 FDD: May pork bellies futures (CME)
24 25 26 27 28 29 30 U.S.: Weekly weather report
U.S.: Weekly weather report
31 1 2 3 4 5 6
22 FND: May coffee futures (ICE)
6 LTD: May cotton futures (ICE)
U.S.: Petroleum status report
The information on this page is U.S.: Petroleum status report
subject to change. Futures &
Options Trader is not responsible 23 FND: May crude oil futures (NYMEX)
7 U.S.: Natural gas storage
for the accuracy of calendar dates
beyond press time.
U.S.: Natural gas storage 8 FDD: May orange juice futures (ICE)
LTD: May orange juice futures (ICE)

INDUSTRY NEWS
Futures volume lagging early in year
I f the first few months of the year are any indication,

trading volume is definitely off in the futures arena,
but not yet to the disastrous extent implied by the
immediate reaction to the 2008 financial crisis.
Although volume dropped notably in the beginning of
ADV was up 11 percent from a year earlier. (February pit-
traded stock index volume was down from a year earlier,
however.)
A quick survey of a handful of representative commodi-
ty futures shows ADV in the first three months of the year
2009 in most financial markets and has continued to be was mostly lower vs. the same contract months for 2008.
moderate, this drop must be put in context of the record Both April gold (GC) and May crude oil (CL) were off
volume of the past few years. around 9 percent from last year, while trading in March
In early March the CME Group announced February sugar (SB) was off 60 percent; March soybeans (S) were
average daily volume (ADV) was 10.8 million contracts trading approximately 10 percent more per day.
per day, which the exchange noted was a 14-percent The IntercontinentalExchange (ICE) reported February
increase from January but still down 28 percent from volume in its U.S. division’s agricultural futures (coffee,
February 2008. The CME’s interest rate and E-mini stock sugar, cocoa, OJ, cotton) dropped 43 percent from last year,
index futures were occupying opposite ends of the volume while its currency futures volume dropped 26 percent over
spectrum, with the former sector experiencing the largest the same period. Volume in its index division was up
year-over-year drop and the latter actually posting a gain. sharply y-o-y, thanks to the exchange’s exclusive listing of
The CME reported February interest-rate volume was off stock-index contracts on the Russell family of indices,
51 percent from February 2008, while E-mini stock index which it snatched away from the CME last year.
CME announces new mini gold, silver contracts
O
n March 26 the CME Group announced the pro- month. The last trading day for both contracts will be the
posed launch of new E-mini gold kilo and E-mini third to last business day of a contract month.
silver 1,000-oz. futures con-
tracts on April 19. The contracts will be
traded electronically through the MANAGED MONEY
CME’s Globex platform. The first listed
Top 10 option strategy traders ranked by February 2009 return.
month for both contracts will be May
2009. (Managing at least $1 million as of Feb. 28, 2009.)
The E-mini gold kilo contract (ticker:
8Q) will be sized at 33.2 troy ounces February 2009 YTD $ under
Rank Trading advisor return return mgmt.
and have a tick size of $0.10. The E-
mini silver 1,000 oz. futures contract 1. ACE Investment Strategists (DPC) 12.32% 21.47% 7.6
(ticker: 6Q) will be sized at 1,000 troy 2. Oxeye Capital Mgmt. (FTSE 100) 7.60% 19.02% 16.5
ounces and have a tick size of $0.01. 3. Financial Comm Inv (CPP) 6.37% 13.92% 1.8
The E-mini gold kilo futures contract 4. ACE Investment Strategists (ASIPC) 5.13% 5.19% 3.1
will trade the current calendar month 5. Kingdom Trading (Short Option) 5.08% 7.87% 1.0
and the next two calendar months,
6. Ansbacher Invest (Elizaville Ptnrs) 5.05% 7.56% 13.0
plus every February, April, June,
August, October, and December for the 7. KBD Capital Partners Ltd (B) 4.02% 5.07% 14.0
next 23 months from the current calen- 8. Quiddity (Earnings Diversification) 3.58% 4.34% 30.0
dar month. 9. GrowthPoint Invest. (Index Condor) 3.54% 1.32% 1.8
The E-mini silver 1,000 oz. futures 10. Harbor Assets 3.40% 6.91% 3.6
contract will trade the current calendar
Source: Barclay Hedge (http://www.barclayhedge.com)
month and the next two calendar
Based on estimates of the composite of all accounts or the fully funded subset method.
months, plus every March, May, July,
Does not reflect the performance of any single account.
September, and December for the next
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
23 months from the current calendar

NEW PRODUCTS AND SERVICES
CME Group’s new average price options contracts and the millisecond, and introduced economic release data avail-
their commodity codes are: propane (OPIS) (G1); Mont able both as stories in CQG News and as quotes in one of their
Belvieu natural gasoline (OPIS) (E1); Mont Belvieu ethane eight quote displays. CQG also introduced CQG Direct, a new
(OPIS) (F1); and Mont Belvieu normal butane (OPIS) (D1). customer network offering ultra-low latency connectivity to
There will be 20 strike prices in increments of $0.01 per gallon its order routing and market data delivery systems. Clients
above and below the at-the-money strike price for a total of at can connect to the CQG Direct network in a number of global
least 41 strike prices. The contracts will expire on the last busi- data centers selected for their proximity to major exchanges in
ness day of the underlying calendar month. The contracts will Chicago, New York, and London. CQG Direct is engineered to
be 42,000 gallons in size with a minimum price fluctuation of provide customers market data and order execution connec-
$0.0001 per gallon. Consecutive monthly contracts will be list- tions via local network access to CQG’s market data and trad-
ed for the balance of the current year plus three additional ing gateways. CQG also provides hosting services to clients
years, beginning with the March 2009 contract. CME Group who require fast connections but do not have presence in the
also announced 13 new petroleum product swap futures con- data centers.
tracts. The new swap futures contracts and their commodity
codes will be: EIA flat tax on-highway diesel (A5); Argus LLS
HedgeStreet.com has added four event-focused bina-
trade month (A4); Argus LLS vs. WTI (Argus) trade month
ry options contracts. The contracts include initial jobless
(E5); Argus WTI trade month (V7); New York 0.7 percent fuel
claims, European Central Bank rate announcements, nonfarm
oil (Platts) (Y4); New York 2.2 percent fuel oil (Platts) (Y3);
payrolls, and the unemployment rate. The new contracts will
New York 3.0 percent fuel oil (Platts) (H1); Japan naphtha
be available to trade on the same online exchange as
BALMO (E6); freight route TC4 BALMO (V9); Mt. Belvieu
HedgeStreet’s binary and bungee contracts. The determina-
propane (OPIS) BALMO (V6); Mt. Belvieu natural gasoline
tion for the event contract outcomes is based on official report-
(OPIS) BALMO (V5); Mt. Belvieu ethane (OPIS) BALMO (V4);
ing from government agencies.
and Mt. Belvieu butane (OPIS) BALMO (Y5). These contracts
are listed with, and subject to, the rules and regulations of
NYMEX. Alyuda Research, a global trading and forecasting soft-
ware vendor, has released Tradecision 4.6, an application for
charting, technical analysis, and creating trading systems.
StreamBase Systems and Lime Brokerage Tradecision is offered in two different editions: Professional
announced that StreamBase is now certified with the Lime Edition and Professional Real-Time Edition. For more infor-
Trading System. StreamBase enables connectivity to Lime’s mation, visit http://www.tradecision.com.
Citrius market data feed and order placement via FIX through
its complex event-processing (CEP) platform. The connectivi-
Advent Software has partnered with BIDS Trading.
ty allows StreamBase clients to access Lime’s high-speed exe-
Clients of Advent’s trade order management solution, Moxy,
cution platform for U.S. equities, derivatives, ETFs, futures,
can search for block liquidity in both the BIDS alternative
and options.
trading system (ATS) and the New York Block Exchange
(NYBX). The BIDS ATS is accessible to both buy-side and sell-
CQG has released CQG Integrated Client 7.9, the global side firms that want to trade blocks through continuous order
market data, analytics, and electronic trading front-end for matching and trade negotiation, and allows traders to control
professional traders. CQG now displays up to four condition their level of information disclosure. Market participants can
values directly on the DOMTrader, the platform’s most popu- choose to auto-execute their order or negotiate, they can set
lar trading interface. Exchange-traded spread trading is avail- their minimum block size to help protect their order, and they
able directly from two new spread quote displays: Spread can filter counterparties based on past trading behavior.
Matrix and Spread Pyramid. CQG’s charting, portfolio man-
agement, custom studies, and analytics can be combined with Note: The New Products and Services section is a forum for industry
the spread-trading interfaces. Charting and analytics now businesses to announce new products and upgrades. Listings are adapted
include yield and forward curves, which plot both real-time from press releases and are not endorsements or recommendations from
and historical data in a customizable chart. CQG has added a the Active Trader Magazine Group. E-mail press releases to
suite of XData Studies that analyze proprietary data down to editorial@futuresandoptionstrader.com. Publication is not guaranteed.

KEY CONCEPTS
The option “Greeks”
American style: An option that can be exercised at any Delta: The ratio of the movement in the option price for
time until expiration. every point move in the underlying. An option with a
delta of 0.5 would move a half-point for every 1-point
Assign(ment): When an option seller (or “writer”) is move in the underlying stock; an option with a delta of
obligated to assume a long position (if he or she sold a put) 1.00 would move 1 point for every 1-point move in the
or short position (if he or she sold a call) in the underlying underlying stock.
stock or futures contract because an option buyer exercised
Gamma: The change in delta relative to a change in the
the same option.
underlying market. Unlike delta, which is highest for
deep ITM options, gamma is highest for ATM options
At the money (ATM): An option whose strike price is and lowest for deep ITM and OTM options.
identical (or very close) to the current underlying stock (or
futures) price. Rho: The change in option price relative to the change
in the interest rate.
Backspreads and ratio spreads are leveraged posi-
tions that involve buying and selling options in different Theta: The rate at which an option loses value each day
proportions, usually in 1:2 or 2:3 ratios. Backspreads con- (the rate of time decay). Theta is relatively larger for
tain more long options than short ones, so the potential OTM than ITM options, and increases as the option gets
profits are unlimited and losses are capped. By contrast, closer to its expiration date.
ratio spreads have more short options than long ones and
Vega: How much an option’s price changes per a one-
have the opposite risk profile.
percent change in volatility.
Note: These labels are not set in stone. Some traders
describe either position as option trades with long and
short legs in different proportions. The Commitments of Traders report: Published
weekly by the Commodity Futures Trading Commission
Bear call spread: A vertical credit spread that consists (CFTC), the Commitments of Traders (COT) report breaks
of a short call and a higher-strike, further OTM long call in down the open interest in major futures markets. Clearing
the same expiration month. The spread’s largest potential members, futures commission merchants, and foreign bro-
gain is the premium collected, and its maximum loss is lim- kers are required to report daily the futures and options
ited to the point difference between the strikes minus that positions of their customers that are above specific report-
premium. ing levels set by the CFTC.
For each futures contract, report data is divided into three
Bear put spread: A bear debit spread that contains puts “reporting” categories: commercial, non-commercial, and
with the same expiration date but different strike prices. non-reportable positions. The first two groups are those
You buy the higher-strike put, which costs more, and sell who hold positions above specific reporting levels.
the cheaper, lower-strike put. The “commercials” are often referred to as the large
hedgers. Commercial hedgers are typically those who actu-
Bull call spread: A bull debit spread that contains calls ally deal in the cash market (e.g., grain merchants and oil
with the same expiration date but different strike prices. companies, who either produce or consume the underlying
You buy the lower-strike call, which has more value, and commodity) and can have access to supply and demand
sell the less-expensive, higher-strike call. information other market players do not.
Non-commercial large traders include large speculators
Bull put spread (put credit spread): A bull credit (“large specs”) such as commodity trading advisors (CTAs)
spread that contains puts with the same expiration date, but and hedge funds. This group consists mostly of institution-
different strike prices. You sell an OTM put and buy a less- al and quasi-institutional money managers who do not deal
expensive, lower-strike put. in the underlying cash markets, but speculate in futures on
a large-scale basis for their clients.
Calendar spread: A position with one short-term short The final COT category is called the non-reportable posi-
option and one long same-strike option with more time tion category — otherwise known as small traders — i.e.,
until expiration. If the spread uses ATM options, it is mar- the general public.
ket-neutral and tries to profit from time decay. However,
OTM options can be used to profit from both a directional Correlation coefficient, sometimes referred to simply
move and time decay. as correlation, refers to the degree of similarity between two
variables. In the markets, correlation is typically used to
Call option: An option that gives the owner the right, but measure how close the relationship is between two price
not the obligation, to buy a stock (or futures contract) at a series (e.g., two distinct stocks or markets), between an indi-
fixed price. vidual stock (or trading fund) and an index, and so on.

Correlation coefficients range between -1.00 and +1.00, Naked option: A position that involves selling an unpro-
with +1.00 representing perfect positive correlation (i.e., tected call or put that has a large or unlimited amount of
two variables moving precisely in tandem); -1.00 represents risk. If you sell a call, for example, you are obligated to sell
perfect negative correlation (i.e., two variables moving the underlying instrument at the call’s strike price, which
exactly opposite to one another). A correlation coefficient of might be below the market’s value, triggering a loss. If you
zero means the two variables have no discernible relation. sell a put, for example, you are obligated to buy the under-
The site http://davidmlane.com/hyperstat/index.html lying instrument at the put’s strike price, which may be well
offers relatively easy-to-digest definitions of this and other above the market, also causing a loss.
statistical terms. Given its risk, selling naked options is only for advanced
options traders, and newer traders aren’t usually allowed
Covered call: Shorting an out-of-the-money call option by their brokers to trade such strategies.
against a long position in the underlying market. An exam-
ple would be purchasing a stock for $50 and selling a call Naked (uncovered) puts: Selling put options to collect
option with a strike price of $55. The goal is for the market premium that contains risk. If the market drops below the
to move sideways or slightly higher and for the call option short put’s strike price, the holder may exercise it, requiring
to expire worthless, in which case you keep the premium. you to buy stock at the strike price (i.e., above the market).
Credit spread: A position that collects more premium Near the money: An option whose strike price is close
from short options than you pay for long options. A credit to the underlying market’s price.
spread using calls is bearish, while a credit spread using
puts is bullish. Open interest: The number of options that have not
been exercised in a specific contract that has not yet expired.
Debit spread: An options spread that costs money to
enter, because the long side is more expensive that the short Out of the money (OTM): A call option with a strike
side. These spreads can be verticals, calendars, or diagonals. price above the price of the underlying instrument, or a put
option with a strike price below the underlying instru-
Delivery period (delivery dates): The specific time ment’s price.
period during which a delivery can occur for a futures con-
tract. These dates vary from market to market and are deter- Parity: An option trading at its intrinsic value.
mined by the exchange. They typically fall during the
month designated by a specific contract — e.g. the delivery Physical delivery: The process of exchanging a physical
period for March T-notes will be a specific period in March. commodity (and making and taking payment) as a result of
the execution of a futures contract. Although 98 percent of
Diagonal spread: A position consisting of options with all futures contracts are not delivered, there are market par-
different expiration dates and different strike prices — e.g., ticipants who do take delivery of physically settled con-
a December 50 call and a January 60 call. tracts such as wheat, crude oil, and T-notes. Commodities
generally are delivered to a designated warehouse; T-note
European style: An option that can only be exercised at delivery is taken by a book-entry transfer of ownership,
expiration, not before. although no certificates change hands.
Exercise: To exchange an option for the underlying Premium: The price of an option.
instrument.
Put option: An option that gives the owner the right, but
Expiration: The last day on which an option can be exer- not the obligation, to sell a stock (or futures contract) at a
cised and exchanged for the underlying instrument (usual- fixed price.
ly the last trading day or one day after).
Put ratio backspread: A bearish ratio spread that con-
In the money (ITM): A call option with a strike price tains more long puts than short ones. The short strikes are
below the price of the underlying instrument, or a put closer to the money and the long strikes are further from the
option with a strike price above the underlying instru- money.
ment’s price. For example, if a stock trades at $50, you could sell one
$45 put and buy two $40 puts in the same expiration month.
Intrinsic value: The difference between the strike price If the stock drops, the short $45 put might move into the
of an in-the-money option and the underlying asset price. A money, but the long lower-strike puts will hedge some (or
call option with a strike price of 22 has 2 points of intrinsic all) of those losses. If the stock drops well below $40, poten-
value if the underlying market is trading at 24. tial gains are unlimited until it reaches zero.
continued on p. 32

KEY CONCEPTS continued
Put spreads: Vertical spreads with puts sharing the same to 52 does not violate the “support level” of 52.15. In this
expiration date but different strike prices. A bull put spread case, the fact that the stock retraced once to the exact price
contains short, higher-strike puts and long, lower-strike level it had established before is more of a coincidence than
puts. A bear put spread is structured differently: Its long anything else.
puts have higher strikes than the short puts.
Time decay: The tendency of time value to decrease at an
Simple moving average: A simple moving average accelerated rate as an option approaches expiration.
(SMA) is the average price of a stock, future, or other mar-
ket over a certain time period. A five-day SMA is the sum of Time spread: Any type of spread that contains short
the five most recent closing prices divided by five, which near-term options and long options that expire later. Both
means each day’s price is equally weighted in the calcula- options can share a strike price (calendar spread) or have
tion. different strikes (diagonal spread).
Straddle: A non-directional option spread that typically Time value (premium): The amount of an option’s
consists of an at-the-money call and at-the-money put with value that is a function of the time remaining until expira-
the same expiration. For example, with the underlying tion. As expiration approaches, time value decreases at an
instrument trading at 25, a standard long straddle would accelerated rate, a phenomenon known as “time decay.”
consist of buying a 25 call and a 25 put. Long straddles are
designed to profit from an increase in volatility; short strad- Vertical spread: A position consisting of options with
dles are intended to capitalize on declining volatility. The the same expiration date but different strike prices (e.g., a
strangle is a related strategy. September 40 call option and a September 50 call option).
Strangle: A non-directional option spread that consists of VIX: The Volatility Index (VIX) measures the implied
an out-of-the-money call and out-of-the-money put with volatility of S&P 500 index options traded on the Chicago
the same expiration. For example, with the underlying Board Option Exchange (CBOE). The VIX is designed to
instrument trading at 25, a long strangle could consist of reflect the market expectation of near-term (in this case, 30-
buying a 27.5 call and a 22.5 put. Long strangles are day) volatility and is a commonly referenced gauge of the
designed to profit from an increase in volatility; short stran- stock market’s “fear level.”
gles are intended to capitalize on declining volatility. The The original VIX, launched in 1990, was derived from
straddle is a related strategy. eight near-term at-the-money S&P 100 (OEX) options (calls
and puts) using the Black-Scholes options pricing model.
Strike (“exercise”) price: The price at which an under- The VIX underwent a major transformation in late 2003.
lying instrument is exchanged upon exercise of an option. The current index is derived from both at-the-money and
out-of-the-money S&P 500 (SPX) calls and puts to make the
Support and resistance: Support is a price level that index better represent the full range of volatility. At the
acts as a “floor,” preventing prices from dropping below same time the CBOE applied the new calculation method to
that level. Resistance is the opposite: a price level that acts the CBOE NDX Volatility Index (VXN), which reflects the
as a “ceiling;” a barrier that prevents prices from rising volatility of the Nasdaq 100 index.
higher. The exchange still publishes the original VIX calculation,
Support and resistance levels are a natural outgrowth of which can be found under the ticker symbol VXO. Figure 1
the interaction of supply and demand in any market. For shows both indices: the VXO from May 19, 1993 to Sept 19,
example, increased demand for a stock will cause its price 2003 and the new VIX over the next four years.
to rise, creating an uptrend. But when price has risen to a For more information about the VIX and its calculation,
certain level, traders and investors will take profits and visit http://www.cboe.com/vix.
short sellers will come into the market, creating “resistance”
to further price increases. Price may retreat from and Volatility: The level of price movement in a market.
advance to this resistance level many times, sometimes Historical (“statistical”) volatility measures the price fluctu-
eventually breaking through it and continuing the previous ations (usually calculated as the standard deviation of clos-
trend, other times reversing completely. ing prices) over a certain time period — e.g., the past 20
Support and resistance should be thought of more as gen- days. Implied volatility is the current market estimate of
eral price levels rather than precise prices. For example, if a future volatility as reflected in the level of option premi-
stock makes a low of 52.15, rallies slightly, then declines ums. The higher the implied volatility, the higher the option
again to 52.15, then rallies again, a subsequent move down premium.

FUTURES TRADE JOURNAL
Bullish consolidation pattern

triggers long trade.
TRADE
Date: Monday, March 16.
Entry: Long May crude oil (CL) at 47.35.
Reasons for trade/setup (long trade):

This trade was a paper trade, as existing
positions made it impossible to execute in
the market.
The entry was triggered by a
good old-fashioned chart setup.
After pushing slightly below the
January low in mid-February, oil
began to stabilize and edge higher,
forming (on a closing-price basis)
what many chart watchers would
likely call an ascending “wedge” or
price channel — a slight consolida-
tion with an upside bias. Outcome: The breakout and upside
On March 16, price pulled back thrust occurred much quicker than antici-
to the lower boundary of this chan- pated. Price hit the initial profit target the
nel and rallied intraday — toward, but not quite to, the next day and toward the end of the session the stop was
upper boundary. This set up the opportunity for a long raised to slightly below the day’s low. The stop was simi-
entry in anticipation of an upside breakout and a push to at larly raised the next two days as the market continued to
least 50. rally, pushing above 52. It was interesting that price pulled
back on a closing basis (see the smaller chart) to the top
Initial stop: 44.41, below the low of the entry bar and the boundary the day after the upside breakout.
lower boundary of the channel/wedge. On the fifth day after entry (March 23), oil pushed above
54 — a 20-percent rally from the low of the entry bar — and
Initial target: 49.90, just below the round-number price of despite a belief the market would push higher, it seemed
50. Take partial profits and raise stop. Secondary target: wiser to book some profits and attempt to re-enter after
57.90, a little below the Jan. 6 high of 58.31. a pullback. The second half of the trade was exited when
the electronic session reopened in the early evening on
March 23.
RESULT Note: Initial targets for trades are typically based on things such as the
historical performance of a price pattern or trading system signal.
Exit: 49.90 (first half); 53.76 (second half). However, individual trades are a function of immediate market behavior;
initial price targets are flexible and are most often used as points at which
Profit/loss: +2.55 (first half); +6.41 (second half). a portion of the trade is liquidated to reduce the position’s open risk. As
a result, the initial (pre-trade) reward-risk ratios are conjectural by
nature.
TRADE SUMMARY
P/L
Date Contract Entry Initial stop Initial target IRR Exit Date Point % LOP LOL Length
3/16/09 CLK09 47.35 44.41 49.90 0.87 49.90 3/17/09 2.55 5.39 3.25 -0.26 3 days
53.76 3/23/09 6.41 13.54 6.70 -0.26 5 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).

OPTIONS
OPTIONS TRADE
TRADE JOURNAL
JOURNAL
FIGURE 1 — RISK PROFILE – LONG CALLS

These five long 20-strike calls had a total delta of 301, meaning the position behaved
Buying calls as Home Depot like 301 HD shares.
extended its mid-March rally
was profitable, but the trade
caught only a small portion of
the move.
TRADE
Date: Tuesday, March 17.
Market: Options on Home Depot

(HD).
Entry: Buy 5 April 20 calls for

$1.52 each.
Reasons for trade/setup: Source: OptionVue

After the S&P 500 index rebounded
10.3 percent from March 6 to 16 and broke above 750, we cent before the stock market opened. The strategy is to enter
decided this bear market rally had legs. Housing starts a bullish, high-delta options trade and hold it until today’s
surged 22 percent in February, surprising analysts before close. We bought five April 20-strike calls for $1.52 each
the stock market opened on March 17. At the same time, when Home Depot traded at $20.47 at 9:45 a.m. The total
Home Depot was upgraded to “buy” from “hold” by position had a 301 delta, meaning it should behave like 301
investment bank Jefferies & Co., a positive signal that could shares of HD.
lift stocks. Figure 1 shows the long calls’ potential gains and losses
Research shows that Dow stocks such as Home Depot on March 17. If HD rallies, gains will accumulate quickly,
tend to rally up to two days after analysts boost their rat- but if it drops the trade can lose only the amount paid for
ings. Of course, much of the bounce occurs overnight as the calls ($760).
stocks open higher following early morning upgrades,
which you can’t capture unless you already own the stock. TRADE SUMMARY
However, Dow stocks have benefited from this bullish
momentum in recent years (1997 to 2007), gaining an aver- Entry date: March 17, 2009
age 0.31 percent from the open to the close on upgrade
Underlying security: Home Depot (HD)
days, and climbing another 0.20 percent the next day (see
Position:
“Playing the ratings game,” Active Trader, September 2007).
5 long April 20 calls
These types of trades work best when the broad market
is pointing in the same direction, and on March 17 the E- Initial capital required: $760
Mini S&P 500 futures (ESM09) were up roughly 0.50 per- Initial stop: Exit if HD drops below yesterday’s close.
Initial target: Hold until today’s close.
TRADE STATISTICS
Initial daily time decay: $9.90
March 17 9:45 a.m. 9:55 a.m. Trade length (in days): 1 day
Delta: 301.4 310.3 P/L: $50 (6.6 percent)
Gamma: 47.74 97.34
LOP: $50
Theta: -9.90 -9.68
LOL: $0
Vega: 11.79 11.66
LOP — largest open profit (maximum available profit during life of trade).
Probability of profit: 37% 40%
LOL — largest open loss (maximum potential loss during life of trade).
Breakeven point: $21.52 $21.52

FIGURE 2 — NICE ENTRY, PREMATURE EXIT
We managed to buy calls at the low, but we sold them too soon. If we simply waited until
the close, we could have gained 38 percent.
Initial stop: Exit the trade if

HD drops below yesterday’s
close of $20.14.
Initial target: Hold until

today’s close.
RESULT
Outcome: Figure 2 shows

we bought calls at the perfect
time. Within 10 minutes, HD
gained 1 percent and the April
20 calls climbed $0.10 in Source: eSignal
value. We exited as soon as
the trade became profitable
and pocketed $0.50 overall; we took such meager profits rallied another 3.9 percent by the close, and the April 20
out of fear the trade would become a loser. calls climbed 30 percent in value. And if we held on
In hindsight, exiting so quickly was a big mistake. HD another day, we could have doubled our profit.
EVENTS
Event: 18th Annual FIA Futures Event: The 15th Forbes Cruise for Investors
Services Division OpTech Conference Date: June 2-14
Date: April 6-7 Location: Lisbon to Venice
Location: The Ritz-Carlton New York, Battery Park For more information: Go to
For more information: http://www.moneyshow.com and click on “Events”
http://www.futuresindustry.org/optech-2009.asp
Event: International Traders Expo
Event: Introduction to Hedge Funds Date: June 3-6
Date: April 14 Location: Los Angeles
Location: New York City For more information: http://www.tradersexpo.com
For more information: http://www.fmwonline.com
Event: International Investors’ Trade Fair
Event: The World Money Show Date: Sept. 4-6
Date: May 11-14 Location: Düsseldorf, Germany
Location: Las Vegas For more information: http://www.mdna.com
For more information: Go to
http://www.moneyshow.com and click on “Events” Event: International Traders Expo
Date: Nov. 18-21
Event: Securities Operations World 2009 Location: Mandalay Bay Resort & Casino, Las Vegas
Date: May 27 For more information: http://www.tradersexpo.com
Location: New York City
For more information: http://www.fmwonline.com

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April 2009 • Volume 3, No.

Options Trading System Lab

Futures Snapshot . . . . . . . . . . . . . . . . . . . . . .24

Trading Strategies Futures & Options Watch

2 April 2009 • FUTURES & OPTIONS TRADER

Futures & Options Calendar . . . . . . . . . . . .27

New Products and Services . . . . . . . . . . . . .29 Options Trade Journal . . . . . . . . . . . . . . .34

Have a question about something you’ve seen

Looking for an advertiser?

in this month’s issue of Futures & Options Trader.

Global Futures RS of Houston

4 April 2009 • FUTURES & OPTIONS TRADER

A publication of Active Trader ®

For all subscriber services:

Editor-in-chief: Mark Etzkorn

Managing editor: Molly Goad

Senior editor: David Bukey

Ad sales Steve Lentz (advisor@optionvue.com) is a well-estab-

FUTURES & OPTIONS TRADER • April 2009 5

6 April 2009 • FUTURES & OPTIONS TRADER

FUTURES & OPTIONS TRADER • April 2009 7

Gain up to 700:1 leverage.

Free market commentary

Free professional level

Standard and mini contracts

Forex traders. Five unique

090301_273x206_CurrencyTrader.indd 1 25/02/2009 09:29:21

Trading wedge reversals

I n the broadest sense, markets go through two domi-

Eye of the beholder

10 April 2009 • FUTURES & OPTIONS TRADER

FUTURES & OPTIONS TRADER • April 2009 11

FIGURE 4 — ADJUSTING THE STOP

1. Add that value to the entry price

The target for this trade is $402.50 +

12 April 2009 • FUTURES & OPTIONS TRADER

A note on false breakouts

The comeback spread

A recent sketch on Saturday Night Live parodied

Raising the Titanic

FIGURE 2 — HIDDEN RISKS OF SELLING PUTS

14 April 2009 • FUTURES & OPTIONS TRADER

FUTURES & OPTIONS TRADER • April 2009 15

Table 1 lists the benefits and drawbacks of each

16 April 2009 • FUTURES & OPTIONS TRADER

This may sound impos-

Table 2 lists the position’s details.

FUTURES & OPTIONS TRADER • April 2009 17

18 April 2009 • FUTURES & OPTIONS TRADER

Starting from scratch

FUTURES & OPTIONS TRADER • April 2009 19

TABLE 6 — COMPARING TWO TRADES

“Easing the pain:

You can purchase and

cash flow of 4.3 percent during an 11-

20 February 2009 • FUTURES & OPTIONS TRADER

The end-of-month options trade

22 April 2009 • FUTURES & OPTIONS TRADER

Option System Analysis strategies are

FUTURES & OPTIONS TRADER • April 2009 23

10-day move/ 20-day move/ 60-day move/ Volatility

Indices - Low IV/SV ratio

Stocks - High IV/SV ratio