BigTrends Brazil 052604 Color

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Contr ary O pi ni on &O pt i o ns S tr ate gi e sFo r a V o lat i le M arke tPrice Headley, CFA, CMT

President & CEO

May 26, 2004

1-800-BigTrendswww.BigTrends.com


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Contrarian Philosophy The majority of investors are usually wrong, being too

Reactive in taking positions

Contrarians profit from the UNEXPECTED what isexpected is already priced into the market

Spotting these reversals is the key most people see

Contrary Opinion as too subjective. My aim is toquantify investor emotion so that we can assess it in an

analytical, non-emotional method.

This allows for a Proactive approach to take advantageof other investors emotional over-reactions.



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Contrary Opinion Indicators

Contrarian Investing Capitalize on theEmotional Reactions of Other Investors

Techniques: CBOE Equity Put/Call Ratio

CBOE Volatility Index (VIX)


Options Indicators are especially useful to

measure Fear & Greed why? Because

option traders use Leverage, and they feelthe swings of the market more quickly and

more dramatically


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What is the VIX? A: The CBOE Volatility Index (VIX) plots an

average implied volatility in put and calloptions. The irony is that at extremes, thesemarket expectations often signal a reversal.__________________________________

Puts increase in value when a stock declines Calls decrease in value when a stock declines

Calls increase in value when a stock rises Puts decrease in value when a stock rises



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Using the VIX

Extremes in the VIX reading indicate a likely

beginning or end of a trend

Readings above 40 indicate much fear

Usually comes at a market bottom a buy signal

Readings below 20 indicate much confidence

Usually comes at a market top a sell signal



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History of the VIX

www.BigTrends.com 1-800-BigTrends


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VIX dropped to 20 at the market top



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VIX spikes to 40 and 50 at lows



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When VIX signal fails after 4 weeks, GET OUT!!!



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VIX now staying under 20

Is that Bullish or Bearish?



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VIX Relative Extremes with Bollinger Bands



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VIX Relative Extremes with Bollinger Bands



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CBOE Put/Call Ratio

A measure of how many puts are tradedrelative to the number of calls traded on any

given day

High put volume, relative to call volume,

indicates bearish sentiment High call volume, relative to put volume,indicates bullish sentiment



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Extremes in the Put/call ratio

Put/call ratios under 40 indicate TOO much

bullishness and optimism a sell signal

A market top

Put/Call ratios over 80 indicate TOO much

bearishness and pessimism a buy signalA market bottom



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CBOE Equity Put/Call Ratio Daily


New - CBOE Equity Put/Call

Ratio Daily


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www.BigTrends.com

OPTIONS TERMS

Call - right to buy stock at a specific price

good through a specific date

Put - right to sell stock at a specific price

good through a specific dateStrike Price -price you can own stock

Expiration - date the option ceases to existVolatility - % movement in the stock

1-800-BigTrends


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OPTIONS TERMS

In-The-Money (ITM) - Option Has

Intrinsic Value

At-The-Money (ATM) - Strike = Stock

Out-of-The-Money (OTM) - Option isAll Time Value

1-800-BigTrends


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Buying a Call

When buying acall, you believethe price of thestock will increase

in value. Here wehave bought theright to BUY 100shares of XYZ at

$60 per share, andwe have that rightuntil December

Option: XYZ December 60 CallPrice: $2.00

Quoted price $2.00x 100 shares x 100

Total purchase = $200

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BUY CALL

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Buying a Put

When buying a put,you believe theprice of the stockwill decrease in

value. Here wehave bought theright to SELL 100shares of XYZ at$60 per share, andhave that right untilDecember.

Option: XYZ December 60Put

Price: $2.00

Quoted price $2.00

x 100 shares x 100

Total purchase = $200

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BUY PUT


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BUY PUT

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TIME DECAY

EXPIRATIONMONTHS UNTIL EXPIRATION

TIME PREMIUM


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In The Moneys as a Stock Substitute

Buy In the Money Options to ReduceTime Value => Focus on Intrinsic

Sell 100 XYZ shares @ 56.60 = $5660

Buy 1 June 60 PUT @ 4.70 = $ 470XYZ goes to 50 before mid-June:

Short Shares gain $660, or 11.7%

ITMs gain $530, or 112%


B LEAPS S ll Sh t T C ll


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Buy LEAPS, Sell Short-Term Calls You can reduce your cost in the

LEAPS by selling short-term calls Buy 1 Jan. 2006 45 call @ 20 = - $2000

Sell 1 3-month 60 call @ 4 = + $400

Do this 5 times and you have no costeffectively in your LEAPS position

Benefit: Time decay on the short-term

out-of-the-money much greater

Risk: Sharp rally may require buying inthe short-term call due to gamma risk



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The Credit Spread Strategy Profit from Time Decay

IF Bullish: Instead of buying calls,be a net seller of puts

100 QQQ shares @ 36

Sell 10 June 35 puts @ 1.25 = +1250Buy 10 May 34 puts @ 0.85 = - 850

Net Credit Collected = + 400Options expire if QQQ closes over 35 on

third Friday in June, you keep the $400



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Using Puts for Portfolio Protection

When Should You Buy Puts for Protection?Technical Indicator says SELL

Options are Cheap Low Volatility Levels

Concerned about Giving Back Big Gains


How Big Should Your Deductible Be?

Usually 1 strike out-of-the-money

Advantages: Keep Tax Basis, Lessen Painon Major Pullbacks,

Disadvantages: Cost, Hurts in Flat Market


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Creating a Low-Cost Collar

A Collar accomplishes the goal of PutProtection, but often at minimal to no cost,

by also selling a call against the stock


XYZ shares at 60Buy 3-month 55 Put for - $300

Sell 3-month 65 call for + $275

Net Cost = - $25 This lowers your cost dramatically to

protect a stock, while giving up

appreciation above a certain level (like a

covered call


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How to Stay with Big Winners

Give yourself a chance to stay with a BigTrend by taking HALF of your position

profits at 100% or more

This allows you to release the fear of givingup profits, as you recoup your initial

investment and guarantee at least a

breakeven

Ride the other half position until it gives

back half its gains, or exit half again if it

later doubles once more



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Percentage Gain to Breakeven

After a Loss

Gain RequiredPercentage Loss to Breakeven

-10% 11%

-20% 25%-33% 50%

-50% 100%

-75% 300%

-90% 900%



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A Flaw in the Options Pricing Model

Q.Which is more important in the Options Model?

(Assume: XYZ shares at 119-1/2, Volatility starts

at 25.00%, Expiration in 70 days, Strike price is 120)

Scenario 1. 20% Volatility Rise (25% to 30%) instantly

A 20% Rise in Price or a 20% Rise inVolatility?

Scenario 2. 20% Stock Price Rise (119.50 to 143.38) instantly

XYZ August 120 call 5.50 => 24.63 a 348% gain

A.Trend impact is 19 X greater than Volatility here

XYZ August 120 call 5.50 => 6.48 an 18% gain



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Why Option Charts ?

Options are NOT the stock they can and

do move independently of the underlying

security

Options DO move in patterns that can be

forecasted with traditional technicalanalysis techniques

STOCKS VERSUS OPTIONS


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STOCKS VERSUS OPTIONS Most options traders look at the stock chart to

determine the trend of the underlying security,

and then decide whether they will buy an option

What if you also looked at an Option Chart?Is that any different than the stock chart?

YES! The additional factors of Time & Volatility oftenmake the options chart look quite different than thestock chart

1) If the stock stays flat, your option will expire and youlose due to Time Decay


B


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eBay


20 Day Acceleration Bands


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20-Day Acceleration Bands


Option Scans Manage Info Overload


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Option Scans Manage Info Overload


Stochastics Cross Over 80


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Stochastics Cross Over 80


NFLX Dec 30 Call (QNQLF)


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NFLX Dec. 30 Call (QNQLF)


QQQ Jan 36 Call Options Chart


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QQQ Jan. 36 Call Options Chart



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What is BigTrends Platinum Club?

Daily Email Updates1. Aggressive Options Trader

2. QQQ Options Timer

3. OEX Options Authority

4. S&P Emini Futures Trader

5. Aggressive Stock Trader

6. Ultimate Fund Investor

7. Sector Trend Advisor

8. Dow Covered Calls

9. Weekly NetLetter



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Auto-Trading

Several brokers offer the ability toautotrade the BigTrendsrecommendations.

Call 1-800-BIGTRENDS (1-800-244-8736) or email: [email protected] a complete list of autotrading

brokers.

mailto:[email protected]:[email protected]


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BigTrends Brazil 052604 Color