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random musings for thinkorswimmers Winter 2011 thinkM o n e y / 11 INSIDE THIS ISSUE DIVERSIFICATION, TRADER-STYLE/10 WEEKLYS FOR THE ATTENTION DEFICIENT/24 STEPPING UP TO VERTICALS/20 FOREX SPECIAL: NOT JUST FOR THE BIG BOYS ANYMORE/ 38

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•random musings for thinkorswimmersWinter 2011

thinkMoney/11INSIDE THIS ISSUE

•DIVERSIFICATION, TRADER-STYLE/10

•WEEKLYS FOR THE

ATTENTION DEFICIENT/24•

STEPPING UP TO VERTICALS/20

•FOREX SPECIAL:

NOT JUST FOR THE BIG BOYS ANYMORE/38

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thinkMoney/11

04•Contents•Photograph byFredrik Brodén

•thinkorswim.com

NOT YOUR DADDY'S DIVERSIFICATION

There are investors, andthere are traders. Andwhile a diversified mix ofstocks, bonds, and cashmay define the former,the latter has a differentset of needs.

p. 10

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Experienced tradersappreciate the predictive indicatorsexclusive to eSignal,Advanced GETEdition, whichinclude the Elliottwaves, eXpert TrendLocator, Profit-TakingIndex and other proprietary indicators that others simply don’t offer.

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thinkMoney/11

07•Contents•Cover photograph byFredrik Brodén

•thinkorswim.com

Miscellaneous

Features

10/Not Your Daddy’s DiversificationStocks, bonds, and cash—three things youmight find in a “diversified” long-term portfo-lio. That’s fine if your time horizon is measuredin years. But what if your timeline is months,weeks, or even days? Today, traders have a dif-ferent set of needs, and options can help.

18/Down and Dirty with VerticalsBefore buying or selling calls and puts, youmay want to check the alternatives. The verti-cal spread is a simple solution to many of theproblems naked options pose. But before youput your hand in the cookie jar, understandwhat you’re trading.

24/Trading in the Red ZoneThere’s been a lot of hype lately about weeklyoptions. And for good reason: Volume isswelling, and traders with short attention spansare using them to speculate on very short-termmoves, or simply as a hedge. So what exactly areweekly options, and why trade them?

32/Forex Special STOCK TRADER, MEET FOREXOnce shrouded in mystery and accessible only toa few institutional players, the face of forex is farfriendlier—even familiar—to the small investor.And you can trade it right from your belovedplatform. PLUS: STRATEGY FOCUS Trading platform tips with forex FOREX Q&A

08/A Quick Howdy

15/Dear Swim 38/The TokenGlossaryIf you see a big wordhighlighted that youdon’t understand,look here for theanswer to the ques-tion, “Huh?”

16/TOS News & ViewsTrader opinions,favorite new tools, top five trading muscle-builders, andof course, "The Suit."

23/Hey, Monkey!Our resident primateis back to dishing tipson trading, the mar-kets, and living green.

29/Capiche? Ever wonder whyyour SPX options settle at a differentprice than what youanticipated? Nowyou’ll know.

30/Forex for FunYou know times havechanged when youcan bet against acountry’s stock mar-ket with its own cur-rency. It’s a good thingyou can do both fromone trading platform.

cont.

Columns

Contact Info You Could UseMain Office 866-839-1100 Technical Support 866-839-1100 ext. 3290 Forex Support 866-839-1100 ext. 3400

•General Help: [email protected] Started: [email protected] Retirement Account: [email protected] Account Transfer Help: [email protected] Account Funding Help: [email protected] Transfer Help: [email protected] Help: [email protected] Questions: [email protected]

•General Mailing Addressthinkorswim, Inc.600 W. Chicago Ave., Suite 100Chicago, IL 60654-2597

•thinkMoney is published quarterly. If you prefer not toreceive this publication, please call 773-435-3210.

31/Where Is It?More TOS tips fromone of our favoritetrading desk jockeys.

gls

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thinkMoney/11

08•A Quick Howdy•thinkorswim.com

thinkMoney®

EDITORIAL DIRECTORKevin Lund

EDITORThomas Preston

ART DIRECTORTom Brown

ASSISTANT EDITORJennifer Agee

DESIGNERJennifer Roberts

CONTRIBUTING WRITERSNicole SherrodFrederic RuffyTodd McCarthyTony Battista

CHIEF PHOTOGRAPHERFredrik Brodén

CONTRIBUTING ILLUSTRATORSBrian Cairns, Evonrude

•PUBLISHERT3 PublishingEmail: [email protected]

ADVERTISING [email protected]

• Now that theeggnog and Aunt

Bessie have worn out theirholiday welcome, it’s timeto dust off the 2010 book oftrading resolutions (most ofwhich we’re sure you’veconveniently forgotten) andmake some new ones. Butin case you have writer’sblock, we thought we’dhelp you through your cre-ative impasse by doling outa few unsolicited 2011 reso-lutions of our own:1. Think beyond the longcall.2. Learn at least half ofwhat you hope to learn.3. Don’t judge an asset byits past reputation.

As in trading, too manyrules can lead to indecisionand confusion. And thepoint of this annual exerciseisn’t to make you feel guiltyfor not following throughon last year’s resolutions.We’re givers. So, we’vecrafted this issue ofthinkMoney to help you liveup to your promises—or, ifnothing else, to make usfeel better about havingdone our job.

If speculating withoptions means buying callsand puts to you, then you’rekind of missing the point.Not that there’s anythingwrong with them, butthere’s usually a betteralternative. If you’re notusing vertical spreads yet,be sure to read “Down andDirty with Verticals” onpage 18, and cross off Reso-lution #1.

Trading, like other skillsets, requires the ability torecognize changes a-comin’and to be able to shift gearsbefore it’s too late. That’sthe point of diversificationin the traditional sense.However, for traders, diver-sifying a portfolio meansmore than simply mixing

asset classes. “Not YourDaddy’s Diversification” onpage 10 ought to help withResolution #2.

And what about Resolu-tion #3? The doors to cur-rency trading have swungwide open in the last 10years. If you haven’t dippedyour toes in the water, besure to read this issue’s Spe-cial Focus on forex trading.

There, see? Not only didwe help you come up withnew resolutions, but overthe next 45 minutes or so,we’ll help you cross themoff your list. Please, noapplause.

Happy trading in 2011!TOS

We want to hearyour pros andcons! Pleasesend your comments to [email protected].

PHO

TOG

RA

PH: F

RED

RIK

BR

OD

ÉN

edit. Broken Promises

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• The information presented in this publication doesnot consider your personal investment objectives orfinancial situation; therefore, this publication does notmake personalized recommendations. This informa-tion should not be construed as an offer to sell or asolicitation to buy any security. The investment strate-gies or the securities may not be suitable for you. Webelieve the information provided is reliable; however,TD Ameritrade, Inc., and its affiliated companies donot guarantee its accuracy, timeliness, or complete-ness. Any and all opinions expressed in this publica-tion are subject to change without notice.

• With respect to the companies or securities covered inthese materials, the respective person, analyst, orwriter certifies to TD Ameritrade, Inc., that the viewsexpressed accurately reflect his or her own personalviews about the subject securities and issuing entitiesand that no part of the person’s compensation was, is,or will be related to the specific recommendations (ifmade) or views contained in this publication.

• TD Ameritrade, Inc., and its affiliates, their employ-ees, directors, consultants, and/or their respective fam-ily members may directly or indirectly hold positions in the securities referenced in these materials. TD Ameritrade, Inc., and its affiliates may, as principal oragent, buy such securities from or sell them to customers.

• Options transactions involve complex tax considera-tions that should be carefully reviewed prior to enter-ing into any transaction.

• The risk of loss in trading securities, options, futures, and forex can be substantial. Customers mustconsider all relevant risk factors, including their ownpersonal financial situations, before trading. Optionsinvolve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristicsand Risks of Standardized Options. A copy can berequested via email at [email protected] or via mail to 600 W. Chicago Ave., #100, Chicago, IL 60654-2597.

• Trading foreign exchange on margin carries a highlevel of risk, as well as its own unique risk factors.Before considering the trading of this product, pleaseread the Forex Risk Disclosure available athttp://www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf.

• A forex dealer can be compensated via commissionand/or spread on forex trades. thinkorswim is subse-quently compensated by the forex dealer. Fundsdeposited into an account with a broker-dealer forinvestment in any currency, or which are the proceedsof a currency position, or any currency in an accountwith a broker-dealer, are not protected by the SecuritiesInvestor Protection Corporation (SIPC).

thinkorswim is a division of TD Ameritrade, Inc.Member SIPC FINRA NFA

© 2011 TD Ameritrade IP Company, Inc.

Product and company names mentioned herein maybe trademarks and/or registered trademarks of theirrespective companies.

• thinkorswim, prior tojoining TD Ameritrade,earned 4.9 stars, the topscore, in the category“Trading Technology,”and was rated #1 overallonline broker in Barron’s

ranking of online bro-kers, 3/15/2010. thinkor-swim was evaluatedversus others in eighttotal categories, includ-ing trade experience,trading technology,usability, range of offer-ings, research amenities,portfolio analysis and

reporting, customer serv-ice and education, andcosts. thinkorswimtopped the list in 2006,2007, 2009, and 2010with the highestweighted-average score. Barron’s is a registeredtrademark of Dow Jones& Company © 2006–2010.

thinkMoney/11

09•Disclaimers•thinkorswim.com

important

info

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thinkMoney/11

10•Portfolio Management•thinkorswim.com

cov.story

DIVER-SIFICA-TION

NOT YOUR DADDY’S

LONG-TERM INVESTORSHAVE BEEN TOLD AD NAU-SEAM NOT TO PUT ALL OFTHEIR EGGS IN ONE BASKET.BUT WHAT ABOUT ACTIVETRADERS? SAME CONCEPT.DIFFERENT ANIMAL.

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WORDS BYTHOMAS PRESTONPHOTOGRAPH BY FREDRIK BRODÉN

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12•Portfolio Management•Photograph byFredrik Brodén

•thinkorswim.com

REMEMBER THE BAD OLD DAYS, WHEN INVESTORS

just bought a single stock and hoped for the best? Thencame the ’80s, when star mutual fund managers soldus on the benefits of “diversification”—particularly thediversification that came from their funds. So theninvestors bought a couple funds and, once again,hoped for the best.

Diversification for a stock portfolio is a way toreduce “non-systematic” risk. Systematic risk is thedanger of the whole market dropping and all stockprices falling along with it. Non-systematic risk is thedanger that is unique to a specific stock, such as man-agement skill, products, legal rulings, and so on. Theidea is if you have enough different stocks in your port-folio, all those company-specific risks offset each other,and no single risk will dominate your portfolio.

All that’s fine. But when you’re a floor trader stand-ing in a trading pit that’s only trading options on oneindex or stock or future, diversification across differentunderlying securities isn’t really possible. So, you thinkabout diversification in a different way. Differentspreads have different risks—some lose money whenthe stock goes up; others, when the stock goes down.Some lose money when volatility goes up; others,when volatility goes down. Retail option traders andinvestors can trade any stock or index they like, butthey can still benefit from thinking about how anoption trader might diversify. Let’s look at a few differ-ent approaches.

HEDGING DIRECTIONFirst, let’s look at the net risk of your positions. Rightnow, go ahead and launch your TOS trading platformand look at the Position Statement section of the Moni-tor page. You can see that each symbol’s net positiongreeks are displayed. (You can do this exercise whetheror not you have option positions, because even stocksand mutual funds have delta.)

Are the net deltas all positive? That means you wantthem all to rise—at least a little bit. What happens ifthe market falls?

If you beta-weight the positions to a common index,is there a particular symbol that has a much biggerdelta than the others? That means that your portfolio’srisk is concentrated in that one symbol. (See sidebar,“Bet Your Bottom Beta.”) It’s okay to have a strongerbullish bias on a particular stock, but make sure youunderstand the risk it presents to your portfolio. If thatone stock crashes, it can wipe out all your other gains.

HEDGING TIME AND VOLIf you do have any options in your positions, you’llnotice other greeks in addition to deltas—theta andvega in particular. While stock trading is somewhatone-dimensional—stocks only go up and down—option trading has to contend not only with the stock’smovement (delta), but also with changes in volatility(vega) and time passing (theta). An option trader canbe right in picking the direction of a stock, but bewrong on time and volatility—and lose money. Thatmeans that the trader who ignores all the factors thataffect options could be blind-sided by any one of them.

Earlier, you looked at delta. Now look at vega—doall your positions have either positive or negative vega?Negative vega means your positions are losing moneyas implied volatility drops, assuming no change in thestock price or theta. If every position has positive vega,what happens if volatility drops? You should look attheta in the same way as well. Are all your positionsnegative theta, which means your option positions arelosing money as each day passes (assuming no changein the stock price or volatility)?

Just because all the deltas, vegas, and thetas are“pointing” the same way isn’t necessarily bad, as longas you understand the risks. If you are very confidentin the direction of stock prices or volatility, then per-haps your portfolio is appropriate. But if you’re not tooconfident, and I don’t know many traders who are,then you might want to diversify a bit. Different optionstrategies such as verticals, calendar spreads, and iron condors have different delta, vega, and theta character-istics, so it’s a good idea to learn more about them.(See “Five Strategies under $1,000,” thinkMoney, Sum-mer 2009.) Diversification with options comes frommixing them so that the portfolio has the delta, vega,and theta risk that you’re comfortable with. No singlerisk should dominate your portfolio.

BE A NIMBLE STRATEGIST As a market maker, I didn’t diversify with a particulartrade in mind. Rather, as orders would come into thepit, I would think of them as either increasing ordecreasing the risk of my position. If I wanted todecrease the risk, then I might be a little more aggres-sive in making a market for an order that would dothat. I was willing to give up a bit of theoretical edge toget my risk in line. For example, if my position wasoverall positive or long vega, and I wanted to make itless positive, then when an order came in to buy a cal-endar spread, I would make my offer a bit lower to tryto sell it. A short calendar has negative vega, so if I soldit, my overall vega would become less positive.

As a retail trader, you can’t really do that because

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you can’t make markets and you don’t see the orderflow coming into the pit. But what you can do is biasyour trades a bit. Let’s say you have positive or longvega in your portfolio because you’re long a bunch ofcalendar spreads. If volatility is lower, calendar spreadswould be less expensive. That might fit your trade cri-teria, but if you bought more calendar spreads andyour vega became more positive, then you’d be addingto your risk if volatility dropped. You might want topass on buying more calendars. Instead, maybe you’dlook to sell iron condors that have a low delta and neg-ative vega. At lower volatility, the credit for iron con-dors would be lower, so you might not do too many ofthem, but they would partially offset your portfolio’spositive vega. If you were going to make a directionalspeculation, you could sell a vertical—call or put,depending on your bullish or bearish bias—whichwould create deltas and negative vega. Alternatively,you could roll some of the short front-month options inyour calendar spreads to a further expiration. Thatwould reduce the amount of positive vega in your port-

folio. (For more on how to roll a calendar spread, see“Lip-Smackin’ Good Rolls,” also in thinkMoney, Sum-mer 2009.)

If you have a stock portfolio in that same low-volatil-ity environment, you’re at risk if the market goes down.If that happens, it’s also possible that volatility wouldrise. As a way to reduce some of your portfolio’s posi-tive deltas and get positive vega, buying long out-of-the-money puts would generate some negative deltas alongwith positive vega. Long out-of-the-money put verticalscould be less expensive than long puts, but would gen-erate fewer negative deltas and positive vega. Long out-of-the-money put calendars would generate even fewernegative deltas, but could generate more positive vega.There’s no “right” answer. There are only choices thataffect your portfolio in different ways.

DIVERSIFICATION HAS A SIMILAR MEANING FOR BOTH

traders and investors. Either way, what you’re reallydoing is keeping your portfolio nimble. However,“investing” for the short term, as traders do, requires a

different set of skills than simply under-standing correlation between stocks,bonds, and cash products to weather astorm. With practice, you can finely tunethe risk of your options portfolio to matchyour risk tolerance and any speculativebias you have. This will also let you struc-ture your portfolios with more discipline.Rather than entering trades as discretespeculations, you see any individual tradesas pieces of a broader portfolio. Any newtrades would fit into and change the portfo-lio a certain way.

• The information contained in this articleis not intended to be investment adviceand is for illustrative purposes only. Diver-sification does not eliminate the risk ofexperiencing investment losses. Spreads,straddles, iron condors and other multiple-leg option strategies can entail substantialtransaction costs, including multiple com-missions, which may impact any potentialreturn. These are advanced option strate-gies and often involve greater risk, andmore complex risk, than basic optionstrades. Be sure to understand all risksinvolved with each strategy, includingcommission costs, before attempting toplace any trade. Be aware that assignmenton short option strategies discussed in thisarticle could lead to unwanted long orshort positions on the underlying security.Customers must consider all relevant riskfactors, including their own personalfinancial situations, before trading.Options involve risk and are not suitablefor all investors. Supporting documenta-tion for any claims, comparisons, statis-tics, or other technical data will besupplied upon request.

SEE GLOSSARYPAGE 38

BET YOUR BOTTOM BETA

Hey, how much risk do you have in your trading portfolio, and how will youhedge it? Don’t know? A slick little tool traders have with TOS is the beta-weighting feature. This tool takes the total delta of your portfolio and convertsit into individual positions on a stock or index that’s optionable, such as DJX orNDX. That number will tell you how many deltas are needed to buy or sell tohedge your portfolio. Cool, huh?

To find the beta-weighting feature, go to the Monitor page> left side, underPosition Statement, click the blue dot to the left of Not Weighted> check boxnext to Beta Weighting. Type in the symbol of an optionable stock or index. Thenumbers in the delta column are the hypothetical equivalent of the stock orindex you entered. To hedge this, if the number is positive, you would shortdeltas in the stock or index. If it's negative, you would buy deltas.

Use the Analyze pageon thinkorswim fromTD Ameritrade tostress-test your hedgeideas. Click the wrenchicon in the Positionsand Simulated Tradessection to adjust theprice of the underlyingor option volatility toview various "what if"scenarios.

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• Thanks for the paper versionof thinkMoney. It’s the perfectweight, not too light, not tooheavy, to whack my cat out ofthe way when he climbs on mytrading keyboard. Now whenhe approaches, I just whisper“thinkMoney” and he takes awide detour.Louisa

• Is there a singles night in theTrader Lounge chat room?Stephan

• I love your new trade showbooth! I hope it’s portable. Ialready booked my ticket to seeyou again at the Orlando show.Mike

• Where do I submit a demotape to be on a TD Ameritradecommercial?Charity

• I heard TOS outsources theircoding to a Chinese prison inTibet and QA to roaming Peru-vian sheepherders ... Don’tquote me on this though.Dan

• Dear VIX ... please go to 50. ;) lolScotty

• When TOS sent me a monkey,I thought it was a mascot, nottheir production test team.Bill

• 90 minutes to go in the ses-sion ... What can happen?Jon

Preconceived notions will bedealt with by the full extent ofthe market.Larry

The sword of leverage is thesame for companies as it is fortraders: Wield it well, and youcan be the victor. Wield itpoorly, and you become lunchmeat.Kerry

And one from a respected trading dude: Ask yourself how it is that aflock of birds or a school of fishcan change direction simultane-ously. There must be a way inwhich they are linked to oneanother. … Traders who haveexperienced being tapped intothe collective consciousness ofthe market can anticipate achange in direction just as abird in the middle of a flock willturn at the precise moment thatall of the others turn. Mark Douglas(Trading in the Zone)

thinkMoney/11

15•Dear Swim•A smattering of thinknothings to our beloved Trade Desk

•Photograph by Fredrik Brodén

•The comments hereare excerpts fromemails submitted byTD Ameritrade clientsas their views and maynot reflect those of TD Ameritrade. Testimonials may notbe representative of the experience of other customers and are no guarantee of futureperformance or success.

lttrs.

Got a quip? Good, bad, and ugly, send your best to [email protected].

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16•TOS News+Views•A hodgepodge of stuff we thought you should know

Toys for TOSOur favoritenew gadgets

The ISE Spread Bookon the Scan tab showsyou actual ordersworking on the Inter-national SecuritiesExchange. Unlike the“regular” spreadbook, which showsonly orders workingon the TD Ameritradeplatform, the ISEspread book showsyou all the optionspread orders that areworking on the entireexchange.

The Strength Meteris a new column forany watch list. It cal-culates the change inprice for a securityover the previousthree weeks. A greenuptrend means>10%. A red down-trend means <10%.And a yellow range-bound means thechange is between+/-10%.

You’ve seen theheadlines: Twoyears after the crashand financial near-meltdown, theeconomy is stillsluggish, and unem-ployment is dis-couragingly high.The volatile mix ofeconomic and polit-ical hopes and fearsfuels hours of TVprogramming. Sincethe Federal Reserveembarked on a pol-icy of quantitativeeasing, it, too, hasbecome a topic ofheated discussion.

Quantitative eas-ing is a techniquethat a nation’s cen-tral bank (e.g., theFederal Reserve)uses to increase thesupply of money bybuying its ownbonds back. This issupposed to raise orstabilize their prices

and lower or stabi-lize interest rates.Whoever owns thebonds—banks, forinstance—increasestheir cash whenthey sell them to theFed, and that is sup-posed to give themincentive to lendthat money out.That increases theamount of money inthe economy. It’snot really printingmoney, as somecommentators sug-gest. Rather, it’s atransfer of cash forassets from the bankto the Fed. Does itwork to stimulate aneconomy? Theglobal record ismixed. But whileany effort that low-ers interest rates andincreases the moneysupply can lead toinflation, what hap-pens to an economyin deflation can bemuch scarier. Thebet by the Fed is thatinflation is the lesserof two evils.

From a trader’sperspective, though,

what does this allmean? It’s possiblethat the recentquantitative easingby the Fed will putinflation back intothe news. It reallyhasn’t been dis-cussed much in therecent past, mainlybecause it’s rela-tively low. Inflationtalk translates intorates talk for

traders. Interest rateproducts, whetherbonds or interestrate derivatives, areaffected not only bythe current inflationrate, but also by theexpectation of whatinflation will be inthe future. Higherinflation usuallymeans higher inter-est rates. Of course,that could triggeranother round ofFed actions. Sure,gold and other pre-cious metals aresometimes consid-ered inflationhedges, but that’smore qualitativethan quantitative.

Watching theyield curve—whether it goes up,down, steepens, orflattens—could bethe story of 2011.And instead of get-ting mad at the talk-ing heads andpoliticians on TV, asavvy trader who

synthesizes andanalyzes the datacould possibly use itto her advantage.

INDUSTRY SPOTLIGHT

QE2.What’s inIt for Me?by Thomas Preston

nws.

•The information con-tained in this articleis not intended to beinvestment adviceand is for illustrativepurposes only. Cus-tomers must con-sider all relevant riskfactors, includingtheir own personalfinancial situations,before trading.Options involve riskand are not suitablefor all investors.Spreads optionstrategies can entailsubstantial transac-tion costs, includingmultiple commis-sions, which mayimpact any potentialreturn. Spreadoption strategies caninvolve greater andmore complex risk,than basic optionstrades.

IRAS N' SPREADS: YA GOTTA LUV IT!DID YOU KNOW THAT CUSTOMERS WHO QUALIFY CANTRADE QUALIFIED SPREADS IN THEIR IRAS? YUP, IRAS ARENOT JUST FOR STOCK TRADERS AND COVERED CALL PLAYERS. SO SPREADERS REJOICE!... OF COURSE, YOU'LL HAVETO PUT UP THE CAPITAL THAT'S AT RISK, SO THERE'S NO BORROWING ON MARGIN. BUT HEY, WHO'S COMPLAINING?

To catch up on all thenew TOS toys andgadgets, go to ourRelease Notesarchives at thinkor-swim.com>Support >Software Support.Select the link at thetop : “Looking forRelease Notes.”

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How do you prioritize cus-tomer requests for changesto the TOS platform?We keep a database of all feed-back so we have an accuratesense of demand for each item.For each software release, we tryto strike a balance of frequentlyrequested items and new fea-tures that help support more suc-cessful traders. In the event thereis disagreement among teammembers around prioritization,we relegate decision-makingauthority to the Magic 8-Ball. (If you have a suggestion, don’tbe shy. Send it to [email protected].)

If you could be granted justone wish, what would it be? I'm a giver, so I'd wish for all prof-its that we made from paper-Money trades to be credited toour live trading accounts.

With all the great featureson the platform, could yousuggest one thing that allclients should be looking at?myTRADE*. I love this feature. Ilove seeing how other individualinvestors are taking action in themarket. I've found some reallysharp traders in the communitywhom I follow on a daily basis.We're all in the fight to outper-form the markets together. Wemight as well get acquainted!

What's on deck for 2011? thinkOnDemand will be reformat-ted. Instead of replaying a histori-cal market, it will allow you to seehow the market plays out in thefuture. (Just kidding.)

* myTRADE, Inc. and TD Ameritrade, Inc. are separate but affiliated companies andnot responsible for each others products or services.

Creatine

A legal, safe wayfor every trader todrive the monkeygenes from hisbody.

Steroids

The ability to liftthe entire yieldcurve with onearm is rewardenough for the kid-ney failure andpimples.

More Food

Recent studiesshow that it’s notthe quality of thefood as much asthe quantity. Acalorie is a calorie.Praise the Lord andpass the fries!

Whey

Provides the pro-tein Miss Muffetneeds to buildenough hard mus-cle mass tosqueeze the juiceout of the Spidersevery expiration.

Nitric OxideBoosters

Doesn’t reallyaffect your metab-olism, but carryingthat big tank onyour back whenyou drag race that’73 ’Cuda givesyou a full-bodyworkout.

Pot ShotsThe Trading DeskRates the Top 5Muscle-Buildersfor Traders•KEY:

2 Buy Tickets =

1 Buy Ticket =

1 Sell Ticket =

2 Sell Tickets =

COMING SOON!•Synchronize chart cross-hairs • Market Maker Move (to estimate one-dayprice changes) • New indicators for TOS charts from John Carter of TradingMarkets.com • Single-ticket futures spread orders • Dynamic watch lists

fyi.

Ask The Suit•

A little Q&A with NicoleSherrod, ManagingDirector, Trader Groupat TD Ameritrade

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thinkMoney/11

18•Verticals•thinkorswim.com

EVOLVING TO PRO TRADER STATUS MEANS MORE THAN BUYING CALLS AND PUTS. THE VERTICAL IS THE FIRST SPREAD OPTION TRADERS TYPICALLY

LEARN. BUT SINCE YOU CAN TRADE BOTH LONG AND SHORT VERTICALS, THERE ARE STILL SOME TOUGH CHOICES TO MAKE.

BY THOMAS PRESTON PHOTOGRAPH BY FREDRIK BRODÉN

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thinkMoney/11

20•Verticals•Photograph byFredrik Brodén

•thinkorswim.com

There, I said it. NowI hear the chorus: “But it’s a spread! It’s two optionsinstead of one! How can it be the simplest?” With all duerespect for the individual call and put, with whom I havea long history and many fond memories, I stand by mystatement. Why? Depending on how far apart or “wide”the strikes of the vertical are, it can be a lot more man-ageable than single options and even plain stock. Verti-cals can be much less sensitive than individual calls orputs. They can even have less risk than long stock.

In contrast to a single call or put, verticals—oftenjust called call spreads or put spreads—are made up ofa long call and a short call, or a long put and a short put,at different strikes, in the same expiration and sameunderlying stock or index. The long and short optionsin the vertical are called “legs” of the spread. Becausethe vertical has long and short option legs, whatever thestock price does, volatility does; or, as time passes, theyaffect the long and short legs in opposite ways. Think ofit this way: A long call makes money if the stock pricegoes up, all other things being equal. A short call losesmoney when the stock price goes up. If you combinethem into a spread, when the stock price goes up, andvolatility and time do not change, one part of the spreadmakes money and the other part loses money (to differ-ent degrees). This means that verticals, or spreads, canbe less sensitive to changes in the stock price (andvolatility and time, as well) than a single option. That isthe heart of their manageability for traders.

GREEKS MATTERWhile this isn’t an article about option “greeks,” com-paring the greeks of a vertical with those of a singleoption, and even those of other verticals, is a conven-ient way to measure their sensitivities. The greeks thatare typically used when talking about verticals are (1) delta, which measures an option’s sensitivity tochanges in the price of the underlying asset; (2) theta,

which measures an option’s sensitivity to time decay;and (3) vega, which measures an option’s sensitivity tochanges in the volatility of the underlying asset.

The greeks of the vertical are the net difference ofthe greeks of the single options. Just take the delta ofthe long leg of the spread and subtract the delta of theshort leg of the spread. For example, if you have a 100strike call with a delta of 0.60 and a 105 strike call with adelta of 0.45, then a vertical that’s long the 100 call andshort the 105 call would have a delta of 0.15 (short callshave a negative delta, so 0.60–0.45=0.15). In thisexample, the delta of the vertical is much smaller thanthe delta of either of the component options. That’sbecause the strikes are close to each other. To continuethe example, if the 130 strike call has a delta of 0.05,then a vertical that’s long the 100 call and short the 130call would have a delta of 0.55—not significantly lessthan the delta of the 100 call by itself.

You can do the same exercise with theta and vega.Look at the theta and vega numbers on the Trade pageof the thinkorswim from TD Ameritrade platform, andyou’ll see that they’re often pretty close in value at adja-cent strikes—that is, the vega of the 100 call is probablygoing to be pretty close to the vega of the 105 call. Thevega, or sensitivity to changes in volatility, of the100/105 vertical is going to be pretty small. Just likedelta, verticals whose strikes are close to one anothercan have much lower sensitivity to changes in time andvolatility than the individual options in the spread.

The lesson here is that the magnitude of the greeks ofa vertical depend on how far apart the strikes are. Thefurther apart they are, the larger the greeks of the vertical.The closer the strikes, the smaller the greeks. The smallerthe greeks, the smaller the sensitivity of the position tothe given change in the underlying. Here, I have toemphasize that verticals can have less sensitivity thansingle options. It’s not the case in all scenarios, but it ismore likely when the strikes of the legs are close.

MULTITASKING WITH VERTICALSSo, what does all this mean to a trader? Trading optionscan sometimes feel like you’re spinning plates onpoles. You start with one, then move to the second,then move to the third, but then you have to go back tothe first to keep that going, then you move to thefourth, then back to the third, and so on. Monitoringhow the changes in the stock price, volatility, and timeare affecting your position can feel like keeping all theplates spinning on the poles. The fewer the poles, theeasier it is. Have you ever been long an out-of-the-

TRADER LINGO

Hey, want to sound like atrader? Sometimes you’llhear people talk about ver-ticals as a “bull call spread”or a “bear put spread.”Traders talk and think interms of buying or selling acall or put spread. Are youbullish? Then buying a callspread or selling a putspread might be positionsto consider. Bearish? Sellinga call spread or buying a putspread are possible posi-tions. Traders buy a callspread or buy a put spread;or, they sell a call spread orsell a put spread. They knowhow each position respondsto a rise or fall in the stockprice, and don’t use theterms “bullish” or “bearish.”By the end of this article,you shouldn’t have to,either.

VERTICALSARE THESIMPLESTOPTION POSITION.

FIGURE 1: The vertical spread has limited profit, but the trade-off is less risk than a typical single option trade.

+

—BREAKEVEN

STOCK PRICE AT EXPIRATION >

Long Strike Short Strike

+

—BREAKEVEN

STOCK PRICE AT EXPIRATION >

Short Strike Long Strike

LONG CALL OR SHORT PUT VERTICAL LONG PUT OR SHORT CALL VERTICAL

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money call and had the stock go up, and still lostmoney as time passed (because of negative theta) andvolatility dropped (because of positive vega)? Yes, avertical still can have delta, theta, and vega, but thepoles are a little lower and closer together.

Going back to the earlier example, look at the100/105 call vertical with the delta of 0.15 versus the100 call with the delta of 0.60. If the stock drops 1.00,the value of that call vertical would theoretically drop$15 and the 100 call would drop $60. If the stock movesagainst your position, the vertical can lose less moneythan the single option. And if it’s losing less money,you’re probably going to be less stressed, and betterable to figure out why the stock is dropping and whatyou think the stock might do from here on out. Verti-cals can give you more breathing room to think about atrade. They slow things down a bit, and can requireless immediate attention.

The main downside of verticals is that they havelarger commissions than single options (because thereare two options in the trade). But what really increases

commissions is that verticals don’t have much delta.So, for example, in order to get the same risk exposureas 100 shares of stock or some single options, youmight have to do many times the number of verticals. Ifa vertical has a delta of 0.10, you’d need to do 10 verti-cals to have the same delta risk as 100 shares of stock.That would require the commission of 20 options.

THINGS TO THINK ABOUTNow, while I still stand by my opinion that verticalsare the simplest options position, they are not suitablefor everyone. But if you are thinking about tradingverticals, here are three pointers I would offer up foryour consideration:

(1) Use limit orders. When you’re opening a position ina vertical, consider using limit orders. They give youcontrol over the price where you trade the spread, butthere’s no guarantee that the order will be filled. Ofcourse, market orders will seek to fill your orders at thenext available prices, but you risk getting terrible fillprices on two options, not just one, which compoundsthe problem.

(2) Don’t “leg in” to the trade. Buying one option andselling the other should be done with a single order.When you try to do them in separate orders, it’s calledlegging, and it exposes you to more risk if you only getone “leg” order filled and the market moves against itbefore you get the other side done.

(3) Never set it and forget it. Even though verticalsmight not be as sensitive, don’t just forget about them.At expiration, be aware that if the stock price is inbetween the strikes of the options, you could automati-cally exercise or be assigned on one of the options—notboth. That would leave you with a stock position afterexpiration, and expose you to unwanted risk.

Verticals are the “gateway” trade. Once you figurethem out, you might combine them into more complextrades such as butterflies and iron condors. Thoseincrease your trading flexibility and choices even more.

•The information contained in this article is notintended to be investment advice and is for illustrativepurposes only. Spreads, butterflies, iron condors, andother multiple-leg option strategies can entail substan-tial transaction costs, including multiple commissions,which may impact any potential return. Be sure tounderstand all risks involved with each strategy,including commission costs, before attempting to placeany trade. Be aware that assignment on short optionstrategies discussed in this article could lead tounwanted long or short positions on the underlyingsecurity. Customers must consider all relevant risk fac-tors, including their own personal financial situations,before trading. Options involve risk and are not suit-able for all investors. Supporting documentation forany claims, comparisons, statistics, or other technicaldata will be supplied upon request.

Want more verticalknow-how? Follow theclick path at thinkorswim.com:Support> OptionSchool> ChatArchivesType in “verticals” inthe fill-in box and andselect “Search.”•

VERTICALS CAN GIVE YOU MOREBREATHING ROOM TO THINK ABOUT ATRADE. THEY SLOW THINGS DOWN A BIT,AND CAN REQUIRE LESS IMMEDIATEATTENTION.

SEE GLOSSARYPAGE 38

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SYMBOL: HHOSYMBOL: FIW

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Q: Hey, Monkey!I’ve already bro-ken all of my NewYear’s trading res-olutions, and it’sonly been a week!Can I beredeemed?A: You think you’rebad, just ask mygut about that latestbox of Twinkies.Anyhoo, it’s safe toassume that justlike the varyingdegrees of debauch-ery that spur NewYear’s resolutions,it’s trading lossesthat prompted youto create your trad-ing resolutions. Dis-cipline in stickingto a trading gameplan is tough to getand challenging tokeep. Even the besttraders falter. Butsometimes theybend the rules tocome up with evenbetter ones. If youkeep losing moneywhen you breakyour rules, stop it.But if you keep los-ing money andyou’re followingyour rules, a reviewmight be in order.Also, consistently

breaking the rulesmight mean you’velearned somethingnew, and need tochange them.Redemption?You’ve got the restof the year. As forme, I swear not toeat anything thathas a fat content ofmore than 20%.But if I end upsucking on a stickof butter in a timeof weakness, I’lljust hit the tread-mill. My doc givesme a year, too.

Q: Hey, Monkey! Iread that when astock has a divi-dend, its calls arecheaper. Why?A: The simplestway I know toexplain this is tothink of calls asalternative to stock.It’s not exact, but ifthe stock goes up,assuming they’renot too far out-of-the-money, callstend to go up, too(all other thingsbeing equal). If astock pays a divi-dend, then the costof owning thatstock goes down.You’re either bor-rowing money tobuy the stock, oryou’re using cashthat would other-wise earn interest.Those interest costs

are reduced whenthe stock pays adividend. So if itcosts less to ownthe stock, then it’sless advantageousto buy the call as analternative. Thecall, then, ischeaper.

A fuller explana-tion is that the putis worth morewhen there’s a divi-dend. A long callthat’s cheaper anda short put that’smore expensivemeans the syntheticstock (long call,short put, samestrike and expira-tion) is cheaper.The price of thesynthetic stock isbased on the cost toown the stock for acertain amount oftime. The dividendreduces that cost,so the synthetic ischeaper. That canhappen wheneither the call ischeaper or the putis more expensive.

Q: Hey, Monkey!In light of myrecent trading per-formance, I’mweighing some ofmy housingoptions at themoment, and havedecided to “go

green.” What’s mycarbon footprint ifI live in my car?A: So much of envi-ronmental friendli-ness is aboutmulti-use, meet-your-needs, replica-ble lifestylechoices. Once thehousing of upscalevagrants, car-livingis poised to becomethe easy, fast way toget LEED certifica-tion in the future.It’s like a battery-powered, mobilegreenhouse. Iapplaud you foryour pioneeringspirit. And if yourtrading turnsaround, all you’llneed for a homemakeover is someair fresheners andfuzzy dice.

• The informationcontained in thisarticle is notintended to beinvestment adviceand is for illustrativepurposes only. Besure to understandall risks involvedwith each strategy,including commis-sion costs, beforeattempting to placeany trade. Customersmust consider all rel-evant risk factors,including their ownpersonal financialsituations, beforetrading. Optionsinvolve risk and arenot suitable for allinvestors. Supportingdocumentation forany claims, compar-isons, statistics, orother technical datawill be suppliedupon request.

thinkMoney/11

23•Hey, Monkey!•Got a question aboutanything? Ask Monkey,our resident primate.

•Photograph by Brent Humphreys

mky.

Just like the varyingdegrees ofdebaucherythat spur New Year’s resolutions, it’s tradinglosses thatprompt you to create your tradingresolutions.

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24•Weeklys•thinkorswim.com

IN FOOTBALL, MAKE ORBREAK MIGHT BE THE FINALFEW YARDS. IN TRADING, ITCOULD BE OPTIONS THATEXPIRE IN THE FINAL FEWDAYS. BUT IF YOU'RE TOOSCRAWNY FOR THE NFL,WEEKLY OPTIONS LET YOUPLAY IN THE RED ZONE.

WORDS BYMARK AMBROSEPHOTOGRAPH BY FREDRIK BRODÉN

TRADING IN THE RED ZONE

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Decisions are a little morepressing. And just as withfootball, the way you per-form in the red zone candetermine your success.Some teams thrive there,and some traders lovethose few days before expi-ration. The product thatlets them play there isknown as “Weeklys”—exchange-traded optionson stocks that expire in just

one week. Weeklys are created on Thursdays and theyexpire the following Friday. Set! Hike!

Weekly expiration options were introduced a fewyears ago, and their popularity among traders isexpanding rapidly. The reason? Weeklys offer the abil-ity to make very tailored speculations on short-termprice moves in the stock. With fewer days to expira-tion, they’re less expensive than other options at thesame strike price in further expirations. And they giveyou a lot of bang for the buck, because if the underly-ing stock or index makes a big move, Weekly pricescan change by a much larger percentage than further-dated options. That’s what makes them “red zone”trades. If the trade in the weekly options goes wrong,there’s no “it’ll come back someday”—unless “some-day” is this coming Friday.

What do I mean? Let's use an option pricing formulato arrive at some theoretical values. (The option pricingmodel we're using Bjerksund-Stensland. All theoreticalvalues in the following example were derived using the

theoretical pricing tool found in the Trade page of thethinkorswim from TD Ameritrade platform. See callout,left.) Let's assume we're looking at a $100 stock with avolatility of 35%.

If the stock price moves from $100 to $101 (assumingno change in volatility), the 100 strike Weekly calls withseven days to expiration theoretically would go from .90to 1.44. Meanwhile, the 100 strike calls with 21 daysdays to expiration would go from 2.23 to 2.76. TheWeekly options rose 0.54, or about 60%. The 21-dayoptions rose 0.53, or about 24%. Thus, Weekly optionshave the potential to increase by a greater percentagefor the same price change in the stock.

BIG BANG, SMALL BUCKWhat makes the Weeklys move so much? The shorttime to expiration means that Weekly options have rel-atively high gamma. That high gamma means thattheir prices respond very quickly when the stock orindex price changes, whether up or down. Gammameasures how much an option’s delta moves whenthe stock price changes; delta measures how much theprice of the option changes.

A good way to think about delta is how much theoption “acts” like stock. When gamma is high, a smallchange in the stock price increases the delta, pushingthe option to act more like stock as it changes closerand closer to parity (dollar for dollar). That’s whataccounts for the very high percentage appreciationyou can see in Weeklys options. The high gammamakes them interesting trades for earnings announce-ments or other news releases. Let’s say you believe thestock will have a big price change when the newscomes out. It’s the Weekly options that will have thelargest percentage changes if you’re right.

If that’s the case, why wouldn’t you just buy Weeklyoptions all the time? Well, the less time there is to expi-ration, the less likely it is that a big move is going tooccur. A longer-dated option gives the stock moreopportunity to rise. The short amount of time withWeeklys means that their decay, or theta, whittles theirextrinsic values down very quickly. Along with the highgamma, Weeklys have commensurately high theta. Ifthe stock does not make the price move you’re hopingfor, that Weekly option’s price will go from cheap tocheaper thanks to time decay, and much of the time,there’s no turning back. That works in favor of shortoptions positions, but your longs are likely toast.

A CASE FOR BUYINGYou might be asking yourself, “But if you’re speculat-ing on a short-term change in the stock, why use theWeeklys instead of trading the stock?” It’s true that

thinkMoney/11

26•Weeklys•thinkorswim.com

SEE GLOSSARYPAGE 38

“RED ZONE” ISFOOTBALL’S UNOFFICIAL SPACEBETWEEN THEGOAL LINE AND THE20-YARD LINE. ITCAN BE THE SPACEOF THE FINALDRIVE OF THEOFFENSE—OR THEFINAL STAND OFTHE DEFENSE. THERED ZONE TESTS ATEAM’S METTLE. INFACT, IT’S A LITTLELIKE EXPIRATIONWEEK FOR OPTIONS.THINGS CAN GETMORE ACTIVE—EVEN CRAZY.

THE

To access the theoreti-cal pricing tool in thethinkorswim from TD Ameritrade platform, simply selectthe Trade tab> enter symbol in fill-in box> inthe dropdown menunext to "layout", select"Theo Price, Mark."Under each of the callsand puts columns,you'll see the theoreti-cal price column to theleft and the "mark" orcurrent price to theright. Just above thechain, you can changethe theoretical days, as well as price andvolatility of the under-lying, to see the theo-retical price whereeach option in thechain might go.

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stock doesn’t expire and doesn’t suffer from timedecay, but it uses a lot more trading capital than aWeekly option, and it can have a lot more risk. If youwere going to buy 100 shares of that $100 stock in theexample, the margin requirement would be $5,000.But the weekly 100 strike call would cost you only$110. And let’s say the stock drops in price. The maxloss on the long Weekly call is $110—as opposed to$10,000 on the long stock. While the stock positionhas advantages, it also has greater risk.

So how about just buying options with a furtherexpiration date? You could buy more to get the gammaequal to the Weekly position, and the time decaywould still probably be lower. The risk here is that thelarger position in options with a further expiration datehas a much higher vega, or sensitivity to changes inimplied volatility. Remember when I said that Weeklyslet you tailor the speculation? Weekly options have lowvega, and don’t move as much when volatility goes upor down. That means that you can focus more on whatthe stock price is doing. With longer-dated options,you have to be aware of what volatility is doing as well.

A CASE AGAINST SELLINGNow, the reason that every trader doesn’t just go outand short Weekly options to take advantage of thesteep time decay is that the lower price of the Weeklysmakes the absolute amount of decay relatively lower.Sure, the rate is high, but the overall amount issmaller. Just as an offense has a running game and apassing game, each with its own particular risk andpotential reward, buyers of Weekly options take therisk of that big move in the stock not happening whilethey battle negative time decay. Sellers have to decidewhether the smaller credit they get from shorting theWeekly is worth taking the risk of a big move in thestock that would create a huge loss in that position.

GETTING IN THE GAMESo, ready to start trading Weeklys as part of yourgame plan? Here are some things to consider duringthe huddle:

1. CURRENTLY A SMALL BASKET Weeklys are avail-able on more than 15 different stocks. Individualstocks sometimes have their biggest price swingsaround earnings numbers. If you’re buying Weeklyoptions to speculate on a big price move on earnings,double-check to make sure the earnings areannounced before the Weeklys expire (see callout,left). Keep in mind that if you guess wrong and theposition moves against you, you could lose the entireinvestment amount spent on the option.

2. HOW TO SHORT If you want to try to take advan-tage of the Weeklys’ time decay, you could considershorting Weekly option spreads in the index products.You can see those symbols on the public watchlist aswell. The index products tend to be less volatile thanindividual stocks, and can be a way to test out shortoption strategies. Bear in mind that some short strate-gies can carry unlimited risk. So be sure to understandall relevant risk factors and whether such strategiesare suitable for your portfolio.

3. WATCH FOR EARLY SETTLEMENT Some Weeklyoptions are based on cash-settled indexes such as theOEX, XEO, DJX, and SPX. The DJX and SPX Weeklyoptions stop trading on Thursday afternoon and settleon Friday morning. For more information, check theWeekly option specifications on the Chicago BoardOptions Exchange website at www.cboe.com.

What should be clear from the advent of Weeklyoptions is that equity markets are no longer targeted tojust long-term investors. As options are becomingincreasingly popular with traders, the industry is scram-bling to find ways to quench their thirst for capitalizingon short-term events that move markets. Heck, recently,the CBOE petitioned the SEC to include options thatexpire daily in its arsenal of products! Who knows ifthat’ll happen, but if “Dailys” are on the horizon, somuch for the red zone—you’re literally at the goal line.

• The information contained in this article is notintended to be investment advice and is for illustra-tive purposes only. Spreads and other multiple-legoption strategies can entail substantial transactioncosts, including multiple commissions, which mayimpact any potential return. Be sure to understand allrisks involved with each strategy, including commis-sion costs, before attempting to place any trade. Beaware that assignment on short option strategies dis-cussed in this article could lead to unwanted long orshort positions on the underlying security. Customersmust consider all relevant risk factors, including theirown personal financial situations, before trading.Options involve risk and are not suitable for allinvestors. Supporting documentation for any claims,comparisons, statistics, or other technical data will besupplied upon request.

To find the list ofWeeklys options cur-rently trading, log on tothe TOS platform, lookon the Market Watchtab of the trading software, and choose“Weeklys” from the“public watchlist”.If you’re looking forearnings plays, theicons next to the symbol indicateupcoming earningsannouncements.

WEEKLYS ALLOW YOU TO MAKE VERYTAILORED SPECULATIONS ON SHORT-TERM MOVES IN THE STOCK. WITHFEWER DAYS TO EXPIRATION, THEY’RELESS EXPENSIVE THAN OTHER OPTIONSAT THE SAME STRIKE. AND THEY GIVE ALOT OF BANG FOR THE BUCK.

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• Trading is great if you like to stare. Thereare so many numbers flashing red andgreen and yellow, it’s like the Feast of SanGennaro. Hey, if you haven’t eaten zeppolein Little Italy, you haven’t lived. When youhave a position on, sometimes you can’thelp but stare at the trading screen. Sure, ifyou have some options on that have weeksuntil expiration and they’re not movingaround very much, you stare at somethingelse. Like TV. But fast-forward to expiration,and you can’t pry your eyes away from themonitor with a crowbar.

One of the most interesting things towatch if you’re an old index option traderlike me is the settlement price of the S&P500 Index (SPX). As you probably know,SPX options stop trading on the Thursdaybefore the third Saturday of the month, andthe SPX settlement price, which determinesif the options are in- or out-of-the-money, isdetermined on Friday morning. If you haveexpiring SPX options, you have to wait andsee what happens from the close on Thurs-day to the open on Friday. And you wonderwhy I have a few gray hairs? Anything canhappen overnight!

WHAT YOU SEE ISN’T WHAT YOU GETSo you wake up extra early on Friday andwatch the S&P 500 futures to see whetherthere was a big move overnight. And youstare really hard at the SPX price at 8:30a.m. CT to see how your positions mightfare. The opening price of the SPX looksgood for your positions, but only a rookiewould breathe a sigh of relief. You see, eventhough the settlement price of the SPX isdetermined by the opening price, it’s reallythe composite of all the opening prices of all500 stocks in the index. That means the set-tlement price of the SPX can be significantlydifferent from the opening price of the SPXitself. So what gives?

The SPX quote you see is the weightedaverage of all the last prices of the 500 com-ponent stocks. If a stock changes price, theSPX price changes a little, too. While mostof the 500 stocks are trading pretty activelyin the middle of the trading day, that’s notnecessarily the case at 8:30 in the morning.Just before the open, the price of the SPX isbeing calculated off the last prices of the500 component stocks from the nightbefore. At 8:30, some, but not all, the stocksstart trading, and the SPX starts to change.The open price you see for the SPX is basedon some current and some old data. Thecurrent data is for the stocks that are tradingat 8:30. The old data is for the stocks that

haven’t traded yet, andis from yesterday’sclose. That’s crucial,because the settlementprice of the SPX can bedetermined only whenall 500 stocks havetraded with an openingprice. As I said, somehave their openingprice at 8:30, but oth-ers might not openuntil 8:45. If the overallmarket moves in those15 minutes, the SPXsettlement price hassome of its data frombefore the move andsome from after themove.

Because you haveto wait until all 500component stockshave opening prices,you won’t know whatthe settlement price ofthe SPX will be until acouple hours after theopen. That gives the

exchanges time to verify the opening prices,calculate the settlement price, double-checkit, and then broadcast it to the world underthe symbol SET. The NDX and RUT settle-ment prices can take even longer.

Generally, if I have any expiring shortout-of-the-money options in the SPX, forexample, I’ll try to close those positionsbefore they stop trading on Thursday. Toomuch can happen in a market betweenThursday night and Friday morning.Because the index settlement price can besuch a wild card, to me, it’s not worth tak-ing the risk leaving those positions open.

And the gray hair? Nah, it’s just a littlepowdered sugar.

Words by Tony BattistaPhotograph by Fredrik Brodén

Do the Numbers Lie?

•TD Ameritrade, Inc., and its registeredemployee, Tony Battista, do not solicit orrecommend any form of trading in the indi-vidual securities mentioned above. Pleasedo careful, independent research beforeinvesting any money as well as weigh thepossible consequences on your particularfinancial situation before doing so. Therisk of loss may be substantial. Optionsinvolve risks and are not suitable for allinvestors.

cap.

How the opening price of the SPX differs from its settlement price—and howit screws traders up.

thinkMoney/11

29•Capiche?•Lessons from a veteran floor trader

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• Many traders find theyare able to spot the top ofthe market or a bearish

trend in equities, but are not willing to pullthe trigger on the bearish trade. For one rea-son or another, most people are wired tolook for bullish opportunities, and quitefrankly, they can miss the forest for thetrees. But what if there were a way to spotbearish opportunities while bullish trendsare occurring elsewhere, and vice versa?That’s what inverse correlation is all about,and it tends to happen frequently in theforex markets—particularly when compar-ing price action between equities and thedollar (USD) in recent years.

WHERE THERE’S A BULL, THERE’S A BEARIn trading geek-speak, correlation has to dowith how assets move in relation to oneanother. In the world of stocks, two compa-nies in the same sector—say, automakers—

often tend to be highly correlated (i.e., havepositive correlation) and move together.Though, over the long term, the dollar andUS equities have been highly correlated,recently, that trend has reversed. In otherwords, as the dollar has moved lower,stocks have moved higher. When stockscrashed in 2008, for example, the dollarfinally broke its multi-year downtrend. Per-haps coincidentally, when traders startedpiling in on equities in March of 2009, wesaw the dollar take another tumble untilthe equities peaked in April 2010. Couldthis mean the dollar/equity relationship isprimarily due to traders running to cash atthe first sign of fear?

Correlation values vary from -1 to +1. A negative value indicates a negative orinverse correlation. A positive value is apositive correlation. The calculation simplycompares relative price moves between twoinstruments over a specific time. If theymove up together point by point, the valuewill be 1, or 100% correlated. If they moveopposite to each other (one moving up andone moving down point by point), the valuewould be -1, or 100% inversely correlated.

Based on data between January andearly December of last year (see chart inFigure 1), the S&P futures (/ES) wasinversely correlated (below the zero line) tothe dollar index (/DX) for most of the year.Extreme readings above 0.5 have strongpositive correlation and below -0.5 havestong negative correlation, respectively.Readings between 0.50 and -0.50 are rela-tively weak correlations. However, specificreadings at certain points in time aren’t asimportant as the overall trend for a period oftime, such as the whole of 2010. How can atrader use this to his or her advantage? The

trade might be to buy dollars when equitiesare falling, and sell dollars and buy equitieswhen they are rising.

If the inverse correlation continues tohold true, buying dollars at resistance levelsin equities and exiting dollar-long trades atequity support levels could be one opportu-nity. And if the U.S. economy does see thedreaded “double-dip” recession after all,what kind of returns might be made on thedollar while others flee the sinking ship ofthe equity markets? Are equities setting upfor that next drop? Time will tell.

•Trading forex involves speculation, and therisk of loss can be substantial. Investorsmust consider all relevant risk factors,including their own personal financial situa-tions, before trading. Trading foreignexchange on margin carries a high level ofrisk, as well as its own unique risk factors.Forex investments are subject to counter-party risk, as there is no central clearingorganization for these transactions. Beforeconsidering the trading of this product,please read the Forex Risk Disclosure avail-able at http://www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf. A forex dealer can be compensatedvia commission and/or spread on forextrades. TD Ameritrade is subsequently com-pensated by the forex dealer. Forex accountsare not protected by the Securities InvestorProtection Corporation (SIPC).

FIGURE 1: Opposites Attract. Using the correlation indicator on the TOS charts, you can start togauge whether one asset tracks another in its movement, or in the case of the U.S. dollar vs. the S&P500, they tended to move opposite of one another for most of 2010. For illustrative purposes only.Source: thinkorswim from TD Ameritrade

Words by Kevin Lund

thinkMoney/11

30•Forex 4 Fun•Currency trading nuggets, onedollar at a time.

The Anti-Equities Trade•

Looking for bears in a bull market? Try using correlation.

Wanna trade forex atTOS? To open anaccount, just followthe click path online atthinkorswim.com>Why thinkorswim?> Order Types & Products> Currency Trading

fx.

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• What do you get that special person whohas everything? It’s a question most of usask ourselves this time of year (guys, incase you forgot, Valentine’s Day is aroundthe corner). And if you’re single, this canbe one of the most daunting tasks you’llface. It once forced me to break up with agirl before the holidays and make up withher after Valentine’s Day. Here’s a slightlybetter idea.

Customized Order Template This is the gift that keeps giving, andthey’ll have it for many expirations tocome. It’s particularly useful for the sweet-heart who loves trading skewed butterflies.

If you’re someone who gets annoyedevery time you want to place an order forthat wild long trade on the SPX with the

four legs, a stop-limit price, good for theday, on the CBOE, saving a custom ordertemplate is now your best friend. And thebest thing about custom order templates isthat it’s a one-time deal and it only takesthree steps.

1. Create an order.

2. Click the icon that looks like a littlepuzzle piece on top of an old-schoolfloppy disc (Figure 1, step 2) in the lowerright-hand corner to the left of theDelete/Confirm/Send buttons. (Workwith us here.)

3. When the “Save Custom Order Tem-plate” window pops up, name your tem-plate (Figure 1, step 3)—perhaps “HoneyBunny’s Butterfly,” or “Pookie Bear’sBack/Ratio.” You get the idea.

The great thing about custom tem-plates is that the next time you need thatsetup, you simply right-click on a bid/askin an option chain and you’ll see your cus-tomized order template option below thestandard ones—i.e., Stop and Stoplimit.Click on it to adjust your strikes, quantity,and price, and you’re off to the races.

Okay, so isn’t really a gift to your lovedone in the traditional sense, but you could

always recommend to that special some-one that they open up a TOS account andgive him/her this article!

The information contained in this article isnot intended to be investment advice andis for illustrative purposes only. Multiple-leg option strategies such as those dis-cussed in this article will have additionalcosts due to the additional strikes traded.Be sure to understand all risks involvedwith each strategy, including commissioncosts, before attempting to place any trade.Be aware that assignment on short optionstrategies discussed in this article couldlead to unwanted long or short positionson the underlying security. Customersmust consider all relevant risk factors,including their own personal financial sit-uations, before trading. Options involverisk and are not suitable for all investors.Supporting documentation for any claims,comparisons, statistics, or other technicaldata will be supplied upon request.

thinkMoney/10

31•Where Is It?•Platform tips from the TOS Trade Desk

•Words byTodd McGarthy

Custom TemplateOrders for ThatSomeone Special

FIGURE 1: Custom Template Order. Fire up an order from TOS (1), click the custom templateicon (2), give your template a name, and save it (3).

Tired of building the same trade? No problem.

?

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thinkMoney/11

32•Special Focus:Forex Trading•Photograph byFredrik Brodén

•thinkorswim.com

YOU DON’T HAVE TO BE A BIG FISH to swim in the pool of currencytrading anymore. It’s certainly not shrouded in the mystique it once

was, and advances in technology have helped to level the playing field by bringingit to the masses. But let’s be clear. It’s not for everyone, and we’ll cover some of thespecific risks a little later.

Also known as forex (or FX), currency trading is a vibrant marketplace. If youhaven’t looked at FX yet, perhaps it’s because you were too afraid of it, or just didn’t quite understand it. But the pool of currency to trade is expansive, and youdon’t have to be a rocket scientist to figure things out. In fact, when trading FX,you can rely on many of the same tools available on the TOS trading platform thatyou already know and love. And if you understand what makes a stock tick, youmore than likely understand what makes FX—ahem, pip. >

FOCUS:

forextrading

Familiarity breeds comfort, and though achart’s a chart, there are some differences

between trading currencies and equities youought to know before diving in.

words by Frederic Ruffy

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34•Special Focus:Forex Trading•Photograph byFredrik Brodén

•thinkorswim.com

WHAT MAKES THE DOLLAR MOVE?One way to think of a country’s currency is the sameway equity investors think of stocks. Higher stockprices typically reflect investor confidence in a com-pany’s future. Likewise, higher currency valuestypically reflect investor sentiment in the health ofthat country’s economy relative to other countries.Earlier in 2010, when word spread that the U.S.Federal Reserve was planning to buy back Treasurybonds, the U.S. dollar (USD) sank. By October2010, the greenback had buckled to new 15-year lowsagainst the Japanese yen. By buying bonds, the Fedsignaled to investors that it was taking serious actionto keep interest rates in check. Lower rates in the U.S.make the dollar less interesting relative to other cur-rencies. That is, as rates or yields fall, banks and otherinvestors will move money into financial systems thatoffer higher rates. For instance, if rates are low in theU.S., investors might move money into Australia andinvest in higher-yielding Australian bonds.

Capital movements across borders are like tidesthat flow in the ocean. These shifts of assets are pow-erful forces that drive currencies higher and lower.Economic data and interest rates are the key funda-mental drivers for this capital movement. As a result,trends can last months or even years and provide bothshort- and long-term profit opportunities in the cur-rency markets.

FIRST, THE NUTS AND BOLTSTrading FX is essentially pairs trading. You are buyingone currency and selling another. If you buy theEUR/USD pair, for example, you are long the euro andshort the US dollar. Some of the more actively tradedpairs today include the USD/JPY, GBP/USD, andEUR/JPY. Major currency pairs consist of any pairwith two of the currencies listed below. All other pairsare considered “exotic.”

USD U.S. dollarJPY Japanese yenEUR EuroAUD Australian dollarCAD Canadian dollarGBP British poundCHF Swiss francDKK Danish kroneNZD New Zealand dollarNOK Norwegian kroneSEK Swedish krona

The minimum price movement in a currency mar-ket is called a pip or tick. For example, let’s say thequote for EUR/USD is 1.4165 bid to 1.4175 ask. Sinceone pip is 0.0001, this means that the difference inprice between the bid and ask is ten pips, which isanother way of saying that the difference in price for€10,000 (euros) is $100 (U.S. dollars). Just as withstocks, investors can buy at the ask and sell on the bid.

For many currencies, the pip is equal to 1/100 of acent, or 0.0001. This seems like a small amount, but astandard trade is $100,000, so a 0.0001 pip equals $10.If you capture 10 pips on a trade, you’ve made $100.

IT’S ALL ABOUT THE LEVERAGEForex trading at TD Ameritrade offers a fixed leverageof 50 to 1 on major pairs and 20 to 1 on exotic pairs.The rules surrounding leverage on FX are a bit differ-ent than margin on equities. Let’s consider an exam-ple: Suppose the EUR/USD currency pair is trading at1.41750 bid to 1.41850 ask, and you buy the pair onthe 1.41850 ask. You are now long the euro and shortthe dollar. You’re anticipating the euro will bouncehigher against the dollar. Assume the euro gainsagainst the dollar, and the quote is now 1.42050 bid to1.42150 ask. You sell the position at the 1.42050 bidprice. On a $100,000 transaction size, you net 20 pips,or a $200 profit. If you’re trading on TD Ameritrade’snon-commission feed, your transaction costs areincluded in the quotes.

($1.42050 – $1.41850) X 100,000 = 0.002 = 20 pips = $200

On the other hand, if the euro loses against thedollar, and the quote is lower, say 1.41650 bid to1.41750 ask, on a $100,000 transaction size, you'redown 20 pips, or a $200 loss.

($1.41650 – $1.41850) X 100,000 = -0.002 = -20 pips = -$200

What’s important to understand about FX leverageis that you don’t need to put up the entire $100,000 totrade EUR/USD. The leverage varies by firm, but it’snot uncommon to see leverage rates of 5 to 1 or even50 to 1 (as with TD Ameritrade). If, for example,you’ve put down $2,000 (50 to 1) and capture 20 pips

fx.

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on a currency trade, you’ve made $200 or 10% onyour investment. However, leverage like this is a dou-ble-edged sword: The more you have, the higher thepotential rewards, and the greater the risk of heftypercentage losses.

THE OTHER BITSFX has some unique features that appeal to equityand options traders, in particular. The following is ashort list.

Same Board, Different Game. Adding FX to your gameplan gives you another product to trade, but it’s notlike you’ll be starting from scratch. You can use manyof the same analysis techniques that you do for equi-ties. After all, a chart is a chart. Chances are, many ofthe indicators that you use to trade stocks, futures, oroptions can be applied to FX charts as well. In Figure1, notice the trend in the USD/JPY currency pair fromMay to November 2010. Even simple trendlines can beuseful when looking for the next major trend in a cur-rency pair.

Trading currencies can also provide some portfoliodiversification. It’s another asset class and anotheropportunity to initiate positions to build a portfolio.If, for example, your stock portfolio isn’t doing well,some of those losses might be offset by positiveresults from a profitable currency position. There’s alot to be said for trading asset groups that do not havea high degree of correlation.

The Long and Short of It. Since currency markets tendto move in trends, they can offer both short- and long-term trading opportunities. For example, the investorfocused on fundamental factors such as interest ratesand economic data can trade on information fromnews releases in search of short-term profits, or evenintraday moves. Economic news releases tend tocause very short bursts of activity in financial mar-kets, including volatile moves in currency pairs. Theidea is to capture a few pips here and there. Remem-

ber, hit for singles, not home runs.Some currencies trend nicely over time and are

sometimes used for longer-term positions. For exam-ple, an investor who expects the dollar to reboundagainst the yen through 2012 might initiate a longposition in the USD/JPY and place a stop-loss above arecent low that is a predetermined price designed toget him out of the trade when that price is reached—something you can program right into the TOS tradingplatform. A long-term, trend-following approach canbe just as useful in trading currency pairs as it is inequities. Frequently, the key is to correctly assesslonger-term macro trends by reading the news andeconomic reports, just as you would equities.

Rock and Roll Around the Clock. Since international cur-rency markets overlap, you can trade currencies dayand night. For the week, markets are normally openfrom 6:00 p.m. Sunday to 4:00 p.m. Friday (Centraltime). The continuous trading helps to ensure thatthere are no “speed bumps” or big moves when mar-kets are closed. The largest volume and most liquidmarkets exist when multiple international marketsare trading.

Because there is no daily close for the currencymarket, the value of any open FX position is calcu-lated at 2:00 p.m. Central time every day and adjusteddue to rollover rates. The rollover is simply the inter-est rate differential between the currency you’re longversus the currency you’re short. If you pay morethan you earn, the rollover will result in a debit. If youearn more than you pay, you get a credit. So, the dailyadjustment is a net debit or credit to the position.Essentially, automatically and behind the scenes, atthe end of the day (2:00 p.m.), one position is closedand a new one is opened reflecting the debit or credit.This process is sometimes called the overnight roll orthe Tom-next procedure. (See page 36 for more on theovernight roll.)

Finally, it’s worth mentioning that although everyinvestment involves some risk, the risk of loss in trad-

ing off-exchange forex contracts can besubstantial. So before jumping in with bothfeet, understand that the only funds thatshould ever be used to speculate in foreigncurrency trading are funds that representrisk capital—i.e., funds you can afford tolose without affecting your financial situa-tion. The reality is that no one can predictwhich way exchange rates will go, and theforex market is volatile. Leverage can pro-duce large losses in relation to your initialdeposit. In fact, even a small move againstyour position may result in a large loss,including the loss of your entire deposit.And, depending on your agreement withyour dealer, you could also be required topay additional losses.

UNDERSTANDING THE RISKS of trading FX iskey, and if it’s a new concept for you,sure, it will take a little time and educa-

For more informationon opening a forexaccount with TOS, goto click path: thinkor-swim.com> Whythinkorswim>Order Types &Products

FIGURE 1: A chart is a chart. Does this chart look familiar? Most of the technical indicators that stock and optionstraders use are shared by FX as well. This chart happens to show the dollar/yen (USD/JPY), but it could just as well beSPX. For illustrative purposes only. Source: thinkorswim.

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36•Special Focus:Forex Trading•thinkorswim.com

• As with stocks orfutures, to trade forex(FX), you need toopen up a separateforex account with

TD Ameritrade. Once open, your FXaccount will be listed under the samelogin as your other thinkorswimaccounts. This allows you to switch backand forth from, say, equities and optionsto FX just by selecting the active accountin the upper left-hand corner of the plat-form. Nice.

Practice Makes Perfect Once you’ve opened a FX account, youmight want to practice a trade or twobefore committing real capital. To do this,select the paperMoney platform at thethinkorswim login screen. With paper-Money, you can familiarize yourself withall of the trading platform’s features andhow to place an order. Once you’ve got thehang of things, if you’ve planning on hold-

ing any currency pairs overnight, youshould understand how interest ratescould impact your P/L.

Checking Your Rollover RatesJumping ahead a little, an important con-sideration when trading FX is the payouton overnight interest rates. Each countrypays out some interest for holding its cur-rency. In the U.S., for example, it’s the Fedfunds rate. You earn that rate if you’re longthe U.S. dollar (USD), and you pay thatrate if you’re short it. That’s important,because every FX trade is a pairs trade,where you’re buying one currency andshorting another. For example, if you buythe USD/JPY and hold that overnight,you’re buying the U.S. dollar and shortingthe Japanese yen.

Because you’re long the dollar, youreceive the dollar interest rate. Becauseyou’re short the yen, you pay the yeninterest rate. If you hold a currency pairovernight, the net difference between therate you’re paid and that which you pay,

fx.

FIGURE 1: Forex rollover rates. To calculate how much interest your long or short currency pair is making or costing you per night, go to the click path MarketWatch>Rollover Rates> “Long P/L” or “Short P/L” columns. For illustrative purposes only.Source: thinkorswim from TD Ameritrade.

FX Tips and the Overnight Roll

tion to learn the ins and outs. Yet, formany investors, FX is an exciting andliquid market to trade. The key driv-ers—economic data and changes ininterest rates—are easy to follow. Justas we’ve seen with the U.S. dollar,currency prices can trend over timeand provide both long-term andshort-term trading opportunities. Ifyou’re already trading equities, youdon’t need to reinvent the wheel. Youcan use many of the TOS platformtools that you already know and love.

•Trading forex involves speculation,and the risk of loss can be substan-tial. Investors must consider all rele-vant risk factors, including their ownpersonal financial situations, beforetrading. Trading foreign exchange onmargin carries a high level of risk, aswell as its own unique risk factors.Forex investments are subject tocounter-party risk, as there is no cen-tral clearing organization for thesetransactions. Before considering thetrading of this product, please readthe Forex Risk Disclosure available athttp://www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf. A forex dealer canbe compensated via commissionand/or spread on forex trades. TD Ameritrade is subsequently com-pensated by the forex dealer. Forexaccounts are not protected by theSecurities Investor Protection Corpora-tion (SIPC). Diversification does noteliminate the risk of experiencinginvestment losses.

For more informationon opening a forexaccount with thinkor-swim, go to thinkorswim.comand follow the clickpath to Why Thinkor-swim> Order Types& Products.

If you made money on your currency pair while sleeping but didn’t know why, here’s your answer.

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Q: Can I trade FXin an IRA?

A: Not at this time.FX trading is avail-able only in marginaccounts.

Q: Can I just starttrading FX in myaccount?

A: You need toopen a FX accountwith us before youcan route forexorders, and it’s easyto do. Go to thinko-rswim.com and login to the accountsservices center.Click on the buttonto apply for FXtrading on eligibleaccounts. That willtake you to a pagethat shows yourmargin accounts,and another buttonto request forextrading. Click onthat, and you’re onyour way to FXtrading.

Now, even thoughyou opened a forexaccount, that’s onlyon the back end.You’ll be able totrade FX rightalongside yourstocks, options,futures, and fundsand see the posi-tions on the tradingplatform. You alsodon’t have to fundyour FX accountseparately.

Q: What is thecommission on FXtrading?

A: If you choosethe non-commis-sion option for yourFX trades, thereisn’t a commission,but it isn’t free.Since mid-markettrades do not occuryou can only buyon the offer and sellon the bid all of thetransaction fees areimplicitly priced in

to the quoted mar-kets. Should youchoose the commis-sion-based option,FX trades are sub-ject to a fixed-com-mission structurebased in counter-currency units (thesecond symbol of apair). For example,the commissionfrom a 1,000-lotEUR/USD tradewould be USD $1($1 minimumand/or $0.10 per1,000 units). Thecommission from aUSD/JPY trade of5,000 units wouldbe JPY ¥90.

Q: When do FXtraders sleep?

A: Not often. TheFX market is opencontinuously fromSunday at 4 p.m.CT to Friday at4 p.m. CT. Becausethe FX market doesn’t really havea close during thattime, the value andprofit/loss on anyposition you hold iscalculated at 2 p.m.CT every day.

Q: How muchmoney do I need totrade FX?

A: There’s no min-imum account size,but there are mar-gins for FX posi-tions based on theleverage allowedfor the currency.For pairs betweenmajor currenciessuch as the U.S.dollar, Australian

dollar, Britishpound, Canadiandollar, Danishkrone, euro, Japan-ese yen, NewZealand dollar,Norwegian krone,Swedish krona, andSwiss franc, theleverage is 50 to 1.For all other pairs,the leverage is 20 to1. That means for aposition that’s long10,000 USD/JPY,the margin require-ment is $200. For10,000 EUR/USD,the margin is 200euros. The marginrequirement isbased on the firstcurrency of the pair.

Q+A:FOREX TRADING

and the method that the interest is debitedor credited, is called the rollover (orovernight roll). This is not something youhave to worry about doing yourself. It’s alldone automatically behind the scenes at 2p.m. CT, and posted at 4 p.m. CT.

You’ll find the “Rollover Rates” page onthe MarketWatch tab in the submenu.That gives you an idea of the debit orcredit for overnight FX positions. There areseven fields for each pair: close price, longopen, long swap, long P/L, short open,short swap, and short P/L. For example,take a look at the USD/JPY in Figure 1:The close price was 83.75, the long openwas 83.7479, the long swap was 21.00 yen,the long P/L was $0.25, the short openwas 83.7425, the short swap was -75.00yen, and the short P/L was -$0.89. Noticehow the long open is lower than the closeprice. With U.S. interest rates higher thanJapanese interest rates, you would earnmore interest being long USD than theinterest you pay being short JPY. The netinterest on an overnight long USD/JPYposition is credited to your account byclosing your long USD/JPY position at83.75 and reopening it at a lower price of83.7479. That difference is 21 yen, whichis the long swap. The value of the 21 yen is$0.25, which is the amount credited toyour account.

If you were short the USD/JPY, you’dlook at the short rates. In that case, a shortposition would be closed at 83.75 andreopened at 83.7425. That difference rep-resents 75 yen, which is the short swap.The value of the 75 yen is $0.80, and is theamount you’re paying in interest by hold-ing the short USD/JPY position overnight.

•Forex trading privileges are subject to TD Ameritrade review and approval. Not all account owners will qualify.

ONCE YOURACCOUNT ISSET UP, YOUCAN TRADE FX RIGHTALONGSIDEYOUR STOCKS,OPTIONS,FUTURES, AND FUNDSAND SEE THEPOSITIONS ONTHE TRADINGPLATFORM.

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38•The Token Glossary•Terms you might stumble across in this issue•thinkorswim.com

gls

The information contained in this article is not intended to be investment advice and is for illustrative purposes only. Multi-legged options transac-tions such as spreads, straddles, iron condors, and butterflies will incur contract fees on each leg of the order, which may impact any potential return.Ancillary costs such as commissions, carrying costs, and fees should be evaluated when considering any advanced option strategy. Be aware thatassignment on short option strategies could lead to an unwanted long or short position in the underlying security. Customers must consider all rele-vant risk factors, including their own personal financial situations, before trading. Options involve risks and are not suitable for all investors. Sup-porting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.

Spread• An option positionor order that containstwo or more option“legs” and includes atleast one long andone short option.

Implied Volatility• The market’s forecast of the futurevolatility of the underlying security;directly reflected in an option’s pre-mium. Implied volatility, expressed asan annualized number, is forward-looking and can change.

Delta • A measure of an

option's sensitivity toa $1 change in the

price of the underly-ing asset. All else

being equal, anoption with a 50 delta(also written as 0.50),

for example, wouldgain or lose $50 per $1move up in the under-

lying. An option’sdelta ranges between0 and 100. Long callsand short puts havepositive (+) deltas,whereas long puts

and short calls havenegative (–) deltas.

Vega• A measure of an options's sensitivityto a 1% change in the volatility of theunderlying asset.

Gamma• The velocity of anoption’s move ismeasured by a meas-ure of delta's sensitiv-ity to a change of $1in the price of theunderlying asset.Gamma is highest forat-the-money options(those at the samestrike as the underly-ing’s price), andapproaches zero asthe option moves further in- or out-of-the-money.

THETA• A measure of anoption's sensitivity tothe passing of time byeach calendar day.Positive theta refers tooption positions thatgain in value as timepasses, whereas neg-ative theta refers topositions that decayas time passes.

Calendar Spread• A DEFINED-RISK, LONG SPREADSTRATEGY, CONSTRUCTED BY SELLINGA SHORT-TERM OPTION AND BUYINGA LONGER-TERM OPTION OF THESAME CLASS (I.E., CALLS OR PUTS). THEGOAL: AS TIME PASSES, THE SHORTER-TERM OPTION TYPICALLY DECAYSFASTER THAN THE LONGER-TERMOPTION, AND PROFITS WHEN THESPREAD CAN BE SOLD FOR MORETHAN YOU PAID FOR IT. THE RISK ISTYPICALLY LIMITED TO THE DEBITINCURRED.

IRON CONDOR• A defined-risk, short spread strategy, constructed of a short put ver-

tical and a short call vertical. You assume the underlying will staywithin a certain range (typically between the strikes of the short

options). The goal: As time passes and/or volatility drops, the tradecan be bought back for less than the credit taken in or expire worth-less, resulting in a profit. The risk is typically limited to the difference

between the strikes, minus the total credit received.

Short Vertical• A defined-risk spread constructed of a short option anda further out-of-the-money option, both calls or puts.Short verticals are put on for a credit. Short put verticalsare bullish and short call verticals are bearish. As timepasses, and/or volatility drops, the short options decayfaster than the longs. The strategy is designed to profitwhen you can buy back the spread for less than you soldit for, or at expiration, the short option is at- or out-of-the-money. The risk is typically limited to the differencebetween the strikes, minus the premium received.

found on pages:

found on page:

12 & 18

found on page:

26

1212 & 21

20 & 26found on page:

found on pages:

12

found on pages:

12 & 27

12, 20, & 27

found on pages:

12, 20,& 26

found on page:

We goofed!• In the Fall 2010 issue of thinkMoney,our editor put his glasses on backwardsand stated that a short vertical profits

when the spread is bought back for morethan you sold it for. In the real world, this

doesn’t work. The spread profits whenyou can buy back the position for less

than you sold it for.

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The risk of loss in trading securities, options, futures, and forex can be sub-stantial. Customers must consider all relevant risk factors, including theirown personal financial situation, before trading. Options involve risk andare not suitable for all investors. See the options disclosure document Char-acteristics and Risks of Standardized Options. A copy can be requested viaemail at [email protected] or via mail to 600 W. Chicago Ave.,#100, Chicago, IL 60654-2597. Trading foreign exchange on margin car-ries a high level of risk, as well as its own unique risk factors. Please readForex Risk Disclosure (www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf) before considering trading this product.thinkorswim is compensated through a portion of the forex dealing spread.Funds deposited into an account with a broker-dealer for investment in anycurrency, or which are the proceeds of a currency position, or any currencyin an account with a broker-dealer, are not protected by the SecuritiesInvestor Protection Corporation (SIPC).

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