•random musings for traders at TD AmeritradeWinter 2014

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10/INVESTINGLIKE A TRADER,

FOR TRADERS

18/IT'S A COVEREDCALL REVOLUTION

24/THE SECRETSAUCE FOR

TRADING VIX

SCRIPT-WRITING FOCUS:

34/CREATE YOUROWN PLATFORM

BELLS & WHISTLES

thinkMoney ta

kes

home the Gold at

the

2013 Pearl Award

s!

(See page 9 fo

r det

ails)

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Bring out the option trading machine in you.

Market volatility, volume, and system availability may delay account access and trade executions.

Options are not suitable for all investors as the special risks inherent to option trading may expose investors to potentially rapid and substantial losses. Option trading privileges subject to TD Ameritrade review and approval. Before trading options, carefully read the previously provided copy of the options disclosure document: Characteristics and Risks of Standardized Options. See our website or contact us at 800-669-3900 for additional copies.

*TD Ameritrade was among the firms listed in the category of “Best for Options Traders” in Barron’s Online Broker Review for five years in a row (2009-2013). Barron’s is a trademark of Dow Jones, L.P. All rights reserved. Reprinted with permission.

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

You eat iron condors for breakfast. You straddle the market like it’s nobody’s business. When it comes to option trading, you think

you know it all, right? Think again. There’s a world of option opportunity out there. And we keep bringing you the innovative tools

to help take it on. Slice and dice data like never before with option statistics. Scan thousands of optionable stocks in seconds with

dynamic scanning. It’s no wonder why Barron’s named us among the “Best for Options Traders” five years in a row.*

Stay on top of the option market with thinkorswim® platform tools.

Learn more at tdameritrade.com/options

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04•Contents•Photograph byFredrik Brodén

•tdameritrade.com

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p. 10

You're Not an InvestorAnymoreThe investing paradigm haschanged. Fundamental analy-sis is still important as ever,but neglecting probability andvolatility in today’s market canput you behind the curve.

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Buy. Sell. Hold.TD Ameritrade Mobile Trader is the app that’s powerful enough

to do it all. Trade equities, multi-leg options, exchange-traded

funds (ETFs), futures, and forex. Plus, get research and market

analysis no matter where you are.

Learn more at tdameritrade.com/mobiletrader

Download Aurasma from the app

store on your device—and hold

your phone up to the image on this

page for an interactive experience.

Market volatility, volume, and system availability may delay account access and trade executions.

Access to real-time market data is conditioned on acceptance of the exchange agreements. Professional access differs and subscription fees may apply. For details, see our Professional Rates and Fees listing.

The risk of loss in trading securities, options, futures, and forex can be substantial. Clients must consider all relevant risk factors, including their own personal financial situation, before trading. Option, futures, and/or forex trading privileges subject to TD Ameritrade review and approval. Not all account owners will qualify. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).

Multiple-leg option transactions, such as iron condors, will incur contract fees on each leg.

Third-party research and tools are obtained from companies not affiliated with TD Ameritrade, and are provided for informational purposes only. While the information is deemed reliable, TD Ameritrade does not guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with respect to the results to be obtained from its use. Please consult other sources of information and consider your individual financial position and goals before making an independent investment decision. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

TDA 1389 S 07/13

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07•Contents•Cover photograph byFredrik Brodén

•tdameritrade.com

Miscellaneous

Features

10/ You’re Not An Investor AnymoreThe old world looked at PE ratios and dividendyields as a basis for investment strategy. Today, ifyou’re skipping volatility and probability, you’remissing some important information. Savvytraders do this...And Granny can do this, too.

18/ The Truth About CoveredCallsJust when you thought you’ve heard it all about this staple strategy, along comes a newreason for traders to rethink this old dog.

24/The Unfair AdvantageIf you’re trading VIX options based off a VIXchart, your compass is off. Now that you haveaccess to VIX futures with thinkorswim®, notonly are you amongst a privileged few, you’re inyour happy place.

08/A Quick Howdy

15/Love Notes

16/News + ViewsAfter three notableexchange glitchesraise eyebrows withtraders, is it time foran OPRA backup over-haul? + The Suitchats on her favoritenew sharing toy.

28/Ask the Trader GuyOur resident advice-disher breaks downvolatility crushes,how dividends affectoption prices, andSuperman’s tradingsecrets.

Columns

42/The TokenGlossary

34/ Special Focus: Script Writingon thinkorswimEASY CODE FOR SMART TRADERSWant a chart indicator that doesn’t exist yet?Write it yourself. No, you don’t have to sport apocket protector to do it. You just need toknow your thinkScript® ABCs.

PLUS: SCRIPTS Q+A

TD Ameritrade Contact Info You Could UseClient Services Representative: 800-669-3900New Accounts: 800-454-9272

•thinkorswim Support: 800-672-2098thinkorswim@tdameritrade.comPlatform Feedback:thinkorswimfeedback@tdameritrade.comTech Support:thinkorswimtechsupport@tdameritrade.com paperMoney Support:thinkorswimpapermoney@tdameritrade.comFor all other inquiries:tdameritrade.com/contact-us

•General Mailing Address200 S. 108th AveOmaha, NE 68154

•

Follow TD Ameritrade

30/The SpotlightIf script-writing hasyou befuddled, DavidKier, aka “Mr. Script,”is the man with theanswers. And hewants to chat withyou.

And follow thinkorswim on Twitter, too: @thinkorswim

BACK ISSUES OF THINKMONEY!To view past issues of thinkMoney, hop on over totdameritrade.com/thinkmoney. You'll be glad you did.

cont.

22/Trader TrioAs if the new funda-mental tool for traderswasn’t cool enough,you can now scan foroptions, as well asupdate your watchlistsevery few minutes—automatically.

40/Capiche?Index options likethose on SPX can costa pretty penny. Ifyou’re looking for abetter deal, thinkweeklies.

32/Coaches CornerYou may never beable to pick markettops and bottoms, butcertain breadth indi-cators could get youcloser.

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08•A Quick Howdy•tdameritrade.com

thinkMoney®

EDITORIAL DIRECTORKevin Lund

EDITORThomas Preston

ASSISTANT EDITOREileen Sutton

ART DIRECTORTom Brown

DESIGNERJennifer Roberts

•

CONTRIBUTING WRITERSNicole SherrodJohn BrodemusRachel Koning BealsChesley SpencerBrandon ChapmanKira Brecht

CHIEF PHOTOGRAPHERFredrik Brodén

CONTRIBUTING ILLUSTRATORJoe Morse

•PUBLISHERT3 PublishingEmail: info@t3publishing.comwww.t3publishing.com

PHO

TOG

RA

PH: F

RED

RIK

BR

OD

ÉN

There are two camps in thestock market today—investors and traders. Andwhile the differencesbetween them has beenbetter summed up in vol-umes of books on the sub-ject, it’s really the style thatseparates the two.Investors tend to be morerisk averse, and “in it” forthe long haul. Whiletraders are looking to makea quick buck on a short-term move using marketmomentum as a guide.

But readers alreadyknow this. After all, just byreceiving this, you’re likelya very active trader. Somoving past the mundanefinance lesson, the point isthat investors can betraders, and traders can beinvestors. However, as theinvesting paradigm shifts,and the markets becomemore short-term obsessed,the lines have becomeblurred as to which disci-pline you might use touncover investment

ideas—i.e. PE ratios anddividend yields, or proba-bilities and volatility. Theanswer—perhaps both.

Doing your due dili-gence to unearth your nexthidden gem doesn’t stop atfundamental analysis. Ifyou’re skipping over thethings you’ve learned as atrader—i.e., probabilitiesand volatility analysis—you’re missing out onsome valuable informa-tion. Our cover feature,“You’re Not an InvestorAnymore,” on page 10,helps break down whereyou can go to blend it all,right on the thinkorswim®trading platform.

And while we’re look-ing through the activeinvestor lens for amoment, you might wantto think about dusting offthe ‘ol covered call strategyand rethinking why it maynot just be for retirementaccounts and conservativeinvestors. Traders can ben-efit as well. On page 18,you’ll find strategy enlight-enment in “The Truth

About Covered Calls.”And finally, if you’ve

ever thought about creat-ing your own tool onthinkorswim before thedevelopers beat you to it,you ought to learn aboutscripting in this issue’sspecial focus on page 34.As they say, if you candream it, you can build it.Give it a whirl and shareyour ideas with us if youcreate your own tool youjust can’t live without.Who knows. It just mightend up on the platform!

Happy Trading!TD Ameritrade Trader Group

Trading Backwards

edit.

Got Feedback? Talk to us aboutthinkMoney! Take our survey and you’ll qualify forinfinite brownie points. tdameritrade.com/tmsurvey or write to us at thinkmoney@tdameritrade.com

WE GOOFED!If you're an astute proponent of the Black-Scholes pricing model, thenyou may have noticed an error in the "d2" formula on page 20 of "It'sthe Math, Stupid" in the Fall 2013 issue of thinkMoney. The imagebelow is the correct version. Fortunately, this error doesn’t affect thelessons contained in the article.

1n( ) + (r – )TS—K

o-2—2

d2=o-√—T

=d1– o-√—T

tm22_Pages2to9_rd2.qxd:pages.layout 2014-01-01 9:40 PM Page 8

• The information presented in this publication does notconsider your personal investment objectives or financialsituation; therefore, this publication does not make per-sonalized recommendations. This information shouldnot be construed as an offer to sell or a solicitation to buyany security. The investment strategies or the securitiesmay not be suitable for you. Any and all opinionsexpressed in this publication are subject to change with-out notice.

• Options transactions involve complex tax considera-tions that should be carefully reviewed prior to enteringinto any transaction.• The risk of loss in trading securities, options, futuresand forex can be substantial. Clients must consider allrelevant risk factors, including their own personal finan-cial situations, before trading. Options involve risk andare not suitable for all investors. See the Options Disclo-sure Document: Characteristics and Risks of Standard-ized Options. A copy accompanies this magazine if youhave not previously received one. Additional copies canbe obtained at tdameritrade.com or by contacting us. • Trading foreign exchange on margin carries a high levelof risk, as well as its own unique risk factors. Before con-sidering trading this product, please read the Forex RiskDisclosure, available at http://www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf. • A forex dealer can be compensated via commissionand/or spread on forex trades. TD Ameritrade is subse-quently compensated by the forex dealer.• Futures and forex accounts are not protected by theSecurities Investor Protection Corporation (SIPC).

TD Ameritrade, Inc. Member SIPC FINRA NFA

TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. ©2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permis-sion. Product and company names mentioned hereinmay be trademarks and/or registered trademarks oftheir respective companies.

thinkMoney/22

•

09•Disclaimers•tdameritrade.com

• Neither Investools® norits educational sub-sidiaries nor any of theirrespective officers, person-nel, representatives,agents or independentcontractors are, in suchcapacities, licensed finan-cial advisors, registeredinvestment advisors orregistered broker/dealers.Neither Investools norsuch educational sub-sidiaries provide invest-ment or financial adviceor make investment rec-ommendations, nor arethey in the business oftransacting trades, nor do

they direct client futuresaccounts nor give futurestrading advice tailored toany particula r client’s sit-uation. Nothing containedin this communicationconstitutes a solicitation,recommendation, promo-tion, endorsement or offerby Investools or others described herein, of any particular security,transaction, or invest-ment. Investools Inc. and TD Ameritrade, Inc.are separate but affiliatedcompanies that are notresponsible for eachother’s services or policies.

important

info

Transaction costs (com-missions and other fees)are important factors andshould be consideredwhen evaluating anyoptions trade. For sim-

plicity, the examples inthese articles do notinclude transaction costs.At TD Ameritrade, thestandard commission foronline equity orders is$9.99, online optionorders are $9.99 + $0.75per contract. Ordersplaced by other meanswill have higher transac-tion costs. Options exercises and assign-ments will incur a $19.99commission.

4 TD Ameritrade won the Gold Pearl for Best Overall Magazine Design (for circula-tion over 250,000), as well as tied with one other firm for the Bronze Pearl forBest Overall Editorial for circulation more than 250,000, at the Custom ContentCouncil 2013 Pearl Awards. For more information, http://bit.ly/tmpearls13.

3

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You’re

AnymoreanInvestor

NotWORDS BY CHESLEY SPENCERPHOTOGRAPH BY FREDRIK BRODÉN

THE OLD WORLD LOOKED AT PE RATIOS AND DIVIDEND YIELDS AS A BASIS FOR INVESTMENT STRATEGY.

TODAY, IF YOU’RE SKIPPING VOLATILITY ANDPROBABILITY, YOU’RE MISSING IMPORTANT INFORMATION.

SAVVY TRADERS DO THIS...AND GRANNY CAN DO THIS, TOO.

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12•Trader Analysis•Photograph by Fredrik Brodén

•tdameritrade.com

BUY AND HOLD MAY NOT BE DEAD.But it’s no longer the straightforward process it wasmade out to be. It is in fact a brave new world—withshort-term holdings, hedging, and derivatives becomingever more a part of the regular person’s financial lexi-con. There’s a cultural perception that the cutting-edgein trading is defined by high-speed quantitative analysis,algorithmic risk modeling, and a barrel-full of ten-sylla-ble words that hardly existed twenty years ago. Thetechnicians are rising it would seem, and the fundamen-talists are starting to be seen as, well, fundamentalists.

But this perception has a lot of holes. While it’strue a simple unmonitored portfolio can be a recipe fordisaster, the idea that fundamental analysis has beenreplaced by technical and probability analysis ismostly false. Let’s face it, when all you have is a ham-mer, all your trades look like nails. So using probabil-ity tools in conjunction with a grounding infundamentals can groom you to become a well-rounded, seasoned market crusader.

Let's take a deeper look at how you can add bothfundamental and probability tools into a comprehen-sive toolkit, without going cross-eyed.

WHAT’S GOOD FOR THE GANDERAs an options trader, fundamental analysis can prove asolid complement to the decisions you’re likely tomake. But the reverse is equally true. A solid under-standing of probability analysis through the lens ofoption volatility is invaluable, even if you trade onlystocks. Options may seem like voodoo to the uniniti-ated. But since their worth is tied to the value of therepresented stock, options prices can be quite usefulto someone trading an underlying security.

Implied volatility (IV) is the foundational buildingblock of most probability analysis. Without pummel-ing you with the math, expressed on an annualizedbasis, IV is a percentage representing the market’sexpectation of a security’s price range in the future.Notice I didn’t say which direction. Whereas companyfinancials and price charts help determine a stock’strend, IV helps determine magnitude, or how big theprice move might be. So IV and its siblings, “expectedmove” and “market-maker move,” can be invaluabletools regardless of your trading vehicles. Let’s breakdown how they work and where to find them.

1——Vol Index is the composite IV for an underlying inthe thinkorswim® platform. When in thinkorswim’sAnalyze tab, the probable range of a security’s pricecan be determined for any given date—meaning youcan see the expected stock range between any presentand future time you select. You can find the Vol Indexin a Watchlist column (Figure 1), as a snapshot withinthe Probability Analysis section, or on a day-by-daybasis within the Risk Profile section (both on the Ana-lyze tab of the thinkorswim platform).

Keep in mind the Vol Index is a statistical model of price expectation and not a crystal ball. As anequity holder, high vol can reveal when the marketexpects big stock moves and how big they might be.These date-specific values can potentially be used to help you time portfolio rebalancing, hedging, ortrade exits.

2——Expected Move can show you, the equity trader,the dollar value of an expected move by a specificoptions-expiration date. This is the non-percentagevalue shown on the far-right side of each optionsseries header. While the expiration date doesn’t affectyou directly, this kind of benchmark is a great forward-looking indicator to complement traditional chartingmethods.

3——Market Maker Move (“MMM”) is a displayedvalue when the volatility of the front-month optionsexpiration is higher than the vol of the next expiration.If displayed, you’ll find the MMM at the top right ofthe Trade All Products page in a yellow box when anequity is loaded. If you don’t see the MMM, it is proba-ble that the security is not displaying a MMM value atthat time.

When MMM is present, it implies there’s someevent in the near term, such as earnings or anannouncement, which can shift the price of the under-lying security. The MMM is a derived figure that sepa-rates the volatility implicit to time from the “extra”volatility attributed to the upcoming event—poten-tially giving you the amount of movement the marketanticipates the event to cause.

Again, none of these figures are tied to a move’sdirection. They are merely estimated ranges for a secu-rity, given a certain period of time. A stock trader canoften use these values to determine when a securitymight encounter a bumpier ride, thus signaling a timeto hedge, a time to build a position, or signal a time toexpect a potential reversal.

FIGURE 1: Triple Play. Three ways to track volatility and probabilitieson thinkorswim are the Vol Index, Expected Move, and the Market MakerMove. For illustrative purposes only.

BExpected Move

Marker Maker Move

Vol Index

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STRANGLE THAT STRADDLELet’s look at probability analysis in action by taking alook at high-volatility earnings trades. Picking a direc-tional trade like a long-option strategy, or a neutral tradelike a short straddle, using probability tools can comple-ment your fundamental analysis to give you the mostcomplete picture of a potential trade.

Whether your stock moves up or down, vol in near-month options often drops dramatically after an earn-ings announcement. So overall, option prices tend tomove down once vol is removed. This can work to youradvantage if you sell premium or work against you ifyou’re buying. How do you counter this effect? Look atvolatility to help determine if the price movement mightbe large enough (if you’re a buyer) or small enough (ifyou’re a seller) so that a correct assumption on direc-tion doesn’t turn into a Pyrrhic victory.

The Market-Maker Move above, along with the priceof an at-the-money straddle, will help you get a sense ofan expected range post-announcement. Since a longstraddle is a trade that is profitable when a movementin the underlying is larger than the cost of the trade, itwill be priced at or near the value that the market“thinks” the underlying is likely to move.

Reading this value is straightforward. On the Tradepage of thinkorswim, set the “Spread” dropdown abovethe options chain to “Straddle” and look at the price ofthe strike that is closest to the current market price ofthe underlying. If the front-month price of this straddlesuggests a smaller movement than expected, a longstraddle is more likely to pay off than a short straddle ifyour assumption is validated. If the move inferred bythe prices seems improbably large, the short-straddlepremium will overshadow delta loss from a movement

smaller than that range. Just remember that if youdecide on a directional trade, keep in mind that a net-short position will benefit from a vol-drop postannouncement and a net-long position will need alarger gain to offset that drop.

TRUST THE FUNDAMENTAL CLUESNow that's all well and good once you have a tradingidea. But how does one establish an assumption in thefirst place? Traders can take a look at fundamentals “bythe numbers” in the new Fundamentals screen underthe Analyze tab of thinkorswim (Figure 2, below). It’s agood way to start hunting for ideas. (See “Trader Trio”on page 22 for more on this tool.) Looking at previousquarters’ earnings is pretty straightforward. But youshould also consider other valuation metrics to get con-text for that history. For example, a company with ahistory of beating analyst estimates might be a marketdarling. But if this rising popularity has caused a price-to-earnings ratio to skew, it may be a sign that expecta-

tions are unrealisticallysunny. On the other hand, if acompany in a slumpingindustry has been showinggrowth in market share(viewable in the CompanyProfile), beating earnings esti-mates by even a modestamount might provoke a sur-prising gain because of a per-ceived flight to quality.

REGARDLESS OF THE SPE-CIFIC SCENARIO, COMPAREa security's earnings historyto the price history of thesecurity in that same period toget a sense of establishedtrends. Use your own judg-ment, along with customizedprojections in the Company

Profile, to plan the move you expect. Finally, compareyour analysis to market assumptions using probabilityanalysis, to decide how to best capitalize on your expec-tations, while keeping your risk at acceptable levels.

SEE GLOSSARYPAGE 42

FIGURE 2 : The Fundamental Page on thinkorswim is a smart tool forTraders who want to use traditional metrics. For illustrative purposes only.

For more informationon the risks of investingand option spreads, see page 43, #1-2.Spreads, Straddles, andother multiple-legoption strategies canentail substantialtransaction costs,including multiplecommissions, whichmay impact any poten-tial return. These areadvanced option strate-gies and often involvegreater risk, and morecomplex risk, thanbasic options trades.

Important Information

WHEN ALL YOU HAVE IS A HAMMER,ALL YOUR TRADES LOOK LIKE NAILS. SO USING PROBABILITYTOOLS IN CONJUNCTION WITH FUNDAMENTAL DATA CANGROOMYOU TO BECOME A WELL-ROUNDED,SEASONED MARKET CRUSADER.

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Learn more at www.CBOE.com/tradeSPXJoin the conversation on Twitter with dollar-sign tag $SPX

Trade CBOE’s suite of S&P® Index options for your risk management and income strategies.

Trade with simplicity and efficiency – achieve broad-market exposure in one trade, with a manageable contract size

Gain potentially favorable tax treatment – with many SPX options trades eligible for 60-40 tax treatment*

Settle in cash – Mini-SPX contracts are cash settled, so you never have to make or take delivery of unwanted shares

Exercise only at expiration – like SPX, XSPSM options are European-style contracts, so there is no risk of early assignment

*Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options, including SPX and XSP, are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the Tax Code. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS or from The Options Clearing Corporation at www.theocc.com. CBOE® and Chicago Board Options Exchange® are registered trademarks and Execute SuccessSM, SPXSM and XSPSM are service marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services, LLC and have been licensed for use by CBOE. CBOE’s options based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in such products. Copyright © 2014 CBOE. All rights reserved.

You want all the advantages of SPXSM tailored to your strategy at 1/10th the size.

It’s time to trade Mini-SPX options (ticker: XSP).

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15•Love Notes•Quips from the thinkorswim Chat Rooms•Photograph byFredrik Brodén

lttrs.

Got your own quip orpearl you’d like to share? Send your best prose tothinkmoney@tdameritrade.com.

• If only the Russell 2000 wouldtank, my wife will allow me tosleep indoors, out of the garage.Burt

• Optimists are better folks tohang around, until the house ison fire.Jenn

• People are never wrong, theyare just statistically improbable.Phin

• What if Steve Jobs was eatingGreek food when he was mak-ing the first Apple computer?Would we be talking aboutGyro5 phones? It would have avirtual dipping sauce. Sam

• If you stay in a bad trade longenough one can be right .David

• Repairing a loss is simple.You sell the other side andpray for a rally. Martha

• I’m more tired than bored,but I’ll work on that perception. Jack

• My 3D printer burned out onBitcoins. Max

• My six kids are going to orderthe new iPhones, depending ontheir income levels. I can’tafford the new iPhone becauseI had six kids.Bob

• How bad is it when you can’tcut your grass because it’s expi-ration week?Jo

• I have a 12-legged SpunkyLizard options trade on, but I forgot what I want the under-lying to do.Johnny

• Day-trading is like owning aBed & Breakfast. Most peopledo it until they run out ofmoney.Kristin

• Deflation is engineered intomost everything we havebought (cars, etc.) Inflation isengineered into everything weneed.Darryl

• Reality does not belong infinance or politics.Bob

• The problem with smart isthat it tends to think it can’t bewrong.Ken

• There is no managing risk in adisaster. There is only manag-ing the disaster.Shara

• I’m going to tell everyone atmy wife’s company Christmasparty that I trade catfish feedfutures.Scott

• Bacon improves everything.Allysa

• I shook my own hand, andagreed to take other side of myown trade. One of me shouldwin.Tommy

•Important InformationThese comments areexcerpts from emails sub-mitted by TD Ameritradeclients, as their views, andmay not reflect those of TD Ameritrade.Testimonialsmay not be representative ofthe experience of otherclients and are no guaran-tee of future performance orsuccess.

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16•News+Views•A hodgepodge of stuff we thought youshould know.

•Photograph byFredrik Brodén

•tdameritrade.com

Q: Hey, Suit! I started a blog fortrading. I wish you could make it easier for us to share screen-shots from thinkorswim® ontothe blog. -KARLA: I recently started a blog too, Karl.And I’m pretty sure that means thatblogs have officially jumped theshark. But I continue to be amazedat the power of social communica-tion on the “interweb.” A fewmonths ago, I joined Twitter(@TDANSherrod) and I’m fasci-nated by how many smart, opinion-ated traders and thought leaders areout there every day sharing theirperspective. I have a lot of veryyoung, sharp technologists on myteam who are way more current

than I am. Over a year ago, theystarted building a new capability inthinkorswim that is going to changethe way you interact in the Chatrooms, on Twitter, and on yourblogs. It’s revolutionary. It’s called:

Yup, that’s not a typo. Our mar-keting department told us we couldnot name it yet. But since you mightsee little “Share it!” messages allover this issue, here’s what it does.<this space intentionally leftblank> allows you to easily shareimages of thinkorswim capabilities.But not only that, it also allows youto easily share your personal set-tings with other traders. You maynot realize this, but thinkorswimhas over 2,000 settings that can becustomized. With just three clicksyou can share settings for entireworkspaces, grids, charts, watch-lists, order-entry templates, alerttemplates, and even…wait forit…scripts. Yes! Math nerds rejoice!

How will you access it? Easy, Hitthe “share” button in the upper leftcorner of any capability that issharable.

In the window that pops up,simply hit the copy button next tothe short link to copy it to your clipboard.

nws.

FOLLOW THE SUITRead more of Nicole'smusings on her own blog at tickertape-monthly.com/blog.

Next you can paste that link intoan email, your blog, Twitter, Face-book, the thinkorswim chatrooms…virtually anywhere.

Now your friends who have TD Ameritrade accounts (and I sin-cerely hope they all do—or what’sthe point in hanging out withthem?) will be able to easily applyyour settings to their instance ofthinkorswim.

Not since Snapchat has animage sharing technology beenlaunched that has so dramaticallyaltered the way that we share withone another. I can’t wait to see allthe creative ways you guys startusing this new technology in thecoming weeks and months. See you on the interweb!—The Suit

Ask The

Suit•

A little Q&A withNicole Sherrod,Managing Director,Trader Group at TD Ameritrade

tm22_News&Views_rd2.qxd:pages.layout 2014-01-01 9:34 PM Page 16

toys

Toys forTradersOur latest trading platform faves

thinkorswim®

FUTURES NOW!Watch the skinny onfutures trading fromthe experts, regard-less of the time of day.In conjunction withCNBC, the platformnow offers theFutures Now webcastto all users on a 24-hour basis. In theGadgets tools, chooseTrader TV. ThenFutures Now from thedropdown box.

TRADE FROM THE CHARTSFind a chart and pickit up. All day long, tryto make a buck…fromthe chart, that is. Toload a trade fromthinkorswim Charts,just right click on thechart itself and selectBUY or SELL, or cus-tomize the order withthe BUY Custom orSELL Custom. Thiswill bring up an orderticket with yourdefault quantity stockorder (typically 100,unless you’vechanged it).

GADGET REDUXIn case you missedthe release notes, it’sworth repeating thatthinkorswim Gadgetshave gotten coolerand easier to use. Besure to play with themenu at the bottomof the gadgets paneon the left sidebar ofthinkorswim. Youcan now add, moveand scroll throughthe gadgets, or makethem disappear,without pulling yourhair out.

Nope, it’s notAndrew LloydWeber’s maskedanti-hero sneakingaround the under-belly of the ParisOpera House. We’retalking about thetechnical gremlinsin the options-quotesystem, as a fast-expanding marketstrains multiple-exchange link-ups.OPRA is the OptionsPrice ReportingAuthority, thenational market sys-tem that connectsall exchange data innanoseconds byrecording quote-message traffic. Crit-ics say OPRA andthe exchanges needto beef up a price-quote back-up sys-tem and increasetesting in real time,under realistic mar-ket conditions.

A 12-exchangeprice freeze in Sep-tember (the

exchanges pointedfingers at OPRA)may just be thereality check thattips reform intohigh gear. In fact,the snafu was ablip, and its impacton volume limited,as orders werequickly executedby hand. But theoptions-marketglitch hit onlythree weeks afterNasdaq OMX’sstock-price distri-bution also hic-cupped. To addinsult to injury, aspring 2013 soft-ware upgrade at theChicago BoardOptions Exchangeshut down its CBOEVIX pricing for afew hours, and alarge, unintentionalGoldman SachsGroup Inc. optionsorder sent systemadministratorsscampering to findthe mistake. Securi-ties regulators, stillin high gear topolice and prevent arepeat of the 2010“flash crash”,weren’t amused.

After the Sep-tember incident,the Securities andExchange Commis-sion quickly gath-ered reps from U.S.stock and optionsexchanges, theFinancial IndustryRegulatory Author-ity, DepositoryTrust & ClearingCorp., and OptionsClearing Corp. The SEC told theserespective bodies to“provide compre-hensive actionplans that addressthe standards nec-essary to establishhighly resilient androbust systems forthe securities infor-mation proces-sors,” according to

an SEC statement.That includes “testing standardsand disclosure protocols.”

Translation:build out price-feedback-ups and putthem throughtougher tests. Soon.For their part,exchanges are waryabout extra, mis-guided steps thatadd to cost andcomplexity. Remem-ber, glitches so farare typicallysmoothed by man-ual-order fills of lit-tle consequence to

traders andinvestors. So far.

The bottom line?Any breakdown inquotes, no matterhow limited, nomatter how quicklyfilled by othermeans, risks thereputation of a pop-ular and increas-ingly crowdedoptions market.After all, it’s com-forting to know thatthe figure lurkingbehind the sceneshas the market’sback. Even if wenever see it.

Phantomof theOPRA…or the scarethat brings anoptions price-system fix?•Words by Rachel KoningBealsIllustration by Joe Morse

industryspotlight

For important information on therisks of investingand options, seepage 43, #1-2.

Important Information

tm22_News&Views_rd2.qxd:pages.layout 2014-01-01 9:34 PM Page 17

thinkMoney/22

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18•Strategy Focus•tdameritrade.com

THE T ABOUT COVERED CALLS

WORDS BY MARK AMBROSE PHOTOGRAPH BY FREDRIK BRODÉN

JUST WHEN YOU THOUGHT YOU’VE HEARD IT ALL ABOUT THIS STAPLE STRATEGY, ALONGCOMES A NEW REASON FOR TRADERS TORETHINK THIS OLD DOG.

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thinkMoney/22

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20•Strategy Focus •tdameritrade.com

rom newbie traders to retirees, covered calls arebecoming an important strategy to consider for bothmargin and IRA accounts. And because they’re so pop-ular, you probably think you’ve got it nailed down—i.e., buy 100 shares of stock then sell a call. Soundssimple, but is there more? In thinkMoney fashion, we’llexplore a different way to think about covered calls.

COVERED CALLS 101First, let’s nail down a definition. A covered call is abullish strategy that’s always long stock, and short anat-the-money or out-of-the-money (OTM) call, whereyou have 100 shares of stock for every call you sellshort. That’s the case for the majority of equity optionsin the U.S. that deliver 100 shares of stock. On the otherhand, if you sell, say, 2 calls against 100 shares ofstock, that’s a different strategy, not a covered call, andthat extra short call would be “uncovered.”

To create a covered call, you short an OTM callagainst stock you’ve bought or already own. If itexpires OTM, you keep the stock and maybe sellanother call in the next expiration.You can keep doingthis expiration after expiration, unless the stock movesabove the call’s strike price. In that case, you caneither let the now in-the-money (ITM) call be assigned

and deliver the long shares (that’s why the short call isconsidered “covered”), or you can buy back the shortITM call before expiration, take a loss on that call, andkeep the stock. Check out the Strategy Roller onthinkorswim. It lets you automate the rolling processbased on time, strike, delta, and expiration.

NOW, FOR TRADERS...Traditionally, the covered-call strategy has been used topursue two goals:

1) Generate income 2) Act as a hedge against a stock price’s drop

And while those two things may occur, they’re notthe primary reasons a savvy investor might use cov-ered calls. For starters, generated income implies con-sistency—something in fact the market can’t promise.In theory, income from a covered call comes from yourcredit when you sell the call (minus commissions). Butthe price for which you can sell an OTM call is not nec-essarily the same from one expiration to the next,mainly because of changes in implied volatility. Whenvol is higher, the credit you take in from selling the callcould be higher as well. But when vol is lower, thecredit for the call could be lower, as is potential incomefrom that covered call. That’s why if you’re using thecovered-call strategy to pay bills, you might want abackup plan.

A covered call can act as a hedge for long stock ifthe stock price drops, the short call expires OTM, andthe short call’s profit offsets the long stock’s loss. But ifthe stock drops more than the call price—often only afraction of the stock price—the covered-call strategycan begin to lose money. In fact, the covered call’smaximum possible loss is the price at which you buythe stock, minus credit(s) from short calls. The bottomline? If the stock price tanks, the short call potentiallyoffers minimal protection at best.

Okay. So what’s the lure for traders?

Lower cost basis. In a covered-call strategy, the stock’scost basis is the price you paid for the stock, minusyour credits from covered calls. If you buy stock for$50, and sell an OTM call for $1.00, your stock’s costbasis is $49. If that first OTM call expires worthless andyou sell another call for $.75, the stock’s cost basisgoes down to $48.25.

Now, this definition of cost basis has nothing to dowith tax reporting. Consult your tax expert for that.This particular definition is how a trader might see it.And that’s important. Because theoretically, if the cur-rent stock price is greater than your long stock’s costbasis, the position should be profitable. The lower your

FIGURE 1: Covered Call Profit Curve The covered call can limit yourupside, but the additional premium you collect will lower your cost basisand can increase the duration of the trade. For illustrative purposes only.

Covered Call

+

_

BREAKEVEN

Stock Price

Profit

Loss

Short Strike

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cost basis, the lower the stockprice has to be for it to behigher than the cost basis.Imagine the scenario if yourstock’s cost basis is $0. (Thatmight sound unlikely but it canhappen in certain stock-com-pensation plans.) Because thestock price can’t go below $0,as long as it’s $.01 or higher,that position can be profitable.So think of covered calls aspushing a long stock’s costbasis lower and lower. Maybenot to $0. But potentially lowerthan the stock’s current price.

The advantage of a lowercost basis comes down to thelikelihood of the long stockposition being profitable. If youbought 100 shares of ABC at$50, and another 100 shares ofABC at $51, which 100 shareswould have a better chance ofbeing profitable? The sharesyou bought for $50 only have tobe above $50 to be profitable,while the shares you bought for$51 have to be above $51. Thinkof cost basis as the long stock’sbreakeven point. The lower thebreakeven point, the less thestock has to go up in order to beprofitable. And the less thestock has to go up, the higherthe likelihood of it making that

move. A 1% move is more likely than a 10% move.

Longer duration. Covered calls can also increase theduration of how long you might hold a long stock posi-tion by hedging against losses. Reducing the cost basisby selling calls against the stock means you can movethe price of a stop loss lower (either a mental stop orstop order).

If you wanted to stop the loss of 100 shares of stockat $300, the stop price would be $48 for 100 shares,with a cost basis of $51, and $47 for 100 shares, with acost basis of $50. If the current stock price is $50.50,there is a greater chance it would hit a $48 stop than a$47 stop. That extra downside room means you mighthold that stock position longer and give it more of anopportunity to rally.

TAXES SCHMAXESSome people are concerned their stock will be calledaway with a covered call and trigger a taxable event.

The logic is that if the stock gets called away, the pricehas moved up higher than the strike price of the shortcall, and is either profitable or has a smaller loss.

For long-term investors, this may not be desirable.But from a trading perspective, this is a good thing.Profit is profit. And that’s the name of the game. Along-term investment means you’re speculating thatthe particular stock will outperform, which may ormay not happen. When viewing covered calls as atrading strategy, not an investing strategy, the goalbecomes whittling down the cost basis, while increas-ing the probability of profit and duration—things overwhich you have a lot more control. The process overtime should become almost mechanical, which couldgrow your confidence in your trading decisions. That’sgood for newbies, retirees, and even traders like youand me.

SEE GLOSSARYPAGE 42

Automate Your RollsTo "roll" a call is to buy back your short call and sell thenext month out, while leaving your stock positionalone. With thinkorswim's Strategy Roller (picturedbelow), found in the Monitor page, you can automateyour rolls each month according to the parametersyou define. Just click the Monitor tab and select Strat-egy Roller at the top of the page. For more informa-tion, go to the Learning Center attlc.thinkorswim.com and search for "Strategy Roller."

For more general information, see page43, #1.A covered call strategy can limitthe upside potential of the underlyingstock position, as the stock would likelybe called away in the event of substan-tial stock price increase. Additionally,any downside protection provided to therelated stock position is limited to thepremium received. (Short options canbe assigned at any time up to expira-tion regardless of the in-the-moneyamount.)

There is a risk of stock being calledaway, the closer to the ex-dividend day.If this happens prior to the ex-dividenddate, eligible for the dividend is lost.Income generated is at risk should theposition moves against the investor, ifthe investor later buys the call back at ahigher price. The investor can also losethe stock position if assigned.

The maximum risk of a covered callposition is the cost of the stock, less thepremium received for the call, plus alltransaction costs.

Rolling strategies can entail substan-tial transaction costs, including multi-ple commissions, which may impactany potential return. You are responsi-ble for all orders entered in your self-directed account.

For illustrative purposes only.

Important Information

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FUNDAMENTALS TABEVEN TRADERS CAN LOVE PEAs we mentioned earlier this issue, fundamentals mat-ter—even to traders. And thinkorswim has taken a leapforward by integrating the grand tradition of fundamentalanalytics alongside existing probability and technical-analysis tools, making the platform more useful totraders than ever. In a word, the new Fundamentals tabbrings to the table a company’s traditional tear-sheet datapoints, as well as other functions unique to thinkorswim.

Without entering a symbol, the page will load themajor industry sectors to start you off. When a particularindustry is selected, its listed securities are then dis-played. Click on any of these symbols to load the infor-mation on a particular security. This is a good way to doa quick market browse, or to compare companies in sim-ilar industries.

When you select a company, eitherdirectly with the symbol selector orfrom an industry list, the platformloads the available security into thetool. The tool’s primary section, “Bythe Numbers,” displays a tear sheetwith a company’s core fundamentals,including both an annualized and per-quarter historic view. You’ll find keyindicators like per-share earnings anddividends, return on equity or assets,tax rates, profit margins, asset turnover,and more.

Also included are symbol details fromthe previous Company Profile tool,whose functionality has been expanded.Don’t worry—the Company Profile page

you know and loveis still on the All Products page,but has beenexpanded in contextof the Fundamentalstab as well.

The revenue andmarket-cap visuali-zation is likewisedisplayed next to theTrefis expected price,and any custom pro-jection you mightmake. Click a rev-

enue stream to view its components’ forecasts. If youselect individual forecasts, you can adjust the graphcharting that element’s expectation to match your pro-jections.

For you Company Profile veterans, a number ofnew revenue parameters have been added as well, foran in-depth analysis of each division (click on theDivision Overview tab top-right). Finally, overall com-pany analyst reports, and each of a firm’s major busi-ness lines, are also available on the Company Detailsscreen. Much like the All Products tab, you can indi-vidually activate or arrange the Fundamentals tab’scomponents using the Wrench button at the top-right.This tab delivers vital corporate reporting data to jumpstart your research for a potential trading vehicle, aswell as help you make better-informed projections.

thinkMoney/22

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22•Trader Tools

FIGURE 1: The Fundamentals page featuring the company profile tool. For illustrative purposes only.

• You say nice things about our tools and we blush. But we know thinkorswim can also feel like a gnarly beast. The platform has so manydetailed features and tools that even its developers occasionally overlooksome of its more interesting and useful bells and whistles. Combine thatwith the never-ending work we do to expand and enhance these tools andyou could publish a whole magazine comprised of nothing but descrip-tions of what thinkorswim is capable of. Ego-stroking aside, here are threefeatures that could make you happy this particular gnarly beast exists.1

Trader

TrioThree thinkorswim tools you didn't know you should know

feat.

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SINGLE-OPTIONS SCREENERIN SEARCH OF THE PERFECT OPTIONA more recent platform expansion is a screener built into the Scan tab that lets you scan for specificoptions contracts based on your selected criteria (Figure 2). It also lets you search for underlying symbols that have options meeting those criteria, or a combination of the two.

If you’re familiar with the Stock Hacker feature, thelayout of this tool should be familiar. The tool’s upperportion provides the various scanning parameters, start-ing with which watchlist thetool should begin its search.Immediately below are buttonsto help you add filters like stock,options, and study filters (note:study filters are only available inLive Trading).

1. The Stock Filter button addsa criteria field that allows you tochoose parameters you requirein the underlying symbols, suchas price, volume, beta, etc.

2. The Option Filter buttonadds a criteria field that specifiesparameters of the particularoptions you seek such as delta,days to expiration, or strikeprice.

3. The Study Filter allows youto choose or create any technicalstudy to define which symbolsto return, such as symbols with a given MACD, orthose experiencing a moving-average crossover.

Combine any of these filters with up to ten unique crite-ria. Settings to specify the number of results, their sort-ing criteria, and a selection to include stocks, options,or both, are available in the dropdown menus belowyour list of criteria. Once you click the “Scan” buttonand results are returned, the resulting watchlist can besaved using the Disk button at the top-right of theresults on either a static or dynamic basis.

DYNAMIC WATCHLISTSNEW IDEAS. ALL THE TIME.Though this oldie-but-goodie has been around a while,it’s a useful function that often gets overlooked. Thebasic idea is simple. When you create a new watchlist,whether from the Scan tab or the Watchlist gadget, youcan save the watchlist as a “query” rather than as awatchlist based on your own parameters. By doing so,the watchlist automatically updates every three min-

utes, rather than asking you tomanually re-run the scan forcurrent results. So, for example,if you’d like to know what secu-rities are experiencing unusualoption volume at a givenmoment, or have a moving-average crossover in the last tenminutes, a dynamic watchlistwill continually update with thesymbols that meet your criteria.Looking at Figure 3, here’s howit works:

1. From the Scan > StockHacker tab, create a scan as ifyou were creating a static watch-list. Select the Scan button to theright. If you don’t know how to create a scan watch the videoat the Learning Center(http://bit.ly/tosscantab).

2. To create a Dynamic Watch-list, click “Save Scan Query” inthe action menu at the top-rightof the Stock Hacker tool. A box

will let you name the query. Click “Save.” It will now beavailable anywhere in the platform where a watchlistcan be viewed.

3. To tell the difference between your static and dynamicwatchlists, look for the small sonar icon to the left of thewatchlist name. If the icon’s there, that list is dynamic.

For more information on the risks ofinvesting and options, see page 43, #1-2.

Important Information

2 3FIGURE 2: Single-Options Screener. For illustrativepurposes only.

FIGURE 3: Dynamic Watchlist. For illustrative pur-poses only.

Use either of theseto save your resultsas a dynamic WL

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tm22_VIXfutures_f3_rd2.qxd:pages.layout 2014-01-01 9:45 PM Page 24

THEUN FA

IR

ADVANTAGE

IF YOU’RE TRADING VIX OPTIONS BASED OFF A VIX CHART, YOUR COMPASS IS OFF. NOWTHAT YOU HAVE ACCESS TO VIX FUTURES,NOT ONLY ARE YOU AMONGST A PRIVILEGEDFEW, YOU’RE IN YOUR HAPPY PLACE.

WORDS BY THOMAS PRESTON PHOTOGRAPH BY FREDRIK BRODÉN

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THE SOUP AND THE NUTSIn a word, SPX options drive the VIX. The VIX (oranticipation of what the VIX might be) drives VIXfutures. VIX futures drive VIX options. And VIXoptions drive the VVIX.

The VIX measures the implied volatility (“vol”) ofthe S&P 500 index (SPX) options. The VIX at 14.00should be interpreted as 14%, and is the market’s col-lective estimate of how much the price of the S&P 500might move up or down over a succeeding 30 days.The VIX is calculated from the prices of out-of-the-money (OTM) SPX options. So when the prices of SPXoptions go up, say, because traders expect a pricemove upward, the VIX goes up. When the prices ofSPX options go down, the VIX goes down. The VIXformula does a weighted average of the first two expi-rations of SPX options to arrive at a hypothetical con-stant 30-day-to-expiration volatility. Some investorsonly watch the VIX relative to the S&P 500. But that’sonly half the picture. VIX futures are the other half.

The symbol for VIX futures is /VX. On the Tradepage of thinkorswim, you’ll find the available futures

out five or six expirations with different prices at each(Figure 1). When the prices of the further-expirationfutures are higher, that’s called “contango.” When theprices of the further-expiration futures are lower, that’scalled “backwardation.” In most financial-futuresproducts, contango and backwardation are deter-mined from the “cost of carry”—the cost incurred byowning the underlying stocks or bonds.

VIX futures don’t have a cost to carry. Their con-tango, or backwardation, is determined by the mar-ket’s anticipation of what vol might be. For example, ifyou’re speculating on the VIX, don’t just look at theVIX index. Look at VIX futures, too. Market uncertainty

can create contango in VIX futures where expectationof future market vol exceeds the level of the VIX index.

Back in late 2008, when the VIX spiked higher dueto market fear, VIX futures were in backwardation,indicating there might be less vol in coming months.Investors who don’t want to trade the VIX may useVIX futures to anticipate higher or lower vol in thenear term, and adjust strategies accordingly.

CONNECTING THE DOTSRetail traders can’t trade the VIX itself, so they oftenspeculate using VIX options. But you can’t look at VIXoptions alone. When you’re looking at the VIX optionson the Trade page, you’ll see expirations out roughly tosix months (Figure 2). VIX options are European-styleand cash-settled, with Wednesday expirations 30 daysprior to the third Friday of the calendar month follow-ing the expiration of VIX options. (To see the VIX set-tlement value, use the symbol “VRO.”) Confusing, soit’s a good thing the expirations are clearly labeled foryou in the option chain of each series itself.

Sometimes VIX option prices don’t make sense rel-ative to the VIX. Why? Because of the golden rule of

thinkMoney/22

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26•VIX futures•tdameritrade.com

FIGURE 1: VIX futures on thinkorswim's Trade page. For illustrativepurposes only.

FIGURE 2: VIX options come from the VIX futures, not the popularindex itself. For illustrative purposes only.

was happy when CBOE VIXfutures were added to

TD Ameritrade’s thinkorswim®platform. So, it’s not running withthe bulls in Pamplona. But I’m atrader and excitable. VIX futureson a retail-trading platform are akind of game changer and canhelp to further level the playingfield between retail and profes-sional traders. With the VIXindex, VIX options, the VVIX(volatility of the VIX), and nowVIX futures, you can increasemarket awareness and makemore informed trading decisions.

I

CBOE Volatility Index (VIX)The de facto marketvolatility index used tomeasure the impliedvolatility of S&P 500 indexoptions. Otherwise knownto the public as the “fearindex,” it is most oftenused to gauge the level offear or complacency in amarket over a specifiedperiod of time. Typically, asthe VIX rises, option buy-ing activity increases, andoption premiums on theS&P 500 index increase aswell. As the VIX declines,option buying activitydecreases. The assump-tion is that greater optionactivity means the marketis buying up hedges, inanticipation of a correc-tion. However, the marketcan move higher or lower,despite a rising VIX.

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market making—price options off your hedge. As mar-ket makers buy and sell options, they hedge trades toavoid directional (delta) risk. If you make markets inVIX options, and you can’t trade the VIX itself, what’syour hedge? Bingo—VIX futures.

That’s why VIX options look at the prices of VIXfutures to determine pre-expiration value, not the VIXindex. And that’s why seeing VIX futures easily isexciting. thinkorswim is one of the few retail tradingplatforms to offer VIX futures—which help to makeVIX option pricing more transparent. Here’s how.

Recently, the VIX was 14.25. The 16 put with 19days to expiration was trading for 1.70, and the 16 putwith 54 days to expiration was trading for 1.55. Aren’toptions at the same strike with more days to expirationsupposed to have a higher value than options withfewer days to expiration? Yes, if you’re looking atequity options. VIX options in a particular expirationare priced off the VIX futures with the same expiration.If you’re looking at March VIX options, those are pricedoff March VIX futures. And because of the contango orbackwardation in VIX futures, the VIX options maylook mispriced if all you’re looking at is the spot VIX.

While the VIX was at 14.25, the VIX futures thatexpired in 19 days were 15.00, and the futures thatexpired in 54 days were 16.10. Because the VIX futureswith 54 days to expiration were trading higher thanthe futures with 19 days, the VIX puts with 54 days toexpiration were trading lower (1.55) than those with19 days (1.70).

THE KNEE BONE, SHIN BONE, ANDVVIXWithout VIX futures, it’s hard to makesense of VIX option prices. Seeing the priceof the VIX futures that have the same expi-ration as the VIX options, you can tellwhich VIX options are considered in themoney (ITM) and out of the money (OTM).This helps determine the strike prices youchoose for VIX option strategies.

Just as SPX drives the VIX, you can plug VIXoptions into the same formula to get the overall volatil-ity of the VVIX. If the VVIX is low, the market antici-pates that vol specifically, and the VIX might notexperience large changes up or down in the weeks fol-lowing. If the VVIX is high, the market anticipates

larger VIX price changes. A VVIX chart will show itoscillating up and down, with some mean reversion,like the VIX itself. While some traders might use theVVIX as an indicator for future VIX price changes,and/or corresponding price changes in the S&P 500you could use it as a measure of the amount of VIX-options premium, and consider whether credit ordebit strategies might be preferable.

Think about the S&P 500. If the S&P 500 has beenrallying and pushes the VIX lower, a contrarian tradermight believe the VIX is due to bounce. Two bullishstrategies to consider might be a short put or a long-call vertical.

Take a look at the VVIX as an indicationof whether VIX option premiums are rela-tively high or low. If the VVIX is high, abullish VIX strategy might be a short OTMput. If the VVIX is low, a bullish strategymight be a long VIX at-the-money (ATM)call vertical whose debit is relatively lowcompared to high VVIX markets.

Then look at the /VX futures prices todetermine which VIX options are ITM, OTM, or ATM,and choose the strikes for your strategy accordinglyshould you decide to proceed. Overall, this has been asimple example. But it shows how a basic knowledgeof VIX, VIX futures, VIX options, and VVIX interact,which might make volatility-strategy selection poten-tially simpler and more straightforward.

SEE GLOSSARYPAGE 42

If the VIX is the de factosentiment index for gaug-ing market fear and com-placency through theoptions market, whatwould be a great comple-ment to that? How aboutmeasuring portfolio activ-ity of millions of yourpeers. The Investor Move-ment Index (IMX) does justthat. In a word, the IMX is asentiment indicator ofsorts that uses real port-

IMX: The Other Sentiment Index

folios of over six millionclients to give you a betteridea of what investors areactually doing, versuswhat they’re thinking ofdoing.

While the IMX doesn’tpredict anything like mar-ket direction, it’s usefulwhen viewed over time insuggesting bullish andbearish sentiment by retailinvestors. It’s often beensaid that it’s the “bigmoney” that moves the

markets. But let’s face it.We as retail traders don’tinvest like the institutionsdo. The IMX gives you atruer sense of what a realhuman investor is thinking.

To access IMX, justtype in $IMX in any symbolbox on thinkorswim, or goto tdameritrade.com/IMXfor more info, monthlycommentary, and to signup for email alerts.

INVESTOR MOVEMENT INDEX (IMX): For illustrativepurposes only.

For more on the risks of investing,options, and futures,see page 43, #1-3, 5.

Important Information

THE GOLDEN RULE OFMARKET MAKING IS TOPRICE OPTIONS OFFYOUR HEDGE. BUT YOUCAN'T TRADE THE VIXITSELF, SO WHAT'SYOU'RE HEDGE? BINGO—VIX FUTURES.

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Q: Hey, Trader Guy!What does “volcrush” mean?

A: That’s short-handfor “volatilitycrush,” and it refersto when impliedvolatility drops sud-denly after, say, anews event like anearnings announce-ment. A lot of timesyou’ll see theimplied volatility ofoptions increaseahead of upcomingnews when there’s alot of uncertaintyabout what mighthappen. When thenews comes out, theuncertainty isreduced, and volgets crushed.

Q: Hey, Trader Guy!Sometimes I heartraders talk about“odds” and “proba-bilities.” What’s thedifference?

A: Odds are a ratio ofnumbers, like 2 to 1,or 3 to 1. Odds referto the number oftimes you can losebefore you win onetime, or the moneyyou can be paid ifyou win a bet. So,guessing the day ofthe week could bedescribed as having6 to 1 odds against.If you “take” theodds, you’re betting1, to win 6, that youcan guess the day ofthe week correctly.“Laying” the odds isa bet where you bet6 to win 1. Odds andprobabilities are thesame concept, but indifferent forms.Probabilities are apercentage of thetimes somethingoccurs, over the totalnumber of occur-rences. So, the prob-ability of guessingthe day of the weekis 1/7, or 14.28%.You can convertodds to probabilities,and vice versa. Toconvert a probabilityto odds, take theprobability anddivide it by 1, minusthe probability. Toconvert odds toprobability, dividethe odds by 1, plusthe odds.

Q: Hey, Trader Guy!When I’m workinga limit order for anoption spread at themid-price and notgetting filled, howlong should I keepworking it before Ichange the price orjust give up?

A: It’s hard to givereal guidelinesabout how long youshould work a limitorder because eachcase is unique. Butassuming twothings—one, you’retrading a liquidoption that has adecent level of trad-ing activity, andtwo, the price of theunderlying hasn’tchanged whichwould change thevalue of the optionspread, I think agood rule of thumbis to give a limitorder about 60 min-utes to see if it getsfilled at the mid-price, which is justthe average of thebid and ask prices. If it’s not filled bythat time, you couldchange the limitprice either higher(for a buy order) orlower (for a sellorder) but not by toomuch, maybe .01 ifthe options are trad-

ing in penny incre-ments. You don’twant to give up toomuch slippage tofair value. If chang-ing the limit price by.01 doesn’t get itfilled in a few min-utes, I’d cancel andlook for a new trade.Sometimes youneed to take yourball and go play in adifferent field.

Q: Hey, TraderGuy! Stock A is $50and pays a divi-dend, stock B is$50 and doesn’tpay a dividend. Allthings being equal,why are Stock A’scalls cheaper thanStock B’s?

A: These 3 words—cost of carry—willanswer 99% of thetoughest questions

in the world.“What’s for din-ner?” Cost of carry.Where’s the dog?”Cost of carry. “Doesthis make me lookfat?” Cost of carry.And it answers thisone, too. Think of acall as an alternativeto long stock. If youbuy stock, there’s acost to carry it in theform of interest paidto borrow money tobuy it, or interestlost on the cash youuse to buy it. A callhas to factor thatcost of carry into itsvalue as an alterna-tive to the longstock. If the stockpays a dividend, theamount of the divi-dend may partiallyoffset, wholly offset,or more than offset

the interest part ofthe cost of carry. So,the call on a divi-dend-paying stock isa little bit lessexpensive becauseof the reduced costof carry.

Q: Hey, Trader Guy!I’m betting my col-lege roommates acase of beer on thisanswer. If Super-man can make theEarth spin inreverse and maketime decay on longoptions positive,could Flash getdecay negativeagain by speedingup the expirationcycle?A: Yes.

thinkMoney/22

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28•Ask the Trader Guy•Rescuing traders, one question at a time.

•Photograph by Fredrik Brodén

trdr.

For information on options andmulti-leg optionstrategies, see page 43, #1-2.

Important Information

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Trade Architect®

helps put your

strategy into focus.

Explore Trade Architect at tdameritrade.com/tradearchitect

Keep the market where you want it—in sight. Keep up with the turns and trends in the market with Trade Architect®, an intuitive,

Web-based trading platform you can access anytime, from any computer. It puts the tools

and features you need front and center—making it easier for you to identify strategies,

monitor market action, and be ready to strike whenever potential opportunities arise.

Market volatility, volume, and system availability may delay account access and trade executions.

Access to real-time market data is conditioned on acceptance of the exchange agreements. Professional access differs and subscription fees may apply.

Past performance does not guarantee future results.

TD Ameritrade does not make recommendations or determine the suitability of any security, strategy, or course of action for you through the use of TD Ameritrade trading tools. Any investment decision you make in your self-directed account is solely your responsibility. Please consult other sources of information and consider your individual fi nancial position and goals before making an independent investment decision.

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

© 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

tm22_AssociateSpotlight_rd2.qxd:pages.layout 2014-01-01 9:13 PM Page 30

• Before his girlfriend put the kabosh on thedare-devil thing, David Kier—better knownwithin TD Ameritrade's Trader Group as“Mr. Script”—used to speed throughChicago’s morning traffic dodging cars andbuses and people on an old Italian road bikehe rebuilt himself.

Still a man on a mission, David devoteshis professional focus to fixing things—hav-ing trained his mind on Nebraska farms inhis youth where challenges rose daily. Davidlikes solving puzzles and finding answers.And every day he helps clients get the mostout of the thinkorswim platform.

David joined TD Ameritrade in 2007,working in client-tech support and with thetrade-desk team. On the trade desk, heearned a reputation as the go-to fix-it guy.Today, he spearheads charting developmentfor thinkorswim, and also hosts a weeklychat in the thinkScript® Lounge (see side-bar). How did this boy from a low-key farmcommunity become a savvy computer pro-grammer and part-time options trader? Wesat down with David to find out.

So, how did you become Mr. Script? In 2009, I came up to Chicago and met withGuido Espinosa—a very passionate individ-ual who developed thinkScript—the script-writing tool that turned thinkorswim into atotally customizable trading platform. Istarted playing with it. I was a math majorin college, so I gravitated towardthinkScript. And I like to problem solve,which is what writing code is all about. Iwas working on the tech-support team with

clients who wanted to use the feature towrite their own scripts. There wasn't a bigknowledge base for it. So I became theexpert. Clients liked it and I started support-ing it—hence my nickname.

Why are scripts so popular? For one, they allow you to manipulate tradi-tional technical analysis. ThinkScript allowsyou to develop something in thinkorswimthat’s not preconceived or predefined. Youcan expand into any direction.

What happens in the thinkScript chatroom? We have a dedicated group of users whoknow the software inside out. BecausethinkScript is so customizable you seeunique personalities who really want to dotheir own thing. We do some pretty intenseresearch that can be enhanced through

thinkScript. I showclients uniqueaspects of thethinkorswim plat-form that can beenhanced throughthinkScript or onlyaccessed bythinkScript. Clientshave questions andwe can build theanswers in thethinkScript Lounge.It's essentially on-demand develop-ment.

What's the coolestscript you've everseen?Oh, wow. I havethousands of scriptson my computer. Mybuddy in Omaha

wrote a script that would draw a snowmanon a chart for the holidays.

Got it. So what about a script that relatesto the markets?One client requested something calledAngle Swing Count. It defines angles ofmoving averages and then puts in logic-counting conditions, above and below price.

What's the bigger goal ahead for TD Ameritrade scripts?To make sure everyone can take full advan-tage of thinkorswim’s true power.thinkScript helps unlock that potential.

Do you miss biking to work in the snow? Of course. But, I do help my neighbors fixtheir bikes through the winter. My house isnow a bike shop. And my girlfriend’s happyI’m not at the center of my own video game!

thinkMoney/22

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31•Associate Spotlight•A chat with a TD Ameritrade VIP making things happen

•

Interview by Kira Brecht

•Illustration byJoe Morse

Meet Mr. Script, for RealChat with David "Mr. Script"Kier in the thinkScriptlounge Tuesdays, after themarket close.. Click the Chaticon at the top of thinkor-swim (2nd from right), thenclick the Chat tab, andselect "thinkScript Lounge."

•

David Kier wants to make every trader's life easier—with scripts

Meet the Fix-It Man

spot

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• When you compete, it’s typically a goodthing to be the last person standing. But intrading, the last person standing is thegreater fool because the psychology of greedand fear continually play out by missing bot-toms and buying tops. If you can relate tothis, you may find adding market-breadthindicators into your trading habits may helpyou break the buy-high-and-sell-low cycle.

Market breadth measures the degree towhich a majority of stocks are participatingwith a market’s trend. For example, theS&P 500 may have an up day. But, if amajority of stocks are down, or there ismore volume on stocks that declined, youmight interpret this as bad news. Breadth istypically used to identify possible diver-gences in the market, rather than confirm-ing the strength or weakness seen in anunderlying market trend.

ADVANCING VS. DECLINING ISSUESThe New York Stock Exchange (NYSE) isone popular exchange to monitor forbreadth because of its strict listing require-ments, size, and diversity. If you follow acapitalization-weighted index like the S&P500, you’ll find certain stocks will countmore than others because of their size. Byconsidering the number of stocks advanc-ing (moving up), versus the number ofstocks declining (going down), you’ll beequally weighting each stock. This elimi-nates the potential bias of a few large stockscarrying the index. You’ll find lots of waysto view this information. But, for our dis-cussion we’re going to be using a ratio ofadvancing-to-declining issues.

In the upper chart in Figure 1, you’ll seethe NYSE Advancing Issues ($ADVN) plot-ted against a relative-strength study ofDeclining Issues ($DECN). The left scale is

the value for the rel-ative strength lineand represents aratio of advancing-to-declining issues.The area highlightedtracks the marketswoon following thelast debt-ceilingnegotiation, andsubsequent debtdowngrade in 2011.This is a key area for

some traders, but before we get to that, let’stalk about volume.

UP VS. DOWN VOLUMEYou may have heard volume precedesprice. This idea is that volume will typi-cally increase ahead of a significant pricemove. From our breadth perspective,using the volume of the advancing anddeclining issues on the NYSE may giveyou a heads up when a trend changes. Orit might at least confirm the trend. Up vol-ume is comprised of the aggregate total ofvolume across all advancing issues on theNYSE for a given period, and vice versafor down volume.

The lower chart of Figure 1 is similar tothat of the upper chart—except that theNYSE Advanced Volume ($UVOL) is used

instead of $ADVN, and NYSE DeclinedVolume ($DVOL) replaces $DECN in thestudy. You can arrange both charts forbearish indications by reversing the orderof the symbols.

THE PUNCHLINEYou may have heard traders use the term“90% day (Figure 1).” A bullish 90% day iswhen there is nine times the volume ofadvancing to declining stocks, and 9 timesthe amount of up volume to down volume.The opposite would be true for bearish 90%days. You’ll notice that between August 9thto the 15th, three out of five days were 90%days. This may have provided an early bull-ish signal that breadth was improving.

WHILE THESE TYPES OF DIVERGENCESshould not be your sole trading signal, asa technician it’s important to approach themarket systematically and know whatyour market posture is. Using breadthindicators may give you more confidenceto know that you’re not alone.

thinkMoney/22

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32•Coach’s Corner•Pulling pearls from yourfavorite trading instructors.

•Words byBrandon Chapman, CMTInvestools Instructor

crn.

Finding Strengthin Numbers•

With market-breadth indicators, could buyinghigh and selling low be a thing of the past?

Chart Share!To download the chartsettings above, just copy the following link to your browser.http://bit.ly/toschartRSIFor how to use the sharefunction, see page 16.

FIGURE 1: Searching for Divergence. Market-breadth indicators don't necessarily confirm strength in a trend. They're better for finding divergence, or early warning signs (like "90%" days) that a trend could bereversing soon. Chart Source: thinkorswim®. For illustrative purposes only.

For more important information about therisks of investing, see page 43, #1. Past per-formance of a security or strategy does notguarantee future results or success. It is notpossible to invest directly in an index.

Important Information

90%Days

tm22_CoachesCorner_rd2.qxd:pages.layout 2014-01-01 9:20 PM Page 32

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Options are not suitable for all investors as the special risks inherent to option trading may expose investors to potentially rapid and substantial losses. Option trading privileges in a TD Ameritrade account subject to TD Ameritrade review and approval. Before trading options, carefully read Characteristics and Risks of Standardized Options. Contact TD Ameritrade at 800-669-3900 or your broker for a copy. RED Option Advisors, Inc. and TD Ameritrade, Inc. (member FINRA/SIPC/NFA) are separate but affi liated fi rms. Advisory services are provided exclusively by RED Option Advisors, Inc., and brokerage services are provided exclusively by TD Ameritrade, Inc. A subscription to RED Option Advisors will include a monthly fee. Please contact RED Option at 877-733-6786 for more information, including eligibility requirements. © 2012 TD Ameritrade IP Company, Inc.

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tm22_CoachesCorner_rd2.qxd:pages.layout 2014-01-01 9:20 PM Page 33

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34•Special Focus:Scripting•tdameritrade.com

CODE FOR SMART TRADERS

WORDS BYTHOMAS PRESTON PHOTOGRAPH BYFREDRIK BRODÉN

YEARNING FOR A CHARTINDICATOR THAT DOESN’TEXIST YET? WHY NOT WRITEIT YOURSELF. AND NO, YOUDON’T HAVE TO SPORT APOCKET PROTECTOR TO DOIT. YOU JUST NEED TO KNOWYOUR THINKSCRIPT ABCS.

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thinkMoney/22

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36•Special Focus:Scripting•Photograph byFredrik Brodén

•tdameritrade.com

Today, our programmers can still do it. But why notgive traders the ability to do it themselves, while creat-ing their own custom chart data using a simple lan-guage? With this lightning bolt of an idea, thinkScriptwas born.

No, thinkScript is not an add-on, plug-in, or some-thing to download. And best of all, you don’t need tobe a computer geek to learn it. That means ordinarytraders like you and me can learn enough aboutthinkScript to make our daily tasks a little easier. Atthe closing bell, this article is for regular people. Notprogrammers.

LET’S GET CRACKIN’thinkScript is most frequently used on the Charts andthe MarketWatch tabs. Think of accessing it the sameway you’d add a technical study, because thethinkScript editor that lets you write the thinkScriptcode exists inside the Chart studies and Quotes page.

For Charts 1. Click on the Studies button.2. Select “Edit Studies” in the new window that opensup (Figure 1).3. Click on the “New” button in the lower-left-handcorner. That opens up a thinkScript editor with adefault thinkScript code—“plot Data = close;”—inside it. You can delete that code and start typingyour own in that field.

Note the menu of thinkScript commands and func-tions on the right hand side of the editor window.That’s a thinkScript library with quick definitions ofeach of the functions.

For Quotes1. On the MarketWatch tab click Quotes in the topmenu.2. From the Quotes page, click on the small dot in theupper-left-hand corner next to the word “Symbol.” 3. Select “Customize” from the drop-down menu. 4. Scroll down the list of “Available Items” and click onone of the numbered “Custom” columns. 5. Double click to open the same thinkScript editorwindow that’s on Charts (Figure 1). 6. When you’re done writing your thinkScript code, hit“Apply” to display it on a chart or see it as a column onthe Quotes page.

As I mentioned, you can script just about anythingyou want that’s not in the platform (within reason, of

course). To get started, let’s look at a few cool exam-ples you might want to try.

1. Technical Indicator: Moving-Average CrossoverAbove all, thinkScript was created to tackle technicalanalysis. This is the code for a moving-averagecrossover shown in Figure 1, where you can see 10-dayand 30-day simple-moving averages on a chart. Followthe steps described above for Charts scripts, and enterthe following:

1. def tenday = reference simplemovingavg(length= 10);

2. def thirtyday = reference simplemovingavg(length = 30);

3. plot data1 = tenday;4. plot data2 = thirtyday;

Huh? Let’s back up and clarify terms.FIGURE 1: thinkScript Editor in thinkorswm Charts. For illustrative purposes only.

FIGURE 2: Once you've scripted your personal indicator in thinkor-swim, you can view it in Charts. The chart above is from the script inFigure 1. For illustrative purposes only.

Backin thinkorswim’s® early days, traders clamoredfor more charting tools like technical studies and strategy testing.Originally, the development team wrote these individual tools inthe platform’s rather complex programming language. That wasgreat for performance, but clunky for simpler ideas like “subtractthe 10-day moving average from the 30-day moving average.”

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“def”—Defines something in thinkScript. It says“define this thing named ‘tenday’ as referencing thestudy ‘simplemovingavg,’ which uses 10 days of data.”“def” also defines “thirtyday” as a simple-movingaverage that uses 30 days of data.

“reference”—A command of sorts that pulls studiesinto your code already written in thinkScript. As youknow, developers have already created hundreds ofstudies. Save yourself time and use “reference” when-ever you can. Here, thinkScript is pulling in a studycalled “simplemovingavg.” You can find “simple-movingavg” in the studies list on thinkorswim Charts.Once you find a study, reference it in your code. In thismoving-average crossover code, the “tenday” is tellingthe simplemovingavg study to use “length = 10.” Thatmeans use 10 days of prices in the moving-average cal-culation. The “length = 30” tells the “thirtyday” sim-ple-moving average to use 30 days of price data.

“plot”—Once you’ve defined the things for your chart,display them with the “plot” command. In this mov-ing-average crossover, we’re plotting two lines—a 10-day moving average, and a 30–day moving average.So, we’ll need to create two plots and call them differ-ent things. I just created “plot data1” and “plot data2,”and told them to display what we just defined. “plotdata1 = tenday” means “the plot command will dis-play this thing called ‘data1,’ which we defined aboveas ‘tenday.’” “plot data2 = thirtyday” does the samething for the 30-day simple-moving average.

By the way, at the end of each line of thinkScriptcode you’ll notice a semicolon (“;”). That tellsthinkScript that this command sentence is over. Also,a trained programmer could write a thinkScript codefor colors and all sorts of other things on a moving-average crossover. Don’t worry about that for now.Learn just enough thinkScript to get you started. You’llgo bonkers trying to figure it all out at once.

2. Custom Volatility: IV PercentileIf you want options data that doesn’t currently existas a platform feature, why not create it yourself?Another handy trick of thinkScript allows the Market-Watch tab to display a metric for a stock list on aQuotes page. You may already be familiar with the“Current IV Percentile” in the Trade page’s “Today’sOptions Statistics” section. That number shows the

current overall implied volatility of a stock’s options,relative to its past year’s high-to-low range. But whatif you want to see the IV percentile for a different timeframe, say, 3 months? (See Figure 3)Following the steps described for the Quotes scripts,enter this:

1. def ivol = if !IsNaN(imp_volatility) then imp_volatility else ivol[1];

2. def lowvol = lowest(ivol, 60);3. def highvol = highest(ivol, 60);4. def currentvol = imp_volatility;5. plot data = ((currentvol – lowvol)/

(highvol – lowvol)*100);

This thinkScript code defines four things—“ivol,”“lowvol,” “highvol,” and “currentvol,” and basesthem on the value of “imp_volatility.” “imp_volatility”is a study that gives you the platform’s “Vol Index”number, which is a stock’s options’ overall impliedvolatility. The “if !IsNaN” returns zero if the Vol Indexis unavailable for a symbol. The “lowest” and “high-est” are commands that order thinkScript to find thelowest or highest “ivol” over the previous 60 days. The“plot” command displays the results of a formulausing the things we’ve defined.

You can change “60” to whatever number forwhich you want to see the range. Keep in mind thateach month has about 20 trading days, so 60 tradingdays is about three months. If you want to show ayearly number, use “262,” which is approximately ayear’s trading days. To get this into a Watch List, fol-low these steps on the Market Watch tab:1. Click on the Quotes sub-tab. 2. Click on the dot to the left of the word “Symbol,” inthe upper-left-hand corner of the Quotes tab. 3. Select “Customize” from the drop-down menu. 4. When the “Customize Quotes” box opens, click on

thinkScript Help!

If you're stuck or just wantto explore all thatthinkScript has to offer,there are a couple of placesto go for help.

1. The Learning CenterFor a bevy of tutorials on all things scripting, followthe click path to tlc.thinkorswim.com>Charts> thinkScript.

2. thinkScript LoungeHear live chatter from David"Mr. Script" Kier himself(interviewed on page 30 ofthis issue). From thinkor-swim, click the Chat icon atthe top (2nd icon fromright). Then click the Chattab and select "thinkScriptLounge." A great place tomingle with other scriptors,ask questions, share ideas,and meet your potentialsoul mate.

FIGURE 3: Custom Vol Percentile. Don't want 12 months ofvolatility? Write a script to get three.. For illustrative purposes only.

Script a codeto change IV

Percentile from12 months

to 3.

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38•Special Focus:Scripting•tdameritrade.com

one of the “Custom” choices in the list of “AvailableItems.” That opens the “Custom Quote Formula” box,where you can click on the thinkScript editor tab andwrite in the code. Remember to name your thinkScriptcode so you can add it to your Quotes list.

3. BacktestingthinkScript is also used on thinkorswim charts as atechnical analysis back-testing tool. With this featureyou can see the potential profit and loss for hypotheti-cal trades generated on technical signals. Bear inmind, this does not include commission costs, whichwill affect your true P/L.

Let’s review strategy results that get long (buy astock or option) when a 10-day moving averagecrosses above the 30-day moving average; and getshort (sell a stock or option) when a 30-day movingaverage crosses above a 10-day moving average. To dothis, we have to write two scripts and separate them.

Script 1:1. def sma10 = simplemovingavg(close, 10);2. def sma30 = simplemovingavg(close, 30);3. AddOrder(OrderType.Buy_Auto, sma10 > sma30, tickColor = GetColor(6), arrowColor = GetColor(6));

Script 2:1. def sma10 = simplemovingavg(close, 10);2. def sma30 = simplemovingavg(close, 30);3. AddOrder(OrderType.Sell_Auto, sma10 < sma30, tickColor = GetColor(5), arrowColor = GetColor(5));

To combine the two and add this backtesting scriptto a chart, do the following:1.Right click on a chart, and select “Studies,” then“Edit Studies.”2. This time, click the “Strategies” tab in the upper-left-hand corner.3. Then click “New” in the lower-left-hand corner.When the thinkScript Editor tab opens, enter the codeunder thinkScript 1 above.

4. Give it an easy name like Movin-gAvgBuy.5. Click “OK” button in the lower-right-hand corner to close thethinkScript editor.6. Click “New” again.7. Enter a name like MovingAvgSell.8. Click “OK.”9. Look for the thinkScripts you justcreated in the Strategies list. Doubleclick to see them in the “Added Studiesand Strategies” window. 10. Hit “Apply.”

As in Figure 4, on the chart you’llsee buy-and-sell signals. To see

profit/loss, carefully right click one of the chart’s tradesignals. Then, select “Show Report” from the drop-down menu. The thinkScript code does this throughthe “AddOrder” command. This code specifies“Buy_Auto” when the “sma10” is greater than“sma30,” and “Sell_Auto” when “sma10” is less than“sma30.” Together, they create the chart’s hypotheticalbuys and sells. thinkScript also has commands foropening and closing buy-and-sell orders so you cancreate specific testing scenarios.

The “tickColor,” “arrowColor,” and “GetColor” arecommands thinkScript uses to add color to buy-and-sell signals. The numbers “5” and “6” refer respec-tively to red and green.

BONUS SCRIPT: SCRIPT ALERTSBeing tied into the markets doesn’t mean being tied toyour computer. If you’re out and about, and don’t havetime to watch the SPUs on TD Ameritrade’s mobile trad-ing apps, the alert functionality on the thinkorswim®platform lets you write custom technical indicators andhave messages sent to your phone or mobile devicewhen the indicator reaches a certain level or value.

1. On the Market Watch tab, click on the Alerts sub-tab. 2. Click the Study Alert button in the upper-right-handcorner. 3.When the Study Alerts box opens, click thethinkScript editor tab. 4. You’ll be presented with “SimpleMovingAvg( )” to getyou started. Delete that if you don’t want to be alertedon a moving average. But as an example, this is the codeyou would write to be alerted if the 30-day moving aver-age moves above the 10-day moving average.

For example:plot data = simplemovingavg(30) > simplemovingavg(10)

FIGURE 4: Backtest with thinkScript. You can turn your indicators into a strategybacktest. With the script for the 10- and 30-day moving averages in Figures 1 & 2, forexample, you can plot how many times they cross over a given period. For illustrativepurposes only.

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Q: Where can I learnmore about thinkScript?A: This link takes you to awell-organized thinkScriptresource. You’ll find every-thing from beginner tipsand help getting started, tomore advanced topics forexperienced programmers.

Q: If I create a propri-etary thinkScript indica-tor, can anyone else gainaccess?

A: No. The thinkScriptcode is associated withyour log in and can’t beaccessed by another user,even if on your computerthat person has logged intohis or her account.

Q: If I find thinkScriptcode online written bysomeone else is it safe touse?

A: As long as you enterthe code yourself anddon’t copy files to yourcomputer, thinkScript codewon’t harm your com-puter, or give someoneelse access to your tradingaccount or personal infor-mation. That said, wecan’t verify the accuracy orvalidity of any thinkScriptcode not written by ourdevelopment team.

Q: Does runningthinkScript code slowdown the thinkorswimplatform?

A: It’s possible for athinkScript code thataccesses live data acrossunderlying symbols—likethinkScript applied to aWatch List—to run slowly.If it happens, try applyingthe code to a shorterWatch List. Generally,thinkScript code doesn’tslow down quotes or orderrouting.

Q: Can I use thinkScriptto create live ordersbased on technical indi-cators?

A: It’s possible, but becareful. An error inthinkScript code can eitherenter live orders you don’twant, or create a largenumber of orders thatwould generate huge com-mission costs.

If you create an orderon the Trade page, you’llsee a small “gear” icon inthe lower-right-hand cor-ner of the Order Entry sec-tion. If you click on thaticon, you’ll open up theOrder Rules box. There,click the “Method” drop-down menu and choose“Study.” That will let youroute an order based onthe value of a study youalready defined.

Q+A

ORDINARYTRADERS LIKE YOU AND ME CAN LEARNENOUGHABOUTTHINKSCRIPTTO MAKEOUR DAILYTASKS A LITTLE EASIER.

For more information on therisks of investing and options,see page 43, #1-2.

Backtesting is the evalua-tion of a particular tradingstrategy using historical data.Results presented are hypo-thetical, they did not actuallyoccur and they may not takeinto consideration all transac-tion fees or taxes you wouldincur in an actual transac-tion. And just as past per-formance of a security doesnot guarantee future results,past performance of a strategydoes not guarantee the strat-egy will be successful in thefuture. Results could vary sig-nificantly, and losses couldresult.

Important Information

There are other controls in the Study Alertsbox, like the “Aggregation” period at thetop that lets you choose intraday, daily,weekly, or monthly data. There’s also the“Trigger if” drop-down menu that alertsyou if the value of your thinkScript studymeets certain conditions. When you’redone, click on the Create Alert button inthe lower right, and you’re almost done.

To make sure you get messages with trig-gered alerts:1. Click on Application Settings in the plat-form’s upper-right corner.2. Click the “Notifications” sub-tab. 3. In the “Notify about” list, choose “Alertis triggered.” 4. Check a notification method under“Alert settings” such as email or SMS.You’ll need a confirmed email address orphone number for SMS to set up alert noti-fications, which you’ll do at the top of the“Notifications” sub-tab.

There you have it. Use thinkScripts foralerts, and you’ll never have to miss a trad-ing signal again!

OKAY, WE COULDN’T HELP BUT GET Alittle bit geeky on that last script, but we’veonly scratched the surface of whatthinkScript can do. If you have an idea foryour own proprietary study, or want totweak an existing one, thinkScript is aboutthe most convenient and efficient way to doit. And you just might have fun doing it.

SCRPT

tm22_SpecialFocus.rd2.qxd:pages.layout 2014-01-01 12:05 AM Page 39

• You know how it rolls. You hit a certainage and think back to the old days whentimes seemed better. Canolis were madewith heavy cream (no low-fat allowed).Cool guys drove Camaros or Trans-Ams ormaybe even Corvettes, instead of today’sminivans with DVD players in the back.And a Prius? Please. But despite the walkdown memory lane, I’ve been a trader for30 years and I must confess times are betternow to trade options.

YOU’RE SKEPTICAL?Consider this. Back then, there were nostreaming quotes on computers or mobilephones. Getting trade-execution reportstook minutes instead of milliseconds. Andmarket makers like me kept the bid/askspreads high, wide and handsome. In fact,one of the biggest factors in bid/ask spreadsbeing narrower, or tighter, today is elec-tronic trading.

You want proof? Take a look at SPXoptions in two expirations—the weekly-expiration options and the options in theregular expiration cycle. The “regular” SPXoptions are still traded in open outcry at theCBOE. The weekly SPX options are tradedelectronically, and open outcry in thehybrid system. The weekly and regularexpiration options are both cash-settled, areboth based on the S&P 500 cash index, andhave the same contract size. The only differ-ence is that one is trading only in open out-cry, while the other is open outcry pluselectronic.

CLOSING THE GAPLook closely at the bid/ask spreads of bothtypes of options. The bid/ask spreads ofthe weekly SPX options are narrower.They’re up to 1/2 the width of the spreadsof the regular SPX options. The weeklySPX options have spreads .50 wide, whilethe regular SPX options have spreads over1.00 wide.

So, why is this? You have to understandhow market makers think about bid/askoptions spreads. When I was a marketmaker, a sheet told me the theoreticalvalue of an option for a given index price.I’d look at the index price, look at the theovalue, then make a bid price lower thanthe theoretical value and an ask pricehigher. That difference around theo valuewas my “edge.” But if the index changedwithout me looking, I’d be making a mar-ket off an inaccurate theo price. So I mademy bid/ask spreads wider to give me roomin case the index did move, especially a bigindex like the SPX. I didn’t want to get

picked off by making aninaccurate bid/ask off anold index quote.

But with electronicallytraded options, computersdon’t get caught not look-ing at the index price.With electronically tradedoptions, the quotes areelectronically generatedas well. So when thequotes are generated by acomputer using anoption-pricing model, thequotes can be updatedwith every tick in theindex price. The comput-ers don’t have that prob-lem, and are less

concerned about getting picked off. So,their bid/ask spreads can be a bit tighter.

Electronically traded options have beenwith us for years, and the resulting nar-rower bid/ask spreads can mean reducedslippage when retail traders like us executelimit orders. The options traded in pennyincrements wouldn’t be possible withoutelectronic trading. But sometimes you for-get how nice it is to trade them and need tobe reminded of the way it was in the olddays. But I still miss my Trans Am.

thinkMoney/22

•

40•Capiche•Pearls from a veteran floor trader

•Words by Thomas Preston

The Weekly Deal•

For big indices like SPX, weekly optionscan pinch a better penny

You can view all SPX andother weekly optionsunder the Trade tab inthinkorswim®. Just enter asymbol in the fill-in box inthe upper left, and if theyare listed, the weeklies willshow up in the Option Chainin the center of the page.

For important information on options, seepage 43, #1-2. Because they are short-livedinstruments, weekly options positionsrequire close monitoring, as they can besubject to significant volatility. Profits candisappear quickly and can even turn intolosses with a very small movement of theunderlying asset.

Important Information

cap.

tm22_Capiche_rd2.qxd:pages.layout 2014-01-01 9:17 PM Page 40

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27

thinkMoney/22

•

42•The Token Glossary•Terms you might stumble across in this issue.•tdameritrade.com

gls

AT THEMONEY • An option whosestrike is “at” the priceof the underlyingequity. Like out-of-the money options,the premium of an at-themoney optionis all “time” value.

IN THEMONEY• An option whosepremium contains“real” value, i.e. notjust time value. Forcalls, it’s any strikelower than the priceof the underlyingequity. For puts, it’sany strike that’shigher.

OUT OF THEMONEY• An option whosepremium is not onlyall “time” value, butthe strike is awayfrom the underlyingequity. For calls, it’sany strike higherthan the underlying.For puts, it’s anystrike that’s lower.

Short Straddle • A market-neutral strategy with unlim-ited risk, composed of an equal numberof short calls and puts of the same strikeprice, resulting in a credit taken in at theonset of the trade. The strategy assumesthe underlying will stay within a certainrange, in which case, as time passesand/or volatility drops, the options canbe bought back cheaper than the credittaken in, or expire worthless; resultingin a profit.

SHORT PUT• A bullish, directional strategy withunlimited risk in which a put option issold for a credit, without another option(of a different strike or expiration) orinstrument used as a hedge. The strat-egy assumes that the stock will stayabove the strike sold; in which case, astime passes and/or volatility drops, theoption can be bought back cheaper orexpire worthless, resulting in a profit.

Delta/Market Neutral• A strategy that begins with no specula-tive (directional)bias. All combined deltasbetween each leg of an option spread thatis delta neutral equal zero.

found on page:

found on page:

13

Delta• A MEASURE OF AN OPTION’S SENSITIVITY TO A $1 CHANGE IN THEUNDERLYING ASSET. ALL ELSE BEINGEQUAL, AN OPTION WITH A 50 DELTA(ALSO WRITTEN AS .50) FOR EXAM-PLE, WOULD GAIN 50 CENTS PER $1MOVE UP IN THE UNDERLYING. LONGCALLS AND SHORT PUTS HAVE POSI-TIVE (+) DELTAS, MEANING THEYGAIN AS THE UNDERLYING GAINS INVALUE. LONG PUTS AND SHORTCALLS HAVE NEGATIVE (–) DELTAS,MEANING THEY GAIN AS THEUNDERLYING DROPS IN VALUE.

27

found on page:

13, 20, 23 & 27

Long Call Vertical Spread• A defined-risk, bullish spread strategy, composed

of a long and a short option of the same type (i.e. calls). Long verticals are purchased for a debit at the onset of the trade. The risk of a long vertical

is typically limited to the debit of the trade.

27

found on page:

20 & 27

found on page:

20 & 27

found on page:

CBOE VOLATILITY INDEX (VIX)• The de facto market volatility index used to measure the implied volatility of S&P 500 index options.

Otherwise known to the public as the “fear index,” it is most often used to gauge the level of fear or complacencyin a market over a specified period of time. Typically, as the VIX rises, option buying activity increases, and

option premiums on the S&P 500 index increase as well. As the VIX declines, option buying activity decreases.The assumption is that greater option activity means the market is buying up hedges, in anticipation of a cor-

rection. However, the market can move higher or lower, despite a rising VIX.

found on page:

found on page:

13found on page:

13, 20 & 27

tm22_Glossary&Disclaimer_rd2.qxd:pages.layout 2014-01-01 9:26 PM Page 42

2/ OPTIONS STRATEGIESMini-options do not reduce the pershare cost or price of options.

Spreads, condors, butterflies, strad-dles, and other complex, multiple-legoption strategies can entail substantialtransaction costs, including multiplecommissions, which may impact anypotential return. These are advancedoption strategies and often involvegreater risk, and more complex risk,than basic options trades. Be awarethat assignment on short option strate-gies discussed in this article could leadto unwanted long or short positions onthe underlying security.

The naked put strategy includes ahigh risk of purchasing the correspon-ding stock at the strike price when themarket price of the stock will likely belower. Naked option strategies involvethe highest amount of risk and are onlyappropriate for traders with the highestrisk tolerance.

Naked option strategies involve thehighest amount of risk and are onlyappropriate for traders with the highestrisk tolerance.

The risk of loss on an uncovered calloption position is potentially unlimitedsince there is no limit to the priceincrease of the underlying security.

Option writing as an investmentstrategy is absolutely inappropriate foranyone who does not fully understandthe nature and extent of the risksinvolved.

A covered call strategy can limit theupside potential of the underlyingstock position, as the stock wouldlikely be called away in the event ofsubstantial stock price increase. Addi-tionally, any downside protection pro-vided to the related stock position islimited to the premium received. (Shortoptions can be assigned at any time upto expiration regardless of the in-the-money amount.)

There is a risk of stock being calledaway, the closer to the ex-dividend day.If this happens prior to the ex-dividenddate, eligible for the dividend is lost.

Income generated is at risk should theposition moves against the investor, ifthe investor later buys the call back at ahigher price. The investor can also losethe stock position if assigned.

The maximum risk of a covered callposition is the cost of the stock, less thepremium received for the call, plus alltransaction costs.

Rolling strategies can entail sub-stantial transaction costs, includingmultiple commissions, which mayimpact any potential return. You areresponsible for all orders entered inyour self-directed account.

3/ FUTURESFutures trading is not suitable for allinvestors as the risk of loss in tradingfutures is substantial. Futures tradingprivileges are subject to TD Ameritradereview and approval. Not all accountowners will qualify. Futures accountsare not protected by the SecuritiesInvestor Protection Corporation (SIPC).Equity options trading involves risksand are not suitable for all investors.Spreads and other multiple-leg optionstrategies can entail substantial trans-action costs, including multiple com-missions, which may impact anypotential return.

Futures and futures options tradingis speculative, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Optionsprior to trading futures products(https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA631.pdf).

Futures accounts are not protectedby the Securities Investor ProtectionCorporation (SIPC).

4/ PROBABILITY ANALYSISProbability analysis results are theoreti-cal in nature, not guaranteed, and donot reflect any degree of certainty of anevent occurring. The probability pro-jections in the Analyze page assumethe underlying stocks follow a lognor-mal distribution. The results arederived using the Black-Scholes for-mula for delta, consisting of the currentstock price, number of days in thefuture, current volatility of the stock,and the risk-free rate of return.

5/ Investor Movement IndexHistorical data should not be usedalone when making investment deci-sions. Please consult other sources ofinformation and consider your individ-ual financial position and goals beforemaking an independent investmentdecision. The IMX is not a tradableindex, and should not be used as anindicator or predictor of future clienttrading volume or financial perform-ance for TD Ameritrade.

1/ GENERAL DISCLAIMERThe information contained in this article is notintended to be investment advice and is for illustrativepurposes only. Be sure to understand all risks involvedwith each strategy, including commission costs, beforeattempting to place any trade. Clients must consider allrelevant risk factors, including their own personalfinancial situations, before trading. Past performanceof a security or strategy does not guarantee futureresults or success.Transaction costs (commissions andother fees) are important factors and should be consid-ered when evaluating any options trade. Optionsinvolve risk and are not suitable for all investors. Sup-porting documentation for any claims, comparisons,statistics, or other technical data will be supplied uponrequest. It is not possible to invest directly in an index.

important

info

thinkMoney/22

•

43 •ArticleDisclaimers•Important info that youneed to know.•tdameritrade.com

•random musings for traders at TD AmeritradeWinter 2014

thinkMoney/22

10/INVESTINGLIKE A TRADER,

FOR TRADERS

18/IT'S A COVEREDCALL REVOLUTION

24/THE SECRETSAUCE FOR

TRADING VIX

SCRIPT-WRITING FOCUS:

34/CREATE YOUROWN PLATFORM

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tm22_Glossary&Disclaimer_rd2.qxd:pages.layout 2014-01-01 9:26 PM Page 43

Choose your app attdameritrade.com/mobileapp.

* TD Ameritrade and tastytrade, Inc. are separate, unaffiliated companies. TD Ameritrade is not responsible for any third-party content or opinions presented.

iPad® is a registered trademark of Apple, Inc.

The paperMoney software application is for educational purposes only. Successful virtual trading during a one-time period does not guarantee successful investing of actual funds during a later time period —market conditions change constantly.

Market volatility, volume, and system availability may delay account access and trade executions.

The risk of loss in trading securities, options, futures, and forex can be substantial. Clients must consider all relevant risk factors, including their own personal financial situation, before trading. Option, futures, and/or forex trading privileges subject to TD Ameritrade review and approval. Not all account owners will qualify. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

TDA 2012 SS 03/13

Swipe, drag, and tap your way through the market.Our mobile trading apps are optimized for the iPad®.TD Ameritrade MobileThis easy-to-use app is packed with trading essentials and innovative functionality. Place trades, discover potential investments with Snapstock™, and access enhanced third-party research.

TD Ameritrade Mobile TraderAct on your most sophisticated trading strategies with this technologically advanced app. Trade equities, multi-leg options, futures, and forex; view live, streaming international CNBC feeds and premium video content from tastytrade®;* and test-drive theories with paperMoney®.

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PRSRT STDUS PostagePaidTD Ameritrade

The risk of loss in trading securities, options, futures, and forex can be substantial. Clients must consider all relevant risk factors, including their own personal financial situations, before trading. Options involverisk and are not suitable for all investors. See the Options DisclosureDocument: Characteristics and Risks of Standardized Options. A copyaccompanies this magazine if you have not previously received one.Additional copies can be obtained at tdameritrade.com or by contactingus. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the followingrisk disclosure before considering trading this product: Forex Risk Disclosure (www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf). A forex dealer can be compensated via commission and/or spread on forex trades. TD Ameritrade, Inc.,member FINRA/SIPC/NFA.TD Ameritrade is a trademark jointly ownedby TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.© 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

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