Futures & Options For Dummies^®

by Joe Duarte

• ISBN13: 9780471752837
• ISBN10: 0471752835
• Format: Paperback
• Copyright: 2006-04-01
• Publisher: For Dummies

Summary

The days of buying and holding stocks and mutual funds for years are gone; nowadays, futures and option markets offer some of the best opportunities to make money trading in volatile times. But like all investments, high risk is involved, and in order to become a successful trader you must be prepared to work as a geopolitical analyst, a money manager, and an expert in all types of commodity markets.Futures & Options For Dummies will show you how trading is done and how to survive and succeed in these ever-changing markets. Filled with nuts-and-bolts advice, you'll soon discover how to manage the risks involved and reap the rewards of futures and options trading. This straightforward guide gives you the tools you need to understand: Ins and outs of trading futures and options How to analyze the markets and develop strategies Interest-rate futures and speculating with currencies How to stock up on indexes The direction of commodity futures Organizing your financial data and calculating your worth Developing strategies now to avoid pain later The execution of successful tradesTrading takes an iron-cast stomach and nerves of steel to perform, and this book features ways to keep yourself sane and secure. It also lists resourceful Web sites, commodity exchanges, books, newsletters, and magazines to assist in your trading endeavors. From technical analysis to finding a broker, Futures & Options For Dummies has all the information you need to capitalize on these markets!

Author Biography

Dr. Joe Duarte, www.joe-duarte.com, is a leading independent analyst focusing on intelligence, energy, and geopolitics, and their effects on the financial markets.</p>

Table of Contents

Introduction	1	(1)
About This Book	2	(1)
Conventions Used in This Book	3	(1)
What I Assume about You	3	(1)
How This Book Is Organized	4	(2)
Part I: Understanding the Financial Markets	4	(1)
Part II: Analyzing the Markets	5	(1)
Part III: Financial Futures	5	(1)
Part IV: Commodity Futures	5	(1)
Part V: The Trading Plan	5	(1)
Part VI: The Part of Tens	5	(1)
Icons Used in This Book	6	(1)
Where to Go from Here	6	(1)
Part I: Understanding the Financial Markets	7	(82)
The Ins and Outs of Trading Futures and Options	9	(8)
Who Trades Futures and Options?	10	(1)
Who Is a Successful Futures Trader?	11	(1)
What You Need to Trade	11	(1)
Trading Modalities	12	(1)
Getting Used to Going Short	13	(1)
Managing Your Money	14	(1)
Analyzing the Markets	15	(1)
Enjoying Your Trading Habit	15	(2)
Where Money Comes From	17	(14)
How Money Works: The Flat System	18	(2)
Money's money because we say it's money	18	(1)
Where money comes from	19	(1)
Understanding Central Banks (Including the Federal Reserve)	20	(2)
The central bank of the United States (and the world): The Federal Reserve	20	(1)
How central banks function	21	(1)
Understanding Money Supply	22	(5)
Money supply and inflation: The inevitable equation	22	(2)
Something from something is something more	24	(1)
Getting a handle on money supply from a trader's point of view	24	(3)
Putting Fiat to Work for You	27	(1)
Bonding with the Fed: The Nuts and Bolts of Interest Rates	28	(1)
Relating Money Flows to the Financial Markets	29	(2)
The Futures Markets	31	(14)
Who Trades Futures?	32	(1)
Contract and Trading Rules	33	(1)
Expiration	33	(1)
Daily price limits	33	(1)
Size of account	34	(1)
You Can't Just Swipe a Card: Exploring the Uniqueness of the Futures Markets	34	(1)
Futures Exchanges: Where the Magic Happens	35	(2)
The Trading Floor: How Trading Actually Takes Place	37	(4)
Shifting sands: Twenty-four-hour trading	37	(1)
Talking the talk	38	(3)
Understanding the Individual Players	41	(2)
Hedgers ain't pruners	41	(1)
Speculators don't wonder	42	(1)
Margin Basics	43	(2)
Understanding the Not-So-Hair-Raising Truth about Options	45	(26)
Decisions, Decisions: Figuring Out Whether Options Are for You	46	(1)
Getting the Lay of the Land: Stocks Versus Options	47	(1)
Options, Not Love, American Style	48	(9)
Choosing an options broker	49	(2)
What you want to know before trading	51	(1)
Types of options	52	(1)
Types of traders	53	(1)
Understanding option quotes	53	(2)
Don't forget the expiration date	55	(1)
A summary of a sample call option trade	55	(1)
A summary of a sample put option trade	56	(1)
Being bullish with puts	57	(1)
Options on Futures	57	(5)
The language barrier	58	(1)
The Greek stuff	58	(4)
Understanding Volatility: The Las Vega Syndrome	62	(9)
An overview of the Black-Scholes formula	64	(2)
Using volatility to make trading decisions	66	(1)
Selling expensive options and buying cheap ones	67	(3)
Screening for volatility with software	70	(1)
Yeah Baby! Basic Stock Option Strategies	71	(18)
Avoiding the Terrible Mistake	72	(1)
A Little Bookkeeping First, Please: The Options Agreement	73	(1)
Avoid Getting Caught Naked: All About Covered Call Writing	74	(3)
Service after the Sale: Following Up after Writing a Call	77	(2)
Protecting your trade by diversification	77	(1)
Knowing what to do when the stock rises	78	(1)
Rolling forward	78	(1)
Hoping to Make Big Bucks with Small Amounts of Money: Buying Calls	79	(3)
Calculating the break-even price for a call	80	(1)
Calculating the break-even price for a put	80	(1)
Using delta to time call-buying decisions	81	(1)
From the Top: Basic Put Option Strategies	82	(7)
Buying put options	82	(1)
Making the most of your put option buys	83	(1)
What to do if you have a huge profit in a put option	83	(1)
Buying put options --- fully dressed	84	(1)
Creating straddles	85	(1)
Getting naked with put sales	86	(1)
Selling covered puts	86	(1)
Taxing issues: How the IRS gets at your put options	87	(1)
Dividing issues: How dividends affect put options	87	(1)
Exercising your put option	87	(2)
Part II: Analyzing the Markets	89	(84)
Understanding the Fundamentals of the Economy	91	(20)
Understanding the U.S. Economy	92	(2)
Getting a General Handle on the Reports	94	(2)
Exploring how economic reports are used	95	(1)
Gaming the calendar	96	(1)
Exploring Specific Economic Reports	96	(8)
Working the employment report	97	(1)
Probing the Producer Price Index (PPI)	98	(1)
Browsing in the Consumer Price Index (CPI)	98	(2)
Managing the ISM and purchasing manager's reports	100	(1)
Considering consumer confidence	101	(1)
Perusing the Beige Book	102	(1)
Homing in on housing starts	103	(1)
Staying Awake for the Index of Leading Economic Indicators	104	(3)
Grossing out with Gross Domestic Product (GDP)	105	(1)
Getting slick with oil supply data	105	(2)
Enduring sales, income, production, and balance of trade reports	107	(1)
Trading the Big Reports	107	(1)
Making It Easy on Yourself: Straddle	108	(3)
Getting Technical Without Getting Tense	111	(24)
Picturing a Thousand Ticks: The Purpose of Technical Analysis	112	(2)
First Things First: Getting a Good Charting Service	114	(2)
Deciding What Types of Charts to Use	116	(4)
Stacking up bar charts	117	(1)
Weighing the benefits of candlestick charts	118	(2)
Getting the Hang of Basic Charting Patterns	120	(9)
Analyzing textbook base patterns	121	(2)
Using lines of resistance and support to place buy and sell orders	123	(1)
Moving your average	123	(2)
Breaking out	125	(1)
Using trading ranges to establish entry and exit points	126	(2)
Seeing gaps and forming triangles	128	(1)
Seeing through the Haze: Common Candlestick Patterns	129	(6)
Engulfing the trend	129	(2)
Hammering and hanging for traders, not carpenters	131	(1)
Seeing the harami pattern	132	(3)
Speculating Strategies That Use Advanced Technical Analysis	135	(18)
Using Indicators to Make Good Trading Decisions	136	(11)
Making good use of moving averages	136	(2)
Understanding and using oscillators	138	(2)
Seeing how trading bands stretch	140	(5)
Trading with trend lines	145	(2)
Lining Up the Dots: Trading with the Technicals	147	(6)
Identifying trends	147	(1)
Getting to know setups	148	(1)
Buying the breakout	148	(1)
Swinging for dollars	149	(1)
Selling and shorting the breakout in a downtrend	150	(1)
Setting your entry and exit points	151	(2)
Trading with Feeling Now!	153	(20)
Understanding Contrarian Thinking	154	(1)
Survey Says: Trust Your Feelings	154	(3)
Understanding Volume (And How the Market Feels about It)	157	(2)
Out in the Open with Open Interest	159	(3)
Rising markets	160	(1)
Sideways markets	161	(1)
Falling markets	161	(1)
Putting the Put/Call Ratios to Good Use	162	(3)
Total put/call ratio	163	(1)
Index put/call ratio	163	(2)
Combining Open Interest, Volume, and Options	165	(1)
Using Soft Sentiment Signs	166	(4)
Scanning magazine covers and Web site headlines	166	(1)
Monitoring congressional investigations and activist protests	167	(1)
Watching the Drudge Report	168	(2)
Developing Your Own Sentiment Indicators	170	(3)
Part III: Financial Futures	173	(54)
Wagging the Dog: Interest-Rate Futures	175	(20)
Bonding with the Universe	175	(6)
Understanding the Fed and bond-market roles	176	(1)
Hedging in general terms	177	(2)
Globalizing the markets	179	(2)
Yielding to the Curve	181	(1)
Deciding Your Time Frame	182	(2)
Shaping the curve	183	(1)
Checking out the yield curve	184	(1)
Sound Interest-Rate Trading Rules	184	(1)
Playing the Short End of the Curve: Eurodollars & T-Bills	185	(6)
Eurodollar basics	186	(1)
Trading Eurodollars	186	(4)
Trading Treasury-bill futures	190	(1)
Trading Bonds and Treasury Notes	191	(4)
What you're getting into	191	(1)
What you'll get if you take delivery	192	(3)
Rocking and Rolling: Speculating with Currencies	195	(18)
Understanding Foreign Exchange Rates	196	(1)
Exploring Basic Spot-Market Trading	197	(9)
Dabbling in da forex lingo	197	(3)
Electronic spot trading	200	(6)
The U.S. Dollar Index	206	(1)
Trading Foreign Currency	207	(4)
Trading the euro against the dollar	208	(1)
The UK pound sterling	209	(1)
The Japanese yen	209	(1)
The Swiss franc	210	(1)
Arbitrage Opportunities and Sanity Requirements	211	(2)
Stocking Up on Indexes	213	(14)
Getting a Grip on the Noise	214	(2)
Contracting with the Future: Looking into Fair Value	216	(1)
Major Stock-Index Futures Contracts	216	(4)
The S&P 500 futures (SP)	217	(1)
The NASDAQ-100 Futures Index (ND)	218	(1)
Minimizing your contract	219	(1)
Trading Strategies	220	(4)
Using futures instead of stocks	220	(1)
Protecting your stock portfolio	221	(2)
Swinging with the rule	223	(1)
Speculating with stock-index futures	224	(1)
Using Your Head to Be Successful	224	(3)
Get real	225	(1)
Get a grip on your money management	225	(1)
Choose your contracts carefully	225	(1)
Take your trading seriously	226	(1)
Never be afraid of selling too soon	226	(1)
Never let yourself get a margin call	226	(1)
Part IV: Commodity Futures	227	(72)
Getting Slick and Slimy: Understanding Energy Futures	229	(24)
Some Easy Background Info	230	(1)
Completing the Circle of Life: Oil and the Bond Market	231	(3)
Watching the bond market	232	(1)
Looking for classic signs as oil prices rise	232	(2)
Examining the Peak Oil Concept	234	(1)
The Post-September 11, 2001, Mega Bull Market in Energy	234	(2)
Understanding Supply and Demand	236	(1)
Playing the Sensible Market	237	(1)
Handling Seasonal Cycles	238	(1)
Preparing for the Weekly Cycle	239	(2)
Checking other sources before Wednesday	240	(1)
How to react to the report	240	(1)
Forecasting Oil Prices by Using Oil Stocks	241	(3)
Burning the Midnight Oil	244	(1)
Getting the Lead Out with Gasoline	245	(2)
Contract specifications	246	(1)
Trading strategies	246	(1)
Keeping the Chill Out with Heating Oil	247	(3)
Getting Natural with Gas	250	(1)
Getting in Tune with Sentiment and the Energy Markets	250	(2)
Some Final Thoughts about Oil	252	(1)
Getting Metallic without Getting Heavy	253	(18)
Tuning in to the Economy	254	(1)
Gold Market Fundamentals	255	(3)
Lining the Markets with Silver	258	(1)
Catalyzing Platinum	259	(1)
Industrializing Your Metals	259	(1)
Getting into Metal without the Leather: Trading Copper	260	(11)
Setting up your copper-trading strategy	261	(1)
Charting the course	262	(3)
Organizing the charts	265	(2)
Making sure fundamentals are on your side	267	(1)
Getting a handle on the Fed	268	(1)
Pulling it together	269	(2)
Getting to the Meat of the Markets: Livestock and More	271	(14)
Exploring Meat-Market Supply and Demand, Cycles, and Seasonality	272	(1)
Understanding Your Steak	273	(3)
The breeding process	274	(1)
The packing plant	274	(1)
The feeder cattle contract	275	(1)
The CME live cattle contract	275	(1)
Understanding Your Pork Chop	276	(1)
Living a hog's life	276	(1)
Pork bellies	276	(1)
Matching Technicals with Fundamentals	277	(1)
Watching for Big Reports	278	(2)
Counting the cattle-on-feed reports	279	(1)
Playing ``This Little Piggy'': The Hogs and Pigs Report	279	(1)
Other meat-market reports to watch	280	(1)
Understanding the Effects of Key Reports	280	(2)
Outside Influences that Affect Meat Prices	282	(3)
The Bumpy Truth about Agricultural Markets	285	(14)
Staying Out of Trouble Down on the Farm	285	(1)
Agriculture 101: Getting a Handle on the Crop Year	286	(3)
Weathering the highs and lows of weather	288	(1)
Looking for Goldilocks: The key stages of grain development	289	(1)
Cataloging Grains and Beans	289	(3)
The soybean complex	289	(2)
Getting corny	291	(1)
Culling Some Good Fundamental Data	292	(2)
Getting a handle on the reports	292	(1)
Don't forget the Deliverable Stocks of Grain report	293	(1)
Gauging Spring Crop Risks	294	(1)
Agriculture 102: Getting Soft	295	(4)
Having coffee at the exchange	296	(1)
Staying sweet with sugar	297	(1)
Building a rapport with lumber	298	(1)
Part V: The Trading Plan	299	(42)
Trading with a Plan Today So You Can Do It Again Tomorrow	301	(8)
Financing Your Habit	302	(1)
Deciding Who's Going to Do the Trading	302	(2)
Choosing a CTA	304	(2)
Reviewing the CTA's track record	304	(1)
Other CTA characteristics to watch for	305	(1)
Considering a trading manager	305	(1)
Choosing a Broker	306	(3)
Falling in the pit of full service	307	(1)
Choosing a futures and options discount broker	308	(1)
Looking for Balance Between the Sheets	309	(8)
Exploring What's on Your Mental Balance Sheet	310	(2)
Why do you want to trade?	310	(1)
Trading as part of an overall strategy	311	(1)
Trading for a living	312	(1)
The Financial Balance Sheet	312	(2)
Organizing your financial data	312	(1)
Setting realistic goals	313	(1)
Calculating Your Net Worth	314	(3)
Developing Strategies Now to Avoid Pain Later	317	(10)
Deciding What You'll Trade	317	(1)
Adapting to the Markets	318	(2)
Trading the reversal	319	(1)
Trading with momentum	319	(1)
Swing trading	320	(1)
Managing Profitable Positions	320	(2)
Building yourself a pyramid (without being a pharaoh)	321	(1)
Preventing good profits from turning into losses	321	(1)
Never adding to losing positions	322	(1)
Back Testing Your Strategies	322	(1)
Setting Your Time Frame for Trading	323	(1)
Day trading	323	(1)
Intermediate-term trading	323	(1)
Long-term trading	323	(1)
Setting Price Targets	324	(1)
Reviewing Your Results	324	(1)
Remember Your Successes and Manage Your Failures	325	(1)
Making the Right Adjustments	326	(1)
Executing Successful Trades	327	(14)
Setting the Stage	327	(2)
Getting the Big Picture	329	(2)
Viewing the long-term picture of the market	330	(1)
Doing a little technical analysis	330	(1)
Stalking the Setup	331	(3)
Checking your account	331	(1)
Reviewing key characteristics of your contract	332	(1)
Looking at the short-term chart	333	(1)
Fine-tuning your strategy	334	(1)
Reviewing your plan of attack	334	(1)
Understanding Intermarket Relationships	334	(1)
Waiting for the Catalyst	335	(1)
Jumping on the Wild Beast: Calling in Your Order	336	(1)
Riding the Storm	337	(1)
Knowing When You've Had Enough	338	(1)
Reviewing Your Trade	339	(1)
Learning the Right Lessons	340	(1)
Part VI: The Part of Tens	341	(12)
Ten Killer Rules to Keep You Sane and Solvent	343	(6)
Trust in Chaos	343	(1)
Avoid Undercapitalization	344	(1)
Be Patient	344	(1)
Trade with the Trend	345	(1)
Believe in the Charts, Not the Talking Heads	346	(1)
Remember, Diversification Is Protection	346	(1)
Limit Losses	347	(1)
Trade Small	347	(1)
Have Low Expectations	348	(1)
Set Realistic Goals	348	(1)
More Than Ten Additional Resources	349	(4)
Government Web Sites	349	(1)
General Investment Information Web Sites	350	(1)
Commodity Exchanges	351	(1)
Trading Books	351	(1)
Newsletter and Magazine Resources	352	(1)
Index	353