Trading by Numbers

Get the E*Trade experts' inside track on playing the markets

For retail traders, knowing which possible strategies to employ when has always been a challenge. That is, until now. For the first time, popular E*Trade educators Rick Swope and Shawn Howell introduce their two-dimensional scoring system for determining how bullish/bearish a trade setup looks by reading charts. In Trading by Numbers, they present a scoring system that uses a trend score and a volatility score, removing the guesswork and giving you a solid guide to the markets. Based on the score, the authors provide a toolkit of option strategies that are best to execute in each specific situation. Using common indicators and patterns, the book provides analysis for choosing your right strategy while managing risk.

• Authors Swope and Howell are accomplished market educators and their partners are the leaders in trading and investing, including E*Trade, CBOE, OIC, NYSE, NASDAQ OMX, CME and ISE
• An easy-to-use guide that will help you make the best decisions in any situation, the book is essential for traders at all levels

Trading by Numbers outlines a proprietary market scoring system that helps traders determine the best option strategies to execute in any market climate.

Acknowledgments xi

Introduction xiii

CHAPTER 1 Market Scoring 1

Intuition Can Be High Tuition 2

The Role of Technical Analysis 3

CHAPTER 2 Trend Scoring 9

Trend-Scoring System 10

CHAPTER 3 Volatility Scoring 27

Volatility Overview 28

Volatility Scoring System 34

Know That You Don’t Know 42

CHAPTER 4 Protecting Your Position 43

Seven Keys to Risk Management Success 44

Three Legs of Managing Risk 54

Setting Stops 63

Safety in Numbers 66

CHAPTER 5 Covered Calls 67

Getting to Know the Strategy 68

Strategy in Action 70

Strategy Management 71

Strategy Application 76

CHAPTER 6 Long Calls 81

Getting to Know the Strategy 81

Strategy in Action 85

Strategy Management 91

LEAPS 92

Strategy Application 95

CHAPTER 7 Long Puts 101

Getting to Know the Strategy 101

Strategy in Action 102

Strategy Management 104

Speculative Puts 107

Collars 110

Strategy Application 111

CHAPTER 8 Straddles and Strangles 117

Getting to Know the Strategy 118

Strategy in Action—Straddle 119

Strategy Management 122

Strategy in Action—Strangle 124

Strategy Application 125

CHAPTER 9 Debit Spreads 131

Getting to Know the Strategy 132

Strategy in Action 135

Strategy Management 136

Strategy Application 141

CHAPTER 10 Cash-Secured Puts 145

Getting to Know the Strategy 145

Strategy in Action 147

Strategy Management 149

Strategy Application 153

CHAPTER 11 Credit Spreads 159

Getting to Know the Strategy 160

Strategy in Action 160

Strategy Management 162

Strategy Application 168

CHAPTER 12 Horizontal Spreads 171

Getting to Know the Strategy 173

Strategy in Action 175

Strategy Management 176

Strategy Application 179

CHAPTER 13 Diagonal Spreads 183

Getting to Know the Strategy 184

Strategy in Action 190

Strategy Management 191

Strategy Application 193

CHAPTER 14 Index Options 197

Getting to Know the Strategy 198

Strategy in Action 204

Strategy Execution 204

CHAPTER 15 Butterfly Spreads 207

Getting to Know the Strategy 208

Strategy in Action 210

Strategy Management 212

Strategy Application 213

CHAPTER 16 Iron Condors 217

Getting to Know the Strategy 218

Strategy in Action 218

Strategy Management 221

Strategy Application 223

APPENDIX Strategy Profit and Loss Diagrams 227

About the Authors 231

Index 233

Rick Swope is a cofounder of Pro Market Advisors, which specializes in premier investment education and trading consultation services for retail and institutional clients such as E*Trade Financial Corporation, the Options Industry Council, and the International Securities Exchange. Previously, he was the co-owner and managing partner of one of the first online trading firms. He is the coauthor of The Market Guys' Five Points for Trading Success (Wiley).

W. Shawn Howell is a cofounder of Pro Market Advisors. He spent a decade working with Charles Schwab's most affluent and sophisticated traders as well as managing teams of specialized brokers. In 2005, Shawn concluded his tenure as the divisional manager of Schwab's Active Trader Field Team to teach currency, stock, option, and technical trading strategies across North America for Investools. In 2007, he became the Managing Director of the forex enterprise for Thinkorswim Group Inc. In 2009, Shawn and longtime friend Rick Swope cofounded Pro Market Advisors.

For years, would-be traders have been trapped between a rock and a hard place when it comes to learning the markets. You can try and find an expert to shadow or open an account and go for broke, hoping you learn enough to stay afloat before your money runs out. At best, you might be able to choose "none of the above" and have faith that by reading your way through a library of dense tomes on specific trading topics you'll come out the other side with at least a vague understanding of how the markets work.

Or you can get this book.

Trading by Numbers: Scoring Strategies for Every Market provides the in-depth coverage you're looking for along with the practical edge you need to turn theory into reality. Tackling one of the biggest challenges facing retail traders—knowing which strategies to employ and when—it presents a unique two-dimensional scoring system for determining how bullish or bearish a trade setup looks, created by accomplished market educators Rick Swope and W. Shawn Howell.

Providing structure for your analysis, the authors explain how trend and volatility are the two key dimensions of the market that any trader must understand in order to make intelligent trading decisions. The book presents a scoring system comprising both a trend score and a volatility score that makes it easy to remove emotion and personal preferences, which can cloud your judgment, to help you take an honest look at what the market is trying to tell you. Based on the score each trading opportunity yields, the authors provide a toolkit of option strategies tailored to meet the requirements of the specific trade, removing the guesswork and giving you a solid, reliable guide to the markets.

Including in-depth coverage of specific strategies—Covered Calls, Straddles and Strangles, Iron Condors, and many others—Trading by Numbers incorporates stories and examples to bring concepts to life by showing them in action. Highly adaptable, the book can be read from cover to cover or on a chapter-by-chapter basis as needed, making it the essential user's manual for market traders.

Praise for Trading by Numbers

"Rick and Shawn's style of identifying trading opportunities is straightforward and simple to follow. They have done a terrific job of explaining the concepts of their proprietary approach and building upon those ideas in each chapter of Trading by Numbers. Experienced traders and beginning traders will take away solid trading strategies as well as important trade management techniques from this book."—DAN GRAMZA President, Gramza Capital Management

"In Trading by Numbers, Rick and Shawn take a useful and practical approach in educating individuals who are considering using options in their personal portfolio. Rick and Shawn are at the top of their profession as far as educating the public on practical uses of options. Trading by Numbers does an excellent job taking their approach and putting it into words."—RUSSELL RHOADS, CFA Instructor, CBOE Options Institute

"Fear of the unknown—we all have it. Nothing seems more complex, confusing, and unachievable than options trading. Trading by Numbers eliminates that fear, simply and clearly removing the mystery and showing you how, one step at a time, to trade like an options pro."—TODD KANE CEO, Cayrum