Since You Asked
| Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
TRADING PREPARATION
Do you prepare for the day, or do you simply start trading? I've heard you mention that you respond to the market, but is that always enough? -- JS
That's a good question, and sometimes I wonder if it's ever "enough"! However, we do our best to prepare our traders for each trading day. Our traders are connected each morning to a live chat that originates in New York, Vancouver BC, North Carolina, and Las Vegas. Four traders (me included) share the "numbers" for the day (support, resistance, pivots, and so on), and conduct a market commentary. By having more than one trader/commentator, we are able to gather insight from various perspectives. We respond to questions, and offer as much help as possible before the opening bell.
In addition, I post a weekly calendar for all traders that shows the economic numbers, earnings, and other data that is due out that week. I hope that each trader will take a second to see if this information will affect his or her core trading stocks.
VOLUME-WEIGHTED AVERAGE PRICE
I keep seeing and hearing about something called a VWAP order. Can you please explain what this means? --Terry A.
Let's start with the basic definition. VWAP stands for "volume-weighted average price." If you take all the transaction prices that take place in a single stock each day, and weight them by share volume, you will come up with a constantly changing average price during the day. At the end of the day, you will be able to see the actual volume-weighted average price. Now to how and why it is used:
Major institutions used to give brokers "not-held" orders to "work" so that they would get a fair price on their 250,000-share order (sort of). This has changed recently; the institutions tell the broker that I will buy (sell) 250,000 (of an individual stock) at the VWAP (as determined at the end of the day). You will notice that many brokers offer this service at a somewhat higher commission rate. This can cause some grief for the executing brokers, who are sometimes a bit slow to recognize a straight-up market. They will have to pay more than the VWAP to provide the stock to the customer. We teach our traders to simply watch for size trades at or near the current VWAP, and perhaps ride the market up for a while, until the broker may actually sell a small portion of the stock to keep the VWAP in line with the average price.
We teach our traders to watch the VWAP for their primary stocks for the last hour or so of the day. Over time, they will be able to find patterns that develop and profit from them.
SHARE VOLUME
Can you clarify exactly what the share volume of a stock or an index represents? For example, if INTC volume was 360 million shares traded on a day, does that mean 180 bought and 180 sold? It would seem that way, but I have read that the NYSE and Nasdaq count volume differently. The article I read also said shares traded (very large blocks) among big firms may bypass the exchange altogether, so it would not show up as any volume that day. Thanks --Tom S.
It takes a buyer and a seller to make a trade, but only the "seller" (NYSE) puts the trade up on the tape. So, even though I may buy 1,000 and you sell me 1,000, only 1,000 shares make the tape. That is the number that you will see recorded. This can be very confusing, especially since you and I both are going to pay commissions on 1,000 shares. All shares are (eventually) included in the share volumes (often revised).
BIG-CAP STOCKS AND THEIR OPTIONS
How does option expiration impact the overall market or the individual "big-cap" stocks? Is there really a big influence on the markets? What happens when the price of the underlying security is close to a concentrated strike price? --Steelhead
Well, this question is timely, since I'm writing this on expiration day, and today was a perfect example. We saw a published imbalance before the opening bell, and it showed a clear upside bias. My personal basket of stocks showed pretty big buy imbalances. As of this second, 29 of 30 Dow stocks are up (mid-trading day), and the DJIA is up about 70 points. This reflects the "short call, long put" leveling off, or flattening out, of positions for the holders of these expiring options. That's the first thing to look for.
After the first hour or so things settle down quite a bit, and we wait to see the MOC (market on close) imbalances, which come out at 3:40 pm ET. At this time, we check to see if our stocks are trading in between the option strike prices.
Here's another interesting point: When I was an option market maker (1979-89), we used to see stocks go to the strike price most of the time on expiration. However, over the last few years, big institutional firms and bigger traders realized that if they kept the stocks away from the strike price, they could reduce their risk considerably. Out of about 200 stocks in our personal trading accounts, we usually have four or five that we have to worry about being assigned or "put" stock on at any given expiration.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the August 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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