Q&A
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 |
BULLETS
Do you know where I could find more information about the "bullet" options strategy involving married puts? Thank you - Matt Bridier
Married puts or "bullets" are simply contracts entered into between a trader, his firm, and another entity. Stock is purchased with an equivalent number of puts. The puts are exercised at the end of the trading day, leaving the trading account "flat." During the day, the trader can trade with the long stock, and can sell it without marking the sale short. This practice varies from firm to firm, and is generally only available to proprietary traders (due to margin rules and so on).
FAIR VALUE PREMIUM/DISCOUNT
I've heard you discussing the fair value premium/discount concept on your Saturday radio program and would appreciate any additional information you might have. Thanks - PD
First go to www.programtrading.com and find today's fair value number. Now make up a basket on your quote machine or Excel spreadsheet that shows in this order: Spm2 (futures price), Spx (spot price), resulting in a number we call Spinx (you can get this directly if you pay exchange fees). Now that you have the Spinx, place fair value right below it. The result is what we call premium, which is simply the difference between where the futures should be trading (fair value) and where they are trading (premium or discount to fair value). This is one of the most important things we look at before placing any order.
We also use the premarket premium or discount when placing opening-only orders in a strategy designed to take advantage of gap opening prices.
STOCKPICKERS
I am interested in daytrading, but have little experience. There are some newsletters and companies that will tell you what to buy and when to exit. Can you provide a few reputable ones? - Diana S.
Okay, now you have hit a pet peeve. There are absolutely no newsletters or stock-picking services that will help you with your trading. In my opinion, these services are much akin to the "best bets" person you meet in a horse-race parking lot. If there were any real validity to these picks, other than an occasional self-fulfilling prophecy due to enough people listening to the advice, why would these people sell this information? (Before I get letters from advice services, let me state that I have, in the past, offered to trade these overnight daily picks and attempt to validate them. The services had little interest, and the few who did had so many caveats in their picks that it was impossible to follow them.)
Most of our better traders find three or four core stocks to trade, day in and day out (maybe 20-40 times per day). By sticking to a few stocks, you can learn how they trade, how the specialist handles certain market conditions, and how the stocks move in relation to other market indicators. This is so much more important (and usually more profitable) than trying to trade "picked" stocks each day.
FAIR VALUE AND CURBS
Do you still watch the futures and premium/discount to cash when the curbs? are in? It seems to me that if the curbs are meant to stop program trading, then you would not have as much success following the premium while the curbs are in. Is this true from your experience? - Joel
Good question! We alert our traders to trading curbs, especially when there is a trading halt on the futures. Since the spot price continues to move up and down on the index without the futures moving (when they are halted), it can give a false impression. When simple "sidecars" are in place, but trading continues, then you can go ahead and view the premium and discount to fair value accordingly.
MONEY MANAGEMENT
What do you have students/new traders do to improve money management? I think I am weak in that area. I tend not to take small losses quick enough, so end up taking larger losses. I'm sure you have seen this a lot, because I think it is the no. 1 problem of traders. Any tips or hints would be appreciated - vhehn
One of the simplest things I try to pass on to the students is, "If I cover now, I won't feel so bad if I think I can get back in at a better price." This will allow you to take the 10-cent loss, buy it back down 25 cents, and get into the idea of good entries and good exits. If you buy and wait, then you never want to sell at the bottom, or think "If I sell now, this thing will surely turn." At least by trading this way, in and out, you eliminate the larger losses, and it helps psychologically as well.
Level II
When you refer to the indications in your openings journal, are you talking about the Level II area in the equity montage? If so, can you give me an example of how you used such an indication to figure out your order prices? - Samuel Song
Actually, just prior to the opening you should see opening indications on your quote window. My quotes turn from white to yellow whenever the stock is indicated up or down over about 35 cents or so. What you see in the Level II montage is the electronic communications network (Ecn) trading, which may or may not reflect the specialist's indicated opening range.
VOLUME
Volume is a key indicator of market enthusiasm. How important is the number of trades? Is it necessary for higher volumes to have a higher number of trades and vice versa for low volumes? And if it is important, then how do we interpret number of trades with volume? Thank you - Syed Rehan Ali
The number of trades, and volume of each trade, is significant when tape-reading an individual stock, more than when reading the entire market. For example, if you see 500 trades of 300?1,000 shares on a given stock, then there is public participation, whereas if you see 100 trades of 10,000 shares or more, then you know that there is a lot of institutional activity as well as the normal public interest. For overall market sentiment, it takes a combination of both to signal a strong or weak market.
Volume generally is associated with market movement in the stock as well, since more shares will be traded when good news or earnings hits than when everything is status quo. The same pertains to the downside with bad news or earnings warnings.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the March 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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