High Impact Options Trading Option Profits Through Superior Stock Selection Price Headley President & CEO
August 20, 2000
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Key Concepts
The Power of Compounding
Techniques: Letting Winners Ride & Cutting Losses Quickly
Contrarian Investing
Technique: CBOE Equity Put/Call Ratio
The Concept of Opportunity Cost
Technique: Relative Strength
The Principle of Acceleration
Technique: Acceleration Bands
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The Power of Compounding
Whats a Dollar Doubled Daily Worth in 10 Days?
$512
20 Days? $524,288 30 Days?
$536,870,912
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The Power of Compounding
600000000
Dollars
400000000 200000000 0
10 13 16 19 22 25 28 1 4 7
Days
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NASDAQ vs. CBOE Equity Put/Call Ratio
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NASDAQ vs. CBOE Equity Put/Call Ratio
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Opportunity Cost & Relative Strength
If a stock rises 20% per year indefinitely, would you want to own it? IT DEPENDS if another stock is doing 30% per year, NO The 10 percentage point difference is your Opportunity Cost that was lost. We use Relative Strength (the performance of one stock relative to the market) to focus on the best stocks.
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Qualcomm (QCOM): 1995-98
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Qualcomm (QCOM): 1998-99
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Acceleration Bands
Acceleration - find trends that are starting to speed up for faster profits I started trading with moving averages, but noticed that the best stocks never come back to test major moving averages I liked to concept of adaptive bands that could adjust based on more recent price action - Acceleration Bands should encompass 95% of price action
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Acceleration Bands
If Acceleration Bands encompass 95% of the price action, I prefer to trade the other 5% of the price events outside of the Acceleration Bands George Soros stated that these unexpected substantial moves, known as the fat tails, were where he usually made the most money
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Acceleration Band Formula (Omega)
UpperBand = Average((high*(1+2*((((highlow)/((high+low)/2))*100)*.01))),20) MidPoint = Average(close,20) LowerBand = Average((low*(1-2*((((highlow)/((high+low)/2))*100)*.01))),20)
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(CMGI): 1999-2000
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(CMGI): 1999-2000
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(CMGI): 1999-2000
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Qualcomm (QCOM): 1999-2000
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America Online (AOL): Late 1999
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Yahoo (YHOO): 1998-99
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S1 Corp. (SONE): 1997-99
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Cisco Systems (CSCO): 1996-2000
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Trends: Your Edge vs. the Options Pricing Model
Which of these trends would you rather buy a call option on?
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A Flaw in the Options Pricing Model
Which is more important in the Options Model? A 20% Rise in Price or a 20% Rise in Volatility? Assume: XYZ shares at 119-1/2, Volatility starts at 25.00%, Expiration in 64 days, Strike price is 120
20% Volatility Rise (25% to 30%) in 42 days
XYZ August 120 call 5.50 => 6.75 a 23% gain
20% Stock Price Rise (119.50 to 143.38) in 42 days
XYZ August 120 call 5.50 => 23.75 a 327% gain
Trend impact is 14 X greater than Volatility
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Determining Price & Time Targets for Your Option
Be more Conservative than you think you should based on your market view We all have a tendency to exaggerate our upside targets as traders, and downplay or avoid thinking about the downside risk
Buy 1 more month of time than you think you need Or Buy 1 strike in from what you think you need
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Percentage Gain to Breakeven After a Loss
Percentage Loss -10% -20% -33% -50% -75% -90% Gain Required to Breakeven 11% 25% 50% 100% 300% 900%
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How to Stay with Big Winners
Give yourself a chance to stay with a Big Trend by taking HALF of your position profits at 100% or more This allows you to release the fear of giving up profits, as you recoup your initial investment and guarantee at least a breakeven Ride the other half position until it gives back half its gains, or exit half again if it later doubles once more
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THE 80/20 RULE IN ACTION
S1 Corp. (1/2 position) Apr. 90 call Vignette (1/2 position) Mar. 220 call CMGI Mar. 130 call Nvidia (half-position) July 120 call S1 Corp. May 55 call Exodus Comm. (1/2 position) Mar. 145 call S1 Corp. (1/2 position) Apr. 90 call S&P 100 Index (1/2 position) Feb. 760 put Nvidia (1/2 position) July 120 call Nvidia (1/2 position) July 120 call Knight/Trimark July 55 call Exodus Comm. (1/2 position) Mar. 145 call Vignette (1/2 position) Mar. 220 call CommerceOne (1/2 position) Mar. 220 call 8-1/2 (of 64 total) Positions $20,378 $33,878 $9,470 $30,540 $7,395 $21,915 $12,278 $20,803 $25,855 $15,665 $4,420 $11,840 $14,078 $17,470 295.7% 240.4% 214.5% 213.5% 200.4% 184.9% 178.3% 169.0% 136.2% 109.6% 104.9% 100.0% 100.0% 100.0%
$245,982
$216,560
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BigTrends.com - Track Record
Stocks UP 55% in 2000 Options UP 162% in 2000 Stocks & Options UP 169.7% in 1999
Options UP 730% in 1999-2000
Note: Past performance does not guarantee future results through August 18, 2000
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QQQ Stock & Options Timer
Up 107% in 10 months - through August 1, 2000
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Contact Us (for a copy of our slides)
Via Internet at http://www.BigTrends.com Phone: 1-800-BigTrends (1-800-244-8736) Fax: (513) 631-5039 Email:
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