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Trading by Numbers: Scoring Strategies for Every Market


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

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.

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


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