david aranson mta journal patterns

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MARKET

TECHNICIANS

ASSOCIATION

JOURNAL

Issue 21

May 1985


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MARKET TECHNICIANS ASSOCIATION JOURNAL

MTA Journal/May 1985 1


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MTA Journal/May 1985


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MARKET TECHNICIANS ASSOCIATION JOURNAL

Issue 21

May, 1985

Editor: James M. Yates

Bridge Data Company

10050 Manchester Road

St. Louis, Missouri 63122

Contributors: David R. Aronson

Barbara B. Diamond

Ralph Fogel

David Holt

William R. Johnston

George C. Lane

Steve Leuthold

J. Curtis Shambaugh

Jim Tillman

Bronwen Wood

Publisher: Market Technicians Association

70 Pine Street

New York, New York 10005


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OMarket Technicians Association 1985



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MTA JOURNAL - MAY, 1985

TABLE OF CONTENTS

Title

Page

MTA OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

MEMBERSHIP AND SUBSCRIPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

STYLE SHEET FOR SUBMISSION OF ARTICLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

MTA LETTER FROM THE EDITOR . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . .

9

James M. Yates

TECHNICAL ANALYSIS IN THE UNITED KINGDOM, DOMESTIC AND INTERNATIONAL . . . . . . .

11

Bronwen Wood

HOW CYCLETREND CHANNELS HELP DETERMINE TURNING POINTS

FOR STOCKS AND THE MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .

27

Jim Tillman

THE POWER OF THE YIELD CURVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . .

29

J. Curtis Shambaugh

RELATIVESTRENGTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

A Workshop on Relative Strength Moderated by Steve Leuthold

LANES STOCHASTICS: THE ULTIMATE OSCILLATOR

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

George C. Lane

A VIEW FROM THE FLOOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

William R. Johnston

A THREE YEAR FOLLOW-UP ON THE ENIGMATIC STOCK OPTION

A CONSTANT CHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . .

47

David Holt

A VIEW FROM THE FLOOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . .

61

Ralph Fogel

CENTERFOLD

. . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . .

64

OPTIMIZATION - SOFTWARE REVIEW WORKSHOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67

Barbara B. Diamond

ARTIFICIAL INTELLIGENCE/PATTERN RECOGNITION APPLIED TO

FORECASTING FINANCIAL MARKET TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . .

91

David R. Aronson


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1984-85 MARKET TECHNICIANS ASSOCIATION

PRESIDENT

Richard Yashewski

Butcher & Singer

5161627-l 600

VICE PRESIDENT

John Greeley

Greeley Securities

212/227-6900

VICE PRESIDENT (SEMINAR)

Gail Dudack

Pershing/Div. DLJ

2121902-3322

OFFICERS

PROGRAMS

David Krell

2121623-8533

NEWSLETTER

Robert Prechter

4041536-0309

JOURNAL

James Yates

314/821-5660

CERTIFICATION

Charles Comer

2121825-4367

MEMBERSHIP

Phil Roth

2121742-6535

LIBRARY

Ralph Acampora

212747-2355

SECRETARY

Cheryl Stafford

Wellington Management

617/227-9500

TREASURER

Robert Simpkins

Delafield, Harvey, Tabell

6091924-9660

COMMITTEE CHAIRPERSONS

ETHICS & STANDARDS/ PUBLIC RELATIONS

Tony Tabell

6091924-9660

PLACEMENT

John Brooks

404/266-6262

EDUCATION

Fred Dickson

2121398-8489

COMPUTER SPECIAL INTEREST GROUP

John McGinley

203/762-0229

FUTURES SPECIAL INTEREST GROUP

John Murphy

2121724-6982

SAN FRANCISCO TECHNICAL SOCIETY

SPECIAL INTEREST GROUP

Henry Pruden

415/459-l 319


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MARKET TECHNICIANS ASSOCIATION

MEMBERSHIP AND SUBSCRIPTION INFORMATION

REGULAR MEMBERSHIP - $75 per year plus $10 one-time applicat ion fee.

Receives the MTA Journal, the monthly MTA Newsletter, invitations to al l meetings, voting member status, and a dis-

count on the Annual Seminar fee. Eligib ilit y requires that the emphasis of the applicants professional work involve

technical analysis.

SUBSCRIBER STATUS - $75 per year.

Receives the MTA Journal and the MTA Newsletter, which contains shorter articles on technical analysis. The sub-

scriber receives special announcements of the MTA meetings open to The New York Society of Security Analysts

and/or the public, plus a discount on the Annual Seminar fee.

ANNUAL SUBSCRIPTION TO THE MTA JOURNAL - $35 per year.

SINGLE ISSUES OF THE MTA JOURNAL (including back issues) - $15.

The Market Technicians Association Journal is scheduled to be published three times each fiscal year in approxi-

mately November, February, and May.

An ANNUAL SEMINAR is held each Spring.

Inquiries for REGULAR MEMBERSHIP and SUBSCRIBER STATUS should be directed to:

Membership Chairman

Market Technicians Association

70 Pine Street

New York. New York 10005



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STYLE SHEET FOR THE SUBMISSION OF ARTICLES

MTA Editorial Policy

The Market Technicians Association Journal is published by the Market Technicians Associ-

ation, 70 Pine Street, New York, New York 10005 to promote the investigation and analysis of

price and volume activities of the worlds financial markets. The MTA Journal is distributed to

individuals (both academic and practioner) and libraries in the United States, Canada, Europe

and several other countries. The Journal is copyrighted by the Market Technicians Association

and registered with the Library o f Congress. All rights are reserved. Publication dates are Feb-

ruary, May, and November.

Style for the MTA Journal

All papers submitted to the MTA Journal are requested to have the following items as prereq-

uisites to consideration for publication.

Short (one paragraph) biographical presentation for inclusion at the end of the accepted article

upon publication. Name and affiliation will be shown under the title.

All charts should be provided in camera ready form and be properly labeled for text reference.

All tables should be properly labeled and in camera ready form.

Paper should be submitted typewritten, double-spaced in completed form on 8% by 11 inch

paper. If both sides are used, care should be taken to use sufficiently heavy paper to avoid

reverse side images. Footnotes and references should be put in the end of the article.

Greek characters should be avoided in the text and in all formulae.

One submission copy is satisfactory.

Manuscripts of any style will be received and examined, but upon acceptance, they should be

prepared in accordance with the above policies.



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MTA LETTER FROM THE EDITOR

The Journals deepest appreciation for the contributors notes, text, and exhibits for this Sem-

inar Journal. A lot of hard work went into their preparation and it is evident by the contents.

The MTA Seminar Indicator is once again included for your inspection and interpretation.

Good weather and lots of hot air is predicted at Hilton Head in May, 1985; so we hope everyone

enjoys and takes advantage of it.

The editors compliments to the valued assistance in the production (as usual) go to Sally Rup-

pert and Pam Hollrah. The Seminar issue is always close to the wire and could not occur with-

out their competent and cheerful help.

James M. Yates

EDITOR


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This page left intentionally blank for notes, doodling, or writing articles and comments for the MTA Journal.

;


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TECHNICAL ANALYSIS IN THE UNITED KINGDOM, DOMESTIC AND INTERNATIONAL

Bronwen Wood

INDICATORS AND STATISTICS NOT AVAILABLE IN THE LONDON STOCK MARKET

1) Due to the British paranoia for secrecy there is no volume data for individual stocks. The

only volume figures for sectors are monthly. There is no breakdown of any kind of the one daily

volume figure, which is total equity bargains.

2) There are no satisfactory figures on institutional liquidity. Official figures are months out of

date. Private sampling suggests that absolute levels of liquidity move in up and downtrends,

so that shortage of cash so great that the market cannot rise further wa s signalled at five per-

cent between 1976 and 1980, whereas the level at which the supply of cash exceeded the

supply of stock and, therefore, caused the market to rise, trended down from fourteen percent

to five and one-half percent over the same period. There was then a readjustment, and the

new trend has high liquidity sloping from eight percent to five and one-quarter percent and low

liquidity from five percent to two and one-half percent. Another adjustment is in the making at

the moment, with possibility of an uptrend developing over the next fe w years.

3) The only sentiment indicator available is the puticall ratio which is so new that its use-

fulness cannot yet be established. In fact, the options market is so little used that it may turn

out not to be a very good indicator.

4) There are no margin debt figures as margin trading in stocks and bonds is not permitted

in London.

5) There are no specialist, member or odd-lot, short sales figures. This is basically because

short sales are not permitted at all by many stockbrokers and are generally not admitted to

when they do occur. Rolling a short position over from one two-week accounting period to the

next is rarely permitted, even if your broker will knowingly allow clients to go short. Even if short

sales figures were collected, the all-pervading secrecy would never allow the data to be broken

down into specialist, member and odd-lot, bargains.

6) There is no formal measure of contrary opinion. There is not a big enough private client-

base seeking investment advice to allow more than a small number of market letters to pros-

per, and these mostly take the form of tip sheets. There is therefore no way of assessing

professional advisory sentiment objectively.

INDICATORS AND APPROACHES WHICH ARE HELPFUL IN LONDON

7) Overbought/Oversold Indicators. I calculate three for the equity market, the gilt (or gov-

ernment bond) market, and the gold mining market.

a) The daily net figure of how many more of the last ten trading

days were up than down. At plus six or greater, the market is

showing signs of being overextended.


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b) The fourteen day R.S.I., using seventy and thirty as overbought

and oversold levels. This is sometimes helpful as a divergence indicator.

c) The ten-day moving total of the net rises and falls for all

stocks in the relevant market. For short-term corrections

this is the best of these indicators. For medium-term moves,

it is a good non-confirmation indicator. (See Chart 1:

gilt overbought/oversold in May and December, 1984;

equity overboughtioversold December, 1983, and July, 1984.)

These indicators are particularly useful when they are all clearly overbought or oversold to-

gether, which they frequently are not. In addition, they are good for confirming a major change

in the direction of the market, when, for example, they become overbought but the market re-

fuses to correct (e.g., Chart l), the period in the gilt market after November, 1982, when the

market wa s embarking on a prolonged period of sideways trading after a long bull leg, and

August, 1984, in the equity market when a huge new bull move ( + thirty-five percent) had just

started.

d) Five-day momentum is a good short-term indicator. It is

overextended at plus three percent.

8) Cumulative advance/decline

works well, though not invariably. For example, it gave a

good sell signal in May, 1984, - see Chart 1. It gave clear but not always early signals at all

major tops and bottoms from 1971 onwards.

9) Annual momentum is most useful in London at major tops and bottoms. It gives good ad-

vance warning that absolute peaks and lows are about to be hit and has signalled well for both

equities and gilts over the past fifteen years. (See Chart 1: gilts end 1982; Chart 2: equities

mid-l 970 to February, 1971; Chart 3: equities March/May, 1972.)

10) Volume rarely has anything to add to an understanding of the London market. Occasion-

ally, one finds volume starvation (e.g., Chart 3 May/June, 1972, and September/October, 1972).

11) Another divergence indicator which sometimes works extremely well, but is also some-

times confusing is illustrated for the gilt market on Chart 4. The top line is a three-day moving

average and the bottom line is a five-day average of the percentage difference between the

index and its thirty-eight-day moving average.

12) As a lagging indicator the five-day moving averages of new highs and new lows often

works well. When a change of primary trend looks likely it remains unconfirmed until the two

lines have crossed dramatically and been able to stay crossed. See Chart 1 - 1983.

13) The quotient of the All-Share Index divided by the Government Securities Index has

given excellent long-term trends for many years. The trend only breaks when top or base-build-

ing in the equity market is well advanced or has been completed. See Chart 5.

OTHER ASPECTS OF TECHNICAL ANALYSIS IN BRITAIN

14) While indicators such as these are a major part of the technicians armoury in the London

market, it must be admitted that severally and together they have let us down quite often in the

past five years. The most recent memorable occasion wa s in July, 1984, when most indicators



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suggested that the bull market was coming to an end. See Chart 1. A pattern which looked as

though it could well be a major head-and-shoulders top developed (Chart 6). However, in Au-

gust, relief that interest rates were falling, and that the sterling crisis was over, seems to have

been enough to make a nonsense of all the technical indicators, and the market began a rise

which added thirty-five percent to the All-Share Index in under six months.

The only wa y to get the market right and be useful to ones clients for quite a long time now

has been to concentrate on sectors and individual shares rather than on market indices and

indicators.

15) London has become so volatile that moving averages have often set traps by breaking,

rolling over and crossing just as the share or the market concerned is about to reverse direc-

tion I find them too unreliable to be useful except as confirmation, and sometimes not even

then.

16) Relative strength, however, on shares and sectors is one of the most useful tools in Lon-

don, particularly for support and resistance levels and trendlines. For sector selection, in par-

ticular, relative strength lines are invaluable.

17) The government securities market in London is extremely important. I keep my three

overbought/oversold indicators, the oscillator, annual momentum, interest rate charts, futures

charts and subsector charts for gilts. The London gilt market is one of the biggest and most

flexible in the world and attracts enormous overseas business. It outperforms the equity mar-

ket quite often, and not just in bear markets. Given the end of the bear market in sterling and

the probability of interest rates falling, a lot of international money will probably be attracted to

United Kingdom gilts during the next eighteen months. Contrary to prejudice, technical anal-

ysis works extremely well in our gilt market.

18) Because London fund managers invest enormous sums abroad, it is necessary for us to

keep abreast of

overseas markets.

My solution to this is to be aware of the position of the

major indices for each national market, but only to look at individual shares as requested. The

only source of reliable charts for individual stocks over a wide range of countries that I am aware

of is the Chart Analysis international Book. It is my contention that for top quality technical as

well as fundamental information on individual stocks, experts in the country of origin should

be used, due to the greater depth of data available to them. However, for an overall view of

foreign markets it is often possible to be surprisingly successful by using market indices, fig-

ures for which are available in the Financial Times.

19) Being internationally orientated, gold bullion and currencies are very important in Lon-

don. I use a combination of long-term and short-term charts for both. In particular, I like one

box reversal point and figure charts on an insensitive scale for currencies. This allows history

and sensitivity to both be apparent on the same sheet of paper. See Charts 7a, b, and c. For

bullion, I use an insensitive long-term point and figure chart and a sensitive bar chart, the for-

mer for perspective and the latter for estimating trading moves. See Charts 8 and 9.

20) The various chart books and services available from Chart Analysis and Investment Re-

search are excellent for London equities and gilts, overseas markets, currencies, and com-

modities. They stand head-and-shoulders above anything else available so far from England,

including Datastream, whose charts, though more numerous, are not so reliable.


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CHART 6

ALL-SHARE INDEX 1967-1985

Scale: 2 points per box, 5 box revel sal



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20


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BIOGRAPHY

Bronwen Wood joined Rowe & Pitman twelve years ago where she is currently in charge of

Technical Research, covering the U.K. stock and bond markets, commodities, currencies and

overseas markets for a largely institutional clientele.

Bronwen was educated at Bristol and London Universities and the Central London Polytechnic

where she completed a post-graduate diploma in management studies. Bronwen first joined

a stockbroking firm as a fundamental analyst. Finding technical analysis to be more effective,

she gradually switched over and moved to Chart Analysis, the well-respected technical con-

sultancy firm. From there she joined Rowe 8. Pitman. Rowe & Pitman is due to become part

of the new financial conglomerates which will come into existence sometime in October, 1986.

Its United States operations have already been merged into S. G. Warburg, Rowe and Pitman,

Akroyd, Inc.



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HOW CYCLETREND CHANNELS HELP DETERMINE TURNING

POINTS FOR STOCKS AND THE MARKET

Jim Tillman

Having written a market letter based on cycles for over ten years, I have tried various methods

of presentation to correctly convey my views. Dealing with such a conceptually difficult subject

as cycles and the way they combine within the market has been difficult, at best, for many and

total frustration for others. Only after adding cycle channels a fe w years ago did the total picture

come into focus for the average reader.

These charts of the Dow Industrial Average on a weekly, daily, and hourly basis show how the

concept may be helpful no matter what time parameters one may choose. Of course, this par-

ticular time period (February 15,1985), was clearly saying the market w as ready to come down

and would need to pick up channel support before ready to advance again.

At the Market Technicians Association annual conference, I will show where we are currently

in the Cycletrend channels, illustrate how channels may be used on individual stocks, and make

projections for the market based on current dominant cycles. I look forward to seeing you there.

DOW JONES INDUSTRIAL AVERAGE INDEX:

Daily, weekly, and hourly charts


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BIOGRAPHY

Jimmie E. Tillman is Vice President, interstate Securities, institutional Department, Charlotte,

North Carolina. He is also author of Cycletrend, an institutional cycie timing service for the stock

market and stock groups. Married, with four children, Mr. Tillman is a native south Georgian,

educated at Clemson Univsersity and a self-taught market technician for twenty-five years.



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THE POWER OF THE YIELD CURVE

J. Curtis Shambaugh

The most frequently observed phenomena that all capital market participants utilize in making

decisions is the term structure of interest rates. The U. S. Treasury yield curve, which appears

in all financial publications, as well as being available on line in numerous information re-

trievable devices, represents the sum total of all participants transactions in the capital market,

whether they become borrowers or lenders, hedgers or investors, are taxable or non-taxable,

individual or institutional, or domestic or foreign. Any alteration of the slope of the yield curve

reflects changes occurring somewhere else in the financial markets induced by governmental

policies, supply and demand of credit, or even fear or greed.

As a result of the past half-decades rapid deregulation of interest rates and the onset of very

liquid hedging devices of futures and options, a huge market of interest rate swaps has de-

veloped. Consequently, a greater proportion of the U. S. economy is now more sensitively at-

tached to the level of and change of shorter-term interest rates, particularly in adjustable rate

mortgages for housing, and automobile loan rates.

Academicians in study of the Treasury Yield Curve describe a positive yield curve as a forecast

of rising interest rates when utilizing rolling horizon analyses. A simple example of this method

would be that if a one-year security yielded nine percent and a two-year security yielded ten

percent, in theory, one year later in time a one-year security could yield eleven percent to result

in an equivalent total return as the original two-year security.

However, yield curves have evidenced long periods of positive or negative character before

such forecasts come to pass. Also, interest rates have come down a number of times when

the yield curve was positive or have even come down when the yield curve was less positive.

Most rises in interest rates have occurred in periods of negative yield curves.

Over the past half-decade, changes in slope of the yield curve have evidenced a high corre-

lation to prediction of moves in the capital markets as will be more evident in the following charts.

The reasons that these changes in slope are predictive are more easily explained in visceral

terms of fear and greed. Most simply, as the yield curve gets more positive, the investing wor ld

is induced to extend in maturity (read risk) and when the yield curve becomes less positive,

such incentive is reduced. Since the price of anything is most effected by the marginal trans-

action and if the marginal transaction is a purchase, it seems logical that the price should rise.

As can be seen in Chart 1, there have been numerous changes of significance over the past

five years. This chart is very simple: just the ratio of the active long-term treasury bond yield

divided by the bond equivalent yield of the six-month treasury bill. After testing more complex

ratios and/or different maturities, I have found this chart worked best and was extraordinarily

correlative to subsequent moves in monthly total returns of long-term treasury bonds (Chart

2) and even leading changes in equity indices that are not overweighted by market price or

capitalization. (Chart 3 is the monthly average of the industrial component as the Value Line

Index.)

We will discuss in more depth, at the seminar, each of these charts and which moving aver-

ages seem to add even greater predictive value to these events.


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0.8

Od

CHART 1


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15

10

5

0

2

-5

-10

-

-

-

\

LUNCi IktW WNU ~IURNS

1/29/80 To 3/26/85

YIELD TOTRET GOV (45.000)

CHART 2

THE FIRST ROSTON CORPORATION

fIXED INCOME RESEARCH


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220

200

140

Ir(WSTt(LIaI.

PRICE VALUE LINE INDEX

CHART 3

THE flRST ROSTON CORPORATION

plWeL .a-. .- -s-m . - --


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BIOGRAPHY

J. Curtis Shambaugh has been with First Boston Corporation as Vice President, Taxable Fixed

Income - Strategist since January, 1983. Prior to that he was with with Alliance Capital Man-

agement and its predecessors in a variety of positions. Going backwards in time Mr. Sham-

baugh has been a portfolio manager equity accounts, fixed income accounts; manager of

discretionary fixed income department (originated in 1970); investment counselor; member of

Moodys Investors Rating Committee-Industrial Specialist; and Moodys Manuals. Prior to 1981,

he was employed by Edwards & Hanley, registered representative: Permatex Corp., Labora-

tory Chemist, and U. S. Weather Bureau.

Mr. Shambaugh was educated at Massachusetts Institute of Technology, and C. W. Post Col-

lege.



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LANES STOCHASTICS: THE ULTIMATE OSCILLATOR

George C. Lane

In 1954, I joined Investment Educators as a junior analyst. In reality, I was a go-fer, running

the projector, carrying the luggage. But I also kept up the charts, learning the art of technical

analysis by doing.

investment Educators was then an eight year old educational school, teaching charting, mov-

ing averages, and the Elliott Wave in a series of three classes--all on the stock market. In those

days, the stock market had periods of drifting without much to interest potential clients, so we

soon added commodities courses to our fare. I taught them.

After I joined the six-man, no-pay research sta ff, we discovered oscillators. We researched and

experimented with over sixty applications, with the result that we found about twenty-eight that

had predictable values. In charting our cumulative oscillators, we found they were running all

over the chart paper. Soon, we had chart paper running all over the walls. So, we struck upon

the technique of reducing these oscillators to a percentage. We used the alphabet to differ-

entiate one from the other: %A, %B, etc. Each one was reduced to a percentage indicator pri-

marily so we could manage to keep them workable on the chart paper

As a result of all the hard work (the 14-hour, mostly by hand, no-pay days), we decided that

the most reliable indicator was %D for % of Deviation. The basic premise of %D is that mo-

mentum leads price. It makes top before price and it makes bottom before price. Momentum

is a leading indicator. %D is a momentum oscillator.

I quote from Welles Wilders book, New Concepts in Technical Trading Systems::

One of the most useful tools employed by many technicians is the momentum os-

cillator. The momentum oscillator measures the velocity of directional price move-

ment. When the price moves up very rapidly, at some point it is considered to be

overbought; when it moves down very rapidly, at some point it is considered to be

oversold. In either case, a reaction or reversal is imminent. The slope of the mo-

mentum oscillator is directly proportional to the velocity of the move. The distance

traveled up or down by the momentum oscillator is proportional to the magnitude of

the move.

For those of you who would like a detailed mathematical description of the theory and func-

tioning of momentum and oscillators, I refer to Perry Kaufmans book, Commodity Fading Sys-

tems and Methods.

Let us now turn to the practical application of Lanes Stochasatics (%K and %D). We are using

U. S. Treasury Bond Futures for illustration. Using Elliott Wave analysis, we had exhausted the

downside in 1981, when we reached the 55-00 level. The period of 1981 to 1984 can be ana-

lyzed as a double bottom formation. (See Chart A.) Our analysis begins in 1983 (see Chart

B). We are short and, as we follow the downward pattern of T-bonds, we are aware that our

short side prosperity must, someday, come to an end. But when?

In late May, we noticed the long-term interest rates were making a pointed top, and at the same

time, T-bond futures had accelerated their decline, n-2 pushing their way through the downside

of their previous channel. (See Chart C.) We drew a parallel channel of the same width below


37


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it, and on Thursday, May 28, 1984, T-bonds just touched the bottom of that channel and re-

bounded. There is a loose f ive-week cycle in T-bonds, so we bracketed a period of six weeks

(allowing for ten percent deviation on either side, as taught by Walt Bressert) in advance. T

bonds returned back inside their original channel, rallied up to the top of it and turned down.

History has taught us that, if this is truly to be the bottom in the futures (the top in interest rates),

the channel should contain the downmove. We, therefore, now had a window of price and time

(a technique taught by Jake Bernstein): price: 58-l 6 to 59-l 6; time: the week of June 29 to July

5,1984. Five weeks after their first top, long-term interest rates, which had declined, rallied and

made an attempt at a new high. This attempt failed, and by July 3 to 5, 1984, we could spec-

ulate that interest rates had topped out--and T-bond futures had made bottom (The municipal

bonds topped a week earlier than the corporate and treasury instruments. It just goes to show

you: the bond dealers are smarter than the government and corporations )

Question: Did we have a

major bottom?

Could we cover our shorts and reverse our position

in the face of so much adverse, contrary professional and public opinion?

We now turned to our computers not that we hadnt been haunting them, checking the printouts

in the wee hours, in the weeks previous (See Chart D.) What did we find?

A. Volume showed a large increase at the firs t botton - a selling climax. But volume dried up

at the second bottom - classic volume action at a double bottom: bullish

B. Open interest had begun growing in April and continued to do so right through the double

bottom: bullish

C. Lanes stochastics gave us a preliminary buying signal in May 1 and in June 2, when price

made lower lows but %D made higher lows, a divergence caused by deviation from the former

rate of descent. The final buying signal in

July

3 (completing the l-2-3 buying signal pattern)

showed enormous upward strength, barely managing to touch the oversold band: bullish As

far as we were concerned, the bottom was in

D. Lanes Serial Differencing, a tool we use to complement and confirm Lanes Stochastics,

gave us the same

l-2-3

buying signal in May - June - July: Bullish confirmation that the sec-

ond leg of the double bottom had been completed.

As we went through our printouts, we found that six out of seven of our other indicators con-

firmed our analysis. This was the buy week So, we did

To profit in trading futures, be it gold, T-bonds, or the stock indexes, we have a simple, but ef-

fective approach. We use conventional charting techniques, augmented by Elliott Wave and

cycles to determine a window of time and price. Within that window, we use our own Lanes

Stochastics to determine when the major change in trend occurs. By your bank balance, will

you also swear it works



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. .

T-BONDS

CBT CHI. s

Chart A

ii

II

1

1

1

1

1

60

76

76

74

72

70

66

66

64

62

60

56

56

54

Chart B


39


42/134

0 24 I 9 7J

I

6 20

I

4 18

FEB. MAR. APR.

MAY JULY

I

AUG.


Chart C

40


43/134

PI ki

Pl Li

._

1; : Lt..& I-,

I

ct il

%.K..~~ i

- _.- - _ .-.-..-.. - .- - - ._.-.

STOCHASTICS

SERIAL DIFFERENCING

Chart D


41


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45/134

A VIEW FROM THE FLOOR

William R. Johnston

MTAs theme for this 10th anniversary seminar Looking Back - Looking Ahead is certainly

appropriate as we celebrate, or mourn (depending on ones perspective) the tenth anniversary

of May Day, this forum permits me to reflect on the past and the future from my vantage point

as a specialist. A role, I might add, which many thought would be non-existent long before May

Days tenth birthday.

In the relatively short ten years since the unfixing of commission rates, our business has lit-

erally been transformed into an industry whose participants are as diverse as the products it

now offers.

May Day marked much more than the departure from the 183-year tradition of fixing rates by

the New York Stock Exchange (NYSE). It meant the end of the business as we knew it. It meant

future performance would be under a microscope. May, 1975, was the end of an era and the

birth of an industry the financial services industry

The deregulation which has occurred over the last decade has shaped an industry which is

unlike the one it replaced. Todays financial services business is one driven by customer ser-

vice, product diversity, and competitive edge gained through innovation and technology.

In my end of the business, the pace of change has been equally quick. Whereas ten years ago

there were almost one hundred units on the NYSE, today there are fewer than sixty At the

same time, capital in todays specialist community is almost one hundred percent.

In a broad context, as I look ahead, even greater change is in store for the specialist business.

Recent rule changes at the NYSE will permit hedging by specialists in their registered issues,

as well as open the way for diversified firms entry into the specialist business. As these de-

velopments, and others on the near horizon, begin to impact the wa y our industry operates,

the future of the specialist business will be determined by capital, talent, and competitive tech-

nology. But unlike the last ten years, these ingredients for success will be in greater demand

than ever before. Upstairs risk positioning to accommodate a progressively more volatile and

short-term oriented trading scene will mean greater levels of risk to brokers and specialists,

thereby creating new channels to spread those risks. And use of derivative products by our

customers will place ever increasing demands upon the dealer community to quickly and ef-

fectively respond to major shifts by institutional investors.

I would like to focus a bit this morning on three major elements of change effecting the spe-

cialist business: technology, capital, and customer service.

Today, the trading floor at the NYSE looks nothing like it did a fe w short years ago. If you were

to visit the Floor, and I hope each of you will consider this an open invitation to do so, you will

find fully electronic trading posts. Those old stanchions of oak and mahogany which served

the Exchange so well between 1929 and 1980 have all vanished. In fact, most were preserved

and now grace the halls of prominent museums and universities around the United States. In

their place, we have built the most efficient electronic trading arena the securities world has

ever seen.

Beginning with our automated order routing network, known as SuperDot 250, a customer can

walk into a branch off ice of a member firm and place a market order for 1,000 shares of any



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listed stock. That order will route electronically from branch office to point of sale on the Trading

Floor, be exposed to the auction market, executed and reported to the office of entry in less

than 80 seconds. And SuperDots capability continues to grow. We are currently providing au-

tomatic executions (up to 1,000 shares) in several hundred stocks with 118 point markets. Most

importantly, the entering firms own floor personnel never touch these orders. The significance:

systemized orders, now defined at 1,099 shares or less at the markeV30,099 shares or less

with limited prices, may be electronically routed, effic iently handled, given exposure to auction

market principles, executed and reported to originating office in the time it once took an

average order clerk to type it for transmission. The retail customer is efficiently served, and the

broker-dealers own floor staff is free to concentrate on the high end (block) business, where

professional agent representation is critical.

The routing network (SuperDot 250) was only the beginning of technological enhancement to

our market. We followed SuperDot 250 with an opening assist program known as OARS, which

stands for Opening Automated Reporting System. This system allows firms to electronically

enter orders prior to the opening each day in a master electronic file. The specialist cues the

file shortly before the opening to determine the supply/demand picture in a stock. Using con-

ventional methods for opening a stock, he then enters the opening price in OARS which au-

tomatically triggers instant reports to all orders in the file. In the past, large openings could cause

significant delays in reports to customers. Today, delays caused by an influx of orders at the

opening are virtually nonexistent. Most importantly, all trades entered in the OARS file are clocked

and guaranteed clean, that is no dont knows or question trades which cause administra-

tive headaches and significant expense.

The technology express moved to high gear in recent months with the elimination of the paper

books for specialists at eleven locations on the Floor. In their place are electronic limit order

files that accept, store, monitor, display and report electronically delivered limit orders (up to

30,099 shares). As an integral part of SuperDot 250, once these limit orders are executed, a

single input automatically triggers execution reports on such order. This system will continue

to expand floor-wide.

A totally paperless touch-trade system using personal computers with touch screens is the

way of our future. Touch-trade will perform all reporting, trade and quote dissemination tasks

for market and limit orders that had traditionally been handled manually. Thus, a single touch

executes a trade, reports it to the tape, sends reports to the entering firm, and enters the trans-

action into the comparison system. There are six such systems in operation on the Floor today.

Post-trade reconciliation also bears mention. Each trade executed through SuperDot 250 is

automatically submitted to the comparison cycle on a locked-in basis. This guarantees that all

systematized orders are processed error-free with a complete audit trail. This process will ul-

timately lead to a much streamlined post-trade process, reducing the current five-day cycle to

overnight processing.

We are also developing voice-recognition technology. The potential applications are enor-

mous. Suffice to say that in the future all trade data, execution reports, tape prints, post trade

reconciliation, audit trail, etc. will be captured at the point of sale by capturing the brokers spo-

ken words.

Let me refocus briefly on specialists capital. Considering the prospect of diversified firms en-

tering the specialist business and the competitive factors which that implies, financial capital

commitment in our business will inevitably grow. Human capital will also increase dramatically.

The sure judgment and expertise required to efficiently utilize dealers dollar commitments, in

an increasingly volatile marketplace, continues to force a change in the specialist community.

One measure of the ongoing competition for expert market-makers is the fact that the NYSE


44


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48/134

BIOGRAPHY

Mr. Johnston is presently serving as Chairman of the Board & Chief Executive Officer o f Agora

Securities. Prior to August, 1980, he was Senior Vice President and Director of Mitchum, Jones

& Templeton, Inc. Other business activities include: NYSE floor official (second term), NYSE

Competitive Review Committee and NYSE Specialist Evaluation Committee, Board Member

and Treasurer of Specialist Critical Issues Organization, Chairman of Education Committee of

SCIO (Reverse FACTS) and Director of North American Bank Corporation.

Mr. Johnston graduated from Washington & Lee University with attainments in commerce in

1961.


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A THREE YEAR FOLLOW-UP ON THE ENIGMATIC STOCK OPTION

A CONSTANT CHALLENGE

David Holt

PREFACE

The theme of the 1982 Market Technicians Association (MTA) Annual Meeting in Princeton,

New Jersey, was Challenges for the 80s. As the author pointed out in his presentation at that

meeting, the theme was especially apropos for exchange listed options. Because of their unique

qualities, options resisted and, in some cases, totally repelled conventional rules of technical

analysis.

During the three intervening years the listed options market has undergone a tremendous met-

amorphosis; and yet, the more it changes, the more it stays the same, at least as far as tech-

nical analysis is concerned.

Our objective in presenting this paper hopefully meets the appropriate requirements of Article

II of the MTA Constitution, to wit: B. Educate the public and the investment community (in-

cludes MTA members) to the uses and limitations of technically oriented research and its value

in the formulation of investment decisions. C. foster the interchange of material ideas and

information for the purpose of adding to the knowledge of the membership.

To reach these objectives, we will first review the idiosyncrasies of options that create the in-

compatibilities with conventional technical analytical techniques, both as they existed three years

ago and as they are now. We then will present some ideas and information that, hopefully, will

add to the knowledge of the members who review this presentation.

Perhaps the best way to start this discussion is to touch on several of the unique features of

stock options that severely restr ict conventional technical analysis techniques.

VOLUME

Unlike equity securities, the volume of stock option contracts is all but useless as raw data for

the application of conventional technical analysis. More correctly stated, its the unique aspect

of option volume as well as the method used in

reporting

option volume that stymies the tech-

nician.

One of the primary objectives of analyzing volume is to determine the amplitude and bias of

any imbalance between demand and supply. With equities, this is a rather straightforward anal-

ysis and has been quite useful for a number of years. Options, however, are another story be-

cause of the unique situation where a transaction can either be supply, demand, or both. When

a closing trade occurs between two parties who are both exiting, you have supply. However,

when one side of either transaction is opposite to the other, you have both supply and demand

which tends to neutralize their pressures. To compound the problem, the various option ex-

changes (through their control of the Option Clearing Corporation (OCC) ) continue in their re-

fusal to release opening and closing volume on a timely basis. To their credit, they did throw

a crumb to the technicians (who had been grinding them for this type of data for years) in 1984

when they started releasing opening and closing statistics for customer orders. However, the


47


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data is so delayed in its availability that its usefulness has been reduced to a minimal level.

The OCC still contends the firm and market maker orders, which consistently run over sixty

percent of the total, cannot be marked opening or closing for competitive reasons. We readily

admit that a large neon sign flashing opening or closing on every ticker a market maker

activate would unduly restrict his (or her) floor activities. However, in this high technology age

of the 198Os, there are undoubtedly multiple ways in which orders could be identified as open-

ing or closing without contributing the real and implied threats to the security of privileged in-

formation of those in front of or behind the various posts on the trading floors.

If properly motivated we feel the OCC could easily release opening and closing volume for all

orders each day, along with the other statistics created by their overnight clearing activities.

Until that happens, volume statistics will continue to perplex and frustrate technicians attempt-

ing to use them in conventional ways.

Whether option volume is used in its more traditional role as a confirmation of price movement

or, in what has become quite a fad with the introduction of broad-based cash-settlement op-

tions, as a foundation for put/call ratios, option volume can be a useful tool for technicians who

can break out the supply and demand portions (i.e., brokerage firms who can tabulate both

their own and their customers opening and closing volume) on a timely basis. Other than that

relatively small application, we submit that technical indicators using option volume are, at the

best, marginally efficient and, at the worst , dangerous.

BREADTH

Because of having a set life span, which in the spectrum of investments is relatively short-term,

options naturally have a built-in downside bias as their time value evaporates. Thus, if you are

attempting to work with advance/decline data in the conventional sense, you must firs t elimi-

nate the downside bias. But that is easier to say than do. We have expended a lot of man and

computer hours analyzing various option series in an effort to find a consistent pattern of ero-

sion. When we first started, we felt it would be a task easily and quickly disposed of, as the

severe downside bias should be in the weeks immediately prior to expiration. However, in the

real world, where expanded position limits, new products, and a sharp increase in the sophis-

tication level of the players exploded the number and size of hedging and arbitrage programs,

this makes a

predictable

erosion curve as elusive as a feather in a windstorm.

We started with the hypothesis that a set of option series would adopt a pattern of eroding time

value dictated by the characteristics of the underlying stock and general-market psychological

pressures. Perhaps it was merely a case of being naive, but we felt, as long as the logic was

there, the reality of it would follow. What we failed to anticipate was a change in the basic forces

brought about by proliferation and unique external pressures, such as straight and reverse

conversions, illiquidity, and huge arbitrage programs that employ options. In our early work we

did not allow for the almost unbelievably high level of sophistication that would be achieved by

the market professionals on the floor(s) that would in turn create an unprecedented level of

effic iency. Fortunately, our learning curve allowed us to adjust to the highly efficient market that

evolved, even though, in the process, we had to scrap most of our initial programs.

The erosion of time value, which produces the downside bias in breadth indicators, is still fairly

consistent for

calls

when monitored as a group (i.e., expiration series, exchange, in/out-of-

money, etc.). However, puts are relatively erratic even when smoothed by the use of large

universes (see Charts A-l and A-2).



51/134

After extensive computerized cross-screens of the corresponding aspects of option series, we

have come to the conclusion that the relatively erratic erosion curve of puts is a direct result

of the liquidity quotient. This hypothesis is supported by the application of simple logic.

The one thing puts and calls do have in common in this area is the almost total unpredict-

ability of individual contracts, even on the same stock and same cycles. On the surface, it would

appear that the erosion patterns are controlled to a large degree by the dictates of the market

professionals based on what part that particular contract plays in their overall position/hedge

strategy.

Even though none of the foregoing, either separately or collectively, represent an insurmount-

able hurdle in achieving penetrating technical analysis of the options market, they do present

challenges worth pursuing with more sophisticated analytical processes.

One of the unique features of listed stock options that may wel l end up being the foundation

of a truly historic breakthrough in technical analysis is . .

REMAINING TIME VALUE

In the interest of brevity, we will summarize our conclusions on time value by saying it is the

sum and total of all supply and demand pressures that are at work on the price structure of an

option contract at any particular point in time. It is the bottom line of an options financial state-

ment revealing which pressure is in excess and to what degree.

If you are a writer , you want all the time value you can get, because it represents your potential

gain. If you are a buyer, you dont want to pay anything over intrinsic value if you dont have

to. As a matter of fact, you would like to be able to buy the contract you want at a discount if

you could, and quite often, can if it is far enough in-the-money. NOTE: In-the-money options

do not necessarily go point-for-point with their underlying stocks as the attached tabulations

for April 11, 1985, show. (See Tables I and Il.)

As a consequence of this, we use time value as one of the primary screening devices for the

selection of options both for writing (primary) and purchase (secondary).

It seems logical, therefore, that time value would be an excellent base for constructing timing

indexes for the overall options market.

The application of logic tells you time value for calls should increase during a market uptrend

as enthusiastic buyers in their exuberance bid up prices. Conversely, the time value for calls

should decrease as a market correction unfolds and buyers become more and more reluctant

to be on the long side. The opposite to the above should be the pattern of time value for puts.

Apparently, this logic is faulty, because that is not how time value equates to overall price struc-

tures, at least not consistently enough to be of value. In a very loose interpretation, the time

value for puts does go in opposite direction from their underlying stocks, but time value for

calls does not correlate with its stocks even loosely. (See Chart 9.)

This lack of correlation is undoubtedly a direct result of the high degree of efficiency achieved

by the proliferation of sophisticated hedging and arbitrage programs during recent years.


49


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Getting back to logic for a minute, it would seem that comparing time value of puts to calls

(on a percentage basis so you have a common denominator) would produce a very mean-

ingful ratio. When the ratio gets high, the price structure of the stocks should be overextended,

and thus, a top could be expected to form. When the

value

is low, prices should be in the pro-

cess of bottoming as the corrective process comes to a conclusion.

Based on the above, we programmed our computer to calculate this data so we could con-

struct a put/call ratio of percentage time value. We only used stocks that had both puts and

calls

(starting in the summer of 1977 with twenty-five) so there would not be any distortion in

the ratio with only one side of the equation (i.e., calls only). Our thoughts were that it would

be a superior indicator to one using volume (we couldnt factor in opening and closing volume),

prices (distorted by the imbalance of in or out-of-the-money contracts) or other criteria.

The resultant put/call ratio is depicted on Chart C. We have indicated most of the interme-

diate-term tops and bottoms in price with the tie-lines. Up until the early 198Os, the

put/call

ratio, at the best, could be labeled interesting, provocative, or enigmatic. It most certainly was

not the historic breakthrough we were looking for, even though we felt quite strongly time value

reflects all internal and external pressures being brought to bear on prices.

However, during recent years one characteristic has become extremely reliable in confirming

a major market advance:

When the put/call ratio is relatively low and experiences a sharp and substantial

increase, a major advance in the overall market is virtually assured (See Chart C.)

In all candor, we must admit the logic of why this occurs escapes us. Our logic tells us it should

be just the opposite; time values for calls should expand rapidly as a major uptrend is launched,

not

puts.

However, here again the cause of this effect is undoubtedly the result of massive

hedging and arbitrage programs which utilize the purchase of puts. This excess demand, which

is anticipatory, produces a sharp expansion in the time value for puts while the expansion of

demand for calls is reactionary pressure produced by the normal lag-time sequence of trend

following decision making processes.

Thus, by utilizing one of the unique features of options, you can develop a relatively consistent

timing device for the price structure of the underlying stocks. This tool can, therefore, be added

to the technicians arsenal of conventional market timing tools to arrive at an even stronger

conviction as far as impending market behavior is concerned.

The next logical search takes you in quest of a method to effectively use this unique charac-

teristic of options in an efficient screening process.

AVERAGE (AVR) PUT AND CALL PERCENTAGE TIME VALUE FOR INDIVIDUAL STOCKS

A SCREENING TECHNIQUE

Lets start with the assumption that you have recognized and accepted the fact that time value

is a valuable piece of information you can use to increase your performance, regardless of the

option strategies you employ. Now, how do you obtain and put this information to use?

Our experience has taught ,us that the most productive sequence in screening any type of data

is to start with the stock and end up with the option. Once you accept the validity of time value,


50


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it becomes easy to understand why some stocks consistently command relatively high and

others relatively low time values.

A high velocity, highly volatile stock that has a lot of sex-appeal to investors is, naturally, going

to have large time values for both their puts and calls. Stocks in the area of technology are

obvious examples, as well as swinger stocks that are the favorites of professional traders

because they can get a lot of action out of them--in both directions.

On the other side of the equation, you have low beta, slow moving, pachyderm-type stocks

that consistently have relatively low time values. This is primarily due to low demand from

traders who cannot make any money on stocks that are asleep and from investors who, by

the very nature of the stocks, do not feel compelled to use their options to hedge their stock

positions. Utilities are the most common among these type of stocks.

Because of the basic desire of option buyers to be cheap and option writers to be greedy,

you would, naturally, expect writers to be attracted to the former and buyers to the latter, which

they are. But here is where actual strategies must be fitted with the correct merchandise

(options). As an example, income writers, as a general rule, require (desire) very stable stocks,

and, thus, they would not be interested in the normally high beta, high time value stocks whereas

the speculative and aggressive writers would feel right at home with these swingers, as

would investors who write options as hedging techniques.

By compiling a relative strength (rank) of the percentage time value of the almost four hundred

underlying stocks, you have a logical screening technique for both buyers and writers of op-

tions. (See Tables III and IV).

First, a general explanation of the printouts. There are four (4) different listings of forty stocks

which are appropriately labeled. The various columns ar self-explanatory except you should

be aware the the last column (NO) refers to the number of put or call options for that stock

depending on the heading of that list.

As you glance through these four lists you can see the pattern of stocks we described earlier

(i.e., highest time value = electronic and computer stocks; lowest time value = utilities

and banks). There will, naturally, be some that dont fit the mold, but thats because they are

there for special situation reasons or are, in reality, different than they are generally perceived

to be so far as velocity and volatility are concerned. In general, however, you will be able to

accept the placement of most of the stocks in each category.

There are several cross-screens of these lists that are very fruitful exercises. First, you have

the stocks that appear in both the highest average percentage time value for both puts

and calls. These are the high velocity, highly volatile stocks whose options were consistently

in demand, at least for the week tabulated, enough to produce extremely high time values.

These time values reflect the excess demand better than do most other numbers you could

come up with. Fifteen of the forty stocks were in both lists in the previous week. As you would

expect, the names pretty well fit the mold and contained some exceptionally large betas, which

confirmed their high degree of volatility.

The next cross-screen was, logically, the stocks in both the lowest AVR percentage time

value for both puts and calls. The eight names on Table IV contain a low-beta utility as well

as stocks like Western Company of North America, Lehman Corporation, and Tri-Continental.

The options on these stocks are, currently at least, out of favor for both buyers and writers.

The third list, and quite frankly the one that most piqued our imagination, wa s the stocks that

were in the highest AVR, percentage time value for calls, and lowest AVR percentage

time value for puts.



54/134

If

you

locate a stock whose

puts

and

calls

consistently have one of the highest

AVR per-

centage time value out of all three hundred seventy-four underlying stocks, you know you

have a high velocity, highly volatile stock. Because the options on this stock, both puts and

calls, are under heavy demand, you know you are going to be required to pay a hefty premium

(i.e., time value) if you want to buy them. If you are a writer, you know you are going to receive

a hefty bonus for being on the supply side of a transaction. How you can use this informtion

to your advantage is relatively straightforward, especially those utilizing writing strategies.

Now, lets take a look at a totally different breed of cat. Lets say you isolate a stock whose

calls

have one of the largest AVR percentage time value of all underlying stocks. What does this

tell you, and how can you use this information to increase the performance of your option strat-

egies? The firs t logical conclusion is either the calls are overvalued, the puts are underval-

ued, or both. It is an obvious case of unbalanced supply and demand pressures on the options

caused by any number of possible reasons.

Your strategy is, therefore, relatively apparent as you would want to go short the calls and go

long the puts. This strategy, of course, takes into consideration the point we made earlier that

all other considerations must be equal, or at least neutralized. In other words, you should not,

necessarily act on the AVR percentage time values, and disregard all the other factors that

could affect your results (i.e., overall market conditions, underlying stocks technical condition,

status of individual option, etc.). However, the point we want to make is that such a strategy

could

be viable enough to employ independent of, but in conjunction with, your normal strat-

egies.

In conclusion, we must confess we have experienced a great deal of success in applying proven

technical analysis techniques, such as first and second derivatives of price, to stock options

and are not in the least deterred in our efforts. We are, however, intrigued by the challenges

presented by the items mentioned in this article and will continue to pursue them, even though

the successful conclusion is reached by someone other than ourselves. Indeed, w e would be

extremely thrilled to learn these challenges have already been overcome, if the conquerors

are willing to share the results.

1


52


55/134


56/134

CHART B

A.II I ,

, I ; (

,

I

I

IrWIIl / I I/ I I

CHART C


54


57/134


58/134

LOWEST x TIME VALUE

(PUTS)

LEIY AY CR AU; 20 13.75 5.7s 31 -3.6

LEHYAN CP AUG 15 13.75 G.97 6 -2.8

r.

x

IN TM

OUT

VL

30ME MINES

PUG 15 9.75 5.OC

ZENITH RAD

AUG 30 2l.iC

3.50

INTL FLAVC

AUG 35 27.37 6.5:

\ L INOUS

AUS 15 11 .SG 3.25

TESORO PET

AU: 2C

12.12 7.62

AVNET INC

PUG 40

30.37 F.GC

SKYLINE CC

AUG 20 14.00 5.75

35

3c

2P

-2.6

-2.4

-2.2

-2.2

-2.1

-2.1

-1.8

STCCU CPT'N

PR:CE

PRICE

PTION

APR SERIES

STOR; TECH

APR 15

2.50

STORC TECH

APR IO 2.50

WSTR UNION APR 15 e.a7

bISTR UNION

APQ 20 8.e7

WSTR UNION

APR 25 e.87

VERBATiM

APR 10 7.37

VEROATIH

APR 15

7.37

STOR; TECH

APR 5

2.50

SOUTHLND R

APR 2'0

15.37

SYITH INTL

APR 20

11.37

e3 -15.2

75 -15.2

12.12

7.12

5.75

lG.75

15.75

2.37

7.37

4C -4.2

55

-4.2

54 -4.2

26

-3.5

SC

-3.5

2.43

4.25

50 -2.E

23 -2.4

43 -2.2

.37

MAY SERIES

REAONG-BAT

qA Y 15 9.62

4.62

G E c INTL

HAY 10

5.12 4.62

LEHMAN CP

MAY 20

13.7s 5.75

LEHqAN CP

MAY 15 13.75

3.87

SKYLINE CO

MAY 20

14.00

5.b2

DOME MINES

'4AY 15

9.75

5.00

ZENITH RAO

MAY 3G 21.00 8.50

INTL FLAVO

MAY 35

27.87

6.50

N L INDUS

MAY IS

11.50 3.25

TESORO PET

MAY 20

12.12 7.42

JUN SERIFS

23

39

24

3C

SE? SERIES

MOHAWK OAT

MARY KAY

L T V CORP

NTL PATENT

TEXAS GIL

DATA GENRL

VEECO IhST

FCL CP AM

SANTAFE SP

COHP SC1

5.00

11.37

lG.12

SEP 15

SEP 1s

SCP 15

SEP 2s

SEP 25

SEP 70

SEP SO

15.25

17.37 7.25

46.00 23.00

19.75

SEP 1s 6.87

SEP 35 27.00

sip 20 15 .30

OCT SERIES

uSTP UNION

OCT 15 9.67

SCUTHLNC R

CCT 20 15.37

CHX&NU TRN

OCT 30 13.b2

Ti E COMM

OCT 15 6.75

TANDY CORR

OCT 40 33.25

3ETHLHH ST

OCT 25 17.50

WINNEBA;O

OCT 25 17.75

9.75

3.25

4.62

9.37

66 -5.2

24 -3.3

32

-2.5

39

-2.5

30 -2.2

34

-2.2

34 -1.9

54 -1 .e

22 -1.9

25 -1.7

9.87

8.OC

7.5c

4.75

35 -7.8

49 -5.0

31 -3.6

e -2.8

30 -2.7

5.75

4.25

4c

23

34

5s

16

-4.2

-2.4

-1.9

-1.9

-1.5

-1.4

-1.4

-1.4

-1.3

-1.3

35 -2.6

32 -2.4

15.oc

3.12

6.25

7.25

7.00

20 -2.2

23 -2.2

39 -2.1

30

29

16

24

16

HSTN NAT G OCT 55

45.37 3.5c

FLUOR CORP O CT 25

19.00 5.7s

PCLAROIO OCT 35

29.37 5.25

EY PHARM

JUN 20

MOHAWK OA T JUk 15

GEhc MOTO RS JUN 85

~GLCBA L MAR JUN 10

PARADYNE

JUN 20

KEY PHARM

JUN 15

L T V CORP JUN 15

ZAPATA CP

JUN 25

VEECO INS T JUN 30

NTL PATEN T JUN 25

JUL SERIES

STORG TECH JUL 5

WSTR UNION JUL 15

WSTR UNION JUL 20

WSTR UNION JUL 25

STORG

VERBATIM

TECH JUL 1C

JUL 10

SOUTHLND R JUL 20

BETHLHM ST JUL 25

ALLIS CHAL JUL 15

T I C

COMM JUL 10

9.75 9.75

5.oc 9.75

73.50 9.00

4.37 5.5c

51 -5.1

66 -5.0

13

-3.4

56 -2.9

2e -2.6

3s -2.6

32 -2.5

40 -2.5

34 -2.5

39

-2.5

NCV SERIES

READNG-BPT NOV 15

9.62 5.00

LEHMAN CP NOV 2C

13.75 5.75

DATAPC:NT NOV 20

14.50 s.oc

LEHYAN CP NOV 15

13.75 0.87

ZENIT H RAO NOV 30

21.00 3.5G

INTL FLAVO NOV 35

27.87 6.5C

N L INOUS NOV 15

11.50 3.25

TESCRO PET NOV 20 12.12 7'.62

AVNET INC

tiov 40 30.37 9.oc

DATA PCINT NOV 25 14.50 10.25

35

31

27

8

3P

20

23

-3.9

-3.4

-3.4

-2.8

-2.4

-2.2

-2.2

-2.1

-2.1

-1.7

14.37 5.25

9.75 5.00

10.12 4.b2

14.87 9.75

19.75 9.75

15.25 9.37

39

24

42

3.07 5.7s

8.87 10.75

2.50 2.25

8.87 15.75

7.37 2.37

15.37 4.25

2.5c

17.50 7.12

7.37

6.75 3.12

6.75

3.12

50,

75

4c

5s

64

26

-13.0

-5.2

-4.2

OEC SERiES

-4.2

-4.2

-3.5

-2.4

-2.2

-1.9

-1.9

MARY KAY

OEC 15 11.37 3.25

24

OOU CHEM

OEC 35 29.00 5.50 17

COHP SC1

OEC 20 15.00 4.75 2s

KANE3 SRVC OEC 15 9.12

5.75 39

KEY PHARY

DEC 15

9.7s 5.12 35

L T V CORP OEC 15 10.12 4.75

32

APACHE CP

OEC 15

11.37 3.50 24

PER'CIN ELM DEC 30

24.00 5.75

2c

PARADYNE DEC 20

14.37 5.50 28

YT L PATEN T DEC 20

15.25 4.62

23

-3.3

-1.7

-1.7

-1.4

23

30

-1.3

-1.2

5s

32

-1.1

-1.c

-0.9

-0.9

AUG SERIES

READNG-BAT PUG 15

9.62

5.00 35 -3.9

TABLE II


56


59/134

AVERAGE ?ERCENT TIME VALUES for CPTION UNCERLYING STOCKS

Run on: II-Apr-85

RUN tt: 1099

3:

;:

.

HIGHEST AVR ,Y TIHE VALUE

HIGH:ST AVR X TIME VALUE

RANKED ACCO RDING TO CPLLS

RANKE3 ACCCRDIN; TO PUTS

STOCK

----------

MOHAWK OAT

GERBER SC1

ALLIS CHAL

C B S INC

L T V CORP

COHMOR INT

ALL1 STORE

NTL PATENT

CRAY RSRCH

KEY PHARM

DOME MINES

I T T CORP

TELEX CORP

ASARCO INC

STORG TECH

;&EM& :ZG

HEWLETT PK

SALLY HFG

AMDAHL CP

t&S;":$"

GEN IhSTR

COHP SC1

DATA GENRL

FED EXPRES

ZENITH RAD

ALCAN ALUM

U S AIR

;G; FAI;;'

CNTRL DATA

CHRYSLER

TESORO PET

GENRAD INC

PRIME CHPR

GuLF&WSTRN

GLOBAL MAR

VIACOM IkT

COASTAL CP

AVERAGE:

AVR AVR

CALL PUT NO

----- m-m-- --

'X 3.2c.75

_

6:44

s

6.00 x:

:*;4 2:64

3:

9

5143 ;*A;

1194

11':

5.39

10

;'g

5111

7.;;

2142

2;

4.90 2.46 1:

y;

4:80

y9"

-9167

:i

1

yp

4174

';A;

1177

7

9

4.65 1.69 9

2.;: $25

9

4149 2:35-z

4:38

$91 1

1173

1%

4.18

t-i: . $.;a:59 4: 8

4.05 3.29 18

----- --m-s --

4.91 1.88 10

AVR AVR

STOCK CALL PUT NC

--e-------

----- -e-e- --

MCtiAwK DAT

VALERC ENS

APERADA HS

;C; ;T;t$A

ti i iNOUS

UNIOk OIL

A H F CORP

COASTAL CP

TELEX CORP

NCRTHROF C

GERBER SC1

COMYDR IhT

COLECO IN0

CRAY RSRCH

ASARCC INC

ENSERCH CP

CROUN ZELL

4;T;:: P

VIACOM INT

ALL1 STORE

p;; pcmb

A S A LTD

REVLON INC

NTL SEMICD

NTL DISTLR

TERADYNE

ZAPATA CP

CHHPN INTL

LOUIS LAND

f4oaxL coRP

CtiLLINANE

GENRA3 INC

AVON PROD

CHRYSLER

I T T CORP

STRLNG ERG

MEDTRCNIC

3.69

4.05

4.87

2:s

5155

3.73

zt

2:46

y*"2:

2:97

;*;z

2175

:*B

3:04

t=:i

3:57

2;7i

2.72

-----

AVERAGE: 3.77

5.75 8

4.32 8

x; I9

z:9c :

:=Pt z

2:74

2.69 ep

2.67 11

2.65 6

2.64 6

2.63 16

z: 8

2154 $

2.53 8

$2; lcj

1147 6

2.46 10

2.46 11

2.45 8

2.42 9

- - - - e - -

2.97 10

TABLE III


57


60/134

LOWEST AVR % TIME VPLUE

RANKED ACCORDING TO CALLS

LCWEST AVP % TIME VALUE

RANKED ACCORDING TO PUTS

AVR AVR

STOCK CALL PUT NO

---s-e---- ---mm s---m me

STOCK

----------

STGRG TECH

VER34TIM

LEHMAN CP

kSTR CO NA

GLOBAL YAR

iJSTR UNION

REBDNG-SAT

BETHLHM ST

PARKR ORLL

SKYLINE CO

AM ELEC PW

INTL FLAVO

gE;;;I;oPA

MGH U4 ENT

TRi-CONTL

i : :Nk::n

INEXCO OIL

G E 0 INTL

CCMPTRVISN

APACHE CP

NCVO INDUS

SHELL GIL

BLCK DECKR

FIRESTONE

AM HOSPITL

SYBRON CP

y::;': gy

EkGLHRG CP

SHAKLEE CP

;Lp; p ;i

OCW CHEM

HARRIS CP

KANE3 SRVC

SE4RLE G D

i"; ZF5 *NC

----------

AVERAGE:

4VR

CALL

-em--

$-S?

0:8;

-1%

3:75

3:;

ti:oo

3.27

0.51

1.22

AVR

PUT

-w--s

I;=;;

-3:19

I; l ;;

-I:24

-0.65

WSTR CO NA

AVERAGE:

DUKE POWER

;R;K~oD;T?L

CONS EDISO

SHELL OIL

CONTL TEL

CROWN ZELL

SOUTHRN CO

AM ELEC PW

DOMNON RES

AVON PROD

AM TELBTEL

VERBATIM

EXXON CORP

AETNA LIFE

TEXACO INC

aELLSOUTH

LILLY ELI

TRAVELERS

COOPER IN0

LEHMAN CP

BANKAHERCA

GENUINE PA

ROYAL DUTC

ALLIED CP

ATL RICHFL

TRI-CONTL

FST CHICAG

SCHERING P

WARNR LA43

MAPCO INC

INTL FLAVO

A# HOME PR

AM EXPRESS

CARTER H H

CLOROX CC

CiGNA CORP

ECKERO JAC

GOODYEAR T

----------

I;=;;

0:oo

0.20

0.34

-d*Z

-0:53 ':

2.26 6

1.83 s

8-25 :

2:33 13

1.53 6

1.10 8

0.60 9

0.63 17

:=x

1:22

1.23

x

1:25

1.27

xi

,,',B

0.80 0.79 9

----- --

HIGHEST CALLS

HIGHEST PUTS

-------------

MOHAWK OAT

EEiB;RIi;I

L T V CORP

COMMOR INT

ALLI STORE

fRfYTR;;;;

TELEX CORP

ASARCO INC

VALERO ENG

NTL SEMICD

CHRYSLER

GENRAO INC

VIACOM INT

COASTAL CP

:=a;

3:60

3.97

:*:i'

0136

:29

2:21

"r=$l

2:71

0.25

0.25

8%

0:32

3.34

0.35

--e-e

---a-

2.46 -0.50

DUAL LISTINGS

-------------

LOWEST CALLS HIGHEST CALLS

LOWEST PUTS LOWEST PUTS

------------ -------------

kSTR CO NA

PARKR ORLL

SHELL OIL

AM ELEC PW

VER8ATIM

LEHMAN CP

TRI-CONTL

INTL FLAVO

ALLIS CrlAL

STORS TECH

flGM UP ENT

GLOBAL MAR

HIGHEST PUTS

LOWEST CALLS

------------

CROWN ZELL

CPRTER H H

AVON PROD

TABLE IV



61/134

BIOGRAPHY

After completing his formal education at UCLA, David Holt joined a Certified Public Accounting

firm in Southern California, where he specialized in Municipal Auditing. He joined a NYSE member

firm in 1961 as a registered representative. After several years, he went into private business,

where he continued to gain experience as an investor. In January, 1972, he joined Trade Levels

as Director of Advanced Planning. He is now President of T L Communications, Inc. and Editor

of the nationally known Trade Levels Report and the Trade Levels Option Report.


59


62/134

This page left intentionally blank for notes, doodl ing, or writing articles and comments for the MTA Journal.



63/134

A VIEW FROM THE FLOOR

Ralph Fogel

The primary qualification for being an effective trader is experience. Experience is what the

trader uses to define the three most important factors that underscore the decision-making

process. Those factors are risk and reward, competitive edges, and the environment.

Risks and rewards vary, depending on the traders area of responsibility. For example, a spe-

cialist generally tries to keep his inventory small so that he can take advantage of the times

when there are extreme buying or selling going on in his stocks. The specialists gauge their

risks and rewards on the movement of stocks, balancing longs against shorts, opting for some-

what smaller profits in light of assuredly smaller losses.

On the other hand, option traders aim to set up positions with as little risk as possible for a wider

play. The options trader takes advantage of the different options within the stock that he/she

is trading. Often he becomes a trader who bases his risk decisions on the values of the indi-

vidual options. Their decisions are also based on order flow and on the value of any given spread

within the many options of a security and stock.

Just as options traders draw on much different criteria than do specialists or off-the-floor trad-

ers when considering risks and rewards, so do different criteria pave the way when the traders

consider their competitive edges. Specialists have an edge in that they handle the same stocks

daily; therefore, they gain a familiarity with what the ranges are of stock. They have a feel for

any movement. They sell strengths and buy market weaknesses. Specialists have access to

the ticker tape. For those people who are traders and are concerned with movement-to-move-

ment transactions within the security, the ticker tape is the most important source of infor-

mation, providing an edge over those who do not watch the tape on a moment-to-moment basis.

Unlike specialists, options traders are not interested in the movement of stocks. They try to

maximize the fact that they are buying and selling value. These traders try to buy spreads un-

dervalued and sell them overvalued. The options traders competitive edge is that he sees or-

der flow in the various strikes within the options which off-the-floor traders do not see.

Prior to a recent rule, off-the-floor traders had a more difficult time than others when it came

to establishing a competitive edge. However, since the advent of the Clearing Member Trade

Agreement (CMTA), these traders now pay to see order flow. They also have an edge in that

they do not have to be on two sides of a market at all times and do not have to make specific,

standard required allotments of inventory on every transaction. In many ways, off-the-f loor traders

are not as limited by the rigid guidelines imposed on specialists and options traders. However,

it could be argued that what the off-the-f loor traders make up for by having less stringent guide-

lines, they lose in environmental deprivation.

The floor of the exchange is an environment like no other. Being on the floor gives traders a

feel for the market. There is more than just a ticker tape and seeing order flow. Traders can

almost feel the surge of orders--the tempo increases, the noise level increases, and the move-

ment on the floor increases. It is the wordless sounds of excitement that inform traders of a

turn in the market or of a rally.

Specialists and options traders see the ticker tape and actually see the individual sales taking

place--not just the accumulation of them as seen on a bar graph. Being stationed in that en-

MTA JourndiMay 1985

61


64/134

vironment, those traders see more than an end-of-day chart showing the markets range and

its highs and lows by closing time. They are provided access to information on a first hand ba-

sis. The more information that the traders abstract from the environment, the better able they

are to make profitable decisions.

It is the experienced trader who learns to view various communication situations as environ-

ments. Even the off-the-floor traders realize that the market chatter on a bus or train ride to

work, the street noise on their way to get coffee, and the news medias coverage of rumors

are all valuable communication environments that just may hold the key to where a stock is

headed on any given day.

In conclusion, it is not any single factor (risk and reward, competitive edges, the environment)

that influences a traders decisions. It is all the aforementioned factors being processed si-

multaneously that provide the experienced trader with the needed information to make the best

possible decisions.



65/134

BIOGRAPHY

After graduating Brooklyn College, Mr. Fogel was employed by Spear, Leeds where he be-

came vice-president in 1977. In 1980, he became a general partner of Spear, Leeds and Kel-

logg, where his duties included all trading operations on the American Stock Exchange Floor.

In April, 1984, Mr. Fogel was appointed as floor official on the American S

david aranson mta journal patterns

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