•random musings for traders at TD AmeritradeSummer 2014

thinkMoney/24

10/TIPS FOR

TRADING WITH YOUR

GUT

18/VOLATILITY’S LITTLE SECRET

24/HOW TO NEUTER YOUR

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thinkMoney/24•

04•Contents•Photograph byFredrik Brodén

•tdameritrade.com

tm24_Pages2to9_rd5.qxd:pages.layout 2014-05-23 12:35 PM Page 4

Trading With A Sour StomachIn bull markets, sometimes logicgoes out the window. So the nexttime your gut is telling you to getinto a trade despite your rules,pick a strategy that tempers yourenthusiasm.

p. 10

tm24_Pages2to9_rd5.qxd:pages.layout 2014-05-23 12:35 PM Page 5

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thinkMoney/24•

07•Contents•Cover photograph byFredrik Brodén

•tdameritrade.com

Miscellaneous

Features

10/ Trading With A Sour StomachNo matter how many rules you strictly follow,there’s going to come a time when you just haveto trust your gut on a bullish trade. But depend-ing on how confident you are, you can tweak thedownside risk to help you sleep better.

18/ News For Show, Vol For DoughHeadlines may come and go. But the volatilityresulting from headlines is what can mattermost to traders. And before you write offhigher-volatility markets, here’s a little secretyou ought to know.

24/How To Neuter Your TradeAt some point you may have heard an optiontrader boast about being a “delta neutral” or“market-neutral” trader. But what do theseterms mean and are they really useful? Let’s putthe debate to rest.

08/A Quick Howdy

15/Love Notes

16/News + ViewsRetail options tradingis caught in the crossfire of Congress-man Camp’s tax pro-posal. Should you beworried?+Ask the Suit

28/Gear HeadToday’s cool tool two-fer: A Dow-to-gold script from TD Ameritrade’s “Mr. Script” and howto share a chart withyour loved ones.

Columns

42/The TokenGlossary

32/ Special Focus: Charting forEveryone CHARTS THAT RULE THE WORLD No doubt you can find lots of charting programsout there. But seriously, why look further? Otherthan a back massage, thinkorswim® Charts cangive you almost anything you need—even ifyou’re not a chart reader.

PLUS: THINKORSWIM CHARTS Q+A

TD Ameritrade Contact Info You Could UseClient Services Representative: 800-669-3900New Accounts: 800-454-9272

•thinkorswim Support: 800-672-2098thinkorswim@tdameritrade.comPlatform Feedback:thinkorswimfeedback@tdameritrade.comTech Support:thinkorswimtechsupport@tdameritrade.com paperMoney Support:thinkorswimpapermoney@tdameritrade.comFor all other inquiries:tdameritrade.com/contact-us

•General Mailing Address200 S. 108th AveOmaha, NE 68154

•

Follow TD Ameritrade

31 /The SpotlightFun guy MikeBarwacz is makingsure your TradingDesk confidant at TD Ameritrade haswhat it takes toanswer your toughquestions. And hecan show you a goodtime doing it.

And follow thinkorswim on Twitter, too: @thinkorswim

BACK ISSUES OF THINKMONEY!To view past issues of thinkMoney, hop on over totdameritrade.com/thinkmoney. You'll be glad you did.

22/Evolution ofthe TraderIf you thought tradingstarted under a but-tonwood tree, you’dbe wrong. Think mon-keys, Darwin, andopposable thumbs.

40/Ask the Trader GuyOur resident gururesponds to why alloptions aren’t createdequal, how to size upyour vertical spread, andfalse promises from adumb clairvoyant.

38/Capiche?If you’re buying ETFsthat track futures likeoil and volatility,beware of the “rollingpenalty” that could bestealing your profits.

cont.

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make a huge difference in yourprobability of success, dependingon how confident you are. Andthis is where gut meets science.In this month’s cover feature,“Trading on a Sour Stomach”(page 10), we’ll show youwhether the difference betweenfeeling a “sure thing” or just“meh” could dictate which strat-egy you may want to consider fora given trade.

But suppose you don’talready have a system, andyou’re just discovering thethinkorswim® trading platformfor the first time. Continuing ourSpecial Focus on the finer tools ofthe platform, we’ll dive intothinkorswim Charts (starting onpage 32). Serving up nothing lessthan the kitchen sink, the Chartspage has tools from which eventhe “I don’t use charts” tradercould benefit.

And of course, after you’vepulled the trigger and entered atrade, at some point, you’ll findyourself in one of two situa-tions—facing a loss or staring ata profit—and not sure what to donext. “How to Neuter YourTrade” on page 24 is a must-readfor you nail-biters that could pro-vide some relief.

It’s been said that trading canbe traced back to our simianancestors. As Trader Erectusonce wrote on his cave wallwhile contemplating his nextPaleo snack, “mmfph”—whichwas later translated to “Buy spar-ingly and sell often.” We agree.

Happy trading!

Kevin Lund, Editor-in-Chief, thinkMoney

thinkMoney/24

•

08•A Quick Howdy•tdameritrade.com

thinkMoney®

EDITOR-IN-CHIEFKevin Lund

EDITORThomas Preston

ASSISTANT EDITOREileen Sutton

ART DIRECTORTom Brown

DESIGNERJennifer Roberts

•

CONTRIBUTING WRITERSNicole SherrodJohn BrodemusChesley SpencerKira BrechtGreg LoehrDavid Kier

CHIEF PHOTOGRAPHERFredrik Brodén

CONTRIBUTING ILLUSTRATORJoe Morse

•PUBLISHERT3 CustomEmail: info@t3publishing.comwww.t3publishing.com

PHO

TOG

RA

PH: F

RED

RIK

BR

OD

ÉN

Let’s face it. No matter howimpressively automated yourtrading system is—custom scans,charts, half-eaten Twinkies—atthe end of the day, it’s really aneducated guess where the stockyou’re coveting is going next.Though your indicators all pointto up or down, you don’t reallyknow for sure—which meansyour level of confidence in thetrade sits on a spectrum. Of sorts.In other words, it’s more of adata-driven gut feeling that ulti-mately drives your decisions.

You may know which stockyou want to trade. But choosingthe right option strategy could

Me Go Trade

edit

GOT FEEDBACK?Talk to us aboutthinkMoney! Take oursurvey and you’ll qualifyfor infinite browniepoints. tdameritrade.com/tmsurvey or write to usat thinkmoney@tdameritrade.com

tm24_Pages2to9_rd5.qxd:pages.layout 2014-05-23 12:36 PM Page 8

• The information presented in this publication doesnot consider your personal investment objectives orfinancial situation; therefore, this publication does notmake personalized recommendations. This informationshould not be construed as an offer to sell or a solicita-tion to buy any security. The investment strategies orthe securities may not be suitable for you. Any and allopinions expressed in this publication are subject tochange without notice.

• Options transactions involve complex tax considera-tions that should be carefully reviewed prior to enteringinto any transaction.• The risk of loss in trading securities, options, futuresand forex can be substantial. Clients must consider allrelevant risk factors, including their own personal finan-cial situations, before trading. Options involve risk andare not suitable for all investors. See the Options Disclo-sure Document: Characteristics and Risks of Standard-ized Options. A copy accompanies this magazine if youhave not previously received one. Additional copies canbe obtained at tdameritrade.com or by contacting us. • Trading foreign exchange on margin carries a high levelof risk, as well as its own unique risk factors. Before con-sidering trading this product, please read the Forex RiskDisclosure, available at http://www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf. • A forex dealer can be compensated via commissionand/or spread on forex trades. TD Ameritrade is subse-quently compensated by the forex dealer.• Futures and forex accounts are not protected by theSecurities Investor Protection Corporation (SIPC).

TD Ameritrade, Inc. Member SIPC FINRA NFA

TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. ©2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permis-sion. Product and company names mentioned hereinmay be trademarks and/or registered trademarks oftheir respective companies.

thinkMoney/24•

09•Disclaimers•tdameritrade.com

• Neither Investools® norits educational sub-sidiaries nor any of theirrespective officers, per-sonnel, representatives,agents or independentcontractors are, in suchcapacities, licensedfinancial advisors, regis-tered investment advisorsor registered broker/deal-ers. Neither Investoolsnor such educationalsubsidiaries provide

investment or financialadvice or make invest-ment recommendations,nor are they in the busi-ness of transactingtrades, nor do they directclient futures accountsnor give futures tradingadvice tailored to anyparticula r client’s situa-tion. Nothing containedin this communicationconstitutes a solicitation,recommendation, promotion, endorsementor offer by Investools or others described herein, of any particular security,transaction, or invest-ment. Investools Inc. and TD Ameritrade, Inc.are separate but affili-ated companies that are not responsible foreach other’s services orpolicies.

important

info

TD Ameritrade was evaluated against 19others in the 2014 Barron's Online BrokerReview, March 15, 2014, and wasawarded 4.5 stars overall (along with 3others). The firm was ranked 1st in thecategories “Best for Long-Term Investing”

and “Best for Novices.” TD Ameritrade was also amongthose listed in the categories Best for Frequent Traders(ranked 4th), Best for Options Traders (ranked 2nd) andBest for In-Person Service (ranked 5th). Star ratings areout of a possible 5. Barron’s is a trademark of Dow Jones.L.P. All rights reserved.

Transaction costs (com-missions and other fees)are important factors andshould be consideredwhen evaluating anyoptions trade. For simplic-ity, the examples in these

articles do not includetransaction costs. At TDAmeritrade, the standardcommission for onlineequity orders is $9.99,online option orders are$9.99 + $0.75 per con-tract. Orders placed byother means will havehigher transaction costs.Options exercises andassignments will incur a$19.99 commission.

3

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thinkMoney/24

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10•Gut-TradingStrategies•tdameritrade.com

NO MATTER HOW MANY TRADING SYSTEMS YOU TRY,THERE’S GOING TO COME A TIMEWHEN YOU JUST HAVE TO TRUST YOUR GUT ON A BULLISHTRADE. BUT DEPENDING ONHOW CONFIDENT YOU ARE, YOUCAN TWEAK THE DOWNSIDE RISKTO HELP YOU SLEEP A LITTLEBETTER AT NIGHT.

I N T H E W O R L Dof numbers and analy-

sis, a gut feeling can seemsquishy and out of place. But

with trading and investing, there’s nodenying that our gut instinct can often help. It

can make us confident or wary, no matter the analy-sis we used to determine a bullish or bearish direc-

tional bias. And for the record, it’s not that ouranalysis is wrong. It’s just that our gut remembers pastwinners and losers and a different part of the brainengages. It’s right brain vs. left brain. In a word, our gutcan provide a reality check. • Now, some tradersmight use their gut as a “go, no-go” indicator. The “go”is all in with long stock, for example. The “no-go” issit on your hands and do nothing. But there’s asmarter approach that may help fine-tune your trad-ing instincts. Figure out whether your gut is mak-

ing you slightly confident, semi-confident, orvery confident in your bias. Let’s look at

a few bullish strategies that maymatch what your gut might

suggest.

TRADINGWITH A SOURSTOMACH

WORDS BYTHOMAS

PRESTON

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12•Gut-TradingStrategies•Photograph by Fredrik Brodén

•tdameritrade.com

THE SORT-OF-CONFIDENT BULLISH TRADESHORT, OUT-OF-THE-MONEY PUT VERTICAL

When looking at a stock, you might believe itwill go up—at least that’s what your analysisis telling you. But your gut isn’t quite as psy-

ched about it. It’s telling you that the stock might not goup, and might drop. Since the out-of-the-money (OTM)put vertical has a defined max loss and defined maxprofit, it might be an appropriate strategy when you’resort of confident in the direction you think the underly-ing will go.

A bullish short OTM put vertical is made up of ashort OTM put, and a long OTM put that’s furtherOTM than the short put. This trade is designed to pro-duce a credit, which is the max profit the trade canmake(less transaction costs). The max loss is the dif-

ference between the strikes minus that credit (plustransaction costs).

What the short OTM put vertical does is potentiallyprofit not only if the stock rallies, but also if it sits at itscurrent price, or even drops a bit. More than a bitwould mean the stock drops below the short strikeplus the credit received, in order to incur a loss. Aslong as the price of the stock is higher than the strikeprice of the short put at the expiration of the options,this position can be profitable. A long stock position,for example, can’t do that. If the price of the stockdoesn’t go up, or drops, the long stock position isn’tprofitable (not counting possible dividends). Theshort put vertical can also have a lower marginrequirement than long stock. That means you don’tneed to tie up a lot of your trading capital in a sort-of-confident trade.

THE SEMI-CONFIDENT BULLISH TRADE

NAKED, SHORT OUT-OF-THE-MONEY PUTHuh? a naked short option if you’re onlysemi-confident? That may sound risky, but

hey, at thinkMoney, we don’t flinch. A short OTM puttakes in a credit (the premium received for selling theput), which is its max potential profit (less transactioncosts). The max potential loss is the strike price of the

put minus the credit you realize for selling it. That’sthe loss that would occur if the price of the stock goesto zero. And it’s that large potential loss that might beraising eyebrows for the semi-confident trader. Thestrategy also includes a high risk of purchasing theunderlying stock at the strike price when the marketprice of the stock will likely be lower.

But think about it. The short put has no more riskthan long stock. The losses for both are large if the priceof the stock drops sharply, let alone goes to zero. Buthere’s an advantage for the short OTM put—the price ofthe stock can sit where it is, or even drop a bit by expira-tion, and the short OTM put can still be profitable. Longstock can’t do that (save, for possible dividends). Ashort OTM put also has no greater margin requirementthan long stock. In a margin account, the margin on ashort put can be lower than on long stock, and in anIRA, the margin on a cash-secured short-put positionand a long stock position can be roughly the same.

The short OTM put and the short OTM put verticalshare some characteristics. So, what makes the shortOTM put the choice for the semi-confident trade? Theshort OTM put can have a higher credit than a short-put vertical, and thus larger potential profit. If theshort put of the short-put vertical and the short put areat the same OTM strike price and same expiration, thecredit for the short OTM put vertical will be lower thanthe credit for the short-put. The difference is the costof the long-put component of the short-put vertical.The short put gives you potentially more profit than ashort-put vertical in exchange for a higher marginrequirement and higher potential risk. That’s why itmay be a choice if you’re a bit more confident in yourbullish bias.

FIGURE 1: Short OTM put vertical. A smaller potential reward withhigher probability of success than long verticals, when you’re feeling so-soabout the direction of the underlying. For illustrative purposes only.

+

_

BREAKEVEN

STOCK PRICE

Short Put Vertical

Short Strike

Profit

Loss

LongStrike

FIGURE 2: Short OTM put. Wee bit bigger potential reward, lots more risk. Still a higher probability of success than a long vertical posi-tion, since you could potentially make money even if the stock stands still.For illustrative purposes only.

+

_

BREAKEVEN

STOCK PRICE

Short Put

Profit

Loss

Short Strike

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THE CONFIDENT BULLISH TRADE

LONG, AT-THE-MONEY CALL VERTICALA long at-the-money (ATM) call verticalcould be the choice as a “very confident”

trade. A bullish long ATM call vertical is made up of along slightly, in-the-money (ITM) call and a short OTMcall in the same expiration. You pay a debit when youdo this trade, and the debit of the long ATM vertical isits max possible loss. The max potential profit is thedifference between the strike prices, minus the debitpaid, including transaction costs, and occurs when thestock price is higher than the strike price of the shortOTM call at expiration. That means the price of the

stock has to go higher for the ATM vertical to profit. Itcan’t just stay at the same price or drop, like it can forthe short OTM put, or short OTM put vertical. If thestock drops, the long ATM vertical will likely losesome money, and the max loss happens when theprice of the stock drops below the strike price of thelong call at expiration.

The long ATM call vertical may be a confidentchoice because it can have a higher delta than an OTMshort put vertical, or even a short put—meaning, it canbe more responsive to a rise in the stock price. But ifyou’re so confident, why not just buy stock, or a longcall for that matter? Neither caps your upside poten-tial, so why choose it?

Compared to long stock, the long ATM call verticalcan have less potential risk, for one. Nothing is guar-anteed to go higher. If the stock does drop sharply, theloss on the long stock can bemuch greater than on the longvertical. Also, the long ATMcall vertical can have a lowermargin requirement than longstock. That means that you tieup less of your trading capitalwith verticals.

Compared to a long call, thelong ATM vertical can be lesssensitive to changes in volatil-ity (vega) and time (theta),because the vertical has both along and short option in it. Thenegative vega in the shortoption offsets the positive vegain the long option, resulting ina net-lower vega than a singlelong option. Likewise, the neg-ative theta of the long option isoffset by the positive theta ofthe short option, resulting in anet-lower time decay than asingle long option.

THE KEY IS UNDERSTANDING THAT YOUR GUTdrives strategy, not trade size. The smart way to imple-ment confident analysis is with a strategy that not onlyreflects that confidence, but also can have lower risk,lower margin requirements, and opportunity to profitif you’re directional bias proves wrong. Remember,your gut gets you in the game. Your brain hopefullygets you paid.

SEE GLOSSARYPAGE 42

FIGURE 3: Long ATM call vertical. The lowest probability of successamong the three strategies discussed here, but the greatest possiblereward when you’re feeling warm and fuzzy about the direction of thetrend. For illustrative purposes only.

+

_

BREAKEVEN

STOCK PRICE

Long ATM Call Vertical

LongStrike

Short Strike

Loss

Profit

Naked option strate-gies involve the high-est amount of riskand are only appro-priate for traderswith the highest risktolerance. Spreadsand other multiple-leg option strategiescan entail substan-tial transactioncosts, including mul-tiple commissions,which may impactany potential return. Supporting docu-mentation for anyclaims, comparison,statistics, or othertechnical data willbe supplied uponrequest.

Important Information

BEFORE YOU GUTFind trades your gut feelsgood about. Fire upthinkorswim's "MOSTACTIVES" lists to getsome ideas. From the MarketWatchtab, go to the Quotessub-tab. Click the littlegear icon to the far rightto see a menu of pre-defined lists, such as"Lovers and Losers" and"Top 10," featuring theday's hits and misses.

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Kyle S.thinkorswim® user

Nicole “The Suit” Sherrod@TDANSherrod

Managing Director, Trading

Explore thinkorswim sharing:

tdameritrade.com/shareyourtos

myTrade is a service of myTrade, Inc., a separate but af iated rm. TD Ameritrade is not responsible for the services of myTrade, or content shared through the service.

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

Access granted.With the new sharing feature in thinkorswim, you’ll discover how our experts use the platform and

which tools they rely on most. You can also generate new ideas and share your platform setup with

friends, followers, and the myTrade® community.

Get an exclusive look into how “The Suit” uses thinkorswim.

tm24_LoveNotes_rd5.qxd:pages.layout 2014-05-22 6:41 PM Page 14

THE TWEETS• @TDANSherrod: Today I’mworking on our 2015 StrategicPlan. And I’m putting thethings that my Twitter follow-ers ask for FIRST.

• @NewShoesHere: Does theStrategic Plan include how toplay pocket Aces under thegun? ☺

• @TDANSherrod: No but itdoes include a new tab called“High Probability Racehorse Hand-icapping.”

• @MichaelComeau: Please add Pac-Manto the thinkorswim platform. I will trademore, I swear.

• @TDANSherrod: We already have Tetris.And Mine Sweeper.

• @MichaelComeau: Yes—but Pac-Man isa must. Come on, I’m not asking for Ms.Pac-Man here.

• @panthersfan1234: @JaviFusco Sinceyou made it into a magazine, now you’renever gonna shut up. Thanks a lot,@TDANSherrod… :D

DA QUIPS• On trading vanityIt is quite possible that I just might be thebest looking day-trader in all of Alabama, if not the world.Joe

• On take-backsThere are no Mulligans in trading.Pat

• On disruptive technologyI want a driverless car...so I can text whiledriving.Brendan

• On domestic financesIf your husband defaults on you, youcan always execute a swap.Francine

• On electric-car drawbacks Tesla. Where gas stations don’tknow your name.Sam

• On inter-market analysisI think Justin Bieber got arrested

again. Not yet sure what impact it willhave on crude.

Jack

• On pragmatismThe Millionaire Next Door is not trading theVIX, but he is wearing four sets of clothingon the plane.Stacey

• On predictive analysisForecasting is the art of saying what willhappen and then explaining why it didn't.Skip

• One from a famous dude:If past history was all there was to the game, the richest people would belibrarians.Warren Buffet

thinkMoney/24

•

15•Love Notes•Sweet tweetsand quick quips from all of us•Photograph byFredrik Brodén

Follow the “experts” onTwitter for all thingsmarkets, trading, andthinkorswim:@TDANSherrod@TDAJJKinahan@thinkorswim

Important InformationThese comments are excerpts from chat rooms, emails, and tweets submitted by TD Ameritrade clients, and their views may not reflect those of TD Ameritrade.Testimonials may not be representative of the experience of other clients and are noguarantee of future performance or success.

lttrs.

tm24_LoveNotes_rd5.qxd:pages.layout 2014-05-22 6:42 PM Page 15

thinkMoney/24

•

16•News+Views•A hodgepodge of stuff we thought youshould know.

•Photograph byFredrik Brodén

•tdameritrade.com

Q: What’s new in the world ofeducation at TD Ameritrade? Any new events coming up?

A: Yes! Here’s a short list of someof the latest and greatest:

Market Drive events. My workBFF, JJ Kinahan, hooked us upwith some amazing sponsor part-ners this year so we can bring ourTD Ameritrade Market Driveevents to even more cities and tolarger venues. (Thanks CME,BlackRock, Barclay’s, and CBOE!*)

If you’re not familiar with theseevents, in a word, get off your der-rière and go. “In a city near you”you’ll get a day of royal treatmentlearning all kinds of thinkorswim®tips, as well as mingle with othertrading fanatics. And, of course,you’ll be inducted into our trading“inner circle.” Find out morehere:www.tdameritrade.com/registerformarketdrive.

thinkorswim Chat Rooms. Don’tforget about the great educationgoing on daily in thinkorswim ChatRooms. If you’re looking for some-thing topical it’s there, it’s color-ful, it’s unedited. And our “on air”talent keeps stepping up their col-lective games to drive even moreimpact from these events. Just fireup thinkorswim, and select Sup-port/Chat in the upper right of thescreen. Then select the ChatRooms tab.

And for the Ladies. Finally,there’s one other thing that we’reworking on. You might not knowthis, but the readership of thisesteemed publication skews to themale side. Yup, it’s a fact thatwomen are not as invested as men.

But we’re going to change allthat. That’s right—developed byladies for ladies, we’re launchingnew educational content designedto empower women to focus onbuilding even greater wealth andinvesting savvy investing in themarkets (tdameritrade.com/up).Why say it here? Because I wantyou to share a link with thewomen you care about—your sis-ters, daughters, friends, mothers,and yes, even wives.

nws.

FOLLOW THE SUITRead more of Nicole’smusings on her own blog at tickertape-monthly.com/blog.

Follow Nicole on Twitter:@TDANSherrod

Ask The

Suit•

A little Q&A withNicole Sherrod,Managing Director,Trader Group at TD Ameritrade

*CME, BlackRock, Barclays, CBOE, and TD Ameritrade are separate and unaffiliated companies and are not responsible for each other's services or policies.

tm24_News&Views_rd5.qxd:pages.layout 2014-05-23 11:29 AM Page 16

toys

Toys for TradersA few of ourlatest trading faves

thinkorswim®

TRADE FLASHThis toy displaystrade-related eventsas they happen—such as analystup/downgrades,block trades, tradeimbalances, eventson the trading floor,and more. To tradeon a “Flash,” justclick on the symbolin the Trade Flashfeed and you’ll besent to the Trade tab.

MY TOOLSInstead of scroung-ing around all thesubmenus for yourfavorite indicators orchart functions, thistoy gives you easyaccess and one clickfor each of yourfaves. Apply it to oneor all the charts, orjust those detached.To turn on My Tools,bring up Chart Set-tings and look underthe General tab, bot-tom right.

ISE SPREAD BOOKThis old tool hasbeen turned back onto let you see all theworking spreadorders on the ISEthat your peers aretrading. Similar tothe regular spreadbook, you can searchfor all types ofspreads (verticals,butterflies, etc.) forany symbol tradedthere to analyze foryour own purposes.

Can I interest you ina little light reading?House Ways andMeans CommitteeChairman DaveCamp, a MichiganRepublican, hasissued a 979-pagedoor stop called the“Tax Reform Act of2014.” In hisdefense, an overlycomplex U.S. taxcode requires noth-ing short of a beefyrewrite. And thereamong the fine printis the proposal hefirst pushed in Janu-ary 2012, a “mark-to-market”treatment of certainderivatives that willsnag listed optionsthat retail investorsfavor in the sweep-ing list of changes. Essentially, the pro-posal calls for mark-ing all derivatives to

market in order toput a price on thatinvestment, thentax it as income.This meansinvestors would berequired to paytaxes on gains, evenif it’s an open posi-tion. The Act callsfor treating theoption, includingbuying a put, as if itwere sold on thelast business day ofthe year. Toss instraddles with aderivative, and non-derivative, offset-ting position —including stock thatis not part of a qual-ified covered call —both sides would bemarked to market.

The aim is toclean up and clarifytaxation and regula-tion of the increas-ingly complex suiteof derivatives prod-ucts launched in thelast decade. Guiltyby association is thedecades-old listed -

options market.Options’ tax treat-ment has been“well-settled” for 30years, argues theOptions IndustryCouncil. Otherpotential problems,according to tax-lawfirm Chapman andCutler: Valuation oflightly traded deriv-atives; attemptingto price as individ-ual productsembedded deriva-tives whose “value”may depend onwhat happens withthe entire trade; andperhaps mostimportantly, expect-ing investors to

pony up taxes onmoney they don’tactually have inhand.

Stay tuned.Camp has somebipartisan support,but the proposalfaces a long road,especially in a mid-term election yearthat may give Con-gress a facelift. Pick-ing on retailderivatives is justthe tip of the icebergfor a proposal thattakes on individualand corporate taxrates, and manymore complexities.For now, a red penawaits its call.

If it Ain’tBroke, Don’tTax ItWill a tax proposal that picks onretail option traders survive?•Words by Rachel Koning Beals

Illustration by Joe Morse

industryspotlight

AND THEREAMONG THEFINE PRINT OFTHE "TAXREFORM ACTOF 2014,"MARK-TO-MARKETTREATMENTWILL SNAGLISTEDOPTIONS THATRETAILINVESTORSFAVOR IN THESWEEPINGLIST OFCHANGES.

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18•Volatility Secrets•tdameritrade.com

WORDS BY THOMAS PRESTON

HEADLINES MAY COME AND GO. BUT VOLATILITY IN REACTION TO THOSE HEADLINES IS WHAT CAN

MATTER MOST TO TRADERS. AND BEFORE YOUWRITE OFF HIGHER-VOLATILITY MARKETS, HERE’S A

LITTLE SECRET YOU OUGHT TO KNOW.

VOLFOR

DOUGH

NEWS FOR

SHOW,

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PHOTOGRAPHS BY FREDRIK BRODÉN

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good news, bad news, news you consider important,news you ignore. Of course, how you interpret news isup to you. But there’s no mistaking the one signal—implied volatility—that can tell us how the marketitself feels about news. Simply put, implied vol meas-ures the magnitude of an index or stock’s potentialprice change. It goes up when the market is uncertainor fearful about what a headline mightmean for future price changes, anddown when news makes the marketconfident.

Sometimes, though, market volatil-ity itself becomes news. And talkingheads sound the alarm when the VIX—the Chicago Board Options Exchange(CBOE) volatility index—spikes higher.The VIX might not be reacting to newsat all. But scary headlines about volatil-ity can make novice investors skittishand afraid to act.

Sure, it’s a free country. And you canchoose to trade or not, depending onyour nervous system. But savvy tradersunderstand that higher volatility mayactually signal potential opportunities.In fact, veteran traders may use strate-gies that leverage the very thing that’soften scary to novices. How? Becausethey understand that when the VIX ishigher, options premiums don’t justincrease in lockstep. They do so expo-nentially.

LEG BONE CONNECTED TO THE SHIN BONETraders know the VIX is calculatedusing out-of-the-money (OTM) SPXoptions prices. Those prices move

higher and the VIX goes up, when traders buy themas a hedge or speculation against a large SPX pricechange. When option prices move lower becausetraders are selling in expectation of smaller pricechanges, the VIX moves lower. The relationship isessentially mechanical.

Traders may have an idea that short-option strategies like short straddles, for example, presentopportunities when implied vol is higher, and wait fora higher VIX before they either open positions orincrease position size. The higher the volatility, thehigher the credit received for a short straddle—allother things like SPX price, strike price, and time toexpiration being equal. That higher credit can meanhigher potential profits and wider break-even pointsfor a short strangle, which is why the strategy may bemore attractive when volatility is higher. That said,short strategies in higher volatility environments posegreat risk due to the wild swings that could drive ashort option deep in the money very quickly. For thatreason, you will always need to be aware of theincreased risks as volatility increases, but as it does,how much higher is the credit?

PUT TO THE TESTLet’s use some actual numbers for the dollar amountthat a change in the VIX means to SPX prices. The dif-ference between the VIX at 14, and the VIX at 20, is dueto SPX option prices. But how much higher are the SPXoptions when the VIX is at 20, than when it was at 14? Alittle bit higher, a lot higher, or somewhere in between?

AREFILLED

WITHNEWS—

OURTRADING

DAYS

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To answer that, Idid a little study usingthe thinkBack tool onthe Analyze tab ofthinkorswim®.thinkBack lets you lookat end-of-day stock-and-option prices forevery trading day goingback to 2003. Set thedate in the upper-right-hand corner to open upthe stock and optionprices for that date. It’svery handy for thistype of analysis.

I looked for tradingdays where the SPXprices were very close—only a few points difference—and where the expirations were the same number ofdays in the future. The dates I found were July 9, 2013,and October 8, 2013. That removed much of the influ-ence of the SPX price, and days to expiration on theprices of SPX options. The main reason for any differ-ence in the option prices would be volatility. So, sameSPX price, same days to expiration. Only the VIX is dif-ferent. Here’s what I found:

The table above is divided into two sections show-ing SPX options with nine days to expiration, and 37days to expiration. The strike prices are down the mid-dle. On the left hand side are out-of-the-money SPXoption prices, when the VIX was 14.50. On the rightare out-of-the-money SPX option prices when the VIXwas 20.34. The strike prices 1650 and lower, show SPXput prices, and the strike prices 1655 and higher, showSPX call prices. You want to look only at out-of-the-money options because their values are purely extrin-sic, and clearly illustrate the impact of higher andlower volatility on their prices.

The VIX at 20.34 is 40% higher than the VIX at14.50. You might think that the SPX option prices arehigher by a similar amount but they’re not. In the caseof the 1500 puts with 9 days to expiration, with the VIXat 14.50 they were .20. But with the VIX at 20.34 theywere 1.35, or rather 6.5x greater. The 1500 puts with 37days to expiration were 2.85 with the VIX at 14.50, but7.55 with the VIX at 20.34—more than 2.5x greater.

The 1650 puts with 9 days to expiration, whichwere closer to the money, were 13.00 with the VIX at14.50, and 18.55 with the VIX at 20.34. That’s 1.4xhigher, which is closer to the increase in the VIX. The

1650 puts with 37 daysto expiration were28.70 with the VIX at14.50 and 37.30 withthe VIX at 20.34.That’s about 1.3xhigher.

FOLLOW THE RISKThis analysis illus-trates the actual pre-mium change for theSPX options thatpushed the VIX from14.50 to 20.34. And it’simportant to under-stand that relation-

ship. It’s not the VIX moving higher that makes theSPX option premiums go up. It’s the SPX option premi-ums that make the VIX go up. In fact, the SPX optionsmoved up a larger percentage, depending on their dis-tance out of the money, than the VIX. The further outof the money the option was, the greater the percent-age price change. The closer to the money the optionwas, the smaller the percent price change.

That means the VIX is really a shorthand for howmuch premium is available in SPX options. BecauseSPX options represent liquid and efficient markets, andthey’re used to calculate the VIX, the VIX is a respon-sive indicator of potential market risk. This is one goodreason traders ought to check the VIX daily, arguablygiving it even more attention than underlying trends.

Also, note the SPX was the same price, but the VIXwas different, suggesting the SPX price itself isn’t nec-essarily an indication of fear or confidence. That infor-mation is packed into the prices of the SPX options,and makes the VIX a forward-looking indicator.

DOES SELLING PREMIUM WHEN VOL IS HIGHERguarantee profits? Absolutely not. Is volatility theonly thing to consider when trading? Nope. But thisinformation is a kind of dollar validation for usingvolatility as a basis for a strategy. Arguably, youshould be looking at the VIX even before looking atthe price of S&P futures pre-market. For a well-capi-talized trader who is comfortable employing short-option strategies, the potential reward for keeping asharp eye on the VIX can mean you potentially don’tmake a little more. You can potentially make a lotmore for the same level of risk.

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21•Volatility Secrets•tdameritrade.com

SEE GLOSSARYPAGE 42

JUL. 9/13SPX 1652VIX 14.50

OCT. 8/13SPX 1655VIX 20.34

JUL. 9/13SPX 1652VIX 14.50

OCT. 8/13SPX 1655VIX 20.34

9 DAYS TO EXPIRE

37 DAYS TO EXPIRE

2.854.005.658.70

12.9019.7528.70

14.556.352.70

.95

.55

.25

7.559.9512.9017.0022.1528.9537.30

25.7014.757.453.301.20.60

1500 put1525 put1550 put1575 put1600 put1625 put1650 put

1675 call1700 call1725 call1750 call1775 call1800 call

.20

.25

.50

.952.155.25

13.00

3.60.65.15.10.05.01

1.352.152.904.556.9511.0518.55

10.503.35.95.35.10.05

1500 put1525 put1550 put1575 put1600 put1625 put1650 put

1675 call1700 call1725 call1750 call1775 call1800 call

Naked option strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance. Backtesting is the evaluation of a particular trading strategy using historical data. Results presentedin thinkBack are hypothetical, they did not actually occur and they may not take into consideration all transactionfees or taxes you would incur in an actual transaction. Past performance of a security or strategy does not guarantee future results or success. Results could vary significantly, and losses could result. Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which mayimpact any potential return. Supporting documentation for any claims, comparison, statistics, or other technicaldata will be supplied upon request.

Important Information

For illustrative purposes only. Not a recommendation.

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thinkMoney/24

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22•The Centerfold•Illustration by Joe Morse

1st LEVEL:Calliputibus Volarensis

OPPOSABLE THUMB CREATESADVANTAGE OVER OTHER APES BY ALLOWING 5 LOTS

EXTRA-LARGE FOREHEAD PERFECT

FOR BEATING AGAINST TREE WHEN CLOVIS POINT

TRADE GOES BAD

UPRIGHT STATURE APPLIEDTO OPTION MARKETS AND

CREATES VERTICALS

mky.

Evolutionof the Trader•

The recent discovery of the “T-DNA,” or trader’sgenetic code, hasled scientists topiece together thethinkMoney familytree.  Who knew weall share a doublehelix started by our favorite littlecreature way back when?

tm24_monkey evolution_rd5.qxd:pages.layout 2014-05-23 10:41 AM Page 22

NONAGENARIAN DOESPRECISE PORTFOLIO

REBALANCES TO KEEPWHIPPERSNAPPERS

AT BAY

GALLIC KING OFTRADERS CORNERSMILK MARKET, SETS

FRANCE UP AS CHEESE

CAPITAL IN PERPETUITY

EDICT FORCING ENGLISH SUBJECTS TOTAKE OTHER SIDE OF

ROYALS’ LONG OPTIONTRADES LEAVES STERNRULER PENNILESS BUT

LOVED BY MILLIONS

BUYS TOPS, SELLS BOTTOMS,

REPEATS

BEARISH DRUIDTRADER PAINTS SELFBLUE IN ATTEMPT TO

CONFUSE COLOR-BLIND BULLS

DELIGHTS IN THESIGHT OF A FLOCK

OF ATM BUTTERFLIESEXPANDING AT

EXPIRATION

MUCH TO HIS MOTHER’SDISMAY, LIVES LIKE

HE TRADES—AT THE THIRD STANDARD

DEVIATION

WORKS LIMIT ORDERS SO AGGRESSIVELY THATUS MINT IS CONSIDERINGSUB-$.01 INCREMENTS

SO EXCHANGES CANKEEP UP

CONSTANT PANIC AND DIRE WARNINGS

LEAVE WANNA-BE BEAR WITH NO TIME TO ACTUALLY TRADE

PENCHANT FOR 17-LEGGED OPTION

TRADES LEADS PUZZLED ROMAN

TRADER TO RENAME

HIS CITY “BYZANTIUM”

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thinkMoney/24

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25•Market-NeutralTrading•tdameritrade.com

WORDS BY THOMAS PRESTON PHOTOGRAPH BY FREDRIK BRODÉN

HOW TO

NEUTERYOUR TRADEAT SOME POINT YOU MAY HAVE HEARD AN OPTIONS TRADER BOASTABOUT BEING A “DELTA NEUTRAL” OR “ MARKET NEUTRAL” TRADER. BUT WHAT DO THESE TERMS MEAN, AND ARE THEY REALLY USEFUL? LET’S PUT THE DEBATE TO REST.

tm24_F3_MarketNeutral_rd5.qxd:pages.layout 2014-05-23 12:49 PM Page 25

But add the terms “market” or “delta” and the real funbegins. Why? Because “market neutral” and “deltaneutral” are trading terms—often confused, confus-ing, and used interchangeably. Is a market-neutralstrategy always delta neutral? Or can a delta-neutralstrategy be market neutral? Rather than get into asemantic argument, let’s define them, then explorehow you can apply them.

DELTA WHAT?Delta neutral means that the delta of a portfolio orgiven position—how much money it will make or loseif a stock price changes $1.00, all other factors beingequal—is zero, or close to zero.

A simple position like a straddle, or a portfolioholding a lot of different options, can have cumulativedelta close to zero, and be considered delta neutral atthe onset of a trade, but not likely for long. Delta-neu-tral trading kicks in when the need arises to “neutral-ize” deltas, or rather, reset the position’s delta to zero.Market makers employ this technique when there’stoo much directional risk—or in trader-speak, toomany positive or negative deltas (see sidebar, right)—in a given position. Market makers continuously buyand sell options, and perhaps hedgeeach option trade with stock. Forthem, their profits arise from thebid/ask spread, and they don’t wantto lose those profits if the stock orindex moves in a given direction.

For example, if an order comesinto an exchange to buy out-of-the-money (OTM) calls, the marketmaker takes the other side of thetrade by shorting those calls. Theshort calls have negative delta, and

can lose money if the stock rallies. The market makermay immediately buy stock shares to generate positivedeltas, to offset the call’s short deltas. If the stock ral-lies, he’s hedged. Or, he might see an order for some-one trying to buy puts. If he takes the other side of thattrade by shorting puts, that too, could generate posi-tive deltas to hedge the short calls. It’s complicated,but being delta neutral keeps the market maker’sdirectional risk low. In that sense, delta neutral is aresponse to a question about an existing position. Howmany deltas does that existing position have, and howcan they be reduced? More on that later.

AS FOR MARKET NEUTRAL…Market-neutral trading, however, is much closer towhat retail traders—you and me—do. We might createa specific strategy as a market-neutral trade, if webelieve the stock price or index will stay in a range, orat least not move past certain price levels. The marketbias is neither bullish nor bearish, and the expectationis the stock won’t move much at all. Hence, it’s marketneutral. For example, think short strangles or iron con-dors. These market-neutral strategies typically startwithout a bias, and result in positions that we choose

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26•Market-NeutralTrading•tdameritrade.com

SEE GLOSSARYPAGE 42

FIGURE 1: Checking deltas. To view the deltas of each position or your entire portfolio inthinkorswim, 1) click the little “wrench”-looking thingy in the upper right of the Position Statement section of the Monitor page. Then 2) add “delta” in the menu of options to add to the columns. For illustrative purposes only.

NEUTRAL.The word conjures images of a discrete Switzerland and fifty shades of beige.

1/Click little

wrench

2/Add delta

to thecolumns

tm24_F3_MarketNeutral_rd5.qxd:pages.layout 2014-05-23 12:49 PM Page 26

based on price, probability, or potential return vs risk. Now, market-neutral strategies often have very low

deltas, at least when trades are initiated. How so? Ashort strangle, for example, composed of a short out-of-the-money (OTM) call, and short OTM put in thesame expiration, can have a very low delta, if the call’sand put’s strike prices are roughly the same number ofpoints OTM. The short call has a negative delta, andthe short put has a positive delta.

Combining the negative delta of the short call andthe positive delta of the short put, the delta of theshort strangle is close to zero. But a near-zero deltadoesn’t always mean market neutral. For example,consider a long at-the-money (ATM) call vertical inoptions with single points between strikes. The longATM call option might have a delta of .50, and theshort-call option at the first OTM strike might have adelta of .46. The net delta is .04, which is pretty small.But that long-call vertical has a decidedly bullish bias,and is not market neutral. It could lose money if thestock just sits where it is. So, small delta doesn’t meanmarket neutral.

By the way, you can always see the delta of yourcurrent positions on the Monitor page of the thinkor-swim® platform (see Figure 1). It’s one of the columnsin the “Position Statement” section of that page. Toadd delta, click on the little “wrench” icon in theupper-right-hand of the Position Statement section,and find “delta” from the list of available columns.

RUBBER, MEET ROADSo, hopefully you now understandthe difference between delta neutraland market neutral, but how can youuse it? Is delta neutral solely for mar-ket makers? No. Retail traders, too,can employ delta-neutralizing strate-gies in an effort to protect profits andreduce losses. Unlike a market makerwho neutralizes delta—i.e., gets thedelta of a trade close to zero, on atrade-by-trade basis—retail tradersmay just want to reduce delta on alosing trade to help defend againstfurther losses, or on a winning trade to potentiallycapture profits. Let’s see how.

Consider a scenario with a stock price at $50 and ashort 47 strike put for a 1.00 credit. This strategy losesif the stock price drops, and profits if the stock pricerises. It has a positive .30 delta when you first put thetrade on, and a breakeven point at $46.

Defend against losses. If the stock drops to $48, theput will likely be losing money, and its delta rises to,say .45. Your strategy now has more delta (directional)risk to it, with the potential to lose a growing amountof money if the stock continues to drop.

Now, you could just buy back the short put, butmaybe you think the stock might stop dropping, oreven rally a bit. A way to “defend” the short put wouldbe to reduce the higher delta by selling a call against it.

If the 50 call has a .35 delta, selling it for 1.20 wouldgenerate negative -.35 deltas, and leave you with ashort 47/50 strangle with a current delta of positive.10. Selling the call also adds to the credit of the overallstrategy, which increases the potential profit to 2.20(minus transaction costs), and lowers the downsidebreakeven point to $44.80. Yes, you are adding risk tothe position if the stock rallies sharply. But if the stockcontinues to drop, you could roll the short call to alower strike to realize even more credit, which wouldlower the downside breakeven point further.

Capturing profits. On the other hand, let’s say thestock rallies from $50 to $53, and the short 47 put isnow profitable with a delta of .15. Rather than addingupside risk by shorting a call to reduce the already-

lower delta, you might buy the 48 putwith a delta of .20, for example, if it’strading for less than the credit you tookin for selling the 47 put. If you can buythe 48 put for .75, you’d not onlyreduce your delta from +.15 down to -.05, you’d also have the long 47/48 putvertical on for a net .25 credit (minustransaction costs).

THESE ARE TWO SIMPLE EXAMPLESof reducing a position’s delta. You canuse verticals or other spreads, forexample, to reduce delta in a definedrisk way. But if you understand the

logic of choosing a specific option or spread based notonly on how much it neutralizes the delta of a posi-tion, but also on how it can potentially enhance orimprove the resulting cumulative position, you’ll beable to think more strategically about individual posi-tions, and even your entire portfolio.

NEUTRAL JARGON

Multiple-leg optionstrategies can entailsubstantial transactioncosts, including multi-ple commissions, whichmay impact any poten-tial return. These areadvanced option strate-gies and often involvegreater risk, and morecomplex risk, thanbasic options trades.

Important Information

DELTA One of the option“greeks” that is themeasure of expectedchange in an option’sprice per $1 move in theunderlying. Long callsand short puts havenegative (-) deltas,while long puts andshort calls have posi-tive (+) deltas. Themaximum deltas a sin-gle US option contractcan have is 100. Thetotal sum of all posi-tions in a portfolio isthe portfolio delta.

DELTA NEUTRALA position or optionportfolio in which thetotal net deltas of allthe legs of every posi-tions combined equalzero. For example, anat-the-money straddleis a delta neutral posi-tion because the call,carrying a delta of 50offsets the put, with adelta of -50, for a netdelta of 0. Since delta isalways changing as themarket moves, marketmakers and optiontraders will oftenreduce (“hedge”) theirdeltas with an offset-ting position, such aslong puts against longcalls or long stock; andshort puts against shortstock.

MARKET NEUTRALA style of trading inwhich a trader attemptsto capture profits froma stock or index tradingwithin a specific range.Though some marketneutral strategies, likethe straddle, start offas delta neutral, that’snot always the case.

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COOL SCRIPT #1THE DOW-TO-GOLD RATIO• Words by David “Mr. Script” Kier

When asked to describe a widespread problem andthen offer a solution I thought they meant for some-thing like global warming. But alas, it was to solve aproblem related to thinkorswim using thinkScript®, thedo-almost-anything-we-didn’t-think-of tool. If you'renew to thinkScript, see the left sidebar to learn more.

For my first trick, I want to show you how to build achart that displays the ratio of the Dow Jones Industrialaverage to the price of gold. Despite the name, the“Dow-to-Gold Ratio” is used by many traders to tellhow overpriced the S&P 500 (SPX) might be. (See Figure 1.) You can see historically as the SPX hit newhighs, gold was also at highs, and the ratio remainedrelatively low. But at the time of writing, as SPX continues to rise, gold is going down. So SPX isbecoming expensive valued in goldas well as U.S. dollars.

BUILD-A-RATIOThe Dow-to-gold ratio has beenused to analyze everything fromstock-market moves to predictingupcoming interest-rate decisions.We aren’t going to delve into Dow-to-gold theories, but rather describehow to see this ratio on thinkor-swim. The problem we face is youcan’t enter ratios in the symbolentry box on thinkorswim. So weneed to think outside the (symbolentry) box to solve this one.

Starting on the thinkorswimCharts tab, bring up a one-yeardaily chart of the S&P 500 index by

entering SPX in the symbol box. We’re going to builda study for a lower sub-graph of the chart in whichthe displayed data will be independent of the chartedsymbol—meaning, you can change the symbol with-out changing the new study. Once you see an SPXchart, fire up the thinkScript Editor by following the sidebar “Scripting from the Charts.” Then enter thefollowing script:

1. #hint: Ratio Chart2. declare lower;3. Input symbol_1 = “/YM”;4. Input symbol_2 = “/GC”;5. Plot ratio = close(symbol_1) / close(symbol_2);6. ratio.AssignValueColor(if ratio >= ratio[1] theColor.UPTICK else Color.DOWNTICK);

After you’ve entered the above code, press Applyand OK and you’ll see a chart similar to Figure 2, withthe Dow-to-gold indicator at the bottom.

Now let’s break down the code line by line to helpyou figure out how you got there.

thinkMoney/24

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28•Trader Tools•thinkorswim scripts and gadgets

FIGURE 1: How overpriced is it? The Dow-to-Gold ratio (the lower indicator above) helps you see how overpriced the SPX (upper chart) might be relative to the ratio. For illustrative purposes only.

Gear

HeadFor your inner trading nerd, one part thinkScript, and one part gadget. Enjoy.

1NEW TO SCRIPTING?You can find help to getstarted in two places:

1/ The thinkorswimLearning Center attlc.thinkorswim.com.Select the Charting tab,then thinkScript in thesubmenu.

2/ Read our ScriptingSpecial Focus inthinkMoney, Winter 2014, by going totdameritrade.com/thinkmoney.

3/ Listen to Mr. Script'sweekly show in thethinkScript Lounge ofthe thinkorswim ChatRooms. From thinkor-swim, click the Chat iconat the top (2nd icon fromthe right) >Chat>thinkScript Lounge.

gear

Dow-to-Gold Ratio script

results in thisindicator.

tm24_GearHead_rd5.qxd:pages.layout 2014-05-23 9:41 AM Page 28

1. Line one is a note which doesn’taffect your script but is used to keeptrack of each section’s goal. In ourexample we created “fancy note” byusing the key word hint. This tells thethinkScript Editor to place the littlehelp bubble next to our custom scriptin the Edit Studies and Strategies.

2. Line two tells the script this is astudy by default that belongs on alower subgraph. This is used withstudies that don’t relate, or will notscale, to the chart’s price graph.

3. Lines three and four allow you tochange the raio symbols without edit-ing the script.You can customizethese two inputs in the study parame-ters similar to how you customizepre-defined studies. Since we arebuilding the Dow-to-gold ratio, I usedthe futures for each of these specific products.

4. Line five is the math, the heart and soul of thescript. We are simply taking the first input symbol anddividing it by the second, thus making it a ratio.

5. Line six makes the study pretty. The AssignValue-Color function allows us to color the line as the ratiochanges. If the ratio moves up, we color the line as ourUptick. And if it moves down, as our Downtick.

Congrats, you have your own Dow-to-gold ratiochart. And since you solved this in a smart way, younow create any ratio chart you desire simply by editingthe symbols in lines 3 and 4. If you’re new to scripting,be sure to read our primer on scripting in thinkMoney,Winter 2014 issue. We may not have solved globalwarming today, but we did make one small step for alegion of traders!

THINKORSWIMSHARING ONE WORLD. LET’S SHARE IT• Words by Chesley Spencer

With over a bajillion possiblecustomizations available,

thinkorswim can be a little intimidating. Users oftenask “how do I set up my platform like [insert celebritytrader here]?” Trying to replicate another trader’ssetup used to be quite the exercise, but now it’s aseasy as a button click.

The Sharing Center enables users to share and

consume a dozen different flavors of platform cus-tomizations by way of a web link. Each one of theseplatform functions has its own “Share” option that,when clicked, will generate a link to a web addresswhich can then be given to anyone. Users can sharetheir workspaces, watchlists, order or alert templates,trade grids, charts, scan queries, thinkScripts (stud-ies, strategies, columns, and alerts), or flexible grids.

As we mentioned, each sharable function has itsown share button, generally located where that func-tion is set up. For example, the button for a singlechart is at the top of the chart’s border. The grid shar-ing button is in the grid menu, etc. Figure 1 showsmany, but not all, of the locations where these linkscan be created.

Once you select a share function, a new windowyou’ll see with the option to share the content directlywith myTrade®, or to create an HTML link which canthen be posted anywhere you like on the Internet.Keep in mind: you’ll need a myTrade username to cre-ate a link (so others can see the source). This can becreated under the Tools tab in myTrade. FrommyTrade, click on “Settings,” edit your Display Name,then click “Update Settings.”

When shared content is loaded into the platform,it will either save a copy to load later (such as a Work-space), or pop-out in a discrete window (such as achart). This way, you’ll always have the chance tosave your setup.

myTrade is a service of myTrade, Inc., a separate butaffiliated firm. In order to use the service, you must cre-ate a myTrade profile, and conform to the myTrade termsof use. TD Ameritrade is not responsible for the servicesof myTrade, or content shared through the service.

Important Information

FIGURE 1: Share Your Awesomeness. Set up a chart with all your favorite indicators andshare it with friends and loved ones. For illustrative purposes only.

2

Watch It!For a more detailed walk-through on the SharingCenter, watch the video in the Learning Center.

tm24_GearHead_rd5.qxd:pages.layout 2014-05-23 9:41 AM Page 29

Learn more at investoolsconferences.com/thinkmoney

TD Ameritrade, Inc. (member FINRA/SIPC/NFA) and Investools®, Inc. are separate but affiliated companies that are not responsible for each other’s services or policies. Investools, Inc. and TD Ameritrade, Inc. are wholly owned subsidiaries of TD Ameritrade Holding Corporation.TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.Investools does not provide financial advice and is not in the business of transacting trades.

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tm24_AssociateSpotlight_rd5.qxd:pages.layout 2014-05-23 7:42 AM Page 30

•"Hey kid, you wanna come work for me?" That was thinkorswim® founder Tom

Sosnoff, talking to Mike Barwacz thirtyyears ago on the trading floor of theChicago Board Options Exchange (CBOE).Happily for us, Barwacz said yes, and firstclerked for Sosnoff before moving into theOEX pit as a market maker in his own right.Back then, Barwacz took a lot of grief forhis trading badge which read “SYZ” (pro-nounced “size”)—an ironic acronym sincehe started as a one- and two-lot trader.

As fate would have it, the acronymspoke volumes about Barwacz’s ambitionand drive. Still a passionate trader geek,he’s now Director of TD Ameritrade’s TradeDesk and oversees teams in Chicago, FortWorth, and Canada. Not surprising, hedraws heavily on 22 years of knowledgeand wisdom from the trading floor toensure trade-desk reps have the right stuffto talk to clients about even the most com-plex options strategies.

Barwacz is called the unofficial mayor ofChicago for good reason, and walking theCBOE trading floor with him takes sometime. He seems to know everyone and lovesto talk trading strategies. We wondered howhis years on the floor helped shape who heis today.

Mike, tell us about those early days at theCBOE.It was the mid-1980s and options were get-ting hot. That was the buzz. At one pointthe OEX (S&P 100) was the biggest pit in theworld and had almost 600 guys. Tom Sos-noff, JJ Kinahan and I, we all stood veryclose to each other. We were like family. Thebest days were when you really couldn'tleave, because there was so much paper(orders), and you were sweating throughyour coat. It was great. The energy, the com-petitiveness, having a broker yell somethingout, and you being the first on the ticket.

You were at thinkorswim in the earlydays, right?I joined thinkorswim (when it was anindependent brokerage) in 2007 andhelped guide the Chicago office throughTD Ameritrade transition after the merger.Hiring people from the floor is what madethinkorswim so special. Floor traders are a

different breed. Wehave a differentgene. As competi-tive as it was, therewas also honor andetiquette, which wetook off the floor aswell. We knew howto talk to clientsand explain thingsin a clear, simplemanner. That’s thebenefit of coming to TD Ameritrade. It'slike a family here.

What are yourthree trading rulesto live by? Don’t panic, man-age your winners,learn from yourmistakes.

What's the biggergoal ahead forTrade Desk?At the timeTD Ameritradebought thinkor-swim, about 6% oftheir trades wereoptions. Now, it’s40%. We wanted

customer-service reps to be able to answercomplex phone calls about option strate-gies. So, in the last year and a half, we'vecombined trade desks into the “One TraderGroup,” and taken reps through a rigoroustraining. We make sure all our trade-deskreps trade, or paper trade. They've got tohave skin in the game. We hire people whoare passionate about trading.

I heard a rumor you like to “initiate”unsuspecting guests? Well, I’ve been called the “EntertainmentCommittee.” So yeah, if you’re visiting TD Ameritrade’s Chicago office on busi-ness, I’d likely be the one showing youaround. We might make it over to theMotel Bar for an introductory shot ofMalört (an infamously terrible-tasting,Chicago-made liquor, by the way). That’sall I’m going to say.

thinkMoney/24

•

31•Associate Spotlight•A chat with a TD Ameritrade VIP making waves

•

Interview by Kira Brecht

•Illustration byJoe Morse

•

TD Ameritrade’s Mike Barwacz runs the innovativeTrading Desk with old-school principles.

Meet the Mayor

spot

tm24_AssociateSpotlight_rd5.qxd:pages.layout 2014-05-23 7:42 AM Page 31

thinkMoney/24•

32•Special Focus:thinkorswimCharts•tdameritrade.com

NO DOUBT YOU CAN FIND LOTS OF CHARTING PROGRAMS OUT THERE. BUT SERIOUSLY, WHYLOOK FURTHER? OTHER THAN A BACK MASSAGE, THINKORSWIM®CHARTS CAN DO ALMOST ANYTHING YOU’D NEED A CHARTTO DO—EVEN IF YOU’RE NOT ACHART READER.

CHARTS THAT

RULE

THEWORLD

WORDS BYTHOMAS PRESTON PHOTOGRAPH BYFREDRIK BRODÉN

SPCLFOCUS

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 32

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 33

thinkMoney/24•

34•Special Focus: thinkorswimCharts•tdameritrade.com

WANT TO KNOW A LITTLE SECRET? When the thinkorswim®platform was first built, it didn’t have charts. It’s notthat the development team couldn’t build chart func-tionality. It’s just that as ex-market makers, we didn’tthink to add them because we hadn’t really used them.

Then two things happened. One, customers startedto ask for charts. And two, we figured out some coolchart functionality that would help traders who didn’tdo technical analysis.

I won’t bore you with how to interpret the hundredsof technical studies or chart drawings the platform sup-ports. You’ll find volumes of books on that subject. Iwant to focus on the stuff you may not have seen—thecooler stuff that’s easy to overlook.

Let’s shine a light on some of the features thatchartists and non-chartists alike can use in day-to-daytrading. These instructions will be based on the Chartspage unless otherwise noted.

OVERLAYSAn overlay is when you have two or more differentstocks or indices displayed on the same chart. It’s away to see relative performance—whether one is over-or under-performing another. It can be a measure ofrelative strength, and it’s also handy if you’re doingpairs trades. (See Figure 1.)

Here’s how you do it:1— Look in the upper-right-hand corner for the Studiesbutton. Click on it, then hold the cursor over “AddStudy” to see the expanded menu.

2—Hold the cursor over “Compare With” at the bottomof that menu. You’ll see for example a list of defaultindex symbols like DJX and SPX, as well as “Custom

Symbol” at the top. If you click on one of the indexsymbols, or enter another symbol when you click on“Custom Symbol,” a chart for that symbol is overlaidon the chart.

For example, if you have a chart for DJX and youselect SPX from the list of indices, an SPX line chartwill be displayed along with the DJX chart. The verticalaxis on the left-hand-side will be scaled for the overlaysymbol so the high-and-low range fits on the samechart as the original symbol. That’s how the SPX,whose price is 10x the price of the DJX, can be dis-played on the same chart. You can also go back to the“Compare With” menu and add more indices or cus-tom symbols.

To take overlays one step further, click on the“Style” button in the upper-right-hand corner, thenclick on “Settings.” Now in the “Chart Settings” win-dow, click on the “Price Axis” tab and check the “ShowPrice as Percentage” box. That switches the verticalaxis on the left-hand side of the chart to show the per-centage change each symbol has had from the first dateon the left-hand side of the chart, to the current day.This makes it easier to compare performance of twosymbols with different prices.

BACKTESTING*You can test trading strategies based on technical indi-cators, and see the profit-and-loss performance right onthe charts. The charts have what we call “Strategies,”which are simulated long-and-short entry and closingpoints determined by a technical indicator. You cancode your own strategy, which is beyond the scope ofthis article, but I’ll show you how to get started:1—Click on the “Edit Studies” icon in the upper-right-hand corner.

FIGURE 2: Real test, fake money.Backtest a strategy first. Then viewthe entry and exit points on the chart,as well as a p/l before committing real dollars.

ShortEntry

LongEntry

FIGURE 1: Comparing Notes. Usethe overlay function in thinkorswim, tocompare two stocks, or in this case astock to the SPX (pink line).

For illustrative purposes only. For illustrative purposes only.

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 34

2—In the window that pops up, click the “Strategies”tab on the upper-left corner.

3—On the left-hand-side you’ll see a list of the defaultstrategies available. To make the strategies “work,” youneed to add commands that will show both “longentry” (LE) and “short entry” (SE), at a minimum.

4—For practice, look for the “BollingerBandsLE” and“BollingerBandsSE” strategies in the list. Those are thelong-entry and short-entry commands based onBollinger bands. Double click on each one and it willbe added to the list of studies and strategies on thecharts in the main body of the “Edit Studies and Strate-gies” window.

5—Click the “Apply” button in the lower-right-handcorner of the window, then the “OK” button.

You should see “BollingerBandsLE” and “Bollinger-BandsSE” labels on the chart, indicating simulatedbuying and selling 100 shares of stock based on theBollinger Band test. To see the profit and loss of thosesimulated trades, place the cursor directly on one of thelabels, and right click to open a new menu. Click on“Show Report” in that menu to open the “StrategyReport” window. There you’ll find the buy-and-sell sig-nals, and profit-and-loss data for the strategy.

And by the way, if you want to buy or sell thechart’s stock shares for real, right click in the chart’smain body and select “Buy” or “Sell” from the drop-down menu. Plus, on the far-right-hand side of thechart window, you’ll see tabs for “Trade,” “Time andSales,” “Level II,” etc. This lets you add windows withthose features next to the chart window. That can basi-

cally set up charts as your go-to page for stock andfutures trading needs.

LOOKING INTO THE FUTUREOK, not even thinkorswim has a crystal ball. But Chartslet you see future dates to the right of the current date.This helps you locate upcoming earnings and dividenddates, for example, as well as helps you extend draw-ings like trend lines into the future so you can identifypossible price targets. The process?

1— Click on the “Style” button in the upper-right-handcorner and click on the “Settings” choice in the drop-down menu.

2— Click on the “Time Axis” tab in the “Chart Set-tings” window.

3— Now look for the “Expansion Area” control. Youcan enter a number in the field for “bars to the right”—say, 50—then click the “Apply” button on the win-dow’s bottom-right-hand corner.

That will add empty space to the right of the currentdate on the chart (see Figure 3). Once you’ve done that,you can extend a trend line or other drawing into thatspace. Place the cursor directly on the trendline andright click. Select “Extend to Right” from the drop-downmenu and you’ll see that line in those future dates.

A study that’s built specifically for those future datesis the Probability of Expiring Cone (Figure 3 also). Thisdraws the upper-and-lower bounds of a stock’s orindex’s price range that theoretically encompasses alevel of probability.

One way to add the cone study is to click on the

FIGURE 3: Peeking at the Future. By adjusting thechart to stop 50 bars from the right (shaded area), youcan view future earnings and dividend dates. Add a prob-ability cone (pink curve line) to estimate the probabilityrange in which a stock will trade prior to those dates.

More on Charts,Please...If you're looking for evenmore awesomeness tosqueeze out your thinkor-swim Charts, learn more atthe thinkorswim LearningCenter. Go to:tlc.thinkorswim.comthen click Charts.

Right-clickhere & choose

“ShowReport”

ProbabilityCone

Future Earnings &Dividend

Dates

For illustrative purposes only.

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 35

thinkMoney/24•

36•Special Focus: thinkorswimCharts•tdameritrade.com

“Edit Studies” icon in the upper-right-handcorner and find “ProbabilityofExpiringCone”from the list of studies on the window’s left-hand side. Double click to add it to the list ofchart studies. You’ll also find two fields toedit for the study. The “period” is the num-ber of future dates for which the probabilitycone is calculated, and the “prob range,” isthe probability the projected range covers.The default “prob range” is 68%, which cor-responds roughly to one standard deviation.Set it to 95% to see a cone that covers twostandard deviations, or 99%, to see a conethat covers three standard deviations.

THESE FEATURES REALLY JUST SCRATCHthe surface of charting functionality. Buthopefully you now have an idea of theirscope and how to access them. Each of thedescribed menus has other choices thatlead you to other functions. Go ahead andcontinue to explore the charts to see justhow hard you can make them work for you.

*Backtesting is the evaluation of a particulartrading strategy using historical data. Resultspresented are hypothetical, they did not actu-ally occur and they may not take into consid-eration all transaction fees or taxes youwould incur in an actual transaction. Andjust as past performance of a security does notguarantee future results, past performance ofa strategy does not guarantee the strategy willbe successful in the future. Results could varysignificantly, and losses could result.

myTrade is a service of myTrade, Inc., aseparate but affiliated firm. In order to usethe service, you must create a myTrade pro-file, and conform to the myTrade terms of use.

TD Ameritrade is not responsible for theservices of myTrade, or content sharedthrough the service.

Supporting documentation for anyclaims, comparison, statistics, or other techni-cal data will be supplied upon request.

Important Information

Often, too many indica-tors can lead to indeci-

sion and antacids. But there’s a morelogical approach to finding a potentialtrade and plotting a chart using just a fewindicators to answer some importantquestions you might have about what astock may do next.

STEP 1: SCAN THE UNIVERSEUsing Stock Hacker in the Scan tab ofthinkorswim® trading platform, refer toFigure 1. There you can scan the world ofstocks with your own criteria, containingthe list of stocks to scan, your filters, andall the price data your heart desires.Then…

1— Choose the subset of stocks youwould like to scan from the drop-downnext to the words “Scan in.” There, youcan see predefined categories as well as allyour personal watch lists, and GICS classi-fied industry lists. 2— Choose All Optionable if you onlywant to see stocks with listed options. 3— Select “Add Stock Filter” below the“Scan in” drop down to add a stock filterto the existing set of criteria. 4— Choose Last and enter a minimumand maximum price of the stock. 5— Now click the “Add Study Filter” but-ton. Use the drop down to select the “PricePerformance” group and choose “PriceDirection.” The default inputs for this fil-ter are “CLOSE” and “increased,” whichwe’ll keep. But you might want to increasethe number of bars of data to more than 3. 6— Sort for the most heavily traded bychoosing the “sorted by” dropdown to theleft of the scan button. Select “Basic Price& Quote” menu and choose “Volume.”

FIGURE 1:Legal Hacking. Scanning for trades withStock Hacker is as simpleas choosing the list, thenyour parameters, andsorting how you wantthe results to show. Forillustrative purpose only.

How to…Find and Chart Your Next Trade•

It’s easier than you think. Just ask three questions.

WORDS BYDAVID KIER

FIGURE 2:Chart the Trade.Once you find a stock inStock Hacker, right clickand choose “TOS Chart.”Then answer the ques-tions above. For illustra-tive purpose only.

chrts

A Choosestock list

A Choosestock list

A Choosestock list

2/ DetermineStrength of Trend

3/ Is Trend

Strengthening

1/ Determine

Trend

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 36

7— In the next menu choose “Descending.”Then press “Scan.”

The results will appear at the bottom ofthe screen like orderly soldiers. If you’re nothappy with them, you can always edit thefilters.

STEP 2: MASTER THE UNIVERSEOkay, maybe not the actual universe, butyou can attempt to determine where thestocks in your world are going by chartingthem in the thinkorswim Charts. Just rightclick on any symbol in the scan results andchoose “TOS Charts.”

If you’ve never charted, you should tryto answer three basic questions:

1— What’s the trend?2— How strong is the trend?3— Where do I get in?

To help us with these questions, we’lladd three studies: simple moving average,volume, and Relative Strength Index, andmake a couple of minor adjustments to theparameters.

Referring to Figure 2, change your chartto a one-year daily chart. Then, from thestudies menu in the upper right corner ofyour chart, add SimpleMovingAvg and RSI-Wilder. Click on the SimpleMovingAvg andedit the length of the study to 50. You don’thave to add volume since it is alreadyturned on by default. However, if your vol-ume isn’t displayed you can add it withinthe Settings menu.

Once you’ve got thinkorswim Charts setup, you can answer the three questions.

One: Is the stock clearly trading above thesimple moving average (blue line in chart)or has it recently crossed above the line? Two: does the indicator line in the RSI-Wilder cross from below the 30 line to abovethe 30 line recently? Three: is the volume increasing or higherthan normal (bars are higher than priorbars, indicating more traders committing tothe trade)?

WHILE THERE’S NEVER A GUARANTEEthat a trend will continue, if you’veanswered “yes” to all three of these, thenthere’s a good chance you may have filteredfor a stock or two smack dab in the heart ofa bullish run. Happy trading!

Q: How can I synchronizedrawings across multiplechart windows with thesame symbol?A: If you have a drawinglike a trend line or a pricelevel on a chart, you canhave that appear at thesame price level on anotherchart, even if it has a differ-ent time scale. Click on the“Style” button, then clickon “Settings.” In the “Gen-

eral” tab of the “Chart Set-tings” window, you’ll see“Synchronize” with acheckbox for “Drawings”and “Crosshair Position” inthe middle of the left-handside. If those are checked,you can get a drawing dis-played on a daily chart anda minute chart, for example, that have dif-ferent price scales withoutyour having to recreate thedrawing.

Q: I’ve set up my chartsjust how I like them. Howdo I save the settings andhave them open as mydefault?A: Once you have the timeframe, technical studies,colors, and other settingsestablished for each newchart, click on the “Style”button, then click on “SetChart Default” from thedrop-down menu. Now youcan close the thinkorswimplatform and reopen it withyour favorite chart settingsloaded as a default.

Q: How can I share mychart settings with some-one else?A: You can share yourcharts on the thinkorswimplatform with anyone elsewho uses the platform.Click the “Share” buttonin the upper-right-handcorner. This opens a win-dow with a choice to sharethe chart you’re currentlyon via email, Facebook,Twitter, or myTrade®. Ifyou choose email, Face-book, or Twitter, you cancopy and paste a link. Aslong as the other personhas the thinkorswim plat-form open, the link willopen up a chart windowwith your symbol, studies,and settings.

Q+A

FAQs.

PRECISIONCHARTINGHOW TOEDIT YOURSTUDIES

In thinkorswimCharts, if you clickon the “Studies”button in theupper-right-handcorner and hold thecursor over “AddStudy,” you’ll seedozens and dozens

of different techni-cal-analysis toolsyou can add to achart. But if youknow your studies,you’ll know thatmost of them haveparameters thatcan be changed—things like thenumber of databars used in thestudy, or like the Kperiod and D periodin Stochastics, forexample. There’s afast way to edit

those inputs andparameters.

1— In the upper-right-hand corner,look for the “EditStudies” icon thatlooks like a testtube releasing adrop of liquid. It’s acouple inches tothe left of the“Studies” button.

2— Click on thaticon to open the“Edit Studies and

Strategies” window.

3— In that win-dow’s main area,you’ll see any stud-ies you’ve loadedon the chart. Holdthe cursor over thestudy you want toedit and click the“gear” icon on theright-hand side.That opens thecontrols to changethe study’s inputs,as well as color for-mats.

tm24_SpecialFocus_rd5.qxd:pages.layout 2014-05-23 1:21 PM Page 37

• These days, trading terms may not be ascomplicated as “supercalifragilisticexpiali-docious.” But close. Like flying nannies,market words are weird and wonderful.Understanding references like “contango”and “backwardation” could hold the secretto your success when you try to make senseof price moves in ETF products whose val-ues are tied to futures contracts.

Remember a futures contract is anagreement to buy or sell something—likeoil, for instance—at some time in the, well,future. In general, futures prices differ from“spot prices,” which represent real-timecash prices.

If a future price trades higher than thespot, this is called “contango.” If a futureprice trades lower than the spot, this is called“backwardation.” Note the following table.

As an example, crude oil is said to be“in contango” when longer-dated con-tracts trade at increasingly higher premi-ums over cash. This premium exists tocover the costs, for instance, of paying thestorage for the oil between now and afutures expiration. As the contract getscloser to expiration, this premium beginsto “decay,” until the price of the expiringfuture matches the cash.

For instance, assume a cash price of$100 per barrel, and $105 for a 30-dayfutures contract. If oil’s cash price remainsunchanged, then 30 days later the expiringfutures contract will also be worth $100. Ifyou had bought the futures contract, youjust lost $5.

Just a Spoonful of Sugar...What does this have to do with your trad-ing life? Even though you’re trading an ETF,in reality you’re trading futures contracts(at least through the fund manager)because products such as oil ETFs—derivetheir prices from futures. The goal of an oilETF isn’t simply to track the price of oil. It’sto track the price of oil using near-monthoil futures.

As a fund’s near-term futures contractsapproach expiration, those contracts need to

be rolled over intolonger-term futuresexpirations so thefund avoids beingforced into takingphysical delivery ofall that crude.

And when themarket is in con-tango, guess what?You end up payingmore for thelonger-term con-tract than what youreceive from sellingthe shorter-termcontract, and thenet price of yourinvestment goesdown. This iscalled “roll decay,”and with oil futuresexpiring everymonth, this decaycan really add up.

REMEMBER THATjust because amarket is in con-

tango, and longer-term futures cost morethan shorter-term contracts, that doesn’tnecessarily ground your investment. It’sjust a headwind to keep track of. Giventhat the value of oil, volatility, or whateverit is you're trading, could go up, thischange in the cash price might be enoughto offset ‘roll decay’. Or it might not. Youmay not have to clean chimneys, butwatch the words that make the market.And above all, always work to under-stand the products you’re trading.

thinkMoney/24

•

38•Capiche•Pearls from a veteran floor trader

•Words by Greg Loehr

30-day future price—contango $105

Cash (spot) price $100

30-day future price—backwardation $95

For illustrative purposes only.

Burned by Oil Rolls•

If you’re trading futures-based ETFs, beware of the “rolling risk”

Carefully consider the investment objectives, risks, charges and expenses before investing. Aprospectus, obtained by calling 800-669-3900, contains this and other important informationabout an investment company. Read carefully before investing.

Commodity ETFs may be affected by changes in overall market movements, commodityindex volatility, changes in interest rates or factors affecting a particular industry or commod-ity. Commodity ETFs may be subject to greater volatility than traditional ETFs and may notbe suitable for all investors. Unique risk factors of a commodity fund may include, but arenot limited to the fund's use of aggressive investment techniques such as derivatives, options,forward contracts, correlation or inverse correlation, market price variance risk and leverage.This information is for educational purposes only.This is not a recommendation to tradeany specific security.

Important Information

cap.

tm24_Capiche_rd5.qxd:pages.layout 2014-05-23 12:39 PM Page 38

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com. Futures trading is not suitable for all investors, and involves risk of loss. Futures and options on CBOE’s volatility indexes have several unique features that distinguish them from most equity and index options, and investors are strongly encouraged to closely read and understand the ODD and the VIX options FAQ at http://ww-w.cboe.com/micro/vix/vixoptionfaq.aspx and other informational material before investing. No statement within this ad should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. CBOE® and Chicago Board Options Exchange® are registered trademarks and Execute SuccessSM, CBOE Short-Term Volatility IndexSM and VXSTSM are service marks of Chicago Board Options Exchange, Incorporated (CBOE). S&P and S&P 500® are registered trademarks of Standard & Poor’s Financial Services, LLC and are licensed for use by CBOE and CBOE Futures Exchange, LLC. S&P does not sponsor, endorse, sell, or promote any S&P index-based investment product. © 2014 CBOE. All Rights Reserved.

Introducing CBOE Short-Term Volatility IndexSM (VXSTSM) options and futures, with weekly expirations.

By tracking 9-day expected volatility, Short-Term VIX is particularly reactive to

changes to the S&P 500® Index. So now you have the opportunity to capture more

risk premiums with weekly expirations. Capitalize on sudden market events. Better

manage near-term risk. And help take advantage of volatility for the here and now.

Download the Short-Term VIX quick reference guide at ShortTermVIX.comTweet with dollar-sign tag $VXST

tm24_Capiche_rd5.qxd:pages.layout 2014-05-23 12:39 PM Page 39

Q: Hey, Trader!When I look atoptions, I usuallysee that out-of-the-money (OTM) putshave a higher pricethan OTM calls thatare the same dis-tance out of themoney. And some-times I see stockswhose OTM callsare higher than theOTM puts. What’sgoing on and why?

T: That, my friend,is volatility skew inaction. Vol skew, forshort, is when theimplied volatilitiesof the options in aparticular expirationaren’t all the same.If you look at agraph of the impliedvols, they usually

slope up, and away,from the ATMstrikes. And theslope is oftensteeper for the OTMputs than the OTMcalls. This isbecause investorsoften buy OTM putsas a hedge againstlong stock, and sellOTM calls as eithera covered call, or tofinance buying theput. That buying-and-selling pressuredrives the impliedvols of the putshigher than thecalls, which in turnmakes the puts lookmore expensivethan the calls. Butwhen calls are moreexpensive than theputs, the slope ofthe call skew issteeper than the put

skew, and that canhappen when thestock has a lot ofspeculative activity.Investors whobelieve a stockmight make a bigmove higher maybuy calls, which candrive those particu-lar values, andimplied vols, higher.

Q: Why do myAAPL* options lookso strange after thestock split 7-1?

T: No matter howstrange things look,remember that thesplit itself doesn’tchange the value ofyour position.

That said, let’slook at an AAPLoption pre- andpost-split. If theAugust 560 put istrading for $14.00and has .33 deltapre-split, it wouldbe worth about$100 more if AAPLdropped $3.00(with all otherthings being equal)and the 560 putrose to $15.00.Post-split, the priceof AAPL was 1/7thof the pre-splitprice, and all theoption strike priceswere adjusteddown to 1/7th, too.So, the 560 putturned into the 80put and might beworth about $2.00.But the single 560put turned into

seven 80 puts. Asingle 560 put at$14.00 has a $1400value, and 7 80puts at $2.00 alsohave a $1400 value.Now, the delta ofthe 80 put will stillbe about the sameas the 560 put, .33.And if AAPL dropsthe same percent-age post-split aspre-split, a $3.00drop would beabout $.43. Thatmeans the 80 putwould increase byabout .142. Sinceyou have 7 of the80 puts, 7 x $14.20= $99.40, which isnearly the same asthe pre-split changein value. Thatmeans the risk ofyour position does-n’t change frompre- to post-split.

Q: Hey, Trader!Greetings! Myname is Zyphroand I come fromthe year 2514. Iwish to bestowupon you all theFed announce-ments from yourtime until mine soyour future selfcan be wealthy!

T: Um, thanksZyphro, but even ifI knew what theFed numbers weregoing to be, I’d still

have no idea whichway the marketwould move. Seri-ously, that stuff is acoin flip. Interpret-ing Janet Yellen’sstatements is a joball by itself. I’m toobusy actually trad-ing. But if youknow the future,can you tell me ifthis burrito I’mabout to eat willkeep me up allnight?

thinkMoney/24

•

4 0•Ask the Trader Guy•Rescuing traders, one question at a time.

•Photograph by Fredrik Brodén

trdr.*Security symbolsdisplayed for infor-mational purposesonly. This is not arecommendation totrade any specificsecurity.

Multiple-legoption strategies canentail substantialtransaction costs,including multiplecommissions, whichmay impact anypotential return.These are advancedoption strategies andoften involve greaterrisk, and more com-plex risk, than basicoptions trades.

Important Information

tm24_HeyTrader_rd5.qxd:pages.layout 2014-05-23 11:26 AM Page 40

Bring out the option trading machine in you.

Market volatility, volume, and system availability may delay account access and trade executions.

Options are not suitable for all investors as the special risks inherent to option trading may expose investors to potentially rapid and substantial losses. Option trading privileges subject to TD Ameritrade review and approval. Before trading options, carefully read the previously provided copy of the options disclosure document: Characteristics and Risks of Standardized Options. See our website or contact us at 800-669-3900 for additional copies.

*TD Ameritrade was among the firms listed in the category of “Best for Options Traders” in Barron’s Online Broker Review for five years in a row (2009-2013). Barron’s is a trademark of Dow Jones, L.P. All rights reserved. Reprinted with permission.

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

You eat iron condors for breakfast. You straddle the market like it’s nobody’s business. When it comes to option trading, you think

you know it all, right? Think again. There’s a world of option opportunity out there. And we keep bringing you the innovative tools

to help take it on. Slice and dice data like never before with option statistics. Scan thousands of optionable stocks in seconds with

dynamic scanning. It’s no wonder why Barron’s named us among the “Best for Options Traders” five years in a row.*

Stay on top of the option market with thinkorswim® platform tools.

Learn more at tdameritrade.com/options

tm24_HeyTrader_rd5.qxd:pages.layout 2014-05-23 11:26 AM Page 41

thinkMoney/24

•

42•The Token Glossary•Terms you might stumble across in this issue.•tdameritrade.com

OUT OF THE MONEY(OTM) • An option whosepremium is not onlyall “time” value, butthe strike is awayfrom the underlyingequity. For calls, it’sany strike higher thanthe underlying. Forputs, it’s any strikethat’s lower.

AT THEMONEY(ATM)• An option whosestrike is “at” the priceof the underlyingequity. Like out-of-the-money options,the premium of anat-the-money optionis all “time” value.

IN THEMONEY(ITM)• An option whosepremium contains“real” value, i.e. notjust time value. Forcalls, it’s any strikelower than the priceof the underlyingequity. For puts, it’sany strike that’shigher.

Short Straddle/Strangle • A market-neutral strategy withunlimited risk, composed of an equalnumber of short calls and puts of thesame strike price (straddle) or two dif-ferent strike prices (strangle), result-ing in a credit taken in at the onset ofthe trade. The strategy assumes theunderlying will stay within a certainrange, in which case, as time passesand/or volatility drops, the optionscan be bought back cheaper than thecredit taken in, or expire worthless;resulting in a profit. Breakeven pointsof either strategy at expiration is cal-culated by adding the total creditreceived to the call strike and sub-tracting the total credit received fromthe put strike.

SHORT• To short is to sell an asset, such asan option or stock that you don’t ownin order to collect a premium. Theidea being that if you believe theprice of the asset will decline, youcan buy back (or “cover”) your shortat a lower price later. Your potentialprofit would be the differencebetween the higher price youshorted at and the lower price youcovered.

found on page:

found on page:

20 & 27

Theta • A measure of an option’s sensitivityto time passing one calendar day. Forexample, if a long put has a theta of -.02, the option premium will decreaseby $2.

VEGA• A measure of an option’s sensitivityto a 1% change in implied volatility. Forexample, if a long option has a vega of.04, a 1% increase in implied volatilitywill increase the option premium by $4.

Delta• A MEASURE OF AN OPTION’S SEN-SITIVITY TO A $1 CHANGE IN THEUNDERLYING ASSET. ALL ELSE BEINGEQUAL, AN OPTION WITH A 50 DELTA(ALSO WRITTEN AS .50) FOR EXAM-PLE, WOULD GAIN 50 CENTS PER $1MOVE UP IN THE UNDERLYING. LONGCALLS AND SHORT PUTS HAVE POSI-TIVE (+) DELTAS, MEANING THEYGAIN AS THE UNDERLYING GAINS INVALUE. LONG PUTS AND SHORTCALLS HAVE NEGATIVE (–) DELTAS,MEANING THEY GAIN AS THEUNDERLYING DROPS IN VALUE.

Long Straddle• A market neutral, defined risk position, composed of an

equal number of long calls and puts of the same strikeprice. The strategy assumes the market will break out one

way or another, in which case, a profit occurs when oneside of the trade gains more than the other side loses.

Breakeven points are calculated by adding and subtractingthe total debit to and from the strike price of the options.

26

13 & 27

found on page:

found on page:

found on page:

found on page:

12, 21,26 & 38

gls

found on page:

13

1312, 20, 26 & 38

tm24_Glossary&Disclaimer_rd5.xqd:pages.layout 2014-05-23 10:00 AM Page 42

2/ OPTIONS STRATEGIESTrading options involves unique risksand is not suitable for all investors.Mini-options do not reduce the pershare cost or price of options.

The long put strategy provides onlytemporary protection from a decline inthe price of the corresponding stock.Should the long put position expireworthless, the entire cost of the putposition would be lost.

A long call option position placesthe entire cost of the option position atrisk. Should an individual long callposition expire worthless, the entirecost of the position would be lost.

Spreads, condors, butterflies, strad-dles, and other complex, multiple-legoption strategies can entail substantialtransaction costs, including multiplecommissions, which may impact anypotential return. These are advancedoption strategies and often involvegreater risk, and more complex risk,than basic options trades. Be awarethat assignment on short option strate-gies discussed in this article could leadto unwanted long or short positions onthe underlying security.

The naked put strategy includes ahigh risk of purchasing the correspon-ding stock at the strike price when themarket price of the stock will likely belower. Naked option strategies involvethe highest amount of risk and are onlyappropriate for traders with the highestrisk tolerance.

Naked option strategies involve thehighest amount of risk and are onlyappropriate for traders with the highestrisk tolerance.

The risk of loss on an uncoveredcall option position is potentially unlim-ited since there is no limit to the priceincrease of the underlying security.

Option writing as an investmentstrategy is absolutely inappropriate foranyone who does not fully understandthe nature and extent of the risksinvolved.

A covered call strategy can limit theupside potential of the underlyingstock position, as the stock wouldlikely be called away in the event ofsubstantial stock price increase. Addi-tionally, any downside protection pro-vided to the related stock position islimited to the premium received. (Shortoptions can be assigned at any time upto expiration regardless of the in-the-money amount.)

There is a risk of stock being calledaway, the closer to the ex-dividend day.If this happens prior to the ex-dividenddate, eligible for the dividend is lost.Income generated is at risk should theposition moves against the investor, ifthe investor later buys the call back at ahigher price. The investor can also losethe stock position if assigned.

The maximum risk of a covered callposition is the cost of the stock, less thepremium received for the call, plus alltransaction costs.

Rolling strategies can entail sub-stantial transaction costs, includingmultiple commissions, which mayimpact any potential return. You areresponsible for all orders entered inyour self-directed account.

Supporting documentation for anyclaims, comparisons, statistics, or othertechnical data will be supplied uponrequest.

1/ GENERAL DISCLAIMERThe information contained in these articles is notintended to be investment advice and is for illustrativepurposes only. Be sure to understand all risks involvedwith each strategy, including commission costs, beforeattempting to place any trade. Clients must consider allrelevant risk factors, including their own personalfinancial situations, before trading. Past performanceof a security or strategy does not guarantee futureresults or success. Transaction costs (commissions andother fees) are important factors and should be consid-ered when evaluating any options trade. Optionsinvolve risk and are not suitable for all investors. Sup-porting documentation for any claims, comparisons,statistics, or other technical data will be supplied uponrequest. It is not possible to invest directly in an index.

thinkMoney/24

•

43 •ArticleDisclaimers•Important info thatyou need to know.•tdameritrade.com

•random musings for traders at TD AmeritradeSummer 2014

thinkMoney/24

10/TIPS FOR

TRADING WITH YOUR

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18/VOLATILITY’S LITTLE SECRET

24/HOW TO NEUTER YOUR

TRADE

CHARTING FOCUS

32/CHARTS THATRULE THE

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tm24_Glossary&Disclaimer_rd5.xqd:pages.layout 2014-05-23 10:00 AM Page 43

Choose your app attdameritrade.com/mobileapp.

* TD Ameritrade and tastytrade, Inc. are separate, unaffiliated companies. TD Ameritrade is not responsible for any third-party content or opinions presented.

iPad® is a registered trademark of Apple, Inc.

The paperMoney software application is for educational purposes only. Successful virtual trading during a one-time period does not guarantee successful investing of actual funds during a later time period —market conditions change constantly.

Market volatility, volume, and system availability may delay account access and trade executions.

The risk of loss in trading securities, options, futures, and forex can be substantial. Clients must consider all relevant risk factors, including their own personal financial situation, before trading. Option, futures, and/or forex trading privileges subject to TD Ameritrade review and approval. Not all account owners will qualify. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).

TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

TDA 2012 SS 03/13

Swipe, drag, and tap your way through the market.Our mobile trading apps are optimized for the iPad®.TD Ameritrade MobileThis easy-to-use app is packed with trading essentials and innovative functionality. Place trades, discover potential investments with Snapstock™, and access enhanced third-party research.

TD Ameritrade Mobile TraderAct on your most sophisticated trading strategies with this technologically advanced app. Trade equities, multi-leg options, futures, and forex; view live, streaming international CNBC feeds and premium video content from tastytrade®;* and test-drive theories with paperMoney®.

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PRSRT STDUS PostagePaidTD Ameritrade

The risk of loss in trading securities, options, futures, and forex can be substantial. Clients must consider all relevant risk factors, including their own personal financial situations, before trading. Options involverisk and are not suitable for all investors. See the Options DisclosureDocument: Characteristics and Risks of Standardized Options. A copyaccompanies this magazine if you have not previously received one.Additional copies can be obtained at tdameritrade.com or by contactingus. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the followingrisk disclosure before considering trading this product: Forex Risk Disclosure (www.nfa.futures.org/NFA-investor-information/publication-library/forex.pdf). A forex dealer can be compensated via commission and/or spread on forex trades. TD Ameritrade, Inc.,member FINRA/SIPC/NFA.TD Ameritrade is a trademark jointly ownedby TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.© 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

thinkMoney from TD Ameritrade200 S. 108th AveOmaha, NE 68154

TDA 2012 06/14

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