August 2004Trading Tip:
This chart example shows actual candlesticks in the upper half,
and Average Candlesticks in the lower half. The Average
Candlesticks show the directional flow of the market
better. They were created using moving averages to
create an average range and an average candle body.
Apply a moving average study to the chart and set its properties
to the following which calculates an average of the bar Highs
and an average of the bar Lows. The spread between these
two averages is plotted using the Marker as a thin vertical
line. This step creates the average candle range.
Apply a 2nd moving average study to the chart and set its
properties as shown below. This average object will
calculate an average of the bar Closes and an average of the bar
Opens. The spread between these two averages creates the
candle body. Use the Above..Below Study Mode so that an
Up candle body can be plotted in the Green color, and a Down candle
body can be plotted using Red. The Marker selection is the
wide vertical line as shown below.
Ensign Windows has the ability to have the input for a study be
another study. This is often called a 'Study on Study' type of
calculation. One popular use of this concept is StoRSI
where a Stochastic is calculated on the Relative Strength
Index. Another common use of Study on Study would be
plotting an average of the original study values, and using as a
trade signal the study crossing its average.
A third use of Study on Study capabilities would be to plot the
spread between two different studies, which will be illustrated in
This chart has a Stochastic %K line plotted in
Blue. Parameters are Bar=14, %K=5, %D=3. The Red
line in the same study window is a 5 period average of a 9 bar
Relative Strength Index (RSI). The issue being
investigated is the spread between the Stochastic and the RSI which
is the area that is painted yellow.
A MACD oscillator study plots the spread between two
averages. For this example, the Data Point for the 1st average
was set to use the Stochastic %K study. The Data Point for the
2nd average was set to use the Average RSI study. The average
parameters are set to 1 so the raw study values are used for the
The Study Mode selected is Zones, which will permit
the MACD line to be plotted using Green when it is above the
threshold of zero, and Red when its value is below the threshold of
zero. The MACD plot is shown in the bottom study window
of the chart. You can visually see the correlation that when
the Stochastic %K line (Blue) is above the Average RSI line (Red)
then the MACD study line is above zero and plots using Green.
This visual effect has been transferred to the chart
bars by using the Color Bar selection in the Marker drop down
list. When the MACD is above zero and plotting a Green
line, the color bar Marker is also coloring the chart bars
Green. When the MACD is below zero and plotting a
Red line, the color bar Marker is coloring the chart bars Red.
Trade signals might be created from this concept of
comparing one study to another. The signals on the example
chart look promising. However, there has been no attempt to
optimize the parameters that were used in presenting the concept of
Study Spreads. The article is just showing how different
studies might be compared with each other by using the MACD
oscillator to calculate a Study Spread.
Stock Option Model - August
by Howard Arrington and Bill Hatch
I was impressed with Bill Hatch's article Straddle-Strangle-Swap
in the July 2004 Trading Tips issue and have asked Bill to coach me
in paper trading an account for the balance of the year.
So, let me define the scope of this project, and publish an update
each month for the rest of 2004.
The paper trading goal is a monthly revenue of around
$4,000. The expectation is that this revenue objective
can be achieved with a trade size of 1000 shares in each of four
different stocks. The paper trade model will use four stocks
mentioned by Bill Hatch in the July article, namely Dell Computers
(DELL), Home Depot (HD), Office Depot (OPD), and Disney
Stock options expire on the Friday before the 3rd Saturday of the
month. In cases where the 1st day of the month is a Saturday,
the options expire on the 2nd Friday. Therefore, the roll out
date each month will be the Thursday before expiration. The
initial paper trades for this learning exercise use the settlement
prices from August 20th, 2004.
A desirable characteristic is for the stocks to be tracking
sideways. The following are daily charts for the four stocks
in our model.
A Strangle is an option combination strategy where both a Call
and a Put are purchased with space between the strike prices.
For each of these paper trades, a Call is bought with a strike price
that is $5.00 higher then the Put strike price. The
Strangle is the insurance policy that limits the potential loss.
DELL: In November options, bought a $37.50
Call (DLQKT.X) and bought a $32.50 Put (DLQWZ.X). This is the
Strangle that limits the amount that can be potentially lost.
In September options, sold a $35.00 Call (DLGIG.X) and sold a
$35.00 Put (DLQUG.X). This is the Straddle, which is the first
in a series of revenue months. The September Straddle will be
bought back on September 16th, and replaced by selling an October
Home Depot: In November options, bought a $37.50
Call (HDKU.X) and bought a $32.50 Put (HDWZ.X). In
September options, sold a $35.00 Call (HDIG.X) and sold a $35.00 Put
Office Depot: In January options, bought a $17.50
Call (ODPAW.X) and bought a $12.50 Put (ODPMV.X). In September
options, sold a $15.00 Call (ODPIC.X) and sold a $15.00 Put
Disney: In January options, bought a $25.00 Call
(DISAE.X) and bought a $20.00 Put (DISMD.X). In
September options, sold a $22.50 Call (DISIX.X) and sold a $22.50
Here are the initial trades for the Straddle-Strangle-Swap,
initiated with settlement prices from August 20th, 2004.
Commissions: Commission expenses will
vary, depending on your brokerage. A typical cost would
be around $25 for each of the trades shown in this table.
Account Size: Most brokerages will
require equity in the account to cover the maximum loss for each set
of trades. In our model, the maximum loss could be
$2,500 for each of the four stocks. So the minimum account
size needed is $10,000.
Account Balance: Can't complain
that we are $500 to the good just by setting up the model account.
Disclaimer: Hypothetical or simulated performance
results have certain inherent limitations. Unlike an actual
record performance record, simulated results do not represent actual
trading. Also, since the trades have not been executed,
the results may have over or under compensated for the impact, if
any. No representation is being made that any account will or
is likely to achieve profits or losses similar to those shown.
This article is published for educational purposes only.