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EQUITIES:

LESSON THREE
Index & Beta Trading

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TERMS TO
KNOW:

• Types of Indices :
– Price Weighted – Price is the only component to determining
the value
– Capitalization Weighted – Market Cap is another component to
overall value
• Dollar Index –
– Composition:
• Index Futures – A futures contract that represents a particular equity
index (S&P 500, DJIA, etc.) and can be utilized as both a speculation
and hedging tool.
• Beta –Beta – Capital Asset Pricing Model Coefficient that is a past
indication of how volatile a single stocks returns are to an index. A
beta of 1 is similar to an index return while above offers “potentially”
more volatility and reward.

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Key to finding the best setups is understanding
UNDERSTANDING overall picture.
THE BIGGER “Obviously the thing to do was to be bullish in a
PICTURE bull market and bearish in a bear market”
Reminisces of a Stock Operator

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EXPLAINING Weighting can sometimes skew index
behavior and lead to temporary correlations
INDEX (AAPL is 13% + of QQQQ ETF)
BEHAVIOR

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WHEN SHOULD I CATCH Correlation, Sentiment, and Implied
Correlation via option prices can give
BETA AND WHEN SHOULD you clues when to stock pick or chase
I STOCK PICK? beta

In low correlation
environments pick stocks.
High, go to the index

Implied Correlation is often


higher than realized and like
volatility not always good
forecasting tools.

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Intermediate Market Reversal
SIMULATION 1 May 7th, 2010

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KEY POINTS In extreme circumstances, you need
FROM to go off what market players are
SIMULATION 1 watching. In this case the 200-Day MA

MAY 7TH, 2010

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VISUALIZATION • Working on Two Different Time Frames
EXERCISE • Watching out for support on longer
charts though nothing in sight on 5 min
• Instead of hitting the bids, rather place
bids around that level for a low risk high
reward trade

• Visualization exercises are good for


both pre-market and post-market
settings

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SECOND Bear and Bull Trap Reversal
SIMULATION

/GC (GOLD)
6/8/2010
6:00:00

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KEY POINTS Gold did not close above this level, and
caught all the breakout momentum traders
SIMULATION 2 when they ran into real selling orders.

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RANDOM Rules: Buy or Sell the best/worst stocks
respectively on strength/weakness.
SIMULATION No Fading!
I’ll be demonstrating dollar neutral spreading.
MARCH 31ST,
2010

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ANALYSIS, • Looking at futures compared to equities
COMMENTS,
QUESTIONS?

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WHAT TO
LOOK OUT
FOR THIS
WEEK:

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