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Enhancing Awareness Notes - Kirkland Traders

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					John Mohan Consulting LLC   Enhancing Financial Awareness Notes !2008   Updated 8/14/12 - Page 1
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John Mohan Consulting LLC                                            Enhancing Financial Awareness Notes !2008                                             Updated 8/14/12 - Page 2
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John Mohan Consulting LLC                                          Enhancing Financial Awareness Notes !2008                                            Updated 8/14/12 - Page 3
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John Mohan Consulting LLC                                        Enhancing Financial Awareness Notes !2008                                          Updated 8/14/12 - Page 4
                                                     (C"2-1>6%2&1"(
Most people, including me, do not have, or want to, spend the
time watching or trading the stock market on a daily basis.
Yet many are not satisfied with the interest earned from their                                      (H-&E$-I(J1$*/(
saving accounts or similar investments. Often people place
their money with professional money managers. This may
be beneficial if they chose wisely. Others like to manage
                                                                            (J 1 $ *(? (K (4 &" &E &L . (*1 //. / ((
their own money. I am one of those. I enjoy the investing                   How much risk are you willing to take? Walking across a
process and like to help others understand the possibilities.               street is a risk. Having others manage your money is a risk.
Therefore I continue to rewrite these notes to assist me in                 Handling your own money is a risk. The question is not ‘Is
organizing my thoughts so I become a more effective teacher                 there a risk?’ The question is ‘Is trading worth the risk?’
and investor.
                                                                                          Highly successful traders lose
         These notes are a work in process,                                               approximately 1/3 of the time.
      roughly written, incomplete at best, and
                                                                            So get use to the idea of losing occasionally so it doesn’t eat
         subject to constant revision as my
                                                                            you up emotionally. Look at the impact losses have on what
               knowledge increases.                                         must be gained back in order to break even.
(D &/% *$ &E . -(
                                                                                           Loss Percentage         Gain Required
These notes are a learning tool that helps to explain: (1) how                                                     To Break Even
to find what to buy, (2) when to buy/sell, and (3) how to use                                      10%                  11%
the trade tools effectively. These notes explore the process of
                                                                                                   20%                    25%
money management, but do not provide financial advice on
what to buy/sell or strategies to use. The examples used are                                       30%                    43%
not recommendations. Each person is responsible for                                                40%                    67%
doing their own research before making financial
decisions. Remember, the financial world is complex, ever                                          50%                   100%
changing, as are the rules. Integrity is not a high priority
for all players in the financial world so it behooves all of us             (J 1 $ *(9 (8(4 $ F . (E 1 " . I ((
to question and confirm all information before arriving at any              It is often said you can tell what is important to an individual
financial decisions. Also, as a literary shortcut, masculine                by analyzing how they spend their time and money. How
pronouns are used instead of continually typing he/she.                     much time are you willing to allocate to managing your own
                                                                            money? Maybe your time is best spent looking for a highly
(+ % F " 1 , *. > ' . E . " 2/ (
                                                                            successful money manager so you may spend your time doing
The following have been of great assistance in my continuing                things that are much more enjoyable to you. Here is a plan:
education and/or helping with these notes: Joe Arnold, Jeff &
                                                                            1.   Determine your current financial situation. What is your
Lynn Barber, Jerry Benner, Dan Blanchard, Keith Dibble,
                                                                                 income? What are your expenses?
Robert Dietrich, Peggy Eddy, Diane Evanger, Brooks
Josephson, Terrill Flood, Larry Granat, Kirk Greiner, Marty                 2.   Establish goals for each phase of your life.
Jordan, Lisa Lauenberg, Jon Lewis, Jeff Look, Tyler Petty,                  3.   Create and implement a plan of action to achieve your life
Don Pickens, Steve Sanford, Tim & Carol Smith, Zackary                           goals. Set a budget and stick to it. Then review and
Smylie, Bob & Myrna Toombs, Jody Wong, and Nate Yokers.                          adjust the plan as appropriate.
I sincerely appreciate their insights and thank them for
spending time with me.                                                      If you decide to manage your own money,
                                                                                           Buy only to sell, not to own!
(< . /. $ -% # () $ = 1 -/ (G . *B(4 $ " $ ' . E . " 2((
                                                                                           All securities are BAD unless
Research indicates individuals who manage their own money                                        they turn a profit.
generally achieve better results than professional money
managers. Why? Because people hate losing their own                         (J 1 $ *(M (K (5 1 N I (@ # . (G 6 % % . //B6 * (
money. So how come some are awash in debt? I believe it
                                                                            Imitate only those walking the walk, making profits over a
boils down to spending habits. Over-spending is a form of
                                                                            long period of time. Remember, tangible assets are not
instant self-gratification. Debt then creates bondage that limits
                                                                            money. Only when you have cash do you have money
financial opportunities. If in debt, get out now!


John Mohan Consulting LLC                           Enhancing Financial Awareness Notes !2008                              Updated 8/14/12 - Page 5
(flexibility). People often brag their home is worth ‘X’                   whether the crisis will come sooner as the result of a voluntary
amount of dollars. The reality is unless they have the                     abandonment of further credit expansion --- or later, as a total
CASH in hand --- all that bragging is just hot air. If you                 catastrophe, when people of the world no longer have faith in
need a reality lesson, take a diamond ring to a pawnshop and               our fiat currency system (the US Dollar). Currently, a number
find out how much cash you will get for it.                                of major countries such as China and Russia are working
                                                                           toward replacing the US Dollar as the number one currency in
(J 1 $ *(O (K (5 -. $ 2. (< 6 *. /(P (< 1 6 2&" . /((                      the world with a basket of currencies related to exchange and
Rules are established for good reasons. Usually rules are                  trade agreements. These countries are also encouraging their
preventative in nature and enhance success. Follow                         citizens to purchase gold.
buy/sell rules unemotionally. You are looking for reasons
not to trade --- not to lose money. Remember, you are                      (< S @ V (C< + ((
competing with professionals that do this for a living.                    A 22 year old who invests $2000 a year in an ROTH IRA for
                                                                           43 years until he reaches age 65 ($86,000 total outlay) and
(J 1 $ *(Q (8(R /. (E 1 " . I (, &/. *I ((                                 earns 5% interest a year can earn a tax-free portfolio of
After you have met your basic needs, consider using your                   $300,286
money to assist others in their personal and professional
growth. It takes a while to understand this thought, but                   (G 1 *1 E 1 " W/(X &/> 1 E ((
eventually many come to realize the greater joys in life come                ! A generous man will prosper; he who refreshes others
from creating fond memories with others. Some never                            will himself be refreshed.
understand this. They are too self-centered. Then when they                  ! Whoever loves money never has enough.
die others spend the money they accumulated. Set up trusts so
your wealth is useful to others after you are gone. Statistics               ! Two is better than one. If one falls, his friend can help
show heirs often spend their entire inheritance within nine                    him up. A cord of three is not quickly broken.
months of receiving it no matter the amount. Don’t let this                  ! The rich rule over the poor, and the borrower is servant
happen to your lifetime of work and wealth accumulation.                       to the lender.
                                                                             ! He who walks with the wise grows wise.
                    H1&"2/(@1(H1">.-(                                        ! He who accepts and maintains discipline loves
                                                                               knowledge. But he who hates correction is stupid.
Inflation is the investor’s number one enemy. For example,                   ! The prudent see danger and take refuge. But the
an item costing $100 in 1960 would cost $500 by 1995. In                       simple keep going and suffer for it.
barely 35 years, the value of the US dollar fell 80%. The
major players in the market have also been known to practice
some creative accounting and to accept large fees from                                         <./.$-%#(@11*/(
companies they evaluate. According to Martin Weiss (2005),
the following activities have been noted: 25% of the public                Efficient use of time is important to me. Through all my
companies had discrepancies in their corporate earnings                    wanderings in the financial world, I spend most of my
statements, 10,000 brokers were sited for illegal activities, and          research and trading time using Investools for research,
Wall Street Analysts issue only 1% sell ratings and are paid to            ThinkOrSwim for trading, and Investors Business Daily
rate a company. A ‘NR4’ rating is assigned when a company                  Newspaper for news. These three seem to provide all the
doesn't want their rating published.                                       tools I need to make investment and trading decisions.
(S 6 -(4 1 " . I (C/" T2(S 6 -(4 1 " . I (                                        How to navigate and customized these
Most people believe the Federal Reserve Bank is a USA                                 tools is found in the chapter
Government institution. In reality, International Bankers                            “Navigating And Customizing
privately own the Federal Reserve. The Federal Reserve                                Trading Resources” near the
Act authorized twelve private credit monopolies to create
money out of nothing, lend it to our government at a set                                   end of these notes.
interest rate, and control the national money supply. This
money is then owed back to the FED with interest. The                      Also, I occasionally use other financial sources of information
interest is eventually refunded to our government, but only                such as American Bulls.com, Agora Financial, Earnings.
after the FED deducts its operating expenses and a six percent             com/highlight, Finance.Yahoo.com, FinVis.com (free),
guaranteed return for the International Bankers.                           IncomeTrade.com, Investorwords.com, Morningstar.com,
                                                                           Stocktiming.com, Taipanpublishinggroup.com.
(U $ **1 1 " &" ' (0 $ 2&1 " $ *(D . A 2((
There is no known way of avoiding a final collapse of a boom
expansion brought about by increasing credit. The question is


John Mohan Consulting LLC                          Enhancing Financial Awareness Notes !2008                       Updated 8/14/12 - Page 6
                                     G21%F(4$-F.2(S=.-=&.,(
Investing started when someone had an idea that possibly                                                ETF Examples
would make money but didn’t have the financing to develop it.                        Oil              OIL      Nuclear             NLR
So he sought money from others who were willing to risk their                   Oil Services          OIH     US Dollar            UUP
cash in exchange for a share of the potential profits.                             China              FXI       Brazil             EWZ
When the idea proved profitable and looked as if it would                           Gold              GLD       Silver             SLV
generate an income for an extended period of time, outsiders                        Tin               JJT       Grain               JJG
would try to buy shares in the company by offering cash to the
original owners. If several people started bidding for shares                (C" > . Y () 6 " > / (
and the share-owners were willing to sell, the price increased.              Index Funds: securities that represent entire sectors:
                                                                               S&P 500 Index (SPY)           Dow Jones Industrial (DIA)
                (X#$2(C/(U16'#2(P(G1*>(                                        NASDAQ 100 (QQQ)              Russell 2000 Fund (IWM).

                                                                             (S N 2&1 " /(
The main focus of these notes is on buying and selling stocks,
                                                                             Options (Calls and Puts) are purchasable and sellable contracts
ETFs, and Index funds that include options. As a rule I avoid
                                                                             that guarantee rights, but not necessarily obligations to buy or
mutual funds because I cannot protect them with Stops.
                                                                             sell a security for an agreed upon price within a certain time
(G 21 % F /((                                                                limit. Options may be used to leverage growth potential and
                                                                             help protect against huge losses.
Stocks are shares of ownership in a company. Shareholders
may benefit from company profits and a rising stock price.                   (S 2# . -(G . % 6 -&2&. /(
They may also lose their shirt if the company loses money and
                                                                               ! Mutual funds: pooled money managed by professional
stock prices fall. Below are some well-known stocks.
                                                                                 money managers who charge for their services. Mutual
 SLW       SLB       JNJ        DRYS       SIRI      WFC     F                   funds are only traded after the market closes each day
 GG        SU        PFE        FRO        DIS       JPM     GM                  and cannot be protected from falling prices during the
 FCX       BTU       LLY        GMR        TWX       FITB    PCAR                day. So if the market is crashing, shareholders can only
 HL        CHK       GSK        PRGN       DTV       KEY     TTM                 get out at the end of the day.
 AUY       MRO       MRK        OSG        NFLX      BK      TM                ! Bonds: loans made to a company or government with a
 NEM       NOG       AVNR       DAL        TWC       STD     HMC                 guaranteed return if bankruptcy doesn't occur. Often
 SSRI      RIG       BMY        LUV        DISH      CIT     TSLA                bonds are sold to raise cash to expand the business.
(! Y % # $ " ' . (@ -$ > . > () 6 " > /(Z! @ ) /[(                                   o    Bond prices and bond yields move in opposite
                                                                                          directions. As prices head up because more
ETFs hold a diversified portfolio of stocks and/or securities                             people are buying bonds, yields head down.
that are minimally managed. ETFs have the following
advantages:                                                                          o    As inflation rises, bondholders receiving low
                                                                                          interest payments usually sell their bonds so they
 ! ETFs are safer than stocks because an ETF is a basket                                  can invest in assets that might outpace inflation.
   of securities. With multiple securities, you aren’t subject
   to the wide array of risk including corporate scandals,                     ! Commodities: raw materials such as sugar, wheat, pork
   after market earning reports, and other factors that affect                   bellies, metals, etc.
   individual stocks.                                                                o    During economic expansion commodity prices
 ! ETFs may be traded during market hours.                                                generally rise due to increasing demand.

 ! ETFs allow the use of limit orders and STOP-loss orders.                          o    During a recession or deflationary times the
                                                                                          opposite is true except in the case of precious
 ! ETFs have no penalties for early withdrawal and are                                    metals. Sometimes when people lose faith in their
   ‘no-load’ (although usual broker fees apply).                                          paper money they purchase gold or silver as
 ! ETFs are passively managed so their expenses tend to                                   insurance against devaluation of the dollar.
   be lower than comparable mutual funds.                                            o    Note: In the Puget Sound area, rare coins, silver,
 ! ETFs holdings are very apparent and portfolio changes                                  gold, etc. may be purchased at Bellevue Rare
   are relatively infrequent.                                                             Coins, Staggs in Kent, Northwest Territorial Mint
 ! Options are available on some ETFs .                                                   near Federal Way, West Seattle Coins, and the
                                                                                          Northgate Coin Shop.


John Mohan Consulting LLC                            Enhancing Financial Awareness Notes !2008                         Updated 8/14/12 - Page 7
 ! Currencies: paper money that people believe has value.                 ! Momentum investors track prices and volume data to
   As the amount of paper money increases, the value of                     identify stocks trending higher.
   the paper money decreases. With more paper money                       ! Market Timers try to time their investing so they’re
   chasing goods, the rate of inflation rises (gas used to be               buying at market troughs and selling at peaks.
   23 cents a gallon).
                                                                          ! Growth Investors target stocks of companies that
      o    Trading currencies is trading the relationship                   produce, and should continue producing, above-average
           between two currencies such as the US dollar                     earnings growth.
           compared to the Japanese Yen.
                                                                          ! Value Investors shop for bargains, hoping to buy low,
      o    If the Euro dollar is facing extreme pressure due to             as the cliché goes, and sell high.
           the debt of some of its member nations, the US
           dollar may rise.

 ! Certificates of Deposit (CD): a type of investment that                              (4$-F.2(@.-E&"1*1'I(
   requires you to invest money for a certain length of time
   and guarantees the return (like a bond).                               ! Account - Margin: A brokerage account allows
                                                                            customers to buy securities with money borrowed from
 ! REITs (Real Estate Investment Trust): publicly
                                                                            the brokerage firm.
   traded companies that own and manage investment-
   grade commercial real estate. REITs invest in office                   ! Beta measures volatility (price swing) in relation to S&P
   buildings, malls, industrial facilities, hotels, resorts,                500. A beta of 1.0 means average volatility. A beta of
   health care facilities, self-storage, etc. REITs provide a               1.5 means a stock is 50% more volatile than the S&P. A
   simple and inexpensive way to invest in commercial real                  beta of 0.50 is 50% less volatile. Generally the safer
   estate without buying property directly. However, they                   stocks like utilities have a lower beta.
   are not very liquid. REITs provide a fairly reliable                   ! Bulls expect prices to rise. Bears expect prices to fall.
   source of income. At least 90 percent of taxable income                  And Wild Hares expect prices to bounce all over in a
   must be distributed annually to shareholders                             short period of time (high volatility).
                                                                          ! Compound Interest is interest earned on interest,
              ()&"$"%&$*(H$-2&%&N$"2/(                                      commonly referred to as the eighth wonder of the world.
                                                                          ! Depreciation is the reduction in value over time.
 ! Banks and Credit Unions typically provide services                     ! Depression: when the peak-to-trough contraction in the
   including checking, savings, loans, credit and debit                     economy is more than 25%. A recession is when the
   cards, notary services, safe deposit boxes, etc.                         peak-to-trough contraction is more than 10%.
 ! Brokerage Firms typically manage all types of trades                   ! Diversify: to spread out an amount of money into
   (stocks, mutual funds, ETFs, etc.) for a fee.                            different types of investments such as bonds, stocks,
 ! Broker: a licensed professional who advises people                       CDs, funds, real estate, collectables, etc.
   about investments for a fee and may work for a                         ! Dividend is the payment made to a stockholder
   brokerage firm.                                                          representing their share of the company's profits.
 ! Stock and Commodity Markets are exchanges where                        ! FIDO: If a trade goes against you, close it and then
   stocks, options, securities, indexes, currencies,                        ‘Forget it and drive on.’ Do not beat yourself up because
   commodities, etc. are traded.                                            of a failure. Losses/failure is a normal part of the
 ! Market Maker: a professional securities dealer who                       investing process.
   buys and sells stocks or commodities held in inventory                 ! Finance Charge is the fee paid when the entire debt is
   and must ALWAYS provide a bid and ask price at                           not paid off within the designated time period.
   which they will buy or sell a security.                                ! Hedge: an inverse (opposite) position established to
      o    Many market makers may place ULTRA-LOW                           protect an existing position. For example, if 100 shares
           BIDS to purchase a security when sellers want to                 of a gold mine are purchased, 10 to 20 shares (10-20%)
           get out at any price.                                            of an inverse ETF (for example DZZ) may be purchased
      o    A seller can protect against this by placing a ‘limit            which bet against the success of the gold mining.
           order’ (to buy or sell at a given price or better).            ! Interest Rate is the price paid for using someone else's
           However, this doesn’t guarantee the trade will be                money. It is typically expressed as an annual percentage
           automatically filled.                                            rate, such as 6.5% APR.
 ! Investors (speculators) are individuals who usually                    ! IRA-Roth: it provides a way to earn money for
   hold longer-term investments.                                            retirement, without having to pay taxes on the money
 ! Traders (scalpers) are individuals who usually trade                     earned when taken out. A Roth IRA is funded with
   quickly looking for quick profits.                                       after-tax money.

John Mohan Consulting LLC                       Enhancing Financial Awareness Notes !2008                       Updated 8/14/12 - Page 8
 ! IRA-Traditional: it uses pre-tax money to fund a
   retirement account, but the earnings are taxed when                            5#.%F(\16-(R">.-/2$">&"'(
   taken out. IRA’s don’t just ‘make money’ on its own.
   The money must be invested in stocks, bonds, options,
                                                                       1.   If 30% of an account is lost, what must be regained in
   etc. Also, with few exceptions, the money cannot be
   withdrawn until age 59 !.                                                order to break even?
 ! Leveraged ETF . An ETF designed to double in
                                                                       2.   Who owns the Federal Reserve?
   performance on a daily basis. If the sector goes up 2% in
   a day, the leveraged ETF goes up 4%.                                3.   What are stocks?
 ! Liability is something owed.
                                                                       4.   What are ETFs and the advantages of owning them?
 ! Lien is the right given to a lender to collect against the
   borrower's property and/or money.                                   5.   What are Index Funds? List four Index Funds.
 ! Long: ownership or trade owed to you.
                                                                       6.   What are bonds?
 ! P/E (Price-Earnings Ratio) is the current share price
   compared to its per-share earnings.                                 7.   What are the functions of a brokerage firm?
 ! Shorting: a trade owed to another. If a brokerage firm
   loans 100 shares of a stock to someone, then the                    8.   What is a broker?
   individual sells the stock immediately to collect the cash.
   Later the individual shorting hopes to buy back the stock           9.   What is a market maker?
   for a lower price and return the 100 shares of stock to the
                                                                       10. What is the difference between investors and traders?
   brokerage firm, keeping the difference (hopefully the
   profit).                                                            11. Define Beta.
 ! Unearned Income is money made that is not the result
   of labor. For example, money earned through compound                12. Define Bears.
   interest or dividend payments.
                                                                       13. Define Dividend.
(5 1 E E 1 " (+ % -1 " I E /( (
                                                                       14. Explain FIDO.
ARM=Adjustable Rate Mortgage. CD=Certificate of Deposit.
CEO=Chief Executive Officer. CFO=Chief Financial                       15. Explain Hedge.
Officer. COO=Chief Operating Officer. EPS=Earnings Per
Share. IRA=Individual Retirement Account. NAV=Net                      16. Explain the difference between a ROTH IRA and a
Asset Value. NOI=Net Operating Income. ROE=Return on
Equity. ROI=Return on Investment. S&P=Standard &                            Traditional IRA.
Poor's. SEC=Securities Exchange Commission.
                                                                       17. Explain how to “Short” a stock.
SEP=Simplified Employee Pension. TSA=Tax-Sheltered
Annuity.




John Mohan Consulting LLC                      Enhancing Financial Awareness Notes !2008                       Updated 8/14/12 - Page 9
               G.$-%#&"'()1-(]U./2(1B(U-..>^(G21%F/(
The following material deals with fundamental analysis,
looking at the financials and market niche of a stock company.
If you are going to trade stocks, look for companies that are                                           G.$-%#(@11*/(
the “best of breed” in a particular industry, i.e. making money
and being purchased by professional money managers. Also                      There are many ways to find great stocks. Listed below are
look at its price performance in the 2008 market crash. If                    some of the tools I use and a description of how they may be
a security held its own during that time, it is probably a safer              programmed to achieve the desired results.
investment. Then consider at a company's debt load. If
safety is high goal, avoid companies with debt or at least have               (C" = . / 21 1 */ (H - . A 6 &*2(G . $ - % # . / `(
more cash on hand than debt. Finally look for a company
                                                                              Open Investor Toolbox, click on ‘Searches’ and look in the
that has profit strength. Consider companies with a long
                                                                              left-hand column. Choose searches that interest you.
history of dividends payments over the years.
                                                                                ! Prebuilt TurboSearch. Click on ‘High Scoring Stocks
                                                                                  with Positive Industry Momentum’ or ‘Low Scoring
               C"&2&$*(G.$-%#(G._6."%.(                                           Stocks with Negative Industry Momentum’.
                                                                                ! Green Red Arrow Search. Click on Moving Average,
(? `((D . 2. -E &" . (4 $ -F . 2(@ -. " > /(                                      MACD, Stochastics and check Positive for last 10 days.
                                                                                  Under Phase 1 & 2 Scores select a minimum of seven
What are the current market trends with the Dow, S&P 500,                         ‘Good’ Phase 1 Indicators (green arrows) and a
and Russell 2000? This information may be located in                              maximum of two ‘Bad’ indicators (red arrows). Choose
Investools ‘Investor Toolbox’ under “Analysis Tools’, select                      a F/E score of 3.25 or better and then click ‘Run
‘Market Posture’. This will bring up the Dow, S&P 500,                            Search’. The search may be limited by industry.
Russell 2000 and others. In the IBD Newspaper, Section B,
check the ‘What’s The Market Trend’. Also check the                           You also may create your own personal search strategies and
‘Market Pulse’ box.                                                           save them under ‘My Saved Searches’. Look under the
                                                                              heading ‘Search Engines’ in the left-hand column. Some set-
(9 `((G . *. % 2(V &' # 8< $ " F &" ' (C" > 6 /2-&. /(                        ups are described below.
Industry rank is responsible for at least 50% of a stock price.                 ! Investools Power ProSearches. Under Step 1 click on
This information may be found in Investools ‘Investor                             ‘Technical’. Under Step 2, click on ‘Moving Average
Toolbox’ under ‘Industry Groups’. Select ‘Big Chart’ which                        Ratio’. Under Step 3, click on ‘30 Day’. Then click on
ranks industries from 99 (good) to 0 (poorly. The ‘#’ sign                        ‘Add Indicator’. Step 4 will then become active. Under
represents the number of companies evaluated. The higher the                      ‘Sort Type’ click on ‘In Between’. In the ‘Min Value’
number the more diversified the evaluation. To find the stocks                    type ‘101’ and in the ‘Max Value’ type in ‘200’. Under
in an industry, select ‘Best & Worst Stocks’ in the left hand                     Step 5 select ‘Small Cap’. Check ‘Options Available’
column. To sort quickly select ‘Phase 1/Phase 2 score. In IBD                     and ‘Max Results’ of 25. Then run the search.
Newspaper, Section B, check in ‘IBD’s Industry Subgroup
Ranking.                                                                        ! To construct a MACD search, select ‘Technical,
                                                                                  MACD Breakout, 8/17/9-Day, add indicator, Positive
(M `((G . $ -% # () 1 -(@ 1 N (5 1 " 2. " > . -/ (                                Breakout, 3 days, Options Available and Max Results of
                                                                                  25’. Then run the search. It will look for stocks where
Investools has professionally programmed prebuilt searches to                     the MACD's have turned positive anytime over the past
aid in finding the best. They are described shortly. IBD lists                    3 days.
stocks in each industry and boldfaces leading contenders.
There is an ‘IBD 50’ list that describes the leaders in detail.               You may save these searches. They will be stored in the left-
                                                                              hand column under ‘My Saved Searches’.
(O `((G % $ " () 1 -(V &' # . -(a 1 *6 E . (
                                                                              (CU D (0 . , / N $ N . - (G . $ - % # . /(
Preferably look for securities that trade more than 750,000
shares daily. A stock needs to be liquid; meaning that there                    ! Stocks Just Out Of Bases: often highlights stocks that are
are plenty of buyers when it is time to sell. Occasionally I                      still within a buy entry point.
will consider buying a ‘Penny’ stock when I feel adventure-                     ! IBD’s Top Supply/Demand Companies: highly rated
some, but low volume often means it is difficult to find buyers                   stocks with unusually large trading relative to the
when it is time to sell.                                                          number of shares (published on Thursdays).



John Mohan Consulting LLC                                Enhancing Financial Awareness !2008                                 Updated 8/14/12 - Page 10
 ! International Leaders: companies headquartered outside                  Then, in the lower left-hand corner, choose ‘Show 50’ and
   the US but list on our stock exchanges.                                 ‘matches by Symbol & Ascending’. Click on Scan rectangle
 ! Top World Stocks: the top 15 stocks in the world.                       in the lower right-hand corner and a list of stocks will appear.
 ! IBD Timesaver Table: provide a summary of key price                     Adjust scan criteria as personal parameters become clearer.
   action for NYSE & Nasdaq.                                               Click on ‘Save Scan Query’ and type in a name for this
 ! Weekly Stocks On The Move: stocks with heavy volume                     personalized scan. You will find these daily scans on your
   versus their 10 week moving average.                                    watch list in the section designated as ‘Personal’.
 ! Research Table Review: focuses on only best stocks                      Consider adding ‘Front Vol’ and ‘Back Vol’ in one of your
   within their respective industries.                                     scans to indicate the average volatility on the front month and
                                                                           following month. Click on the arrow by the ‘Back Vol’ to see
(S " 8*&" . (C" = . /21 -/`% 1 E (G . $ - % # . / (                        which stocks pay the highest premium. Click on the top of
If you subscribe to IBD Newspaper, you have access to this                 ‘Back Vol’ column to arrange from most volatility to least.
website. When considering a specific stock, click on ‘Stock                Select stocks with 160% volatility.
Research’ tab, “Stock Checkup’ tab and then enter a symbol.
The resulting search will provide data about that particular
stock and a list of stocks that are best in that industry.                              C"=./211*/(G21%F(+"$*I/&/(
Remember, a fourth place ranking in a 10-member group is
not necessarily a good rating.                                             Once a stock has been selected for analysis, begin by
                                                                           evaluating its financials, market niche, news, and any market
To Find The Leading Sector Stocks. Click on ‘Stock
                                                                           estimates. The bottom-line is, does the company make money
Research’ tab. Click on ‘Screen Center’. Click on ‘Sector
                                                                           (or is ramping up to be quite profitable) or are the financials
Leaders’ and scroll down to ‘Groups’ tab and click on it. This
                                                                           running flat or in a downtrend? Listed below are some of the
should show the best and worst five.
                                                                           criteria Investools deems important when considering a stock.
To Find The Five Best/Worst Industries. Click on ‘Stock
Research’ tab. Click on ‘Premium Tools’ that is a drop-down.               (a 1 *6 E . (< $ 2&1 (5 # $ " ' . /((
Click on ‘Industry Groups’ and scroll down to ‘Groups’ tab                 Volume changes are critical indicators of when to buy or sell.
and click on it. This should show the best and worst five.                 Look for stocks with a volume change of at least 150%.
                                                                             ! Increased volume coupled with rising prices usually
                                                                               means institutions are buying.
                                                                             ! Increased volume coupled with falling prices means
                                                                               institutions are usually selling.

                                                                           (H b! (< $ 2&1 c(ZN -&% . (21 (. $ -" &" ' /[((
                                                                           The P/E is the ratio of a stock´s price to its earnings per share.
                                                                           For example, if a stock is trading at $24 and the earnings per
                                                                           share for the most recent 12 month period is $3 per share, then
                                                                           the P/E of 8 is figured by dividing $24 by $3. To put it
                                                                           another way, the purchaser is investing $8 for every dollar of
                                                                           earnings. IBD research has found the best performing stocks
                                                                           expanded their P/E ratios from 20 to 45. Small and mid-cap
                                                                           stocks expanded from 39 to 87.

(@ S G (G % $ " (@ $ A (G . $ - % # . / (                                  (+ % % 6 E 6 *$ 2&1 " bD &/2-&A 6 2&1 " ((
Customizing Stock Hacker Searches. Click ‘Scan’ Tab.                       Accumulation/Distribution is an indicator that measures
Select ‘Stock Hacker’. On the‘load scan query’ pulldown,                   whether big money is buying or selling a security. If the price
select ‘Create New Scan Query’. In the ‘Scan in’ choose                    is rising and the day’s volume is above average, Acc/Dist
Category choose ‘All Optionable’. Under ‘CRITERIA’,                        increases which is a sign that big money is entering the stock.
select the following from the pulldowns: Volume= min:                      If on days of above-average volume the security price has
750000. Pull down ‘Ask’ in the second rectangle, min: 5.00                 been trending downward, it is a sign that big money is
and max: 50.00. EPS (earnings per share)=+5.00.                            exiting the security.
To add a study or a fundamental filter, click on either of the             We should only trade securities owned by professionally
two boxes in the upper right-hand corner. Then select a study              managed funds. Otherwise the professional money managers
or filter accordingly. If you want to delete any studies or                are not touting (gossiping about) the security to their
filters, click on the ‘red circle X’ to the far right of each study        colleagues. Institutional money managers are responsible for
or filter.                                                                 generating OVER half of the daily trading volume.


John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                            Updated 8/14/12 - Page 11
 ! Volume spikes in the last half-hour of the trading day or              ! Most think insider buying correlates to an immediate
   possibly the last half-hour before lunch time indicate the               jump in price. It doesn’t. Insiders cannot buy on non-
   professionals are buying or selling.                                     public information, but they can buy if they think the
 ! A distribution is ‘significant’ when a market drops more                 company has a great chance of landing something huge.
   than 0.2% on high volume with no retesting of the high.                  It usually precedes a price increase within six months.
 ! Four or five distribution days over several weeks nearly
   always signals the market has topped and headed down.                (C" = . / 21 1 */ (C" / &> . - (@ - $ > &" ' ((
   Investors shouldn’t count distribution days after 25                 Select ‘Investor Toolbox’ and look for ‘Insider Trading’ under
   trading days have passed.                                            the ‘Company Reports’ heading in the left-hand column.
 ! When the market climbs 5% above a distribution day                   Click on it and scroll down the page for data.
   close, it is showing it has the strength to overcome high
   volume selling.                                                      (! H G (J -1 , 2# (Q (\ . $ - (
                                                                        This reflects the percentage of earnings growth over the last
(5 $ /# () *1 , ((                                                      five years. Growth of 25% per year or more is considered
A positive cash flow is important. Companies with double-               promising. Note, not all profits may be distributed to the
digit annual cash flow growth over the past five years                  stockholders. Some may be retained to use for further
outperformed the market by 286 percent when screened every              company expansion. Profits are distributed as “dividends”.
quarter (Tycoon Report Jan. 2012). Sometimes a company                  Novice Question: Why not buy stocks shortly before
may spend a significant amount of cash to acquire additional            dividends are paid and make a quick profit? Answer: usually
valuable assets signifying a negative cash flow that is not bad.        the price of the stock usually falls the same amount as the
Continuing negative cash flow is a serious warning that a               dividend payout in order to fend off investors looking for
company may be in trouble.                                              riskless profits.
Cash flow growth isn't the end-all and be-all in fundamental
analysis. There are many other factors that go into picking             (H -&% . (< $ " F ((
winning stocks. But a company that's growing its cash flow              This measures a stock's price performance based on a
by an average of 10 percent or more every year for five years           weighted sum of quarterly returns with heaviest emphasis
is clearly doing something right and is an excellent place to           placed on the most recent three months.
start looking for great stocks. Past greater performers include:
HAYN, QCOR, and RFMD.                                                   () b ! (G % 1 -. (
                                                                        This is a score provided by Investools. It is a combination of
(D . A 2b ! _ 6 &2I (< $ 2&1 ((
                                                                        the Financials and Estimates score. It is expressed on a scale
This is the value of a company if it were liquidated. It                of 1.0 to 4.0 with scores above 3.25 being very positive.
measures how much debt the company has compared to its
equity. The lower the debt ratio, the more financially sound            (! /2&E $ 2. /(
the company. But that doesn’t always mean the stock is a                Estimates look at what professional market analysts are saying
good buy.                                                               about a company’s future potential. If analysts like the growth
                                                                        potential of a company, it is reflected in a high estimate score.
(C" / &> . - (@ - $ > &" '(8(7 . ' $ *((
                                                                        A projected growth of 20%+ for the next five years is positive.
This indicator shows the buying/selling patterns of company
insiders --- those in the know --- such as the CEO, CFO, and            () &" $ " % &$ */(
COO, (versus directors who typically know less than the                 Look for continued growth in revenue and earnings. Compare
people managing the company on a day-to-day basis).                     the numbers quarter-by-quarter and year-by-year because
 ! Insider selling is typical. Usually the selling ratio is 43          some businesses are cyclical such as UPS or FEDX. This
   to one and in small quantities. But if insiders are selling          information provides insight into the past performance and
   large quantities near a low price, watch out!                        helps discern whether the management is operating wisely.
 ! If key insiders are buying large quantities with their own           (C" = . / 21 1 */ () &" $ " % &$ */(5 # $ -2(
   money --- it is bullish. Look for ‘cluster buying’ when
   they all the key insiders are buying the same time at the            Select Investor Tool Box. Select Graphs. Type in a stock
   same price.                                                          symbol. The data on that page links to additional information
                                                                        in the left-hand column. Look for ‘Financials’ under the
 ! When an insider exercises his right (option) to purchase
                                                                        ‘Phase 2’ heading in the left-hand column. Click on it and
   company stock at a cheaper price and then immediately
                                                                        scroll down the page for data.
   sells those shares, it doesn’t necessarily mean he is
   losing faith in the company if he still retains a large
   number of shares.



John Mohan Consulting LLC                          Enhancing Financial Awareness !2008                                    Updated 8/14/12 - Page 12
() *1 $ 2(G # $ -. /(+ = $ &*$ A *. (                                           ! O’Neil prefers to see two straight quarters of decline
                                                                                  before turning negative on a company’s earnings.
The Float is the total number of shares traded by the public. A
company may have 12 million outstanding shares, but only                      (+ (d (+ " " 6 $ *(! $ -" &" ' (C" % -. $ /. / (
10 million shares are available for public trading (the Float).
                                                                              Annual earnings growth should be at least 25% for the last
Sometimes companies may buy back some of the ‘float’                          three to five years. Some of the biggest market winners had
shares to offset stock given to its executives or to offset the               annual earnings growth of 50%+ before starting their big run-
sudden sale of a large number of its insider shares such as                   ups. A trend of three to five years of annual earning increases
when a CEO liquidates in order to raise some cash. Other                      coupled with recent strong earnings in the last several quarters
reasons are to temporarily boost its value so insiders can sell               increases the probability of success in an up-trending market.
their shares at a higher price or provide shareholders gains in               IBD provides charts that include this data.
lieu of making dividend payments to keep operating capital
and reduce individual taxes.                                                  (0 (d (0 . , (H -1 > 6 % 2/ f(4 $ " $ ' . E . " 2f(1 -(V &' # /(
(U . 2$ (a 1 *$ 2&*&2I ((                                                     It seems that anything new that makes our lives richer, extends
                                                                              our health, or increases our productivity, is desirable. Old
The Beta measures the underlying stock's volatility (price                    companies or newly created companies that provide these new
swing) in relation to S&P 500. A beta of 1.0 means the                        things or new services tend to increase in value because of
stock’s volatility is equal to the volatility of the S&P.                     increase in sales. Often these companies are readily found by
A beta of 1.5 means a stock is 50% more volatile than the                     looking at the IBD “52-Week New Highs & Lows” chart.
S&P. A beta of 0.50 is 50% less volatile. Generally, the safer
slower stocks, like utility stocks, have a lower beta (usually                  ! The best performers are relatively young companies that
less than one) while more risky stocks have a higher beta.                        have gone public in the last 15 years. They often have a
                                                                                  market niche few rivals can match and are readily being
(5 1 E N $ -$ 2&= . (G 21 % F (+ " $ *I / &/(                                     acquired by mutual funds.
Compile a list of comparative stocks that trade over 750,000                    ! When a strong market/industry rally takes hold, these
and are optional and then compare them side by side.                              companies have the greatest potential to hit new highs
                                                                                  quickly and make stunning runs.
(C" = . / 21 1 */ (5 1 E N $ - $ 2&= . (5 # $ - 2(
                                                                              (G (d (G 6 N N *I (P (D . E $ " > (
Select Investor Tool Box. Select Graphs. Type in a symbol.
Select ‘Stocks in Industry Group’ in the left-hand column.                    When there are plenty of buyers and few sellers, prices
List the promising stocks. Then select ‘Industry Comparison’                  increase. When demand for stock shares increases, the
and type in some symbols.                                                     company with the least amount of shares available will
                                                                              experience a greater price increase. The greater the number
                                                                              shares available (for sale) the less the price performance.
                CUD(5+0(G7C4(+"$*I/&/(                                        Usually older larger companies with billions of shares are
                                                                              more sluggish than companies trading only 50 million shares.
                                                                              Note, the larger the percentage of management ownership,
William O'Neil, founder of Investor’s Business Daily
                                                                              typically the greater the growth potential.
Newspaper (IBD), developed the ‘CAN SLIM’ investing
analysis criteria that is based upon many years of research and               (7 (d (7 . $ > . -/f(0 1 2(7 $ ' ' $ -> /(
readily displayed in IBD. The following is a summary of the
analytical criteria he developed.                                             There are many ‘wannabes also-ran’ companies. Their price
                                                                              growth results are average at best or a flash-in-the-pan. Select
(5 (d (5 6 --. " 2(e 6 $ -2. -*I (H -1 B&2 (C" % - . $ / . / (                best-of-breed stocks from the top three in strong industry
                                                                              groups with the best quarterly/annual earnings growth.
Strong growth in earnings, more than any other factor, is
what defines the market leaders that potentially are going                      ! Look for stocks in fast-rising industries and sectors. IBD
to experience big price advances. IBD recommends looking                          research shows 49% of a stock’s price rise is tied directly
for stocks with a profit gain of at least 25% compared to the                     to the performance of the industry and sector itself.
same quarter of the previous year. IBD found that three of                      ! In a bull market correction, the stocks that drop the least
every four such stocks boosted profits by more than 70% in                        are usually the best on rebound.
their most recent quarter BEFORE their big run-ups.
 ! Increasing profits supported by increasing growth in                       (C(d (C" / 2&26 2&1 " $ *(G N 1 " / 1 - / # &N(
   sales is a positive. But sometimes companies boost                         When big traders (mutual funds, pension plans, etc) are buying
   earnings by cutting costs. Cost cutting activities can                     millions of shares, it is a good sign the price will run-up. But
   work for only a short period of time.                                      not all mutual funds are equal in quality. Follow the leaders of
 ! A warning ‘possible sell signal’ is generated when                         the best mutual funds. Take a glance at IBD’s Mutual Funds
   profit growth slows by two-thirds or more from the                         section each day to see what “Growth Funds Leading The
   previous growth rate.                                                      Market’ own, are purchasing, or are selling.

John Mohan Consulting LLC                                Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 13
Also check the Accumulation/Distribution Rating and                      ! Brand recognition: a well-known company with strong
compare it to the daily volume of a 21-day moving average to               core products in its industry.
get a fairly up-to-date picture of what is happening. Often the          ! Earnings consistency: a growing company with no
big traders buy one day and then wait four to eight days for a             negative years of earnings growth in past 5 years. If the
slight fall back before making another larger purchase. Note,              company had one year of negative earnings in the past
when an excessive amount of funds own a stock the usual                    five years, then it was not considered.
result is slow growth.
                                                                         ! Long-term debt that is less than two times the
(4 (d (4 $ -F . 2(D &-. % 2&1 " (                                          company’s net income. This ensures the company has
                                                                           not taken on too much risk through its borrowings.
Track the trend averages using the S&P, DJIA, and NASDAQ.
Also consider industries and sectors trends. Markets are either         ! Return On Equity of 15% or more.
in a confirmed uptrend helping prices to rise, an uptrend under         ! Free cash flow that is positive. It is the amount of
pressure that tends to confuse the issue, or a correction in              money that is free to be spent after expenses are paid.
which prices are falling.
                                                                        ! Returned earnings that is 12% to 15% or better.
(G . *. % 2(CU D (5 -&2. -&$ (                                          ! The current operating margin and net profit margin of
Listed below are some of the criteria IBD deems important in              the company is greater than or equal to the current
addition to the factors already discussed by Investools.                  median of its industry.

 ! ROE - Return On Equity. Calculated by dividing net                   ! The total liabilities to total assets ratio for the last fiscal
   annual income by average shareholder’s equity over the                 quarter (Q1) is less than or equal to the industry’s
   last two year. The greatest growth stocks in the last 50               median total assets to total liabilities ratio for the same
   years had had a 17%+, meaning a $1.70 was earned on                    time period.
   each dollar of equity per year.                                      ! The seven-year growth rate in earnings per share from
 ! SMR Rating. A proprietary rating pioneered by IBD to                   continuing operations ranks in the top 75% of the entire
   help investors identify companies with superior Sales                  database.
   Growth, Profit Margins, and Return on Equity ratios.                 ! The three-year growth rate in earnings per share from
   When young companies really start selling product or                   continuing operations is greater than or equal to the
   services, the potential for huge growth is great.                      seven-year growth rate in earnings per share from
 ! EPS - Earnings Per Share. A target rating of 80+                       continuing operations.
   means that the stock has out performed 80% of the                    ! The earnings per share from continuing operations for
   market in terms of profit growth. This scale ranges from               the last 12 months and for each of the last seven years is
   1 (lowest) to 99 (highest). Stocks with an EPS growth                  positive.
   rate of at least 25% compared to a year-ago suggest a               As a side note, John Templeton started in 1939 using a
   company has products that are in strong demand. If the              variation of this strategy. He bought every small-cap stock
   EPS continues to grow, this generally impacts the price             that traded for $1 or less. In four years he quadrupled his
   quite favorably. Note, EPS numbers can be impacted                  money and is now worth $1.8 billion today.
   favorably by stock buybacks to reduce the number of
   shares. This doesn’t mean the company is continuing to
   have strong sales growth that is a negative factor.                                  (4626$*()6">(G.$-%#./(
 ! RS – Relative Strength. This is a measure of a stock’s
   price performance over the last twelve months compared              I no longer invest in mutual funds because sellers cannot get
   to all stocks in the IBD database. The rating scale ranges          out of a mutual fund during intraday trading. As a result
   from 1 (lowest) to 99 (highest) with more weight given              there is no protection if the market gaps down severely or
   to the latest three months of performance. Stocks with              crashes during the day. I invest in ETFs instead which are
   the highest ratings tend to go higher while the weaker              somewhat similar to mutual funds only with less active
   ones die off.                                                       portfolio management, allow protective Stops.
                                                                       On the plus side, mutual funds require little monitoring and
          X$--."(U6BB.2T/(+"$*I/&/(                                    can be highly successfully if the right industry is chosen.
                                                                       When I did invest in mutual funds I used no-load funds
                                                                       exclusively and stayed with top families such as Vanguard,
Warren Buffet focuses on investing in small-cap low-priced             Fidelity, and T.Rowe Price.
stocks. Here’s why. If you buy a $100 stock and it goes up
$1, you’ve made only 1%. But if you buy a $5 stock, a $1 gain            ! No-Load Mutual Funds where there are no fees
equals a 20% profit. Low-priced stocks of rapidly expanding                charged for buying or selling. On an average these tend
businesses will provide some of the biggest gains. The                     to be more profitable than loaded funds.
following are analysis factors Buffet considered important.


John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                           Updated 8/14/12 - Page 14
      Loaded Mutual Funds where an upfront fee or exit fee
      is charged to enter or cash out a fund.
                                                                                        5#.%F(\16-(R">.-/2$">&"'(
The following are examples of mutual funds in quality                           1. Describe the initial search sequence.
families. All symbols for mutual funds end in “X”.
                                                                                2. Why are significant volume changes important?
                   Mutual Fund Examples                                         3. Explain Accumulation/Distribution.
 CAN SLIM         CANGX       Internet                   INPIX                  4. Institutional money managers’ account for what volume?
   Metals         VGPMX       Foreign                   MINDX
  Energy          VGENX        Bond                     TSHYX                   5. Explain the Debt/Equity Ratio.
 Real Estate      PETAX      Balanced                   PVSAX                   6. Explain the impact of insider trading?

IBD also provides detailed information about mutual funds.                      5. Explain the concept of Float Shares Available.
                                                                                6. What is Beta Volatility?
(CU D (4 6 26 $ *() 6 " > (D $ 2$(
                                                                                7. Summarize the major components of the IBD “CAN
Usually mutual fund & ETF information in IBD is found in
Section A. In the lower left-hand corner is detailed                               SLIM” analysis.
information on how to read the charts.                                          8. Explain ROE, Return On Equity.
Morningstar.com provides a list of mutual funds that may be                     9. Why did Warren Buffet invest in small-cap low-priced
arranged by total return year-to-date. Morningstar.com
provides many FREE services with additional assistance                             stocks?
available for a minimal charge. I have used the free services.                 10. What is the difference between a No-load Mutual Fund
Below is one way to search for and approach mutual fund
analysis.                                                                          and a Loaded Mutual Fund?

(4 1 -" &" ' /2$ -(4 6 26 $ *() 6 " > (G . $ -% # (((
Open Morningstar.com. Click on the ‘Funds’ rectangle near
the top of the page. In the left-hand column are many
different screening tools. Under ‘Fund Performance’ select
‘Top 1-Year Performers’ and then adjust the options to your
personal preferences. Another way to search is to click on
‘Fund Screener’ under ‘Find a Fund’ in the lower right-hand
corner. Adjust the ‘Set Criteria’ accordingly. For practice
chose ‘Domestic Stock’ under Fund group, ‘All’ under
Morningstar Category, ‘3 years’ under manager tenure, ‘no-
load funds only’ under Load funds, and check four and five
star ratings. Then click ‘Show Results’. When the results
come up, click on ‘YTD Return’ to find the most profitable
mutual funds since the start of the year.




John Mohan Consulting LLC                               Enhancing Financial Awareness !2008                          Updated 8/14/12 - Page 15
                            U6IbG.**(@&E&"'(C">&%$21-/(
The following material deals with technical analysis, using
                                                                       (@ S G (a 1 *6 E . (+ = . -$ ' . (G 26 > I (H -1 ' -$ E E &" ' (
predictive tools to help determine when to buy, sell or NOT
trade. Not trading is a strategy, especially when the market           The Volume Average Study tracks changes in the amount of
is really choppy.                                                      shares that are traded daily compared to the average shares
                                                                       traded over a select time period. When the volume rises
                                                                       dramatically above its moving average it may indicate a strong
               a1*6E.(D-&=./(@-.">(                                    upward or downward trend is developing. A decrease in
                                                                       volume implies price complacency with no anticipated change
                                                                       unless the price is bouncing against support or resistance.
A trend is the direction of movement of a market, industry, or
individual security. A significant increase in trading                 TO PROGRAM select ‘Charts’ tab. Select ‘Charts’. Click
volume (150%+) is strong trend indicator. As individuals,              on ‘dripping oil can’ symbol in upper right-hand corner. ‘Edit
the volume we trade has very little impact on the market. Our          Strategies & Studies’ will pop up. Click on ‘Studies’ tab to
purchase or sale of a thousand shares is almost irrelevant             the far left. Scroll down to ‘VolumeAvg’ and highlight. Click
except in penny stocks that are high risk trades because there         on ‘Add Study’ at bottom of the column. Look at ‘Studies on
may only be a few buyers when you want to sell. It is only             lower subgraphs’ and highlight ‘VolumeAvg’ so ‘Properties:
when the professional money-managers spend millions do                 VolumeAvg’ pops up. Change ‘Inputs: length’ to the number
trends begin to develop and prices rise or drop significantly.         21. Make sure the box ‘Show study’ is checked. You may
And I have noticed . . .                                               adjust the colors and line sizes and styles if you please. Click
     Huge volume changes often occur the last                          ‘OK’ and the study will show up on your chart. It will show
                                                                       the daily volume and the 21-day average line comparison.
          half hour of a trading session.
                                                                       (7 1 % $ 2&1 " (S B(C" = . / 21 1 */ (a 1 *6 E . (@ -$ % F &" ' (
I have been told if a security trend and market trend match
with supporting high volume, the security price has a 90%              In Investools the volume information is just above the graph
chance of increasing overnight.                                        and in the right-hand column.
Professional money managers tend to buy large quantities and           (7 1 % $ 2&1 " (S B(CU D (a 1 *6 E . (@ - $ % F &" ' (
then wait four to eight days before buying again. So when
there is a dramatic change in daily volume compared to its             In IBD’s Investors.com. select ‘Stock Checkup’. Enter a stock
average daily volume, PAY ATTENTION!                                   symbol. Scroll down to ‘Technical Performance’ and the
                                                                       volume related information is there.
 ! Rising prices with high volume mean institutional
   professional money managers are buying. The larger
   the volume increase, the better chance it is a true
   breakout. During major breakouts it is not uncommon
                                                                                             @IN.(SB(@-.">/(
   for new market leaders to show volume spikes from
   200% to 1000%. To avoid a false breakout, many                      Trends are characterized by a series of zigzags that resemble a
   analysts agree . . .                                                series of peaks and valleys. There are three trends:
                                                                         ! An uptrend is a series of higher highs and higher lows.
      A breakout is typically confirmed when
       there is at least a 3% penetration of                             ! A downtrend is a series of lower highs and lower lows.
               support or resistance.                                    ! A neutral trend is horizontal peaks and troughs and
                                                                           reflects a period of indecision.
      As an example, if a stock is bouncing through a $25
                                                                       If a trader is wrong about the trends --- all other factors are
      resistance point, a breakout requires at least a 75 cents
                                                                       basically worthless. What is popular one moment may be a
      rise to $25.75 to confirm the new trend (3% x $25=.75).
                                                                       ‘dog’ shortly thereafter. Trends are your friends. Money is
 ! Rising prices with little volume is often a sucker’s rally          always flowing somewhere!
   and novice buyers tend to be taken to the cleaners
   because the price rise lacks support by institutions.               (4 1 = &" ' (+ = . -$ ' . /(C> . " 2&BI (@ -. " > / (
 ! Falling prices with high volume mean institutional                  A simple way to see market and security trends and determine
   money managers are selling.                                         support/resistance levels is using Moving Averages (MAs) of
                                                                       differing time periods. Look at a three-month daily charts to
 ! Falling prices with little volume may mean a strong
                                                                       determine medium-term trends. Then check out long-term
   base of support is forming for a possible uptrend.
                                                                       charts of a couple of years on a weekly or monthly basis.


Investment Tutoring LLC                           Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 16
Finally, when contemplating a trade, check the volume and                    (C" > 6 / 2- I (@ - . " > /(
other timing indicators on a two day-chart with five-minute
                                                                             Industry trends are a subcategory of sector trends. This is a
intervals to determine entry/exit points.
                                                                             place where individual stocks are listed.
A Simple MA is the sum of all the prices of the previous time
periods divided by the number of time periods (days for                        ! When new companies are making highs and old
example) selected. The Exponential MA (EMA) weights the                          companies declining, the market may be declining.
near-term prices heavier than prices that are further out. MAs                 ! When price growth slows on low volume and the
are lagging indicators that determine the path of least                          market average recovers less than half of a previous
resistance. Below are two MAs, one smoother 49-day MA                            day’s high, usually a trend is coming to an end.
and a choppy 21-day MA.                                                        ! Professional money managers know the New York
                                                                                 Stock Exchange (NYSE) handles most of the
                                                                                 institutional trading. The Over-the-Counter Exchange
                                                                                 (OTCBB) is considered the small investor’s exchange.
                                                                               ! Confusing Data. If the NYSE is selling (profit-taking
                                                                                 or getting out) and the OTCBB is buying (unaware of
                                                                                 what is happening with institutional money) the small
                                                                                 investor generally loses money.

To set up moving average trend lines on your TOS charts,                     (C" = . / 21 1 */ (C" > 6 / 2- I (@ - . " > (G . $ - % #(
refer to the chapter on Customizing Layouts and Worksheets
                                                                             TO PROGRAM the search click on the ‘Investor Toolbox
near the end of these notes.
                                                                             ‘tab’ and ‘Industry Groups’ tab. Select ‘Big Chart’ in the left-
                                                                             hand column. Select ‘By Rank’. The Big Chart ranks
(7 $ -' . (4 $ -F . 2(@ - . " > / (                                          industries relative to the overall market with 99 being high and
Market trends are determined by an analysis of the buying and                zero being the worst.
selling volume of the Dow, NASDAQ, S&P 500, Russell, etc.                    The number below # and behind Symbol represents the
Large market trends display the following attributes.                        number of companies being tracked in that industry. By
                                                                             clicking on a industry (displayed in a blue font) and then using
         TREND                        BULLISH           BEARISH              the left-hand column, the best and worst stocks are readily
  Institutional Players                Buying             Selling            displayed. Then sort the stocks by volume.
 Long Term Cash Inflow                Expanding         Contracting
                                                                             (5 $ *. " > $ -(@ -. " > / (
(C" = . / 21 1 */ (4 $ - F . 2(@ -. " > (G . $ -% # (                        Some things happen on a recurring basis which cause stock
                                                                             prices to rise and fall almost like clockwork. For instance,
TO PROGRAM the search click on the ‘Investor Toolbox
                                                                             Christmas goods are usually shipped in August and September
tab’. Click on ‘Strategies’ tab. The left-hand column provides
                                                                             influencing the stock prices of UPS or FEDX. India’s
insight into a variety of market information. Remember a
                                                                             wedding season increases the demand for gold.
forecast is just a prediction (a scientific guess).

(G . % 21 -(@ -. " > /(
Sector trends deal with an overall analysis of similar
companies. Listed below are ETFs that cover some sectors.
                              Sector ETFs
     Internet             HHH        Oil Service           OIH
    Materials             IYM           Retail             PMR
   Industrials             IYJ        Consumer             IYC
   Transport              IYT          Telecom             IYZ
   Real Estate            IYR         Big Tech            QQQQ
     Software              PSJ          Media              PBS
      Semis                PSI         Biotech             PBE
      Water               PHO        Health Care           IYH               (S N N 1 /&" ' (@ -. " > / (
     Defense              PPA       Construction           PKB
   Pharmacy               PPH          Utilities           XLU               If the market is retracing significantly over a period of several
    Insurance              PIC        Financials           IYF               weeks or months and a few stocks lost little or actually gained
                                                                             in value during this time, these stocks deserve a look. They
    Nanotech              PXN        Alt. Energy          PBW
                                                                             are often the leaders when the market turns upward.



John Mohan Consulting LLC                               Enhancing Financial Awareness !2008                                 Updated 8/14/12 - Page 17
            G6NN1-2(P(<./&/2$"%.(7.=.*/(                                                      5#$-2(H$22.-"/(
Support/resistance levels (a price channel) are similar to the         The following are some commonly seen patterns that indicate
sides of a road where the price of a stock ranges between past         where support/resistance levels may be located. Knowledge
historical high/low boundaries. Support and resistance levels          of these help determine timing of entry/exit points.
are determined by observing past price movements.
        Prices never go straight up. There are                         (D 1 6 A *. (P (@ -&N *. (@ 1 N / (U . $ -&/# (< . = . - /$ */ (
        always price retracements (fall-backs).
(G 6 N N 1 -2(7 . = . *((
Support Level (floor) is the lowest level to which a price falls
and from which it keeps bouncing off without declining
further. It is where buyers jump in and start purchasing.
                                                                       These double and triple tops appear only after an uptrend and
(< . /&/ 2$ " % . (7 . = . *((                                         when the price fails to break through its resistance level two or
Resistance Level (ceiling) is the highest level to which a price       three times followed by an increase of selling volume. It is
raises and from which it keeps bouncing downward without               thought when a security trades up to resistance it has become
rising any higher. It is where the sellers become active and           overbought and ripe for a fall especially when there is low
take profits. Note: if a stock is bouncing downward against            volume trading.
resistance, tighten a TRAILING STOP by 2% to 4% to protect             A low volume rebound in price is an indication that
the majority of the profits rather than exiting the trade. This        institutional investors are cooling on the stock. Typically the
allows the stock to continue to advance if it still has legs.          price of the stock drops below its support level when the
                                                                       previous pattern is observed. Tight Stops are recommended.
(5 # $ " " . */ (
The support/resistance levels provide outside boundaries for           (D 1 6 A *. (P (@ -&N *. (U 1 221 E / (U 6 **&/# (< . = . - /$ */ (
price channels. These channel boundaries may be drawn as
trend lines on your charts. A down trending channel is
typified by lower highs and lower lows as seen below.




                                                                       These appear only after a downtrend and are considered only
                                                                       reliable if they extend at least seven weeks. The key
                                                                       characteristic is the price fails to break its support level two or
                                                                       three times on low volume followed by increased buying
                                                                       volume. Then the price typically rises above resistance.

An up-trending channel is typified by higher highs and                 (V . $ > ($ " > (G # 1 6 *> . -/(< . = . -/ $ */ (
higher lows. A nuetral-trending channel is typified by
continual bouncing off neutral or flat trend lines.




                                                                       Head & Shoulders Top                   Head & Shoulders
                                                                                                                  Bottom
                                                                       This pattern displays three peaks or valleys with the middle
                                                                       one being higher or lower than the two outside peaks or
                                                                       valleys. The neckline is the support or resistance level which,
                                                                       when shattered in higher volume, is a trend reversal sign.


John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 18
         The Head & Shoulders Top is the #1                               ! The reverse is true when the indicator drops below the
          performing bearish chart pattern.                                 20 % line it means the security is selling near its lowest
                                                                            prices. If the indicator rises above the 20% line, a
The pattern usually signals a reversal and an average price                 bullish upward trend is indicated. .
decline of 22% and only a 4% failure rate. It typically takes
five to six months to form.


                        @&E&"'(@11*/(
Timing tools are comprised of indicators that display the
entire range of a price movement. Oscillators have range
boundaries such as zero to 100%.

(4 + 5 D (7 &" . / (P (V &/ 21 ' -$ E (U $ -/ ((
The MACD (Moving Average Convergence/Divergence) is
one of the most reliable lagging indicators. It uses the
exponential moving average (EMA) to predict trend changes
on daily, weekly, or monthly charts. The typical MACD is a
12-day EMA less the 26-day EMA. The shorter EMA (12-
day) is faster and responsible for most of the MACD
movement. The longer MA (26-day) is slower and less
reactive to price changes in the underlying security. A 9-day
EMA of MACD is then plotted along side to act as a signal               (@ S G (G 21 % # < G C(
line to identify trend reversals. Usually, the longer and sharper       TO PROGRAM select the ‘Charts’ tab. Select ‘Charts’.
the divergence, the better the ensuing signal.                          Click on ‘dripping oil can’ symbol in upper right-hand corner.
The MACD Histogram attempts to interpret the MACD and                   ‘Edit Strategies & Studies’ will pop up. Click on ‘Studies’ tab
predict trend changes. It is less reliable than the MACD so             to the far left. Scroll down to ‘StochRSI’ and highlight. Click
other indicators should be used to confirm MACD                         on ‘Add Study’ at bottom of the column. Look at ‘Studies on
Histogram predictions. The histogram bars consists of                   lower subgraphs’ and highlight ‘StochRSI’ so ‘Properties:
positive (green bars) when MACD is above its 9-day EMA                  StochRSI’ pops up. Change ‘Inputs: rsi length’ to the number
and negative (red bars) when MACD is below its 9-day EMA.               7. ‘overbought’ to 80. ‘over sold’ to 20. ‘rsi choice’ to ‘RSI
                                                                        EMA’. ‘rsi price to ‘Volume’. ‘k period’ to 7 and ‘d period’
                                                                        to 3. Make sure the box ‘Show study’ is checked. Click
                                                                        ‘OK’ and the study will show up on your chart.

                                                                        (U 1 **&" ' . -(U $ " > /(ZU U /[(

Weekly MACD Histograms may be used to generate a long-
term signal in order to establish a tradable trend. Only short-
term signals that agree with majors trend are considered.

(G 21 % # $ /2&% /(
Stochastics measures at what point the price of a security is
within the entire price range of the security over a given
period. Stochastics depicts who is dominating --- BUYERS
buying at higher prices or SELLERS selling at lower
prices. It is also used to predict upcoming trends.
                                                                        BBs show the price range and current volatility for the last 20
There are two default bands on a Stochastics chart. They are a
                                                                        days. BBs are comprised of two standard deviation lines,
75% to 25% price range that may be adjusted to an 80% and
                                                                        encompassing typically a 20-day simple moving average. BB
20%. A reading of 80% or higher means the security is in the
                                                                        expects to encompass 95.2% of the prices being scrutinized.
upper 20% of its highest price trading range. A reading below
the 20% price range indicates the security may be oversold.               ! Narrow Bands Breakout. Narrow bands indicate a
                                                                            security is trading within a tight trading range and has
 ! When the indicator crosses above the 80% line it means
                                                                            low volatility. Often, contracting BBs provide advance
   people are buying at higher prices and the security is
                                                                            notice of an impending new trend. Ideally, both bands
   near the top of its highest prices. If the indicator drops
                                                                            curve toward each other, forming a very tight channel.
   below the 80% line a bearish signal is generated.

John Mohan Consulting LLC                          Enhancing Financial Awareness !2008                         Updated 8/14/12 - Page 19
      Then, suddenly the security may make a strong
      directional move, breaking out of the channel.
      Frequently the first move out of extremely narrow
      BB is false and will be reversed immediately.
 ! Trend Reversal. It is often thought when a security
   trades up to its upper BB it has become overbought and
   ripe for a fall. When that same security falls and touches
   or even penetrates its lower BB, it is thought to be
   oversold and ready to bounce upward.
                                                                       (H $ -$ A 1 *&% (G + < (ZH G + < [(
(4 1 E . " 26 E (5 -1 //1 = . - (                                      The PSAR is a ‘potential stop and reverse’ indicator mainly
The Momentum Crossover simply takes the closing price of               used by short-term traders to determine price momentum. It
the security seven days ago and subtracts it from the current          helps traders determine where stop orders should be placed. It
closing price. The “crossover” arrow appears when there is a           assumes a trader is fully invested and wishes to always have
reversal from negative to positive OR positive to negative             their money at work in the market.
happens.                                                               The PSAR is displayed as a series of dots placed above or
                                                                       below the current price. A dot is placed below the price
(+ = . -$ ' . (@ -6 . (< $ " ' . (Z+ @ < [(
                                                                       when the trend is upward and above the price when the
ATR is an indicator that measures price swings. It is not a            trend is downward. When the dots reverse direction and are
directional indicator. ATR reflects the degree of interest or          placed on the opposite side, a transition is indicated. Many
disinterest in a price move. A dramatic price movement in              traders choose to place their stop loss orders at the PSAR dot
either direction results in a sharp upturn on the ATR price            because a move beyond this will signal a reversal.
chart.
                                                                       (H -&% . (a 1 *6 E . (@ -. " > (ZH a @ [
The ATR may be used to validate the enthusiasm behind a
price breakout. A bullish reversal on a chart with an increase         The PVT is a leading predictor of future price movements.
in ATR would reinforce the reversal. A bearish support break           A rising PVT indicates new money is flowing into the
with an increase in ATR would show strong selling pressure             security. An accelerating PVT indicates ‘the masses’ are
and reinforce the support break.                                       joining the new trend. If the PVT levels off, it is often an
                                                                       early warning the trend is finishing. A declining PVT
                                                                       indicates the smart money is liquidating. A volume jump of
                                                                       150% usually means institutions are starting to buy or sell.
                                                                       Low volume selling is not significant.

                                                                       (H &= 1 2(H 1 &" 2/ (ZH H [(
(5 # $ *F &" (4 1 " . I () *1 , (Z5 4 ) [ (                            Pivot points are one-day support and resistance trend
                                                                       indicators that are used to determine entry and exit points if a
The CMF indicator signals the flow of money into or out-of a           security is at either a point of support or resistance. PPs
security. A zero line is drawn across the chart. The more              consist of three support and resistance levels.
divergent the reading, above or below the zero line, the
stronger the trend signal.                                             (5 $ " > *. /2&% F /(Z5 G / [(
                                                                       The Japanese invented candlesticks in the 1600's to help
                                                                       predict trend. CSs are made up of both solid and hollow
                                                                       candle bodies with ‘wicks’ at both ends of the candles.
                                                                         ! A HOLLOW CS means the price of the stock is
The CMF indicator does not account for Gaps. Gaps occur                    rising. The opening price is at the bottom of the candle
when the lowest price traded is above the high of the previous             body and the closing price is at the top of the body. A
day or, conversely, when the highest price traded is below the             hollow CS indicates a strong interest in buying.
previous day’s low.                                                      ! A SOLID CS indicates heaviness; the price is falling
                                                                           as selling occurs. The opening price is the top of the
(4 % 5 *. **$ " (S /% &**$ 21 - (                                          candle body and closing price at the bottom of the candle
The McClellan Oscillator is an advance/decline momentum                    body.
indicator of the market that is based on the stocks in the               ! WICKS are the thin lines above and below the main
NYSE. It takes the number of advancing issues and subtracts                candle body. The bottom wick represents the low price
the number of declining issues. Then the 39-day exponential                traded that time period. The top wick signifies the high
moving average of Net Advances is subtracted from the 19-                  price for that time period.
day exponential moving average of Net.


John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 20
 ! A SOLID GREEN COLORED CS means the day’s                            The following are some of the more common candlestick
   closing price was lower than the opening price, but the             patterns.
   green means the day’s closing price was higher than
   the previous day’s closing price.
                                                                       Doji look like a cross because the open and
                                                                       close are exactly the same. Dojis are often a
                                                                       sign of market consolidation and represent a
                                                                       potential reversal when occurring at support
                                                                       and resistance levels on high volume.


                                                                       Bullish Hammer & Bearish Hangman are REVERSAL
                                                                       CANDLES that look the same but occur in different locations.
                                                                       A true hammer or hangman has an extended
                                                                       wick that is 2-3 times longer than the body of
                                                                       the candle and the opposite wick is very short
                                                                       or non-existent. It doesn’t matter if the
                                                                       candles are solid or hollow. Hammers
                                                                       occurring at the bottom of long down trends
                                                                       are said to be hammering out a solid support
                                                                       level. A Hangman occurring at the top of a
                                                                       long uptrend are predictive of a upcoming
                                                                       drop and require additional confirmation from other tools.


Candles are more reliable if two or three candles in a row             Bearish Shooting Star. This is a predictive
indicating a particular trend receive confirmation from other          reversal candle that occurs at the top of a
timing tools such as the MACD or Stochastics.                          long uptrend and is predictive of an
                                                                       upcoming drop. The star is fizzling out. It
      CSs patterns near support or resistance                          looks similar to the Hangman except the wick
      with high trading volume predict short-                          configuration may be slightly different in length.
       term reversals of 5 to 15 units (days,
      minutes, etc. depending upon the time                            For more information about candlesticks, read Japanese
                  period selected).                                    Candlestick Charting Techniques by Steve Nison. He is
                                                                       considered one of the foremost authorities on this topic. Also,
 ! Buying Pressure. Long hollow candlesticks show                      americanbulls.com provides additional candlestick
   strong buying pressure if there is volume support. They             understanding.
   indicate prices have advanced significantly from open to
   close and buyers were aggressive.
 ! Reversals. After extended declines, long hollow
   candlesticks may indicate a potential bullish turning
   point or support level.
 ! Hollow candles with no lower "shadows" indicate a
   strong uptrend. This is the time to add to a long position
   or exit short positions.
 ! One candle with a small body surrounded by upper
   and lower shadows indicates a trend change. Risk-
   loving traders might buy or sell here, while others will
   wait for confirmation before going short or long.
 ! Filled candles indicate a downtrend. This is the time
   to add short positions and exit long positions.
 ! Filled candles with no higher shadows identify a strong
   downtrend: stay short until there's a change in trend.




John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                         Updated 8/14/12 - Page 21
                            Highly Reliable Bearish Reversal & Bearish Continuation Candle Patterns




           Dark Cloud Cover                   Kicking                Abandoned Baby              Evening Star




           Evening Doji Star          Identical Three Crows         Three Inside Down       Three Outside Down




        Upside Gap Two Crow           Falling Three Methods              Engulfing           Three Black Crows


         5G/(!BB.%2&=.($2(G6NN1-2b<./&/2$"%.(,&2#(#&'#(aS7R4! (
                            Highly Reliable Bullish Reversal & Bullish Continuation Candle Patterns




             Piercing Line                   Kicking                 Abandoned Baby           Morning Doji Star




                                                                                                  Three White
             Morning Star               Three Inside Up
                                                                     Three Outside Up               Soldiers




           Concealing Baby                                                                    Side By Side White
              Swallow                Rising Three Methods                 Mat Hold                   Line




John Mohan Consulting LLC                      Enhancing Financial Awareness !2008                    Updated 8/14/12 - Page 22
                                                                                   period of time with moderate volume. Price closes at the
(V . &F &" 8+ /# &(5 $ " > *. / 2&% F / (                                          end of each day should be tight, within 1-1.5% of the
The Heikin-Ashi Candle is extremely useful for spotting                            prior week’s close. Intraday/weekly trading ranges
trends and trend changes. It filters noise, helps identifies                       should be narrow and volume subdued indicating no big
classic chart patterns and support/resistance levels. This                         investors moving in or out during base building.
candle is fairly reliable in trend prediction when used with                   ! In most cases the bottom part of the cup should be
volume indicators and momentum oscillators, The following                        rounded rather than a narrow ‘V’ shape because the ‘U’
signals identify trends and buying opportunities:                                shape it tends to scare out the unsure holders. Also look
 ! Long hollow Heikin-Ashi candles with no lower wicks                           for net accumulation of shares during the cup formation,
   indicate a strong uptrend. Consider letting profits ride,                     particularly as it is starting to trend upward.
   purchasing Calls, selling Puts, adding to long positions,                   ! The buy point appears at the highest point of the
   and exiting short positions.                                                  handle, plus 10 cents. Make sure the volume is at least
 ! Long filled Heikin-Ashi candles with no higher wicks                          40% above the average volume when it crosses the buy
   identify a strong downtrend. Consider buying Puts,                            point. Without the volume support the trade is suspect.
   selling Calls, and exiting long.                                            ! Avoid purchasing stocks that breakout below their 10
 ! A single Heikin-Ashi candle with a small body                                 week moving average (past trading history).
   surrounded by upper and lower wicks indicates
   indecision and a possible trend change.
                                                                             () &A 1 " $ % % &(< $ 2&1 / ((
                                                                             Fibonacci ratios, appearing throughout nature: spider webs,
                                                                             pinecones, snail shells, bacteria growth, animal horns,
                                                                             hurricanes, galaxy design, etc. were discovered by Leonardo
                                                                             Fibonacci, a 12th century Italian, are used to establish support
                                                                             and resistance. One number sequence is: 1, 2, 3, 5, 8, 13, 21,
(U 6 **&/# (5 6 N (X &2# (+ (V $ " > *. (H $ 22. -" (                        34, 55, 89, 144, etc. Each number in the series is the sum of
                                                                             the two previous numbers. Some ratios are presented as
This is a highly researched pattern developed by William                     retracements that often occur at three levels: 38.2%, 50%, and
O’Neil of Investors Business Daily Newspaper (IBD). This                     61.8%. Actually, the 50% level really does not have anything
pattern has proven to be quite effective in picking winners. It              to do with Fibonaccis, but traders use this level because of the
operates on the premise that winning stocks don’t go straight                tendency of securities to reverse after retracing half of a
up. Often they retrace or ‘catch their breath’ at some                       previous move upward.
point (frequently after a 20% to 30% advance). If the price
retracement occurs with weak volume it indicates a general                                These retracements are possible
unwillingness among professional money-managers to close                                   support/resistance indicators.
their positions.
                                                                             The following chart shows an actual trade. ARI pulled back to
                                                                             the 50% level. That retracement and a confirming Hammer
                                                                             candlestick was the signal to go long. It resulted in a profit.

                                                  Handle
                            Cup

 ! The entire cup/handle formation must be at least
   seven weeks long. Anything shorter is not considered
   valid pattern. Most patterns develop within three to six
   months although some have taken a16 months.
 ! The declining handle usually begins with a down day
   and should take at least five days to form and may
   consolidate or retract up several months before a major
   breakout occurs. It should form in the upper right-hand
   part of the entire cup. Volume should be light in the
   handle phase. The handle formation is a time of
   sideways consolidation with a slight down trend of 8%
   to 12%. Handles with prices that drift upwards have a
                                                                             To draw a ‘Fib Retracement” on an up-trending stock, place
   higher failure rate. The handle should be above the 49-
                                                                             the curser at the highest price and drag downward to the
   day moving average.
                                                                             lowest price. On down trending stocks, from the lowest low
 ! There should be strong resistance at support with low                     drag upward to the highest high price to establish the
   volume followed by a rise to the previous high over a                     Fibonacci support and resistance lines.


John Mohan Consulting LLC                               Enhancing Financial Awareness !2008                         Updated 8/14/12 - Page 23
() &A / (7 1 % $ 2&1 " (S " (@ S G (5 # $ -2/ (                             opportunity because they believe that the market holds an
                                                                            unjustly bearish outlook and that it will soon adjust. Generally
Click on ‘Charts Tab’ and then ‘Charts’. In the bottom left-
                                                                            traders will anticipate this by looking for spikes in the ratio or
hand corner there are four small white boxes. Select the box
                                                                            for when the ratio reaches levels that are outside its normal
furthest to the right. Click on it and select ‘Fibonacci
                                                                            trading range.
Retracements’ or others of interest.
                                                                            (< . *$ 2&= . (G 2-. " ' 2# (7&" . (
(U 6 **&/# () *$ ' /(P (H . " " $ " 2/ (
                                                                            The Relative Strength line (RS) compares a stock’s price to
The flag is a small rectangle pattern that may slope slightly
                                                                            the S&P 500 index. If the stock’s RS line is climbing, the
downward from the previous trend on declining volume.
                                                                            stock is out performing the broad market. If it fails to break
The pennant is a small symmetrical triangle that begins                     new highs, watch out below.
wide and converges also on declining volume.
                                                                            (X &**&$ E /(H . -% . " 2$ ' . (< $ 2&1 (ZX H < [ (
The ‘flagpole’ is the part of the pattern that displays the
sharp price rise before the formation of the flag or                        The WPR is similar to Stochastics. It shows rapidly changing
pennant.                                                                    price momentum. It compares the closing price to the low
                                                                            and high range that the security had over a select time period
The top of the flagpole is the future buy-point once the
                                                                            (the time period may be adjusted).
price breaks upward out of the flag or pennant pattern.

                                                                                        5#.%F(\16-(R">.-/2$">&"'(
                                                                              1. What is considered a significant volume change?
                                                                              2. When do huge volume changes typically occur? Why?
These patterns signal a PAUSE in an uptrend usually                           3. What characterizes an up-trend and down-trend?
occurring right after a steep price rise that may also
contain a price gap. This pause is typically reflected in                     4. What is the significance of opposing trends?
decreasing trading volume. Then when the price resumes its                    5. Define support and resistance levels.
upward trend with a spike in volume it often signals the
continuation of the uptrend.                                                  6. Draw and explain Double & Triple Top Reversals.

 ! Flags and pennants typically take five days to four                        7. Draw and explain Head & Shoulder Reversals.
   weeks to form. After that they are not as reliable in                      8. Explain MACD Histograms and the role they play.
   predicting future price movement.
                                                                              9. Describe the role Stochastics plays.
 ! A bullish signal occurs when the price rebounds beyond
                                                                            10. Explain Bollinger Bands.
   the upper trend line of the sideways formation and
   continues the original upward price movement.                            11. Explain the Average True Range.
 ! It is commonly thought that the length of the flagpole                   12. Explain the Chalkin Money Flow study.
   indicates the potential price increase.
                                                                            13. Explain the function of the McClellan Oscillator.
 ! A lack of a volume spike on the day of the uptrend
   continuation is an indication that this pattern may not be               14. Explain the functioning of the Parabolic SAR.
   reliable and may actually reverse.                                       15. Explain the different between sold and hollow candles.
(H 6 285 $ **(< $ 2&1 (K (G . " 2&E . " 2(C" > &% $ 21 - (                  16. What do the wicks portray?
It is designed to help gauge the overall mood of the market.                17. When are candlesticks most effective?
The ratio is calculated by dividing the number of actively
traded Put options by Call options. Since the Calls are found               18. Draw a Doji and explain its function.
in the denominator, a reduction in the number of traded Calls               19. Draw three bullish and bearish candle patterns.
or increase in the number of Puts will result in an increase in
the value of the ratio. This is significant because the market is           20. Why would the Heikin-Ashi candlesticks be used?
indicating that it is starting to dampen its bullish outlook and            21. Draw a Bullish Cup With A Handle pattern and explain.
traders are starting to move toward securities that gain when
prices decline or to protect their portfolios in case of a sell-off.        22. What is the buy point in a Cup With A Handle pattern?

The Put-Call ratio is primarily used as a contrarian indicator              23. Describe bullish flags and pennants.
when the values reach relatively extreme levels. This means                 24. What does the length of the flagpole predict?
that many traders will consider a large ratio a sign of a buying


John Mohan Consulting LLC                              Enhancing Financial Awareness !2008                            Updated 8/14/12 - Page 24
                                            <&/F(4$"$'.E."2(
The fear of losing, greed, and the excitement of playing the
market influences many traders and often cause wild mood              () 1 6 -(2I N . / (1 B(G @ S H G (
swings and stupid trades. These emotions must be                        ! Automatic Hard STOP. This STOP is set immediately
controlled for a person to be successful. Trading must be                 after the initial purchase and is not changed until it is
managed like a business with a well-thought out plan.                     deleted or adjusted. Market makers may see hard
                                                                          STOPS and often knock them out during trading by
(4 $ -F . 2(@ -$ > &" ' (H $ 22. -" /(                                    dropping the price suddenly and then raising the price
Northwest trading hours are from 6:30 a.m. to 1:00 p.m. The               shortly thereafter.
following time periods are important to note.                           ! Trailing STOP --- a favorite. As the price of a stock
 ! 1st Half-Hour: when overnight orders from many                         rises, this STOP correspondingly rises. A Trailing STOP
   amateur investors are filled and day-traders start working             allows a winning stock to run while protecting against a
   their magic.                                                           loss if the price drops.
 ! Lunch Hour – 9:00 to 10:00 a.m. Northwest time is                    ! Mental STOP. This STOP is written down but not
   when most professional money managers in the East go                   placed with the brokerage firm because full-time traders
   to lunch and discuss trades (gossip).                                  may not want to be inadvertently stopped out of a trade
 ! Last Half Hour – 12:30 to 1:00 p.m. Northwest time,                    due to a momentary large price swing. This STOP
   when professional money-managers and day-traders                       requires the most self-control.
   often are VERY ACTIVE buying or selling heavily. Just               ! STOP Limit. A ‘Limit Order’ is an order to buy or sell
   compare the volume at this time to its average.                       at a specific price or better and is only ACTIVATED
                                                                         when the desired price is hit. A ‘Stop Limit Order’ may
      Money managers typically analyze most                              be linked to a sequence of other commands. For
         of the day and trade during the                                 example, a ‘STOP Limit Order’ may read, “The STOP
              first or last 30 minutes.                                  must hit the first price, then retrace, then hit it again
                                                                         before a market order to sell is placed.” This helps
 ! Mondays are good days for buying in a bull market                     protect against sudden downturns.
   because historically prices drop on weekend news.
                                                                      Note - TOS sends market orders only when the STOP has
 ! Tuesdays-Thursdays are good days for selling options.              been hit so the market-maker is unaware of pending orders.
 ! Fridays are usually sell-days because perceived risk is
   higher when money is in the market rather than in cash.            (4 $ " $ ' &" ' (G 21 N / (
       rd                                                             A STOP price is usually determined BEFORE the trade is
 ! 3 week of month (Expiration Week). On Monday or
   Tuesday, possibly SELL Covered Calls or cash-covered               initiated and immediately activated as a ‘good until cancelled’
   Naked Puts near the money with an extremely high                   order (GTC). Then once a trade is moving in the desired
   extrinsic value and let time decay work in your favor.             direction, the STOP is adjusted if the situation warrants.
 ! Last/first day of the month avoid trading.                         There are skeptics who argue that setting STOPS increases the
                                                                      chance of being “stopped out” before the stock reverses and
     Money managers often sell or by heavily                          blasts ahead. And this often happens with thinly traded
     on one day and then wait 4-8 days before                         securities. However, skeptics of using real stop losses (instead
             repeating their behavior.                                of mental ones) are playing a dangerous game because it is the
                                                                      catastrophic loss that can severely reduce aggregate profits.
(H -1 2. % 2&" ' (@ -$ > . /(X &2# (G 21 N / (
                                                                      Trading is about making a lot of small compounding
Frequently novice traders fail to protect profits and lose            profits. A few large losses are hard to over come. So what
money even though a security has bounced in and out of                if you miss a big move now and then. It is the big losses that
profitability several times. The use of a STOP is one way to          must be avoided so use real STOPS.
protect an account. A STOP is a chosen price in which the
                                                                        ! Initially set a Trailing STOP of 7-10% with securities.
trader wants to sell a security to prevent a further price
                                                                          Tighten a Trailing STOP to 5% or 2% as the stock price
decline or to take profits. Typically the location of the
                                                                          approaches resistance or when volume is decreasing.
STOP is established based upon the price support level of the
security or a percentage of the purchase price (7% to 10% for           ! If a security is highly volatile, loosen the STOP up to
securities and 35% to 50% for options). There are four types              25% so as to avoid being stopped out with a sudden
of STOPS.                                                                 extremely large price swing.


John Mohan Consulting LLC                        Enhancing Financial Awareness !2008                         Updated 8/14/12 - Page 25
 ! With options initially set STOPS at 50%. Then                         Diversifying prevents losing too much money in any one
   tighten them to 35%, 25%, and 7% as the price                         industry. However, too much diversification can limit
   approaches resistance or the volume decreases.                        success. There is an erroneous belief that wide diversification
                                                                         protects against a market sell-off. It doesn’t! Focus on a few
(G . 22&" ' (+ (G 21 N (C" (@ S G (                                      quality stocks. Four to seven different securities seem
TO PROGRAM the STOP click on Trade Tab, All Products,                    manageable for accounts under $200,000.
and then type in a stock symbol. Right click on the “Ask X’.
Select ‘Buy Custom with STOP’ from the pull-down list. The
                                                                         (D . 2. -E &" &" ' (4 $ Y &E 6 E (71 //(7&E &2/ (
‘ORDER ENTRY’ form pops-up below. As a short cut, click                  Knowing how much you are willing to lose is critical.
on the little ‘redish’ link symbol just to the right of the ‘Side’       Following your “loss limit rules” unemotionally is key to
heading on the second line. It should turn white and links               staying in the trading game. You are going to lose on some
changes in stock quantity so they all change at the same time.           trades so get use to it. Protect yourself from large losses.
There are two parts to this order, one buy and one sell. To
adjust the sell order, change it to ‘TrailStop’ and from DAY to
GTC. Then set the amount in ‘STOP Offset (typically 7%                                Maximum Loss Per Trade Rule
initially expressed as money). Hit ‘Confirm and Send.’ Re-               Conservative investors are generally not willing to risk more
read the order, checking everything before sending.                      than 1% to 3% of their total trading account on a single trade.
                                                                         If conservative, risk 1%. If more aggressive, risk 3%. On a
(H -1 2. % 2&" ' (X &2# (V . > ' . / (                                   $100,000 account it means you are not willing to lose more
A Hedge is an inverse (opposite) position established to                 than $3,000 on a signal trade.
protect an existing position. An owner of a bullish stock
may purchase an inverse ETF to protect against a possible                Portfolio Size___________ times 1%, 2%, 3% (you choose)
near-term price decline. These types of ETFs increase in
value IF the market or sector starts to decline.                                 equals ___________Single Trade Loss Limit Rule
Usually the cost of a hedge is around 10% to 20% of the
position being protected.
                                                                         (G . *. % 2&" ' (+ (G 21 N 87 1 / / (H 1 &" 2(
The problem with these leveraged ETFs is they are typically
                                                                         This formula is necessary in order to determine how many
quite volatile and costly. Also, a leveraged ETF can never go
                                                                         shares or contracts you may purchase while staying within the
back to its high because of the time decay. Assume an ETF is
                                                                         “Single Trade Loss Limit” Rule. “STOPS” help protect from
designed to double in performance on a daily basis. If the
                                                                         a surprise drop of share price (ENRON disaster). It sets the
sector goes up 2% in a day, the ETF goes up 4%. Suppose the
                                                                         maximum loss a trader is willing to absorb on that particular
sector has a series of extremely wild days – down 5%, then up
                                                                         stock, ETF, or index.
5%, then back down 5% again. What happens to the ETF is
the sector is down about 5.24% from where it started. The
double leverage ETF that tracks the price swings is down                                          Stop-Loss Rule
10.9%. So leveraged and inverse ETFs – at least ones tracked
on a daily basis – are a recipe for inevitable performance lag           Typically security STOPS are set at 7% to 10%. Option
over time. The following are examples of inverse ETF’s..                 STOPS range from 35% to 50%. For example, if a stock
                                                                         initially costs $45, a 10% STOP Loss Limit of $45 is $4.50
                             Bearish            Bearish
    Sector                Double Inverse     Triple Inverse
                                                                         which is the maximum acceptable loss for that security.

     Financials               SKF                 FAZ                    Security Price___________ times 7%, 8%, 10%
    Health Care               RXD                RHO
     Oil & Gas                DUG                 ERY                             equals ___________Security Stop Loss Rule
    Real Estate                SRS               DRV
  Semiconductors              SSG                SOXS
    Technology                REW                 TYP                    (D . 2. -E &" &" ' (g (S B(G # $ -. /(@ 1 (H 6 -% # $ /. ((
      Utilities               SDP                SPXY                    Divide the resulting figures from the “Security Stop Loss”
       China                  FXP                 CZI                    into the “Single Trade Loss” to determine the number of
      S&P500                  SDS                SPXU                    shares that may be purchased.
    Russell2000               TWM                SRTY                    For example, if a stock initially costs $45, 10% of $45 is
                                                                         $4.50. Divide $4.50 (potential stock loss) into $3000 (Single
(D &= . -/&BI &" ' (                                                     Trade Loss Limit Rule). The result is 667 total shares of a $45
Putting all your eggs in one basket, stock, industry, or sector is       security may be purchase with a Trailing STOP of $4.50
very risky. One industry could tank (buggy whip makers)                  without breaking the above two rules. It also means seven
while another could explode, rocketing higher and higher.                option contracts may be purchased.



John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 26
                                                                                  o    If the price spikes upward with no volume spike
     Number Of Shares To Be Purchased Rule                                             purchase a second month protective PUT at $40 for
                                                                                       $1.77 if retained ownership of the stock is desired.
   Single Trade Loss _________ DIVIDED BY the Security
                                                                             ! What if the price continues to bounce upward off support
                                                                               --- right around the $39.90 level?
 STOP Loss _____________ equals _________# of shares or
                                                                                  o    Multiply $39.90 by a 3% loss limit rule. It equals
  divided by 100 equals the # of option contracts__________                            $1.20. Then set a trailing stop around $38.70 to
                                                                                       minimize potential losses.
                                                                                  o    Sell a $35 Put and hope it expires worthless. Also
                                                                                       purchase a $30 PUT at the same time to protect
(H 6 -% # $ /&" ' (G . _ 6 . " % . (                                                   against unlimited losses.
Novices jump right in and buy all the shares allowed. Skilled
traders buy in gradually. Some use the following rule.
                                                                                       5#.%F(\16-(R">.-/2$">&"'(
            50-30-20% Security Purchase Rule
                                                                              1. Describe the market trading patterns during the day.
If the timing is right, buy half (50%) of the desired shares. If
the security rises 3%. buy another 30% of the shares. If the                  2. Describe the market trading patterns during the week.
price rises another 2%, buy the remaining 20%.
   Buy 50% of shares________@$________ Total ________                         3. Describe the market trading patterns during the month.
   Buy 30% of shares________@$________ Total ________
                                                                              4. What is the importance of the last half-hour of the
   Buy 20% of shares________@$________ Total ________
                                                                                 trading day?
Applied Protection           Hard STOP          Trailing STOP
                                                                              5. Why is there a huge amount of selling on Fridays?

                                                                              6. Why do money managers buy or sell heavily on a
() &Y &" ' (@ -$ > . /(
                                                                                 particular day and then wait four to eight days before
What if a trade moves against you? Pre-planning each
possible scenario is the answer. Once you have selected a                        jumping in again?
trade and prior to initiating it, plan how to fix the trade if it
heads in an undesired direction. Some ‘fix it’ strategies                     7. Explain a hard stop.
include:
                                                                              8. Explain a trailing stop.
 ! Tightening Stops
 ! Rolling trades to the next month                                           9. What is a stop limit order?

 ! Adding a hedge                                                           10. What percentage loss should a Trailing Stop be set at?
 ! Selling additional Calls or Puts to reduce costs
                                                                            11. Explain hedging a position.

                                                                            12. What is diversifying and the problems with it?
(H -1 2. % 2&" ' (+ " (R N 82-. " > &" ' (@ -$ > . (! Y $ E N *.(
Suppose 100 shares of XYZ were purchased at $40.71 and                      13. Explain how to determine the “Maximum Loss Per
initially a 7% trailing stop was set. Over six months the stock                  Trade Rule.”
has trended to higher highs and higher lows. Now the price is
$45.07 with support at $39.90 and resistance at $45.80.                     14. Explain how a “Stop-Loss Point” is determined.
 ! What if the price continues to bounce downward off
   upward resistance --- right around the $45.80 level?                     15. How is the number of shares to be purchased

        o    On normal volume adjust the trailing stop 7%                        determined?
             below resistance at $42.59 so a profit is retained.
                                                                            16. Explain how to buy in to a stock position using the 50-
        o    On a volume spike --- set a trailing stop 4% below
             resistance starting at $44.96 to lock in profits and                30-20% Purchase Rule.
             possibly gain more if the price continues to run up.
                                                                            17. List four ways to fix trades.
        o    If the price spikes upward on high volume set a
             new stop at $45.40 just below new support.


John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                          Updated 8/14/12 - Page 27
                H*$%&"'(8(41"&21-&"'(8(!Y&2&"'(@-$>./(
With so much financial information available, ‘data overload’
is common and it stops many from trading. They suffer from              (4 $ -F . 2(@ -. " > (< . = &. , (
‘analysis paralysis’. I have had these symptoms. Then I                 Money can be made or lost in any market trend with the
finally jumped in.. Fortunately I lost money on that first              down-trending market usually being the most profitable.
trade forcing me to pay closer attention to what I was doing.           There are four market trends.
Winning the first time tends to make one over-confident.
                                                                          ! Down trending in which security prices are falling.
(H -. -. _ 6 &/&2. /(@ 1 (@ -$ > &" ' (                                     People typically do not know how to trade this market by
                                                                            shorting, buying Puts, and/or selling Calls.
Before placing a trade establish a routine or checklist of things
to do and then do it. Learn the vocabulary. Know the process                  Prices fall faster than they rise, typically
of how to buy/sell or close a trade. Then review market trends                taking five years to reach a high versus
and perform a background check to determine if the stock has:                  three months to lose most of the gain.
 ! Strong fundamentals with 25% EPS gains, increasing
   sales, and a great ROE.                                                ! High volatility in which security prices swing wildly
                                                                            from one extreme to the other. Day traders are very
 ! Solid technicals that indicate it is the right time to buy.              active in this scenario.
 ! Heavy institutional support as indicated by increasing                 ! Up-trending in which security prices are rising. Most
   accumulation in mutual funds, pensions, etc.                             people invest this way because of an optimistic outlook.
If the stock is missing anyone of these three, wait! It is not              This market ranks third in trading profitability.
time yet. Don’t play favorites. Trade what is, not what you               ! Sideways trending markets in which security prices
hope it will be.                                                            trade within a fairly tight range with little fluctuation.
(7 . $ -" (U 6 I b G . **(a 1 % $ A 6 *$ -I (
 ! Bid is the price the buyer is offering to pay. Ask is the                                   H*$%&"'(@-$>./(
   price the seller wants in order to sell. Spread is the
   difference between the bid and ask price. Tight bid-ask              There are several different ways to initiate buy/sell orders.
   spreads are beneficial to the individual investor.
 ! Market Order is a directive to buy or sell a security                (G &E N *. (H 6 -% # $ /. (S -> . - (
   IMMEDIATELY at the best price offered at the                         In TOS, select Trade tab and All Products. Type in a
   moment. A market order is generally not recommended                  security symbol. Click on Ask and the ORDER ENTRY
   when purchasing, but recommended when making a                       TOOLS appear at the bottom of the page. On the green line
   QUICK exit to close a trade.                                         the default should be set to LIMIT, DAY, and BEST. Adjust
 ! Buy/Sell Limit Orders are offers to buy or sell at a                 the QTY to the desired amount of shares to be purchased.
   specific price or better and only executed if and when the           Click on Confirm and Send. Read the final order carefully
   security reaches that price.                                         and then click Send.
 ! Gap is when the security price opens higher or lower                 (G &E N *. (G . **(S -> . - (
   than the closing price of the previous day.
                                                                        In TOS, select Monitor tab and Account Statement. Click
 ! OTM refers to options ‘out-of-the-money.’ ITM refers                 on the Equities blue triangle to reveal the owned securities.
   to ‘in- the-money.’ ATM refers to ‘at-the-money’ or                  Click on blue dot in front of the select security and Create
   ‘near- the-money.                                                    Closing Order appears. The ORDER ENTRY TOOLS
 ! Float is the total number of publicly owned shares                   appear at the bottom of the page. Click on Confirm and
   available for public trading.                                        Send. Read the final order carefully and then click Send.
 ! Liquidity refers to how quickly an asset (any item of
   value that is owned) can be turned into cash.                        (H 6 -% # $ /. (S -> . -(X &2# (G 21 N (
 ! GTC: ‘good ‘til canceled’ order.                                     A Stop may be automatically attached when a security is
 ! OCO: ‘one cancels other’ order (one filled order cancels             purchased. In TOS, select Trade tab and All Products.
   the other order tied to the first order).                            Type in a security symbol. Right click on Ask and select Buy
                                                                        Custom with Stop. The ORDER ENTRY TOOLS appear at
                                                                        the bottom of the page. On the green line adjust the quantity
                                                                        and price to the desired amount. On the two red lines adjust

John Mohan Consulting LLC                          Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 28
the STOP to the desired type of STOP by clicking on the                 (a 1 *6 E . (! " 2-I (G &' " $ */ (
yellow triangle and making a choice. Change DAY to GTC.
                                                                          ! When buying volume increases 150% or more above its
Adjust the STP price to the desired amount. Click on
                                                                            daily moving average. Especially watch the first or last
Confirm and Send. Read the final order carefully and then
                                                                            half hour of the trading day. Often this volume increase
click Send.
                                                                            occurs after a price retracement of 25% or less.
(H 6 -% # $ /. (S -> . -(X &2# (S 5 S (                                   ! When breakaway gaps occur on heavy volume. A
An OCO order (one cancels other) establishes both the Stop                  breakaway is when a price opens far above the highest
and Profit Target at the same time. Then when one side of the               price reached at any time during the previous day. Often
trade is filled, the other trade is cancelled.                              these occur when the price has been running flat for
                                                                            weeks or months and then great news hits the market.
TO PROGRAM in TOS, select Trade tab and All Products.
Type in a security symbol. Right click on Ask and select Buy            (4 1 = &" ' (+ = . -$ ' . (! " 2-I (G &' " $ */ (
Custom with OCO bracket. The ORDER ENTRY TOOLS
                                                                          ! When a pull-back occurs to the 49-day MA on low
appear at the bottom of the page. As a short cut, click on the
                                                                            volume, a buying opportunity may occur when the stock
little redish link symbol just to the right of the ‘Side’ heading
                                                                            starts to rebound on higher volume. Institutions tend to
on the second line. It should turn white and links changes in
                                                                            use the 50-day MA as support and add to their positions
security quantity so they all change at the same time. Then the
                                                                            at this time.
green line default should be set to LIMIT, DAY, and BEST.
Adjust the QTY and LIMIT price to the desired amounts. On                 ! When all three MAs (7,21,49 day MAs) are parallel and
the first red line put in the profit target price. On the second            moving up, consider buying! One strategy is to wait
and third red lines adjust the STOP to the desired type of                  three days after the 7 day MA crosses over and stays
STOP by clicking on the yellow triangle. Change DAY to                      above the 21-day or 49-day MA before making a move.
GTC. Adjust the STOP price to the desired amount. Click on
Confirm and Send. Read the final order carefully and then               (S 2# . -(! " 2-I (G &' " $ */ (
click Send.                                                               ! When a price breaks upward through resistance and stays
 ! To adjust the two sell OCO orders (one as a Stop and the                 above it for at least three days or weeks depending upon
   other for profit taking) click on the ‘white quarter spoke’              the time period being analyzed.
   to the far right of each individual ‘SELL’ order. An                   ! When the price has not exceeded its ‘buy point’ by more
   ‘Order Rules’ form will pop up. It should say ‘SELL’ a                   than 5% since stocks frequently retrace (sometimes more
   certain number of shares and then change ‘Time in                        than 20%) before continuing its upward climb. Buy
   Force’ to ‘GTC’. Adjust ‘Price Rules’ to ‘TRAILSTOP’                     points may be determined by such strategies as the “7/21
   and then set the amount in ‘STOP Offset. Drop below to                   Moving Average Retracement Strategy’ described later
   ‘Order Conditions’ and type in the security below                        in these notes.
   ‘Symbol’, Method=MARK, Trigger=AT OR BELOW,                            ! When the buy point is 10 cents above the left side high
   leave Threshold. Hit ‘OK’.                                               on a cup-without-a-handle pattern that has developed
 ! To adjust the second sell order for profit taking click on               over seven weeks or more. With a cup-with-a-handle the
   the ‘white quarter spoke’ of the lower ‘SELL’ order. An                  buy point is 10 cents above the handle high before the
   ‘Order Rules’ form will pop up. It should say ‘SELL’ a                   handle showed a retracement or consolidated.
   certain number of shares and then change ‘Time in                      ! When a double or triple bottom is formed, set a buy
   Force’ to ‘GTC’. Adjust ‘Price Rules’ to ‘MARKET’.                       point at 10 cents above the middle of the “W
   Drop below to ‘Order Conditions’ and type in the
   security below ‘Symbol’, Method=MARK, Trigger=AT
   OR ABOVE, and then set the dollar amount in the
   Threshold box. Hit ‘OK’.
                                                                                           41"&21-&"'(@-$>./((
 ! Hit confirm and send and then carefully review all steps.
                                                                        (X -&2. (0 1 2. /(S " (@ S G (5 # $ -2/(
                                                                        TO PROGRAM select Charts tab and Charts. Enter a stock
                      !"2-I(G&'"$*/(                                    symbol. In the lower left-hand corner click on the little white
                                                                        box to the right. It will open a pull-down. Select ‘Text Note’
Professionals are always buying or selling. That is their job.          a quarter of the way down the list. Then move the little pencil
Your task is to figure out what they are doing.                         symbol to an open spot on the chart. Click on it and a ‘Note’
                                                                        box will appear. Proceed to write a note and click ‘OK’ to
               Trade what is happening,                                 record. To edit the note, ‘right click’ on the note itself and
             not what you are wishing for!                              select ‘Change Note’. Adjust accordingly and then check the
                                                                        box that says ‘Save As Default’ and the close.




John Mohan Consulting LLC                          Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 29
(G . 22&" ' (R N (@ S G (H -&% . (+ *. -2/(                                 ! When a consolidation base to its MA is formed for the
                                                                              third time or later it is considered a late stage base that
Consider creating alerts to notify you of changes you are
                                                                              may signal a security is due for a deeper consolidation,
looking for is a desirable attribute. TO PROGRAM select the
                                                                              and possibly a long down trend or correction.
Market Watch tab and ‘Alerts’ on the line below. Enter a
stock symbol. Click on ‘Ask’ and the ‘ALERT ENTRY’ line                     ! When a security is on the rise it is often pushed upward
will appear near the bottom of the page. Adjust the “Alert’                   by volatility and fast-moving money. However, too
and ‘Trigger’ to desired action. Then click on ‘Create Alert’                 much volatility tends to generate a sell signal.
to activate. All active alerts will be listed at the bottom of the          ! A climax top typically occurs during the end of a big
page.                                                                         price run during a one to three week time frame. There
                                                                              are three indicators to verify when looking for a climax
(G . 22&" ' (R N (@ S G (G 26 > I (+ *. - 2/(                                 top: (1) the security has staged its largest daily price
TO PROGRAM an alert select MarketWatch tab and ‘Alerts’                       increase since the start of the price run, (2) the spread
on the line below. Enter a stock symbol. Click on ‘Study                      from the security's low price to its high for the week is
Alert’ in the upper right-hand corner and a pop-up appears.                   frequently bigger than for any prior week of the trend,
Select ‘Trigger Type’ and adjust all variables to desired                     and (3) the volume may be the highest since the
action. Then click on ‘Create Alert’ to activate. All active                  beginning of the upward growth.
alerts will be listed at the bottom of the page.                             ! Consider taking some profit after a security has risen
                                                                               20% to 25%.
                           !Y&2(G&'"$*/(                                    ! Consider holding a stock for at least 7 weeks if it goes up
                                                                              20% or more within 3 weeks after its breakout.
Cut stock losses to 7-8% or less. When several different
timing tools indicate it is time to exit a trade, create a tight
STOP or sell at market.
                                                                                         51EE1"(@-$>&"'(!--1-/(
(a 1 *6 E . (! Y &2(G &' " $ */ (                                            ! Over-trading. If you’re not willing to trade a security for
                                                                               a significant length of time then don’t buy it at all. Not
 ! When a stock achieves a new high on low volume, it
                                                                               only is there a substantial evidence attesting to how
   may be a ‘suckers’ rally since institutions are not buying.
                                                                               excessive trading eats away at profits, but . . .
 ! When a stock price drops on the heavy volume, breaking
   through a major support level, professional money                               There is a strong correlation between
   managers are exiting.                                                              diminishing holding time and
 ! When the stock falls below its 49-day or 210-day MA on                                  diminishing returns.
   heavy volume.                                                             ! Failing to wait for trend confirmation and relying on a
(@ -. " > (7 &" . / (! Y &2(G &' " $ */ (                                      ‘gut’ feeling to make a trade.
                                                                             ! Going against the market and industry trends, especially
 ! When a price drop breaks a line set by at least three
                                                                               on low volume.
   intraday or intraweek low points during a price climb.
                                                                             ! Averaging down; buying when the stock price is
 ! When a security with a four-month run-up decisively
                                                                               dropping unless you are buying PUTS.
   breaks through the upper channel line. If it barely
   breaks it and then dips back it's probably not a sell                     ! Buying low priced stocks rather than quality. Cheaper
   signal.                                                                     stocks are cheaper for a reason. Avoid the hype.
                                                                            ! Holding on to losing positions.
(S 2# . -(! Y &2(G &' " $ */(
                                                                            ! Failure to take quick profits when the market is choppy.
 ! When the Relative Strength rating falls below 70
   consider it a very strong sell indication.                               ! Buying up-trending stocks on low volume after a huge
                                                                              sell-off with high volume.
 ! When the leading securities in the top industry groups
   start to weaken or act abnormally.
 ! When major securities in different industry groups start                                 H1-2B1*&1(4$"$'.E."2(
   to breakdown at the same time it is a sign of overall
   market change.
                                                                           (J -1 , (+ (H 1 -2B1 *&1 (C" % -. E . " 2$ **I (
 ! When a company’s rate of bottom-line growth falls by at
   least two-thirds the security price may plummet.                        As an example, if the risk capital is $500 and it is doubled
                                                                           once, a gain of $1,000 plus the original $500 totals $1500. If
 ! When a company posts its largest one-day loss.                          $500 is risked on the next trade and it is a loser, there is still
                                                                           $1000. Keep risking only $500 until the account is up 300%


John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                           Updated 8/14/12 - Page 30
($2,000). Once the account is up to $2000 put the risk at
$1000. If the risk money ever falls below $2,000, go back
to risking $500 until you reach $2,000 again. By always                              5#.%F(\16-(R">.-/2$">&"'(
managing risk, you can go on a bad streak of losing 66% of
your trades and still win.                                            1.   Explain the bid, ask, and spread.
 ! If a 25% gain is made, sell half of the shares owned.
                                                                      2.   What is a market order and when is it used?
 ! If a 100% gain in made, sell half of the shares still
   owned and let the others run with a tighter trailing stop.         3.   What is a limit order?
 ! When purchasing a security, place two sell orders (OCO
   one cancel other). Establish a Trailing Stop Order and a           4.   What is a gap?
   Profit-Taking Sell Order.
                                                                      5.   What is the float?
(J -1 , 2# (H 1 -2B1 *&1 (+ **1 % $ 2&1 " (
                                                                      6.   Explain GTC.
Those having a couple of decades before retirement may take
more risks than retirees because time works in their favor.           7.   Explain OCO.
They may consider the following allocations.
 ! 50% in conservative core holdings that may include                 8.   In what market is the most amount of money made?
   ownership in a home, starting a Roth IRA, owning
                                                                      9.   Why is volume so critical in determining the time to enter
   growth securities, and purchasing LEAPS.
 ! 40% in higher risk trading activities hoping for the                    or exit a trade?
   consistent above-average returns.
                                                                      10. What is the importance of the 50-day moving average in
 ! 10% in cash to cover opportunities or needs that
   may arise.                                                              relationship to institutional investors?

(< . 2&-. E . " 2(+ **1 % $ 2&1 " (                                   11. What are considered the buy points when using the Cup-
Those nearing retirement may consider diversifying                         With-The-Handle chart?
accordingly.
                                                                      12. Why is retracement an important concept in trading?
 ! 70% allocated in conservative core holdings that may
   include a home, owning blue-chip securities that pay               13. Explain two exit signals related to volume and trend
   reasonable dividends, holding quality bonds, selling
   covered calls, and purchasing LEAPS.                                    lines?.

 ! 20% allocated to higher risk trading activities hoping for         14. Explain two common trading errors.
   the occasional homerun.
 ! 10% allocated to cash to take advantage of opportunities           15. Explain how to grow a portfolio incrementally.
   or needs which may arise.




John Mohan Consulting LLC                        Enhancing Financial Awareness !2008                           Updated 8/14/12 - Page 31
                                      C"=./2&"'(C"(G.%6-&2&./(
Are you investing for growth, dividends, or both? Are you                   ! 21-day MA: green line. The 21/49 MAs provide a
day trading, swing trading, or looking long term? What are                    medium view of trends that is useful for investors.
your objectives? You may use several different investing                    ! 49-day MA: purple line. This MA shows the stock’s
strategies in your financial portfolio. However, BEFORE                       broad trend. It filters out much of the day-to-day noise
trading you must know the following:                                          of confusing volatility.
 ! The market, industry, and security TRENDS.                                     o    If a stock is an institution favorite, the 49-day MA
 ! The SUPPORT/RESISTANCE levels of the security.                                      should be a strong support level. When a pull-
 ! If there is above average SUPPORTING VOLUME.                                        back occurs to the 49 MA on low volume, a
                                                                                       buying opportunity begins when the stock starts
       o    When a security is bouncing upward off support                             to rebound on higher volume. The buying may
            with high volume, you may buy the security itself.                         continue until the price extends 5% above the high
       o    When a security is bouncing downward from                                  reached just before the pull-back.
            resistance with high volume, you may set tighter                      o    As a general rule, one should not buy a stock if it
            Stops or sell immediately.                                                 has risen 5% above the 49-day MA.
 ! If there is CONFIRMATION from timing indicators.                               o    If a stock remains below the 49-day MA in a
 ! How to PROTECT and/or FIX the trade.                                                healthy bull market there is probably something
                                                                                       wrong so watch out.
 ! The desired PROFIT TARGETS.
                                                                                  o    If an uptrending stock suddenly slices below its 49-
(D 6 -$ 2&1 " (S B(U 6 **(4 $ -F . 2/ (                                                day MA in high volume, that is a sell signal.
Historically, Bull Markets tended to last 36 to 39 months.                  ! 137-day MA: white dots. This seems to give an
                                                                              advance warning as to what is happening in relationship
(D 1 , (31 " . / (@ -. " > (H -. > &% 2&1 " /((                               to the 210-day MA.
If companies that make things (industrials) and companies that              ! 210-day MA: gold dots. Considered the ‘Death Cross’
ship things (transports) are both moving in the same direction,               if the price drops below this MA. Also, when the 49-day
then, over the last 104 years, the direction of the USA                       MA crosses upward over the 210-day MA, be prepared
economy and stock market has been successfully predicted                      for a reversal. The chance of the price continuing
92.6% time. Analyst predictions are released September 30.                    upward is only 2%. If a stock price move 70%+ above
                                                                              the 210-day MA, consider locking in profits.

       41=&"'(+=.-$'.(G2-$2.'&./(Z4+[(                                     (h 89 ? 8O i (4 + (5 -1 //(S = . -(G 2-$ 2. ' I (
                                                                           When moving averages (MA) cross over one another on
The strategies discussed below are aimed at longer term                    high volume, it signals a trend change. These signals, when
investing rather than day-trading. However, the basic                      used with other timing tools, helps determine when to trade.
concepts may be applied to short-term trades.
                                                                             ! Up-trending. When the 7-day MA crosses upward
     The most common error is to buy low and                                   through the 21-day MA or the 21-day MA crosses
          sell high. Research supports                                         upward through 49-day MA, WAIT 3 DAYS to see if
            buy high and sell higher.                                          the candles remain above the MA trend lines. If the
                                                                               candles remain above, consider buying.
(5 1 " B&' 6 -&" ' (P (5 1 *1 - 8% 1 > &" ' (4 + /(                          ! Down-trending. When the 7-day MA crosses
I plot MAs on time frames outside the norm based upon my                       downward through the 21-day MA or the 49-day MA,
belief in the Christian Trinity and the number seven which                     WAIT 3 DAYS to see if the candles remain
stands for completeness. These MAs are configured and                          ENTIRELY BELOW the MA trend lines. If the
colored-coded as follows.                                                      candles remain below, consider selling.
 ! 3-day MA: yellow dashes. Indicates quick momentum                        ! On the Stochastics chart, when the 3-day dash line
   changes and often used with the Stochastics tool to warn                   crosses downward through the blue dash line, think
   against an upcoming short-term downtrend.                                  about getting out. This is a fairly reliable indicator.
 ! 7-day MA: blue dashes. The 7/21/49 MAs on daily                          ! When all three MAs are parallel and moving up,
   charts have functioned together to provide reasonably                      consider buying! Then when the 21-day MA starts to
   reliable indicators of trends and trend changes.                           trend sideways or flattens out, sell half.


John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                            Updated 8/14/12 - Page 32
(h b9 ? (4 + (< . 2-$ % . E . " 2(G 2- $ 2. ' I (                        (X # . " (5 # 1 1 /&" ' (D &= &> . " > (G 21 % F /(
It is typical for up-trending securities to have a price pullback          ! Look for a lower Dividend Payout Ratio (DPR). To
as in a “Cup with a Handle” pattern which is a bullish strategy              calculate the DPR divide annual dividend by the
that may take up to seven months to develop.                                 Earnings Per Share (EPS). If a company paid an annual
 ! Alert Day & Possible Entry Price. When the 7-day                          dividend of $1 per share and had an EPS of $2, the
   MA crosses upward over the 21-day MA, record the                          payout ratio would be 50%. Generally, a lower DPR is
   highest price the security reached on the CANDLE                          better because the more paid out in dividends the less
   WICK THAT DAY. This will eventually become the                            they are building up cash, paying off debt, and investing
   entry price IF the following condition is met.                            in growing the business. Some analysts suggest looking
 ! Wait For A Pullback to the 21 MA. If the price                            for DPRs under 60%; others say under 80%.
   retraces and the candle-wick TOUCHES the 21-day MA                      ! Look for dividend growth for five years because it
   --- not closes upon or opens at, consider placing a BUY                   provides an indication of overall performance. The
   STOP order at market (good-till-cancelled) at the ‘entry                  stock price, profits, cash, and dividend should be
   price’ that was established on the Alert Day. A Buy                       increasing. To be considered one of the best, a company
   Stop Order is an offer to purchase a stock at specific                    should have paid and increased their dividends for at
   price or higher and is only executed when it reaches that                 least 25 years with a steady increase each year. For
   price. Note! Cancel the order within a month if the 7-                    example, Johnson & Johnson has raised its dividend for
   day MA crosses below the 21-day MA or the price never                     49 consecutive years. Procter & Gamble has raised its
   moves up to the entry price.                                              dividend for 56 consecutive years
As an example, if the 7-day MA of XYZ company crosses                     ! Compare the yields to other stocks in the same industry.
over the 21-day MA of $47 and reaches a high at some time                   If the yield is excessively high it could be a sign of
during the day of $54.31, this is the ‘Alert Day’ that                      increasing risk. Also compare the industry itself to other
establishes the ‘Entry Price’ of $54.31. If a week later the                industries in the market to see where the industry stands.
stock price retraces back to the 21-day MA that is now $48                 ! Compare the net income by quarter to the same quarter
and touches it during the course of the trading day,                         of the previous year. A company can still make money
immediately place a ‘Buy Stop’ order at $54.31. Within a few                 and have a negative net income growth rate, but they
weeks if the price rises above the $54.31 it will be purchased               will not be able to continue to expand their business.
at market. Immediately set a trailing stop to minimize loss.
                                                                          ! Does the company have an excellent credit rating with
                                                                            little or no debt and/or cash to cover the debt.
                   D&=&>.">(C"=./2&"'(                                    ! Look for a stable Return On Investment (ROI) because it
                                                                            shows how long it will take to earn money back from the
A dividend is a share of the company’s profits typically                    initial investment. The ROI is composed of dividend
paid out to investors on a quarterly basis but could be paid                payments and increase in stock price. It is desirable for
monthly or yearly.                                                          both to show a stable, upward trend.
 ! Fast growth companies often do not pay dividends.                      ! Find out how the company did during the 2008 market
   They keep their profits to reinvest in their long-term                   crash.
   growth (buying more equipment or to buy back shares
                                                                         (5 1 E E 1 " (4 &/2$ F . /(S B(D &= &> . " > (C" = . /21 -/(
   which decrease the outstanding shares of stock).
                                                                           !    Many dividend buyers base their buying decisions on
 ! Dividend-paying securities often fall out of favor in
                                                                               yield alone. Yield is important but safety must consider.
   rapidly rising bull markets, subsequently regaining a
                                                                               If the company is weak it may wise to avoid it.
   strong following during unpredictable markets.
                                                                           ! A dividend reduction is a sign of trouble. When a
 ! During slow growth bear markets, many investors seek
                                                                             company cuts its dividend it is saying something has
   shelter in dividend stocks such as the following at the
                                                                             gone wrong: (1) profits have dropped, (2) the company is
   time of this writing:
                                                                             taking on too much debt, or (3) because the stock price
 Microsoft (MSFT))              Johnson & Johnson (JNJ)                      has fallen so sharply that the yield is far beyond the
 Procter & Gamble (PG)          Wal-Mart Stores (WMT                         industry average. In most cases, investors should sell
 General Mills (GIS)            Intel Corp (INTC)                            their shares once a long-standing dividend is cut.
 PepsiCo Inc (PEP)              Abbott Laboratories (ABT)
                                                                         (D &= &> . " > (5 $ N 26 -&" '(G 2-$ 2. ' I (
 Waste Mngement (WM)            Clorox Company (CLX)
 Piedmont N. Gas (PNY)          Kinder Morgan (KMP                       Buy a stock three days before the owner of record date to
 Sunco Logistics (SXL)          National Grid (NGG)                      collect the dividend. Then hold across the owner date to
 AFP Provida SA (PVD)           Blackrock Kelso (BKCC)                   capture dividend. Then sell the stock if so desired.
 Enterprise Prdcts (EPD)        Rayonier Inc. (RYN)


John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 33
                                           SN2&1"(a1%$A6*$-I(
An option is a contract between two parties; one buys an
option on an underlying security and another sells the                    (D &/$ > = $ " 2$ ' . /(S B(S N 2&1 " (@ -$ > &" ' ((
option on the same underlying security for: (1) an agreed                   ! The degree of complexity in determining what and when
upon cost, (2) at a specific strike price, (3) that expires                   to buy or sell.
within a specific time limit.
                                                                            ! The limited time frame that may work for the option
Definition of an “underlying” security is a specific stock, ETF,              seller and against the option buyer.
index, etc. upon which an option contract is based. Typically,
the underlying security is SELDOM bought or sold by
option traders.                                                                     U6I&"'(P(G.**&"'(5$**(SN2&1"/(
       Rather the option contracts themselves
      are bought and sold or expire worthless.                            A CALL option is similar to a lease/option contract used to
                                                                          purchase or sell a home. The renter (possible buyer) pays
There are two types of option contracts, CALLS and PUTS                   $850 per month for the right, but not the obligation, to buy the
that will be described shortly. Note, option vocabulary is                home anytime within the next three years for a pre-agreed-
difficult to learn and not all securities offer options.                  upon price, say $300,000. The renter/buyer hopes the value of
                                                                          the house increases during that time.
           A single option contract controls                              The landlord owner (possible seller) immediately collects the
               100 shares of a security.                                  $850 rent per month and hopes to sell the house within the
                                                                          allotted time of the lease/buy contract if the contract holder
(@ # -. . (H $ -2/(S B(+ " (S N 2&1 " (5 1 " 2-$ % 2((
                                                                          STILL wants to purchase the house for the agreed upon price.
 ! Strike Price – an agreed upon buy/sell price at which                  The seller usually just wants to get rid of the house because he
   the buyer and seller agree to do (strike) a deal.                      can’t afford making a payment on the house he is already in
 ! Expiration Date – when the option contract expires                     while the first home remains vacant.
   (time duration). American options typically expire the
                                                                          (U 6 I &" ' (5 $ **(S N 2&1 " /(
   3rd Friday of a select month.
 ! Premium – the cost of option. The money the buyer                      Call buyers hope the price of the underlying security raises.
                                                                          For example, if the buyer purchases the right to buy a 100
   pays immediately to the seller. This transaction shows
                                                                          shares of a security at $30 within the month and the security
   up in the sellers account as a deficit until time-decay
   works its magic. The size of the premium is determined                 rises to $45, the buyer profits $1500 per contract (one contract
   by market-makers who figure in the value of time-decay,                controls 100 shares times $15 per share equals $1,500).
   security volatility, and intrinsic value of the underlying             The profit potential is unlimited for the Call buyer. The risk is
   security which will be discussed shortly.                              the loss related to the cost of the option. Time decay works
                                                                          against the option buyer because the contract expires
(+ > = $ " 2$ ' . /(S B(S N 2&1 " (@ -$ > &" ' ((                         within an agreed upon time frame.
 ! Selling options may generate a monthly income.
                                                                          (G . **&" ' (5 $ **(S N 2&1 " /(Z5 1 = . -. > (5 $ **/[(
 ! Options control securities without having to own the
   security itself.                                                       The Covered Call (CC) seller immediately receives a
                                                                          premium for selling the option --- the right for someone to
 ! Options may be used to protect profits and hedge
                                                                          take the security away from the seller at a certain price within
   positions to minimize losses.
                                                                          a certain time period. Time works in favor of the seller
 ! Allows one to acquire securities at reduced prices.                    because the buyer must close the contract within the agreed
      The chart below demonstrates the advantage of                       upon time frame. The profit potential for the seller is limited
                 purchasing a Call option.                                to the premium initially received.

  Buying Option vs                Option             Security                         To sell a CC the seller must own
  Buying Security                  Cost                Cost                              100 shares of the security.
  Purchase Price                  $ 1.85             $ 30.20
                                                                          Covered Call selling is a way to:
  Sold Price                      $ 7.40             $ 35.85
  Profit In Dollars               $ 5.55              $ 5.65                ! Generate a monthly income from securities already
                                                                              owned and possibly retain ownership of the security.
  Profit Percentage               300%                18.7%

John Mohan Consulting LLC                            Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 34
 ! Generate portfolio growth by purchasing securities and
   selling in-the-money CCs with the hope of being called                           D.2.-E&"&"'(SN2&1"(H-&%&"'(
   out of the underlying security by expiration Friday.
                                                                         Option pricing is comprised of intrinsic and extrinsic value
           U6I&"'(P(G.**&"'(H62(SN2&1"/(                                 and controlled somewhat by the market maker.

                                                                         (C" 2- &" / &% (a $ *6 . c(&"82# . 8E 1 " . I (
A PUT option is like owning car insurance. The buyer pays                The intrinsic value of an option is based upon the price of the
$1,200 for a year of car insurance. The insurance company                underlying security. To figure the intrinsic value, subtract
collects the money and agrees to fix or replace the car should           the option strike price ($55 in the following example) from
it be wrecked within that year. As each month passes, the                the current security price ($60.05). The remaining amount
value of the insurance policy decreases. The insurance                   is the intrinsic value ($5.05). Intrinsic value is the amount an
company hopes the buyer doesn’t wreck the car. Insurance                 option is in-the-money (ITM).
companies are sellers of option contracts.

(U 6 I &" ' (H 6 2/(                                                                                    Intrinsic Value        Extrinsic
                                                                            Current security             Security price      Market Maker
Put Buyers hope the security price drops dramatically so                     price $60.05                 minus strike       value of time
the security can be purchased at a lower price and then                                                       price           & volatility
sold to the seller of the Put option at a higher price. For                July11 $55 Call Option
example, if the buyer purchases the right to sell the security to          Option Price $6.75             $5.05 plus             $1.70
the seller at $55 within the month and the security drops to
                                                                           July11 $65 Call Option
$10, the Put option buyer would then buy the security at $10
                                                                           Option Price $1.80                   0                 1.80
and sell it to the Put seller at $55. However, usually option
contracts themselves are bought and sold rather than the
actual underlying security itself. The Put buyer’s risk is the           (! Y 2-&" /&% (a $ *6 . c($ (E $ -F . 2 8E $ F . -(21 1 *(
loss related to the cost of the option. Time decay works                 Options out-of-the-money (OTM) are comprised entirely of
against the buyer.                                                       extrinsic value which is the additional fee charged by the
                                                                         market-maker for TIME DECAY (time remaining in the
(G . **&" ' (H 6 2/ (
                                                                         contract) and VOLATILITY (price swings). The market
Put Sellers receive a premium and hope the option expires                maker is a professional exchange securities dealer who has
worthless. The seller hopes the price of the security stays the          the responsibility of making bids and offers and maintaining a
above the strike price so the option does not have to be                 fair and orderly market.
purchased at a price higher than the going price. The profit
potential is limited but the risk is extremely high.                                The market maker can adjust the
                                                                                      extrinsic value of an option.
For example, if the buyer purchased the right to sell the
security to the seller at $75 and the underlying security drops            ! Time decay (value) is the amount paid for the time
to $10, the buyer of the Put option will sell the Put option for a           remaining in the option contract. As an option
+$65 profit per share resulting in a $6500 loss to the Put Seller            approaches expiration the option loses value which is
per contract. OUCH!                                                          expressed in the option Greeks as THETA. Think of car
                                                                             insurance. If $1200 is paid for a year of car insurance,
                                                                             the last month the insurance contract is in effect, the
              (SN2&1"(5#$-2(a1%$A6*$-I((                                     policy is worth considerably less (maybe $100).
                                                                                             Time decay works
 ! Ticker: The name of specific option.
                                                                                          AGAINST the option buyer
 ! Intrinsic Value: Indicates how far the option is in-the-                                & FOR the option seller.
   money, less the time value and volatility value.
 ! Extrinsic Value: The value the market-maker places on                   ! Volatility is the magnitude of the price movement
   time remaining in the contract and the price volatility.                  (ranging from high to low) NOT the direction of the
                                                                             price movement. Volatility pricing is determined by
 ! Bid: What the buyer is willing to pay for an option. It is
                                                                             comparing implied volatility to its historical volatility to
   the ‘wholesale’ price.
                                                                             see if an option is over/under or fairly priced.
 ! Ask: The premium the seller is willing to accept in order
                                                                                o    Implied volatility measures the current volatility.
   to strike a deal. It is the ‘retail’ price.
                                                                                     If the current volatility is higher than the historical
 ! Volume: How many contracts were traded that day.                                  volatility, then the option is priced higher than
 ! Open Interest: Current number of open (unexercised)                               normal. Usually an option premium that is over-
   contracts for each option.                                                        priced no more than 20% is considered acceptable.


John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 35
       o    Historical volatility is the past price movement of            ! Vega: how much an option price changes when the
            the underlying security. If the historical volatility            implied volatility changes 1%. An increase in volatility
            is higher than the current volatility, then the option           will increase the option price. For example, if XYZ has
            price is considered undervalued.                                 a Vega of 0.20 and the volatility increases 1%, the option
Volatility of the underlying security affects the premium. The               price will increase by 20 cents.
more volatile, the higher the premium which benefits the                   ! Alpha: a statistical way to evaluate the risk-adjusted
seller. If the volatility is low, this usually benefits the                  momentum; incorporates both risk and reward.
buyer of options.                                                          ! Beta: a security's volatility when compared to the
      Volatile options cost more and pay more                                market as a whole. A rating above one means the
      than options that have minimal ranging                                 security is, on average, more volatile than the market.
                                                                             A rating below one means the security is less volatile.
                  price movements.
                                                                           ! Gamma: how much delta changes after a $1 move in
Two examples; when the market falls, there is an increased                   underlying security price.
demand for PUTS. These PUTS are then priced higher by the                  ! Kappa: analyzes the regression of options; represents
market makers because the probability of them becoming                       the ratio of the dollar price change in the price of an
profitable sometime during the option contract is good. Also,                option to a 1% change in its expected price volatility.
many sellers of Covered Call options cause option prices to                  The price of an option increases simultaneously with its
drop while increased buyers of Call options make prices rise.                volatility. This term is used as a synonym for Vega,
(a Cj (K () . $ -(C" > &% $ 21 -(                                            Lambda, or Sigma.
                                                                          ! Rho: Measures sensitivity of an option to a change in
The VIX (CBOE Volatility Index), also known as the ‘fear’
                                                                            interest rates.
indicator, is a measure of expected volatility of option pricing
over the next 30 days in comparison to the S&P 500. When                 (5 1 E A &" $ 2&1 " (S N 2&1 " (@ -$ > . / (
the VIX moves up, fear increases, and the market tends to
drop down and vice versa.                                                Combination option strategies are comprised of two or more
                                                                         options (legs) placed on the same security either in the same
To determine the percentage of expected monthly change in                month commonly called Vertical Spreads or paired over
the price of an option, divide the VIX number by 12 months.              several months, commonly called Time Spreads.
A VIX reading of 48 divided by 12 means the option is
expected to move within a range of 4% over the next 30 days              The disadvantage of these strategies is complexity. Putting
when compared to the S&P 500.                                            together several options and then buying back one leg or
                                                                         rolling to another month to protect a position is tricky for new
 ! A high VIX of 50+ means FEAR dominates the market.                    traders. However, the advantages of combining options are:
   This is possibly a time to be a BUYER of PUT options
   and SELLER of Covered Call options if retained                          ! Reduced capital needed to make trades.
   ownership of your security is desired.                                  ! Limits risk and losses. The most that can be lost in
 ! A low VIX of 30 or less means option traders are                          option trading is the difference between the credit/debit
   complacent. It is possibly a time to be a BUYER of                        and range of exposure in the trade.
   CALL options and SELLER of PUT options.                                 ! Provides versatility because these strategies work in
                                                                             bull, bear, or neutral markets.

                      (SN2&1"(J-..F/((                                   (a &. , &" ' (5 1 E A &" $ 2&1 " (S N 2&1 " /(G . *. % 2&1 " / (
Option Greeks help market makers assign a monetary value to              In TOS select the Trade tab. Enter a security symbol. Open
the extrinsic factors that influence option pricing. Listed              the Option line near the top of the chart by clicking on the blue
below is a summary of some of the more critical Greeks.                  triangle. Find ‘Spread’ near the center right followed by a
                                                                         rectangle with the word ‘Single’ in it. There is a small yellow
 ! Delta (very significant): how much the option price                   triangle in the lower right-hand corner of this box. Click on it
   moves when the underlying security price moves $1.00.                 and it will bring up a large number of combination option
   A Delta of .75 means the option price moves 75 cents for              charts that are already set-up. To begin analyzing the different
   every dollar change in the underlying security. CALLS                 types of combination options, start with the ‘Vertical’ chart.
   have positive delta while PUTS have negative delta.
 ! Theta (very significant): how much time decay reduces                 (X . . F *I (S N 2&1 " / (
   the theoretical value of an option per day. Theta doesn't             Some securities offer options that last only nine days. These
   reduce an option's value evenly. Time decay really                    weekly options are created each Thursday and expire on
   accelerates the last month, the last five days, and the last          Friday of the following. Over 40% of the option market is
   day of the contract.                                                  comprised of these weekly options. Weekly options have
                                                                         exactly the same properties as the monthlies.

John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 36
(@ 1 () &" > (X . . F *I (S N 2&1 " / (C" (@ S G ((
In upper left hand corner, click on blue triangle to the left of
‘Support/Chat’. This opens and closes the watch list column.
Choose a watch list. Click on the white gear symbol in the
black rectangle outlined by a yellow line. It opens a drop-
down box. Select ‘Public’ and it opens another drop-down
box. Select ‘Weeklys’ at the bottom of the column and it will
provide a list of all securities that offer weekly options.



            5#.%F(\16-(R">.-/2$">&"'(
 1. Explain the value of the 49-day moving average and the
     210-day moving average.

 2. Explain the “7/21 MA Retracement Strategy”.

 3. List and explain several key factors when select a stock
     that pays dividends.

 4. An option contract controls how many shares of a
     security?

 5. List and explain the three parts of an option contract.

 6. Explain buying and selling of Call options.

 7. Explain buying and selling of Put options.

 8. Explain “Intrinsic Value” of an option.

 9. Explain the extrinsic value of an option?

10. What is the VIX?

11. Explain Delta.

12. Explain Theta.

13. Describe Vertical and Time spreads.

14. What percentage of the market do weekly options
     comprise?




John Mohan Consulting LLC                             Enhancing Financial Awareness !2008   Updated 8/14/12 - Page 37
                                                @-$>&"'(SN2&1"/(
BEFORE choosing a strategy and entering a trade you must
know the following or you are trading blind:                                             SN2&1"(G.**&"'(G2-$2.'&./(
 ! TRENDS, market, industry, security.
                                                                           Option selling is one of most consistent ways to make money.
 ! SUPPORTING VOLUME.                                                      But it is not conducive to achieving ‘home run’ trades.
 ! SUPPORT and RESISTANCE levels.                                          However, over time, collecting small weekly/monthly gains
 ! CONFIRMATION from multiple timing indicators.                           can really add up. Open interest or liquidity is not very
                                                                           important when selling options. If someone is willing to buy
 ! HOW to PROTECT and FIX the trade.                                       what you are willing to sell, then liquidity does not matter.
 ! Desired PROFIT TARGETS.                                                 As a review, the trader SELLS the right for a security to be
Note: novice traders tend to gravitate to trading lower-priced             taken away from him (Calls) or sold to him (Puts). The Seller
options which are the most difficult to profit from. The novice            collects a premium for the sale. Time decay works in favor
will argue cheap options are better because, if successful, the            of the seller. The goal of the seller is to collect as much
win will be greater percentage-wise and, if wrong the loss is              premium as possible with limited risk. An achievable goal is
insignificant. However, a lot of insignificant losses add up.              to aim for a minimum gain of one percent per week or four
                                                                           percent per month per trade.
                  If the odds favor a loss,
                   why make the trade?                                                          Option Selling Rules
                                                                           " Sell option contracts which expire in 60 days or less.
       5#11/&"'(+NN-1N-&$2.(G2-$2.'&./(                                    " Look for trend reversals at support or resistance with the
                                                                             accompanying increased volume.
There are all kinds of option strategies. The following are the            " Divide the strike price into the EXTRINSIC value of the
ones I use most in particular situations and find easier to                  option to determine the percentage of gain.
explain to students.
                                                                           (5 # 1 1 /&" ' (+ (G 2-&F . (H -&% . (X # . " (G . **&" ' (
(H -&% . /(U 1 6 " % &" ' (R N , $ -> (S BB(G 6 N N 1 -2(
                                                                             ! Choose Out-of-the money (OTM) to collect a little
When a security is bouncing upward off support with high
                                                                               extra from a security or LEAP you already own, want to
volume, you may:
                                                                               keep, and it seems to be staying within a channel.
 ! Buy the security itself.                                                  ! Choose At-the-money (ATM) to collect maximum
 ! Buy Call options expecting the price to go up.                              premium from a security that has hit resistance (sell
 ! Sell cash-backed Naked Put options.                                         Calls) or support (sell Puts) and begins reversing its
                                                                               direction. And it doesn’t matter to you if the security is
 ! Sell Bull Put Credit Spread combination options.                            called away or not.
(H -&% . /(U 1 6 " % &" ' (D 1 , " , $ -> () -1 E (< . /&/2$ " % . (        ! Choose In-the-money (ITM) to have the security called
                                                                              away and be paid a little extra for giving up their
When a security is bouncing downward from resistance
                                                                              security. Put sellers wants to purchase the security at a
with high volume, you may:
                                                                              discounted price by being paid to have the security being
 ! Set tighter Stops.                                                         PUT to them.
 ! Buy Puts in anticipation of downward price movement.
                                                                           (G . **&" ' (5 1 = . -. > (5 $ **/(
 ! Sell Covered Calls.
                                                                           Selling Covered Calls is a popular low risk strategy. However
 ! Sell Bear Call Credit Spread combination options.                       the seller must own 100 shares of the underlying security.
                                                                           Therefore a large outlay of cash required to meet the
(H -&% . /(G 2$ I &" ' (X &2# &" (+ (5 # $ " " . *(                        requirements of this strategy.
When a security is in a NEUTRAL CHANNEL some complex                         ! Selling Covered Calls ATM typically occurs when
combination option strategies that seem to work best are:
                                                                               there is high volume and the price of the security is
SELLING Vertical Spreads, Covered Calls, and Iron Condors.
                                                                               bouncing downward from resistance. Suppose 100
                                                                               shares were purchased for $64. Then a $65 CC option


John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 38
      was sold for $2 per share collecting the $200 premium                        $2.99 ($64 minus $63.44). Divide the premium price
      ($65 divided into $2 equals a 3% gain). If the price stays                   received of $2.99 by the $64 strike price. This results in
      below $65 by expiration, the option expires worthless                        4.7% discount for purchasing the security at $64. In
      and security remains with the CC seller.                                     other words, the seller received an additional $2.99 for
 ! Selling Covered Calls ITM is often used when the                                purchasing the security at $64 meaning the actual cost
   seller wants to get rid of the security. Suppose IPI                            for the security is only $61.01. Such a deal!
   (Potash) was purchased at $27.80 and rose to resistance
                                                                             (G . **&" ' (a . -2&% $ *(U 6 **(H 6 2(5 -. > &2(G N - . $ > /(
   at $32.40. Then it looked as if it was going to pullback
   to $29.20, a current support level. A $27 CC could be                     This is a favorite of my college students. It is a two-legged
   sold to collect a $6.40 premium. Subtract 80 cents of                     strategy typically used with an up-trending security. It
   intrinsic value from option price = $5.60. Divide $27 in                  requires very little capital and protects against major losses.
   to $5.60. This is a 20% gain for possibly two-months.                     The objective is for both options to expire worthless. The
                                                                             objective is to SELL a Put that will expire worthless and
To protect against a huge loss from a dramatic drop in the
                                                                             PURCHASE a further OTM Put to protect against gap down
price of the underlying security you may: (1) purchase an
                                                                             losses (insurance) that will also expire worthless. Both
OTM Put to act as a hedge, or (2) set up a good-till-cancelled
                                                                             options have the same expiration date.
combination order to close the option and sell the underlying
security if the underlying security drops below a certain price.             Assume a security is trading at $56.00 and support is around
To find potential CC trades in Investools, in the Investor                   $55.50. Purchase a $50 Put for 25 cents. Then sell a $55
Toolbox click ‘Searches’ Tab. Click on ‘Covered Calls’ in the                Put collecting $1.50 from the sale. Your hope is both options
left-hand column. Then explore the pre-built searches to find                will expire worthless by expiration Friday. Subtract the 25
the one that is best suited to your objective. A personal                    cents paid from the $1.50 received. The net is the maximum
favorite is “Stocks Under $50 Offering High Premiums”.                       profit --- $1.25/share. If the underlying security price falls
Then research these companies to see if you want to own them                 below $50 and the trade has not been fixed before this occurs,
for a short period of time. Consider selling deep ITM to get                 the maximum loss is $3.75 per share ($5.00 minus $1.25).
rid of the stock, collect the extrinsic, and return to cash.
                                                                             (G . **&" ' (U . $ -(5 $ **(5 -. > &2(G N -. $ > /(
(G . **&" ' (5 $ /# 85 1 = . -. > (0 $ F . > (H 6 2/(                        This is a two-legged option strategy that is typically used with
This is a favorite among professionals. However, selling                     a down-trending security. The objective is to SELL a Call
cash-covered Naked Puts is extremely risky. The seller is                    at or near the-money (bouncing downward off resistance) that
hoping the security price will rise or stay flat so the option               will expire worthless. Then PURCHASE a further out-of-the-
expires worthless. The buyer wants to security price to drop                 money Call at a higher strike price to protect against a sudden
dramatically so the seller must buy the security at the higher               gap up in the security price (homerun insurance). Both
strike price. If the underlying security price gaps down it will             options have the same expiration date.
result in a tremendous loss for the seller who is required to                Suppose GG is trading at $56.00. Purchase an insurance $60
purchase the security at the higher strike price or close the                Call for 25 cents that gives you the right to buy the security
trade at a loss. The objective is to collect some money from                 from another at $60 should the price of the security rise above
the sale of an option that expires worthless.                                $60. Then sell a $55 Call collecting $1.50 from the sale. The
 ! Selling Naked Puts ATM is used when there is high                         maximum profit is $1.25/share ($1.50-.25=$1.25). If the
   volume and the price is bouncing upward off support.                      security price is below $55 on expiration Friday both Calls
   If the price stays above the sold Put strike price, time-                 expire worthless and the entire profit is maintained. If the
   decay eats into the option price reducing its value to the                underlying security price rises above $60 the maximum loss is
   point that the option expires worthless and the seller                    $3.75 per share ($1.25 less the $5.00 spread).
   keeps the premium. If the price drops below the strike
                                                                             () &" > &" ' (G N -. $ > (@ -$ > . / (
   price the seller has to purchase the security at the agreed
   upon price or close the trade before expiration so as to                  The following is a list of criteria used to search for some
   take advantage of maximum time-decay. For example,                        possible spreads. First click on the ‘Scan’ Tab in TOS. Select
   suppose an ETF is priced at $16.84 and support is                         ‘Spread Hacker’. On far right next to ‘search’ select
   $15.91. A next month $16 PUT could be sold for 80                         ‘VERTICAL’. On ‘spreads for’ open ‘Category’ and All
   cents. A 5% gain would result if the security is not Put                  Optionable. Under ‘CRITERIA’ fill in the following
   to the seller. Divide 80 cents by the sold strike price to                limitations: Underlying Price=min 2.13. Prob of Profit = min
   determine the percentage of gain.                                         80%. Change third box to ‘Days to Exp’ = max: 60. Add a
 ! Selling Naked Puts OTM is a way to obtain a desired                       fourth box by clicking on ‘Add Fundamental Filter’ located
   security at a discounted strike price. The seller gets paid               top far right. Change to ‘Delta min: -48’. Add a fifth box.
   to buy the security at a strike price the seller chooses.                 Change to Back Vol min: 5.34’. Show 50. Click on Scan
   Suppose an ETF is priced at $63.44 and a $64 Put could                    rectangle and a list of securities will come up. Adjust scan
                                                                             criteria as personal parameters become clearer. Click on
   be sold for $3.55. The extrinsic value of this option is
                                                                             ‘Save Scan Query’ and type in a name.

John Mohan Consulting LLC                               Enhancing Financial Awareness !2008                              Updated 8/14/12 - Page 39
(G . **&" ' (S N 2&1 " /(+ ' $ &" / 2(7 ! + H G(                           ! Enter the trade one to two months prior to expiration.
                                                                             Exit the trade 2 to 10 days before expiration or when a
This is a time-spread strategy that spans months or years. It
                                                                             75% to 80% profit has been achieved.
involves buying long-term options (LEAPS - one year or
more) and selling near-month options ATM or ITM to profit                  ! Enter the Bear Call spread when the price is rising and
from rapid time decay. The objective is to reduce the cost of                the Bull Put spread when the price is falling. Aim for a
the LEAPS by collecting premium from the sale of the near                    credit from each leg that will provide at least $2 for the
month options. If done monthly, the cost of the LEAPS will                   entire Iron Condor.
be reduced substantially                                                  ! Close out any leg of the Condor when it gets down to
If a June security is trading at $40 and expected to be non-                $.10 or less. Close out the entire trade when it is $.25 or
trending for the next few months, buy a LEAPS option (say a                 less and there is still 3 or 4 weeks to go.
$40 call for $400) and sell a near month $40 Call option for
$200. This results in a debit of $200. If the security closes            () &" > &" ' (C-1 " (5 1 " > 1 -(@ -$ > . / (
just below $40 on expiration Friday, the near month option               In TOS select ‘Scan” tab and choose ‘Spread Hacker’. In the
expires worthless. The long-term option loses some time                  ‘search’ box enter Iron Condor. In ‘spreads for’ box enter
decay value but is still worth $350. Selling this nets a $150            S&P 500. Then initially set the following parameters.
profit after taking into account the initial debit of $200.              Underlying Price=$50 - $100. Probability of Profit=60% -
                                                                         75%. Days to Expiration=30 – 60 days. Mark=$.50 - $.60
(G . **&" ' (C-1 " (5 1 " > 1 - /(                                       (how much credit received). Max profit=25% - 50%. In
This four-legged strategy that involves both buying and selling          ‘Security Hacker’ locate the ‘Scan in’ box. Pull it down.
Calls and Puts during the same month. It is generally used               Select ‘Public’ and ‘S&P 500. In the ‘intersect with’ box
when the underlying security has low volatility and is                   select ‘Public’ and choose ‘Penny Increment Options’. Then
generally non-trending. The objective is for all options to              initially set the following parameters. Volume=1,000,000 –
expire worthless. It is used when the underlying security has            Max. Mark=$50 - $150. PE=5 – 20 (expensive & popular =
low volatility and is non-trending. The four legs of an Iron             volatile). Front Volatility=30% - 45%
Condor are:
 ! Sell a Put that is out-of-the-money to collect premium.
   On a security trading at $45 in June, sell a July 40 Put
                                                                                       SN2&1"(U6I&"'(G2-$2.'&./(
   for $100.
                                                                         Buying options is a riskier trade than selling options
 ! Then buy a Put at an even lower strike price such as a                because time works against the buyer.
   July 35 Put for $50. This is “fire” insurance” in case the
   price drops dramatically.
                                                                                             Option Buying Rules
 ! Also sell a Call that is out-of-the-money to collect
                                                                         " Buy options which expire in three months or more.
   premium, say a July 50 Call for $100.
                                                                         " Look for bid/ask spreads of 30 cents or less and a high
 ! Then buy a Call at an even higher strike price, a July 55
                                                                           Delta of .70 or more if the security is over $10.
   call for $50. This is “home run” insurance in case the
   price skyrockets to the moon.                                         " Open interest must be above 500 on short-term options so
                                                                           there are buyers when you want to sell to close the trade.
The net credit received when entering the above trade is
                                                                           Open interest in LEAPS if often limited or non-existent
$100. If on expiration day the security is still trading at $45.
All the 4 options expire worthless and the trader keeps the              " Look for a 150% volume increase that confirms the trend.
entire credit received as profit.
A loss occurs when the security price falls outside the range            (G . *. % 2&" ' (+ (G 2-&F . (H -&% . (X # . " (U 6 I &" ' (
of the sold Call or sold Put. If the security is trading at $35            ! Out-of-the money (OTM) options are bought because
on expiration day, all the options except the July 40 Put sold               they are cheapest and many beginning traders gravitate
expire worthless. If the sold July 40 Put has an intrinsic value             toward them in hopes the security will make a huge
of $500 the option has to be bought back to exit the trade at a              upward price move even though it is highly unlikely.
loss of $400 ($500 minus $100 credit received.                               The downside is the underlying security may trade much
                                                                             higher over time, but the option --- with a very low delta
(5 1 " > 1 -(C" /&' # 2/( (
                                                                             and high theta --- could trade even lower.
 ! Trade indexes or ETFs with high volume and an open                      ! At-the-money (ATM) options are bought near support
   interest of 1,000+                                                        or resistance to benefit from quick, pronounced price
 ! Bid/ask spreads should be tight, penny wide if possible,                  movements. However, time decay reduces the option’s
   but it depends upon the underlying.                                       extrinsic value beginning 60 days out, crashing
                                                                             dramatically during expiration week.



John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                                  Updated 8/14/12 - Page 40
 ! In-the-money (ITM) options are bought because they                     from the $3.60 debit. It reduces the cost to $2.50. The desired
   have a higher chance of being profitable since they have:              result is that the price of the security will rise high enough to
   (1) a high intrinsic value, (2) a low extrinsic value, (3) a           cover the cost of the trade and make a few dollars. The
   high Delta (+.70) which results in quicker profits, and                maximum that can be earned is achieved when the security
   (4) a relatively low Theta so time decay does not greatly              price reaches the $30 strike price. Anything above that and
   impact the option pricing.                                             the security will be called away.

(U 6 I &" ' (5 $ **/(+ 2(G 6 N N 1 -2 (                                   (U 6 I &" ' (+ (G 2-$ > > *. (
The Call buyer hopes the price of the security will rise. For             A Straddle is typically used over earning reports. Many times,
example, if a security is currently priced at $20, a $25 Call             a security price will gap up or down following the quarterly
may be purchased for around a $1.00 or so a share. Assuming               earnings report. However, the direction of the movement can
the price of the security rises above $25 before expiration, say          be unpredictable. A sell-off can occur even though the
to $30, the option buyer has two choices:                                 earnings report is good if greater results were anticipated.
 ! Sell the option contract for $5.00+ premium per share                  The Straddle is a two-legged short-term option strategy. It
   netting a healthy profit. This is what typically happens               involves buying an at-the-money Call option and a Put option,
   and is the easiest way to close an option contract.                    both with same strike price and expiration date. The
 ! Let the option expire and the brokerage house will                     desired result is that the price of the underlying security
   exercise the contract for you for a small fee.                         moves significantly in either direction to cover the cost of the
                                                                          combined premiums.
(U 6 I &" ' (H 6 2/(C@ 4 (+ 2(< . /&/2$ " % . (                           Look for securities with a history of gaps during earnings.
      Put option pricing moves fast. They are                             Time works against this strategy, but the profit potential is
                                                                          unlimited. Buy a straddle two to three weeks ahead of
       often more successful than buying Call                             earnings. Then hopefully prior to the earnings
         options. Puts need more watching.                                announcement the underlying security price jumps
                                                                          significantly due to company news. Once the price trend
If there is high volatility and the underlying security is
                                                                          starts, sell the losing option and let the profitable one run
bouncing downward off resistance, purchase deep-in-the-
                                                                          placing a tight trailing stop.
money Puts with a high Delta (-.70), low Theta, and low
extrinsic value. While this type of option costs more, if the             (U 6 I &" ' (+ (G 2-$ " ' *. (
value of the underlying security drops, the resulting increase
in the Put is dramatic.                                                   This is a two-legged strategy. It involves the simultaneous
                                                                          buying of a slightly out-of-the-money Put and a slightly out-
For example, if Home Depot is priced at $27.44 and possibly               of-the-money Call on the same underlying security with the
the price is going to drop because of: (1) a poor earnings                same expiration date. It has an unlimited profit potential and
report, (2) candle confirmation, (3) MACD Histogram                       limited risk. It is used when it is believed the underlying
confirmation, (4) volume is increasing on the sell side, and (5)          security will experience significant volatility in the near term.
the general market trend and sector trends are dropping, a
November 32 Put could be purchased for $4.56 that has a                   For example, if XYZ is trading at $40 in June, buy a July 35
Delta of -.70, a Theta of .01, intrinsic of $3.24, and extrinsic          Put for $100 and a July 45 Call for $100. The net cost to enter
of $1.32. Then for every dollar drop in price, the value of this          the trade is $200, which is also the maximum possible loss. If
Put will increase 70 cents. A drop to $24 will increase the               XYZ security rallies and is trading at $50 on expiration
value of this Put to around $6.70, a 32% gain.                            Friday, the July 35 Put will expire worthless, but the July 45
                                                                          Call expires in the money and may have an intrinsic value of
(U 6 I &" ' (S @ 4 (H 6 2/ (                                              $500. Subtracting the initial debit of $200, the profit is $300.
                                                                          If the security is still trading at $40 on expiration, both the
If, on above average volume, the security, sector, and market
                                                                          July 35 Put and the July 45 Call will expire worthless.
are all trending downward, consider purchasing long-term out-
of-the-money Puts. Suppose XYZ is priced at $34.11 and the                (U 6 I &" ' (+ (5 1 **$ - (
price appears to be going down, consider purchasing a January
2012 $25 Put at $2.35 with current open interest of 1,905.                This strategy involves three steps: (1) buying a best-of-breed
Then keep an eye on the underlying security. If the price                 security, (2) buying a long-term OTM Put for insurance when
drops significantly in near future, consider taking profits.              there is low volatility, and (3) selling a short-term OTM Call
                                                                          to collect some premium and reduce the cost of the trade. This
(U 6 I &" ' (U 6 **(5 $ **(D . A &2(G N -. $ > / (                        limits risk, allows for an upside if the stock decides to run. AS
                                                                          an example, if the security was bought at $30, buy a $25 Put
This is a two-legged strategy that is used with an up-trending
                                                                          and selling a $35 Call, both options are $5 out-of-the-money.
security. The objective is to PURCHASE a lower strike price
                                                                          This would protect against huge losses if the security fell
call (for example, a $25 strike price @ $3.60) that creates a
                                                                          under $25. In return the trader gives up any price appreciation
debit. Then SELL a higher strike price call ($30 strike price
                                                                          if the security closes above $35.
for $1.10) and collect the $1.10 credit. Subtract this credit


John Mohan Consulting LLC                            Enhancing Financial Awareness !2008                          Updated 8/14/12 - Page 41
(@ # -. . (7. ' ' . > (S N 2&1 " (G 2-$ 2. ' I (                         Stock splits increase the liquidity of a stock; there are more
                                                                         buyers and sellers for 10 shares at $10 than one share at $100.
PURCHASE a Call option at-or-near-the-money that is six
                                                                         Some companies oppose splits and keep the price high to
months out or longer. SELL a Put option at the identical
                                                                         reduce the trading volume. Berkshire Hathaway is an example.
strike price and expiration date to collect the premium and
                                                                         Historically, the odds are a stock split will cause the share
reduce the cost of the trade. Then PURCHASE lower strike
                                                                         price to continue to increase, sometimes doubling in two to
price Put to insure against a dramatic price drop.
                                                                         three years after a split.
For example, GDX (gold miners) is priced at $51.77.
                                                                           ! Buying two-legged” debit spreads. They require very
Purchase a January 13 $50 Call for $9.35. Sell a January 13
                                                                             little capital and protects against major losses. The
$50 Put collecting $7.85. Then purchase a January 13 $40 Put
                                                                             objective is for both options to expire worthless.
for $3.80 to limit risk in the event of a dramatic price drop.
The resulting cost is $5.30. The buyer now controls 100
shares for only 10% of the underlying ETF price.
                                                                                  S2#.-(51EA&"$2&1"(G2-$2.'&./(
(U 6 I &" ' (S N N 1 /&2. (S N . " &" ' (J $ N /(
A Gap is when the price of a security opens substantially                (X . . F *I (5 -. > &2(G N -. $ > / (
above or below the highest or lowest price of the previous day           Weekly options are colored red in TOS followed by the
close. When an opening gap occurs OPPOSITE to its                        number of days left before expiration. They are often
current trend it has a 90% chance of returning to its                    displayed as follows: “Jun2 12 (6) 100 Weeklys. This
previous channel the first day or a 95% chance of                        translated means: the 2nd week of June, 2012, with 6 days left
returning to its previous channel within the first week.                 before expiration Friday, 100 shares per contract.
 ! To trade a gap-up with a down trending stock, buy a next              Weeklys (this is the correct spelling) now make up a 40% of
   month deep-in-the-money Put.                                          all options traded according to Chuck Hughes, a noted options
 ! To trade a gap-down with an up-trending stock, buy a                  trader. Weekly options are cheap, have unlimited profit
   next month deep-in-the-money Call. Then when the                      potential, and are easily traded. Weeklys gives traders 52
   upswing to its normal trading range occurs, sell the Call.            opportunities every year to make a profit of at least one
To initiate the trade, check the news and volume. Then enter             percent per week. You can sell . . .
the trade at the opening --- as soon as a gap is identified.               ! Covered Call weeklys against securities already owned.
Determine your stop-loss. Then watch the trade for the first               ! Cash covered Naked Put weeklys providing you have
20 minutes. If the trade is not working or stays in the                      enough cash to purchase the security if it is put to you.
same place, exit the trade. Gap trades should be closed out
at the end of the trading day or set a stop-loss point.                    ! Vertical Credit Spreads weeklys using securities that
                                                                             exceed $200 in value in order to obtain a higher
(@ S G (S N . " &" ' (J $ N (G % -. . " . -(                                 premium. This is a high-risk trade that is generally
                                                                             successful UNLESS the security “gaps” beyond its
Select ‘Scan’ tab. Select ‘Stock Hacker’. Click on blue
                                                                             average true price range within the select time period,
triangle in front of ‘CRITERIA’ to open scan options. In first
                                                                             typically 14 days.
rectangle click on yellow triangle in the lower right- hand
corner and select ‘Last’. Fill in min: with ‘5.00’. In second            As an example of a vertical credit spread, suppose ISRG is
rectangle select ‘Volume’ and fill in ‘1,000,000’. In third              trending downward and selling for $484.64. And its ‘average
rectangle select ‘% Change’ and fill in ‘+7.00%’. Then select            true range’ of price movement for the last 14 days is $17. To
‘Show 50’ and matches by ‘Symbol’ and ‘Ascending’. Then                  initiate the trade a $500 Call is sold and a $505 Call is
click on Scan. Save this scan query as a ‘7% GAP-UP’. To                 purchased for a 40 cent credit. Hopefully both of these trades
make a GAP –DOWN query fill the ‘% Change max fill’ to a -               expire worthless by expiration Friday. If ISRG rises above
7.00%. You will find these daily scans on your ‘watch list’ in           $500 the most that could be lost is the $4.60 per share, the
the section designated as ‘Personal’.                                    difference between the spreads less the 40 cents.

(U 6 I &" ' (G 21 % F (G N *&2/ (                                               Weekly spreads are difficult to fill; the
                                                                                risk is higher the closer to strike price
A stock split increases the number of shares in a company.
The price is adjusted such that before and after the split the           (X . . F *I (D . A &2(G N -. $ > (S N 2&1 " /(
market capitalization of the company remains the same and
                                                                         This two-legged strategy involves: (1) buying a deep deep
price dilution does not occur. For example, an investor with
                                                                         ITM (in-the-money) option and (2) selling a deep ITM option
100 shares priced at $50 per share splits 2-for-1 resulting in
                                                                         with the hope that both of these options expire ITM. For
each shareholder now holding 200 shares, twice as many.
                                                                         example, say AAPL is selling for $603.83 and its ‘average
Originally the market capitalization was 100 " $50, or $5000.
                                                                         true range’ of price movement for the last 14 days is $22.
Now the price of each share is adjusted to $25. The market
capitalization is 200 " $25 = $5000, the same as before. Splits          To initiate the trade a $540 Call purchased and a $545 Call is
of 2-for-1, 3-for-1, and 3-for-2 splits are common.                      sold. The cost of the trade is $4.60. Both of these trades are

John Mohan Consulting LLC                           Enhancing Financial Awareness !2008                            Updated 8/14/12 - Page 42
outside If AAPL remains above $545 by expiration Friday, the                     ! If and when the security is PUT to you, WAIT until
spread between $540 and $545 is worth $5 at closing.                               the security rises to RESISTANCE and starts back
Subtract the $4.60 originally paid for the spread from the $5.                     down. Then sell a Covered Call that is near, at, or in-
This results in a 40 cent gain at expiration which equals an                       the-money to collect a high premium. If the security
8.6% profit (.40 divided by $4.60). If AAPL drops below                            stays above the strike price it will be called away and
$545 the most that is lost is the $4.60 paid to purchase the                       you will be entire in cash again. If it isn’t called away,
spread.                                                                            sell another Covered Call next month.
                                                                               Warning. The downside of this trade is it requires enough
(! = $ " ' . -T/() &= . 8D $ I (U . $ -(5 $ **(G 2- $ 2. ' I (
                                                                               cash to purchase the security if the sold Put option is exercised
Diane Evanger shared the rules she uses to manage this                         or if the price of the underlying security falls dramatically.
conservative, income-generating strategy. Her goal is to
generate a 60-65% maximum profit in five days. She trades
this strategy because time decay works in her favor and it has                       H-12.%2&"'(P()&Y&"'(SN2&1"(@-$>./(
a high probability of success. What she looks for is . . .
 ! A security channeling down or sideways, making lower                        A 50% STOP on options is often used by the professionals.
   highs in a down or sideways trending industry in the last                   Then when the option approaches support or resistance on
   3-4 weeks. And all of this is combined with a market                        decreasing volume the STOP is tightened.
   forecast that is bearish to neutral.
                                                                               (G . 22&" ' (+ (G 21 N (S " (+ " (S N 2&1 " (
 ! A five point spread or greater between support and
   resistance.                                                                 Got to “Trade” tab. Select the open option position – “POS”
                                                                               (same strike price as to what option was bought or sold).
 ! Volume greater than 1,000,000 shares with open interest
                                                                               Click on ASK or BID and the green/red buy/sell bars will
   in options greater than 500.
                                                                               appear. Change the “Price” to the desired STOP setting.
 ! She prefers (but not requires) a security trading below its                 Change the “Order” to STOP or TRAILSTOP. Then select
   30-day moving average and a security price greater than                     GTC under the chain link. Reread and then click confirm and
   $25 with weak fundamentals and a low accumulation                           send.
   distribution score.
                                                                               Another way to protect an option is to set a STOP on the
She enters the trade when the security begins to bounce                        underlying security. Traders often use this strategy because
downward from resistance (MACD/Stochastics are beginning                       options tend to be much more volatile and have larger price
to roll over and there is a bearish candlestick formation).                    swings than the security itself.
She sells a front month or second month out-of-the-money
spread for a 75 cent credit or greater with a return of 20%                    (G . 22&" ' (+ (G 21 N (S " (@ # . (R " > . -*I &" ' (G . % 6 - &2I(
or greater. She exits the trade when:
                                                                               Got to “Trade” tab. Select the open position – “POS” (same
 !     A 60-65% profit is attained (she places a GTC order to                  strike price as to what option was bought or sold). Click on
      close trade after the trade is filled).                                  ASK or BID and the green/red buy/sell bars will appear. Then
 ! The MACD/Stochastics begin to turn up and/or                                look to the far right along the bar and click on the “half gear
   candlestick formation confirms a trend reversal.                            with a plus” and the “Order Rules” window” will appear.
                                                                               Change “Time in Force” to GTC. Adjust to the correct
 ! The security price closes above resistance (stop loss).                     number of contracts. Change “Price Rules” to Market. Then
 ! The security breaks resistance on heavy volume.                             drop down below “Order Conditions” and click on the space
 ! Prior to news announcements (earnings, security split,                      below “Symbol” to bring up the symbol of the underlying
   mergers, etc.).                                                             security. Then tab across and change “Trigger” (to “at or
                                                                               below” or “at an above”). Then change the “Threshold” to the
() *1 1 > T/ (@ , 1 84 1 " 2# (H 6 2b5 $ **(5 $ /# (G 2-$ 2. ' I (             price of the desired STOP.
Terril Flood presented this strategy at a small group meeting.                 (H -1 2. % 2&" ' (+ (5 1 = . -. > (5 $ **(
His goal is to earn 7% in a two-month period and then be back
in cash by the end of the two months. This strategy is best                    One fear of selling Covered Call options is the price of the
used with HIGHLY VOLATILE securities that the trader                           underlying security itself my drop dramatically resulting is a
wants to own. Options are sold against these underlying                        huge loss. Below is a way to protect against this scenario.
securities to collect high premiums.                                           Assume SLW was purchased at $40.28. A $43 Covered Call
 ! Initially, the price should be bouncing off support.                        was sold to collect a $1.49 premium. The following pre-set
   Then sell a near or at-the-money PUT to immediately                         sequence will trigger protective action should SLW drop to
   collect a high premium. If the price rises above the                        $37.84. This pre-set protection sequence will: (1) buy back
   strike price the option expires worthless.                                  the Covered Call option and (2) sell the security at market
                                                                               immediately thereafter.



John Mohan Consulting LLC                                 Enhancing Financial Awareness !2008                               Updated 8/14/12 - Page 43
1.   Click on the blue dot next to the option symbol. The                 goal is to continue the current strategy, but rearrange its timing
     green ‘BUY’ bar appears below. Change the order to                   or position in order to maintain a high probability of success.
     ‘MARKET’ and ‘GTC’.                                                    ! A Vertical Roll is closing a current option and buying
2.   Then look to the far right along the green bar and click on              the same amount at another strike price in the same
     the “half gear with a plus” and the “Order Rules”                        month.
     window” will appear. Change “Time in Force” to GTC.                    ! A Horizontal Roll is closing the current option and
3.   In the center of that page it will say “Order Conditions”                moving the option forward from month to month using
     and in the bottom third of that section there are the                    the same strike price.
     following headings: SYMBOL METHOD TRIGGER                             ! A Diagonal Roll combines the characteristics and
     THRESHOLD. Click in the spaces below each field.                        virtues of both the vertical and horizontal Rolls, possibly
4.   Adjust each field as follows: Symbol=SLW.                               changing strike prices while moving the trade forward to
     Method=MARK. Trigger=AT OR BELOW.                                       the next month or months.
     Threshold=37.84. What this says is: if SLW drops to                  If the original purchase started with a .75-delta, roll the next
     $37.84, this will trigger the order. Read the order. If it           strike up (if buying Calls on a rising security) or down (in the
     makes sense, hit confirm and send.                                   case of buying Puts on a dropping security) to again achieve a
5.   Then find “Advanced Order” in the lower left-hand corner             .75 delta. This allows some of the profit of the original trade
     and change it to “1st trgs Seq”. Then create an order to             to be pocketed while allowing a continuation of the same
     SELL the SECURITY at market. If/when the first order                 strategy at a different strike price or in a different month.
     fills (to close the covered call), it will send out an order to
     sell the security.
                                                                                Roll when the next strike’s delta matches
                                                                                        the original delta trade
(D . % *&" &" ' (@ # . 2$ () &Y (
                                                                          () &Y &" ' (+ (5 -. > &2(G N -. $ > (J 1 " . (X -1 " ' (
The key is to WAIT until expiration Friday so almost all of
the extrinsic value (Theta) is eaten up. Then, if the current             Suppose XYZ security is currently priced at $36.10. Its
price exceeds the strike price, all you will pay for is the               support over a period of six months is $33 and resistance level
intrinsic value of the option if retained ownership is                    is $37. A $35 Put is sold for a $1.05 credit. Then a $34
desired. The gain in the underlying security price will                   insurance Put is purchased for $0.75 resulting in a $0.30 credit
often offset the option loss.                                             ($1.05 less $0.75). Below are several anticipated trade
                                                                          adjustments.
Suppose 100 shares of GG is purchased at $40.50. A $40
monthly Covered Call is sold for $2.50. Subtract 50 cents                   ! What if the price moves up to $37?
from the $2.50 received in premium. The gain is $2 per share                     o    On normal volume, do nothing because it is hoped
divided by $40 = a 5% gain.                                                           the $35 sold Put expires worthless.
Then suppose the price rises to $44.50 by expiration. The                        o    On heavy volume, place a GTC order to buy back
intrinsic value of the $40 CC option is now $4.50. To buy                             the credit spread for $0.10 to make a quick profit.
back this contract you will pay $4.55 ($4.50 of intrinsic value             ! What if the price stays within a range of $36 to $33?
plus five cents (approximate brokerage fee). Since you                        Do nothing because there is a good chance the normal
originally received $2.50 for selling the option and now you                  price volatility will still make the trade profitable.
have to pay $4.60 to buy back the contract and close the trade,
the loss is $2.10. However, the gain in the price of the                    ! What if the price drops below the $33 support level?
underlying security increased $4.00 per share. Subtract $2.10                    o    On normal volume --- wait one more day for
option loss from $4.00 gain in the underlying security equals a                       confirmation before taking action.
$1.80 gain that equals a 4.5% gain.                                              o    On heavy volume or the downtrend is confirmed
Now what if the price of rises to $40.83. That is only 33 cents                       the second day --- buy back the $35 Put for $3.00
over the purchase price. The initial premium received for                             to close that leg of the spread for a total loss of
selling the CC was $2.50 less 50 cents so the net is $2 per                           $2.70 (subtract the $0.30 credit from the initial
share. Now assume the option price at or near expiration is 83                        spread from the $3.00 loss). Continue to hold the
cents. Subtract 83 cents from $2.00. Your gain per share is                           $34 insurance Put in hopes the drop in price will
$1.17 if you buy the contract back (a 2.9% gain). Plus the                            continue so as to break even.
security remains with the seller with a 33 cents increase in                ! What if the price continues to move down to $31.30?
added value over the purchase price.                                          Close the $34 insurance Put. This is the breakeven point
(< 1 **(+ (@ -$ > . () 1 -(+ (5 - . > &2() &Y ((                              because of $2.70 of intrinsic value. It is not wise to hold
                                                                              a Put on an up-trending security.
Rolling is a continuation strategy that may provide additional
                                                                            ! What if the price moves down to $32 and holds? Sell
premium to increase profits or minimize debts. It is typically
                                                                              another $35 Put for a $3.00 credit resulting in a new net
used when the option is continuing its anticipated trend. The


John Mohan Consulting LLC                            Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 44
      credit of $0.30 (subtract $2.70 debit from the $3.00                 7.    Explain how to profit from declining extrinsic value.
      credit).
                                                                           8.    Explain the strategy of selling naked puts.
 ! What if the price continues to move up to $34 by
   expiration Friday? Roll this month’s $35 Put to next                    9.    Explain the strategy of selling credit spreads.
   month’s $35 Put. Let this month’s $34 Put expire
   worthless. Buy next month’s $34 Put on Tuesday or                       10. Explain the strategy of selling options against LEAPS.
   Wednesday of the following week because the market
   makers mess with the premiums on expiration Friday.                     11. Explain the Iron Condor strategy.
 ! What if the price of the underlying security stays
                                                                           12. List the option buying rules.
   between $34 and $35? Place an order to sell a $36 Call
   and purchase a $37 insurance Call. If the price moves up
                                                                           13. What are the conditions and advantages of buying options
   to $36 --- let the $34 Put expire worthless and buy back
                                                                                 ITM, ATM, or OTM?

           5#.%F(\16-(R">.-/2$">&"'(                                       14. Explain why calls are bought at support.

                                                                           15. Explain why puts are bought at resistance.
1.   What option strategies should be considered when a
     security is bouncing upward from support?                             16. Explain the Straddle Option Buying Strategy.

2.   What option strategies should be considered when a                    17. Explain the Strangle Option Buying Strategy.

     security is bouncing downward from resistance?                        18. What is the “Opposite Opening Gap” strategy?

3.   What option strategies should be considered when a                    19. Explain Weekly Credit Spreads.
     security is channeling within a specific price range?                 20. Explain Evanger’s Five-day Bear Call strategy.
4.   List the option selling rules.                                        21. Explain Flood’s Two month Put/Call strategy.
5.   What are the conditions and advantages of selling options             22.
     ITM, ATM, or OTM?

6.   Explain the strategy of selling covered calls.




John Mohan Consulting LLC                             Enhancing Financial Awareness !2008                           Updated 8/14/12 - Page 45
  0$=&'$2&"'(P(56/21E&L&"'(@-$>&"'(<./16-%./(
The following are instructions for using and customizing the                 may choose to ‘Connect to either “Live Trading” or ‘Paper
tools I primarily use for research and trading. Occasionally                 Money’. Choose ‘paper Money’ to start practice trading.
I use additional sources such as American Bulls.com, Agora
Financial, Earnings.com/highlight, Finance.Yahoo.com,                        (@ S G (@ -$ &" &" ' (P (V . *N (G 1 6 -% . / (
FinVis.com (free), IncomeTrade.com, Investorwords.com,                       The ‘Help’ Tab is located at the top of the page along with the
Morningstar.com, Stocktiming.com, Taipanpublishinggroup.                     other tabs. Click on ‘Launch thinkdesktop’s Learning Center’
                                                                             or open the ‘Search Here’ in the ‘Walkthroughs & Demos’
(C" = . / 21 1 */ () 1 - (< . / . $ - % # (                                  section. Most of these helpful tutorials/videos are only two to
Owned by TD Ameritrade, Investools charges a minimal                         three minutes long. Below are some navigational hints.
monthly fee to access its database and screening services. It is               ! Blue triangles open sections.
a favorite research tool because it is a huge time-saver. It
collects data from a variety of sources and presents it in a                   ! Black triangles change the list sequence.
concise and well-organized manner that is very user friendly.                  ! Blue dots open information on specific trades.
To sign up for this service, Goggle Investools. After logging-
                                                                               ! White/Gray dots open customizing choices.
in, click on the “Investor Toolbox” to access all research data
including searches and stock rankings.                                       (@ 1 (< . 8/. 2(H $ N . -82-$ > &" ' (U $ *$ " % .(
(@ # &" F S -G , &E (Z@ S G [() 1 -(@ -$ > &" ' (                            If you need to reset the paper-trading account balance you are
                                                                             normal. Beginners lose at first. Don’t trade “real” money
Owned by TD Ameritrade, ThinkOrSwim (TOS) has been
                                                                             until you are trading successfully. To reset, click on the
rated by Barron’s Magazine as one of the best trading
                                                                             Monitor Tab and select Account Statement. Right click on
platforms in recent years. TOS is free. The only costs are the
                                                                             ‘Cash Amount’ and ‘Reset All Positions’. The starting
fees charged for opening and closing trades. The beauty of
                                                                             balance should read $100,000.
TOS is its flexibility, extensive teaching tutorials, access to
immediate help from LIVE humans, access to current news,                     (J . 22&" ' (G 2$ -2. > (5 6 /21 E &L &" ' (@ S G (
and access to a free ‘paper-trading’ account where you can
practice your investing skills. When first opening the TOS                   Upon opening your TOS account, in the upper left-hand
platform most people are absolutely overwhelmed by its                       corner in the ACCOUNT INFO column, scroll down to
complexity. But it is worth it. To start…                                    ‘Active Account’ and click on the yellow triangle to see
                                                                             account choices. Select the ‘Margin Account’.
(S N . " (+ (@ D (+ E . -&2-$ > . (C" > &= &> 6 $ *(+ % % 1 6 " 2 (                  Insure your account is open, NOT the
Go to www.tdameritrade.com. Click on the ‘open an account”                              <TOTAL> (ALL ACCOUNTS)
tab, and fill out the registration forms. You need not fund it at
first. When questioned, indicate you are going to actively                   NOTE: You must OWN securities in your account to set
trade and it is a “Cash, Margin & Option” account. Select                    up your layouts and worksheets in TOS. When I wrote
electronic statements and trade confirmations. The total                     these notes, I was using the following set-ups. That doesn’t
process should take about 45 minutes to an hour. There are a                 mean these customizations are the same as my current set-ups.
few forms that need to be printed and mailed, but the                        I keep adapting as I increase my understanding and efficiency.
application process will explain it.

(@ 1 (+ % % . //(@ S G (                                                                 (@1(G.286N(@SG(X$2%#(7&/2/(
This procedure is subject to change. In the past the process
was altered a couple of times after we published our current                 In upper left hand corner, click on blue triangle to the left of
notes. Probably the preferred way is to login at                             ‘Support/Chat’. This opens and closes the watch list column.
www.tdameritrade.com. Then click on ‘Trade Tools Tab’ and                    Click on the wrench to the right of the ACCOUNT INFO.
select ThinkOrSwim. On the right hand side select                            Boxes appear in the watch list column with + or /. Click on
‘Download Platform’ and proceed as directed.                                 the boxes to increase or decrease the number of watch lists
In the past accessing was accomplished by going to                           you want. Click on the wrench to close.
www.thinkorswim.com. Click on the “Software” tab at the                      Then choose a watch list. Click on gray dot to the left of
top of the page and Choose DeskTop – thinkDesktop trading.                   ‘Symbol’. Click ‘Customize’. Move the following ‘Available
It must be downloaded. Then log in and log out. Then log in                  Items’ to be included in the new ‘Current Set’: Symbol, Net
to Desktop-thinkDesktop. When you open your account you                      Change, % Change, Last, Strength Meter, Send to [5]
                                                                             Purple, Send to Send to [8] Brown. Click OK to close.

Investment Tutoring LLC                                 Enhancing Financial Awareness !2008                              Updated 8/14/12 - Page 46
I dispay three watch lists at all time: futures, owned, and                  Customize Information Layout form. Add and remove items
watching. I occasionally add a fourth watch list from the                    so as to end up with the following in this order: Open Int,
‘public’ watch list that may be accessed by clicking on the                  Delta, Intrinsic, Extrinsic, BidX, AskX. Then return to
white spoke to the right of the watch list name. I include the               Layout pull-down and select ‘Save As’ and type in a name for
following symbols on my “Futures” watch list: /SI (silver),                  this personalized layout such as ‘Buying Options 080512’.
/GC (gold), /QM (oil), /YM (Dow), /ES (S&P 500), /TF
(Russell 2000), and VIX (CBOE Volatility Index).                             (@ 1 (5 -. $ 2. (+ (J ! 0 ! < + 7 (S N 2&1 " /(7 $ I 1 6 2((
To link the watch list colors to the appropriate tabs, click                 Click on the blue triangle in front of Options to open options.
Trade Tab. Click the multi-colored square to the right of                    On ‘Spread’ pull-down select ‘Single’. On the ‘Strikes’
white rectangle below ‘All Products’. Choose [5] purple.                     pulldown just below select ‘All’. On the ‘Layout’ pull-down
Then repeat with the Charts Tab, select ‘Charts’ and then                    select ‘Customize’ which brings up the Customize Information
choose [8] Brown.                                                            Layout form. Add and remove items so as to end up with the
                                                                             following in this order: Volume, Open Int, Delta, Theta,
                                                                             Intrinsic, Extrinsic, Prob of Expiring, Theo Price. Then
           (@1(G.286N(@SG(41"&21-(@$A(                                       return to Layout pull-down and select ‘Save As’ and type in a
                                                                             name for this personalized layout such as ‘General Option
Across the top of the page are tabs. Click on the Monitor Tab.               Chart 080512’.
It should turn yellow. Select Account Statement that is just
below the tabs line. Click on the blue triangles to open Order
History, Trade History, Equities, and Options. Adjust ‘today                                  @1(G.286N(@SG(5#$-2/(
for’ to set the number of days that you want to view.
                                                                             When the chart configurations are completed there will be
(@ 1 (5 6 / 21 E &L . (! _ 6 &2&. /(a &. , (                                 seven charts, each with a specific purpose. Then the charts are
This view only shows if you own securities. Right click on                   saved under the pull-down ‘Style’ rectangle that is located on
‘Symbol’ and ‘Customize’ will drop down. Adjust to read:                     the same line as white rectangle located directly under the
Symbol, Description, Quantity, Trade Price, Mark, P/L%,                      Monitor Tab. The charts will coded as follows.
P/L Open, and Mark Value.                                                                 C1- 3mD – Starting Chart 062012
                                                                                          C2- 1yD – Patterns/Dividends 062012
(@ 1 (5 6 / 21 E &L . (S N 2&1 " /(a &. , (                                               C3- 6mD – MA Crossovers 072512
This view only shows if you have open option positions. Right                             C4- 10yM – 08 Market Crash 082912
click on ‘Symbol’ and ‘Customize’ will drop down. Adjust to                               C5- 3mD – Weekly Predictors 071612
read: Symbol, Option Code, Exp, Strike, Type, Quantity,                                   C6- 10d30m – Volume Check 080612
Trade Price, Mark, P/L%, P/L Open, and Mark Value.                                        C7- 2d5m – Timing Buy/Sell 0073012
                                                                             The code reads as follows: C1=chart 1. 3mD=3 months daily.
                                                                             Title=descriptive purpose. 080112=date of latest revision.
             (@1(G.286N(@SG(@-$>.(@$A(
                                                                             (@ 1 (5 -. $ 2. (5 ? (8(G 2$ -2&" ' (5 # $ -2(
Click on the Trade Tab. Select All Products. Then type in a                  Click Charts Tab at the top of the page and select Charts. Then
security symbol that has options. Open UNDERLYING and                        type in a security symbol such as ‘WPRT’ in the white
OPTIONS by clicking on blue triangle.                                        rectangle below Monitor and Charts.
(@ 1 (5 -. $ 2. (+ (G ! 77 (S N 2&1 " / (7 $ I 1 6 2(                        Click on the ‘wrench’ symbol on the same line to the right.
                                                                             It opens a ‘Chart Setting’ box. Click on ‘Time Axis’ tab and
Click on the blue triangle in front of Options to open options.              adjust first column to: TIME, 3 months, Day. Adjust
On ‘Spread’ pull-down select ‘Single’. On the ‘Strikes’                      ‘Expansion Area’ to 5 in the second column. Click on
pulldown just below select ‘All’. On the ‘Layout’ pull-down,                 ‘Appearance’ tab and adjust to ‘CANDLE TREND’, check
select ‘Customize’ which brings up the Customize Information                 ‘Show Wicks’ and adjust cursor to ‘Cross’. Click on
Layout form. Add and remove items so as to end up with                       ‘Equities’ tab and uncheck ‘Show Volume Subgraph, Show
Extrinsic. Bid and Ask show up automatically. Then return                    Extended Session, and Highlight Extended Session.’ Click on
to Layout pull-down and select ‘Save As’ and type in a name                  ‘Options tab and uncheck ‘Show Volume Subgraph, Show
for this personalized layout such as ‘Selling Options 080512’.               Extended Session, and Highlight Extended Session.’ Then
                                                                             click on ‘OK’ to save the results.
(@ 1 (5 -. $ 2. (+ (U R \ (S N 2&1 " /(7 $ I 1 6 2(
                                                                             Then click on the ‘dripping oilcan’ to the left of the wrench.
Click on the blue triangle in front of Options to open options.
                                                                             It opens an ‘Edit Studies and Strategies’ box. Click on
On ‘Spread’ pull-down select ‘Single’. On the ‘Strikes’
                                                                             ‘Studies’ tab to the far left. Scroll down to ‘MovAvg
pulldown just below select ‘All’. On the ‘Layout’ pull-down,
                                                                             TwoLines’ and highlight. Click 3 times on ‘Add Study’ at
select ‘Delta, Gamma, Theta, Vega’. Then a second time on
                                                                             bottom of column. Then look at ‘Studies on upper subgraphs’
the Layout pull-down, select ‘Customize’ which brings up the

John Mohan Consulting LLC                               Enhancing Financial Awareness !2008                             Updated 8/14/12 - Page 47
and highlight ‘MovAvgTwoLines’ so ‘Properties:                                configure studies so as to end up with the following:
MovAvgTwoLines’ pops up. Change ‘Inputs: fast length’ to                      ‘SimpleMovingAvg (CLOSE, 21,0), SimpleMovingAvg
the number 3, slow length 7, and average type to SMA. Repeat                  (CLOSE, 49, 0), MovAvgTwoLines (CLOSE 137, 210, ),
to add the other two pairs of 21 & 49, and 137 & 210. Make                    SMA), MovingAvgCrossover (CLOSE, 21, 210, Simple,
sure the box ‘Show study’ is checked.                                         Simple, above), Momentum Crossover (21, Negative to
Use the following color codes and lines: 3-day SMA= yellow                    Positive), Momentum Crossover (21, Positive to Negative),’
dashes, 7-day SMA=light blue dashes, 21-day SMA=green                         and ‘VolumeAvg(30)’ clicking OK to close. Finally, Click on
line, 49-day SMA=purple line, 137-day SMA=white dots, and                     the ‘Style’ rectangle next to the wrench. Scroll down to “Save
210-day SMA= gold dots. Then add the MomentumCrossover                        Style” and enter the style name, in this case, C3- 6mD – MA
twice, one positive (yellow), one negative (blue), and adjust to              Crossovers 080112. Then check the white box to ‘Include
length to 7.                                                                  study set’ to retain your programming.

Then add the following studies on the lower subgraph:                         (@ 1 (5 -. $ 2. (5 O (8(: ; (4 $ -F . 2(5 -$ /# (5 # $ -2(
VolumeAvg (7), MACD (7/21/9 EMA), and StochhasticFast                         Click Charts Tab at the top of the page and select Charts.
(80, 20, 7, 3, HIGH, LOW, CLOSE, SMA). Click OK to                            Then click the ‘Style’ tab just to the right of the ‘wrench’
close. Finally, Click on the ‘Style’ rectangle next to the                    symbol and scroll down to ‘Daily’ and select ‘10 years
wrench. Scroll down to “Save Style” and enter the style name,                 month’.
in this case, C1- 3mD – Starting Chart 080112. Then check
the white box ‘Include study set’ because if you don’t you                    Click on the ‘wrench’ symbol on the same line to the right.
will lose all your hard programming work.                                     It opens a ‘Chart Setting’ box. Click on the ‘Appearance’ tab
                                                                              and adjust ‘Chart Type’ to ‘LINE’. Click on ‘Equities’ tab
(@ 1 (5 -. $ 2. (5 9 (8(H $ 22. -" /bD &= &> . " > (5 # $ -2(                 and uncheck ‘Show Volume Subgraph, Show Extended
Click Charts Tab at the top of the page and select Charts.                    Session, and Highlight Extended Session.’ Click on ‘Options
Then click the ‘Style’ tab just to the right of the ‘wrench’                  tab and uncheck ‘Show Volume Subgraph, Show Extended
symbol and scroll down to ‘Daily’ and select ‘one year day’.                  Session, and Highlight Extended Session.’ Then click on
                                                                              ‘OK’ to save.
Click on the ‘wrench’ symbol on the same line to the right.
It opens a ‘Chart Setting’ box. Click on the ‘Appearance’ tab                 Then click on the ‘dripping oilcan’ near the wrench to open
and adjust ‘Chart Type’ to ‘LINE. Click on ‘Equities’ tab and                 the ‘Edit Studies and Strategies’ box. Add, remove, and
uncheck ‘Show Volume Subgraph, Show Extended Session,                         configure studies so as to end up with the following:
and Highlight Extended Session.’ Click on ‘Options tab and                    ‘MovAvgTwoLines (CLOSE 1, 20, 0) and clicking OK to
uncheck ‘Show Volume Subgraph, Show Extended Session,                         close. Finally, Click on the ‘Style’ rectangle next to the
and Highlight Extended Session.’ Then click on ‘OK’ to save.                  wrench. Scroll down to “Save Style” and enter the style name,
                                                                              in this case, C4- 10yM – 08 Market Crash 080112. Then
Then click on the ‘dripping oilcan’ near the wrench to open                   check the white box to ‘Include study set’ to retain your
the ‘Edit Studies and Strategies’ box. Add and remove studies                 programming.
so as to end up with the following: VolumeAvg(21) and
StochhasticFast (80, 20, 7, 3, HIGH, LOW, CLOSE, SMA).                        (@ 1 (5 -. $ 2. (5 Q (X . . F *I (H -. > &% 21 -/(5 # $ -2(
Click OK to close. Finally, Click on the ‘Style’ rectangle next               Click Charts Tab at the top of the page and select Charts.
to the wrench. Scroll down to “Save Style” and enter the style                Then click the ‘Style’ tab just to the right of the ‘wrench’
name, in this case, C2- 1yD – Patterns/Dividends 080112.                      symbol and scroll down to ‘Load Style’ and select C1- Start
Then check the white box to ‘Include study set’ to retain                     Chart. This is the template for C5.
your programming.
                                                                              Then click on the ‘dripping oilcan’ to the left of the wrench
(@ 1 (5 -. $ 2. (5 M (8(4 + (5 -1 //1 = . - (5 # $ -2(                        to open the ‘Edit Studies and Strategies’ box. Add and
Click Charts Tab at the top of the page and select Charts.                    remove studies so as to end up with the following. On the
Then click the ‘Style’ tab just to the right of the ‘wrench’                  upper subgraph place the “ProbabilityOfExpiringCone (49,77)
symbol and scroll down to ‘Daily’ and select ‘six months                      and remove all others. On the lower subgraph the following
daily’.                                                                       studies should be listed: MACD (7/21/9 EMA),
                                                                              StochhasticFast (80, 20, 7, 3, HIGH, LOW, CLOSE, SMA),
Click on the ‘wrench’ symbol on the same line to the right.                   and AverageTrueRange (14). Adjust all studies to match the
It opens a ‘Chart Setting’ box. Click on the ‘Appearance’ tab                 numbers above. Click OK to close. Finally, Click on the
and adjust ‘Chart Type’ to ‘HEIKIN ASHI’. Click on                            ‘Style’ rectangle next to the wrench. Scroll down to “Save
‘Equities’ tab and uncheck ‘Show Volume Subgraph, Show                        Style” and enter the style name, in this case, C5- 3mD –
Extended Session, and Highlight Extended Session.’ Click on                   Weekly Predictors Chart 080112. Then check the white box
‘Options tab and uncheck ‘Show Volume Subgraph, Show                          to ‘Include study set’ to retain your programming.
Extended Session, and Highlight Extended Session.’ Then
click on ‘OK’ to save.                                                        (@ 1 (5 -. $ 2. (5 k (K (a 1 *6 E . (5 # . % F (5 # $ -2(
Then click on the ‘dripping oilcan’ near the wrench to open                   Click Charts Tab at the top of the page and select Charts.
the ‘Edit Studies and Strategies’ box. Add, remove, and                       Then click the ‘Style’ tab just to the right of the ‘wrench’

John Mohan Consulting LLC                                Enhancing Financial Awareness !2008                              Updated 8/14/12 - Page 48
symbol and scroll down to ‘Intraday and select ‘10 days and                 of expiring out-of-the-money (OTM) are displayed in red near
30 minutes’.                                                                the top of the chart.
Click on the ‘wrench’ symbol on the same line to the right.
It opens a ‘Chart Setting’ box. Click on the ‘Appearance’ tab
and adjust ‘Chart Type’ to ‘CANDLE TREND’. Click on                             C"=./21-/(U6/&".//(D$&*I(0.,/N$N.-(
‘Equities’ tab and uncheck ‘Show Volume Subgraph, Show
Extended Session, and Highlight Extended Session.’ Click on                 Investors Business Daily Newspaper (IBD) is used to
‘Options tab and uncheck ‘Show Volume Subgraph, Show                        provide insight into the local and world markets. It is
Extended Session, and Highlight Extended Session.’ Then                     delivered six days a week. The information provided is
click on ‘OK’ to save.                                                      outstanding. However, for those with limited time, subscribe
                                                                            to the ‘Monday Special’ that is delivered every Saturday.
Then click on the ‘dripping oilcan’ near the wrench to open
                                                                            Listed below are very useful informational sections.
the ‘Edit Studies and Strategies’ box. Add, remove, and
configure studies so as to end up with the following:                       (X # $ 2T/(@ # . (4 $ -F . 2(@ -. " > l (
‘MovAvgTwoLines (CLOSE 7, 21,0, SMA), ‘Bollinger Bands
EMA (CLOSE, 0, 21, -2.0, 2.0), ‘VolumeAvg( 21), MACD                        Coupled with the ‘The Big Picture’ article that is adjacent to
(7/21/9 EMA), and StochhasticFast (80, 20, 7, 3, HIGH,                      the market trend charts, this information provide a great
LOW, CLOSE, SMA)’ clicking OK to close. Finally, Click                      overview of what is happening right now.
on the ‘Style’ rectangle next to the wrench. Scroll down to
                                                                            (0 . , (V &' # (7 &/2(+ " $ *I /&/ (
“Save Style” and enter the style name, in this case, C6-
10d30m – Volume Check 080612. Then check the white box                      The commentary accompanying this list of 52 week highs and
to ‘Include study set’ to retain your programming.                          lows provides insight into which industries are blasting
                                                                            upward or falling into the cellar.
(@ 1 (5 -. $ 2. (5 h (K (@ &E &" ' (U 6 I bG . **(5 # $ -2(
                                                                            (@ # . (0 . , (+ E . -&% $ (
To create this chart bring up the ‘C6- Volume Check Chart’
Then click the ‘Style’ tab just to the right of the ‘wrench’                This section provides insight into young entrepreneurial
symbol and scroll down to ‘Intraday and select ‘2 days and 5                companies that potentially will increase in value because the
minutes’. Don’t change anything else. Then click on the                     numbers and market niche are quite attractive. The negatives
‘Style’ rectangle next to the wrench. Scroll down to “Save                  are also presented so all factors are discussed before making a
Style” and enter the style name, in this case, C7- 2d5m –                   decision to add the company to your watch list.
Timing Buy/Sell 073012. Then check the white box to
‘Include study set’ to retain your programming.                             (G 21 % F (5 # . % F 6 N (
                                                                            If you subscribe to IBD Newspaper, you have access to this
                                                                            website. Located on Investors.com under the ‘Stock
        @1(56/21E&L.(@SG(+"$*IL.(@$A(                                       Research’ this site provides a quick and detailed analysis of
                                                                            individual stocks by laying out key information all on one
This tool helps predict the percentage of risk when considering             page. When considering a specific stock, click on ‘Stock
a trade. It is used primarily to analyze the selling of credit              Checkup’ and enter a symbol. The resulting search will
spreads. Click on the Analyze Tab. Select ‘Risk Profile’.                   provide data about that stock and a list of stocks that are best
                                                                            in that industry.
Type in a symbol of a current credit spread you are trading
such as GOOG (Goggle). Look to the right to the                             (G 21 % F /(S " (@ # . (4 1 = . (
‘commissions plot lines’ and adjust the yellow outlined
rectangles below to read ‘EXCLUDED, Date and P/L OPEN’.                     This list changes daily and highlights the stocks with the
Look further to the right to ‘prob mode’ and adjust the box                 greatest percentage increases in volume above their average
below to ‘Probability OTM’. Then change the ‘prob date’ to                  daily volume over the last 50 days. Focus on those with EPS
the expiration date.                                                        and RS ratings of 80 or higher.

Drop on down to “PRICE SLICES’ on the far left. Adjust two                  (G 21 % F (G N 1 2*&' # 2(
of the ‘Stk Price’ lines to the outward ranges of your spread.
                                                                            This provides 16 stocks with strong earnings and sales that are
They should be in the ‘Lock’ mode with the remaining line
                                                                            working on new bases or staging breakouts. It also discusses
being ‘Live’ mode that displays the current price. The chart
                                                                            fundamental and technical analysis.
above should display vertical red dash lines that represent the
two spread boundaries and the current price. The probabilities




John Mohan Consulting LLC                              Enhancing Financial Awareness !2008                              Updated 8/14/12 - Page 49
                        G6EE$-I(P()&"$*(SA/.-=$2&1"/(
Do the research. Follow the risk management rules.                        picketing, school boards continue to back mediocrity. Why?
Remember, buy only to sell! All securities are bad! Find
the trends supported which are supported by volume. Trading               We have now established the precedent of protesting every
is not rocket science. You can do it.                                     close election (violently in California over a proposition that is
                                                                          so controversial that it simply wants marriage to remain
(X # $ 2(C(+ E (G . . &" ' b < . $ > &" ' (                               defined as between one man and one woman. We have
                                                                          corrupted our sacred political process by allowing
By nature I am an optimist, but also a realist. If I see a fire           unelected judges to write laws that radically change our
coming I get out the fire hose or run. Much of what I am                  way of life, and then mainstream Marxist groups like ACORN
seeing/reading now is summarized by David Kaiser.                         and others to turn our voting system into a banana republic.
David Kaiser is a respected historian whose published works               Now our mortgage industry is collapsing, housing prices are in
have covered a broad range of topics, from European Warfare               free fall, major industries are failing, our banking system is on
to American League Baseball. Born in 1947, the son of a                   the verge of collapse, Social security is nearly bankrupt, as is
diplomat, David spent his childhood in three capital cities:              Medicare and our entire government. Our education system is
Washington D.C., Albany, New York, and Dakar, Senegal.                    worse than a joke (I teach college and I know precisely what I
He attended Harvard, graduating in 1969 with a B.A. in                    am talking about) - the list is staggering in its length, breadth,
history. He then spent several years more at Harvard, gaining             and depth. It is potentially 1929 x ten.
a PhD in history. He served in the Army Reserve from 1970 to
1976. He is a professor in the Strategy and Policy Department             And we are at war with an enemy we cannot even name
of the United States Naval War College.                                   for fear of offending people of the same religion, who, in
                                                                          turn, cannot wait to slit the throats of your children if they
He writes, ‘I am a student of history. Professionally, I have             have the opportunity. And finally, we have elected a man that
written 15 books on history that have been published in six               no one really knows anything about, who has never run so
languages, and studied history all my life. I have come to think          much as a Dairy Queen, let alone a town. All of his
there is something monumentally large afoot, and do not                   associations and alliances are with real radicals in their
believe it is simply a banking, mortgage, or a credit crisis.             chosen fields of employment, and everything we learn about
Yes, these exist, but they are merely single facets on a very             him, drip by drip, is unsettling if not downright scary (Surely
large gemstone that is only now coming into a sharper focus.              you have heard him speak about his idea to create and fund a
Something of historic proportions is happening. I can sense it            mandatory civilian defense force stronger than our military for
because I know how it feels, smells, what it looks like, and              use inside our borders? No? Oh, of course. The media would
how people react to it. Yes, a perfect storm may be brewing,              never play that for you over and over and then demand he
but there is something happening within our country that has              answer it.
been evolving for about ten to fifteen years. The pace has
dramatically quickened in the past two.                                   Mr. Obama's winning platform can be boiled down to one
                                                                          word: Change. Why? I have never been so afraid for my
We demand and then codify into law the requirement that our               country and for my children as I am now. This man
banks make massive loans to people we know they can never                 campaigned on bringing people together, something he has
pay back? Why? We learned the Federal Reserve, which has                  never, ever done in his professional life. In my assessment,
little or no real oversight by anyone, has ‘loaned’ two trillion          Obama will divide us along philosophical lines, push us
dollars over the past months, but will not tell us to whom.               apart, and then try to realign the pieces into a new and
That is our money, yours and mine. And that is three times                different power structure.
the $700 billion we all argued about so strenuously September
2009. Who has this money? Why do they have it? Why are                    Change is indeed coming. And when it comes, you will never
the terms unavailable to us? Who authorized it? I thought this            see the same nation again. And that is only the beginning. As
was a government of ‘we the people,’ who loaned our powers                a serious student of history, I thought I would never come
to our elected leaders. Apparently not!                                   to experience what the ordinary, moral German must have
We have spent two or more decades intentionally de-                       felt in the mid-1930s. In those times, the ‘savior’ was a
industrializing our economy. We have intentionally dumb                   former smooth-talking rabble-rouser from the streets, about
down our schools, ignored our history, and no longer teach                whom the average German knew next to nothing. What they
our founding documents, explaining why we are an                          should have known was that he was associated with groups
exceptional country, and why we are worth preserving.                     that shouted, shoved, and pushed around people with whom
                                                                          they disagreed; he edged his way onto the political stage
Students by and large cannot write, think critically, read, or            through great oratory. Conservative ‘losers’ read it right now.
articulate. Parents are not revolting, teachers are not
                                                                          And there were the promises. Economic times were tough,

John Mohan Consulting LLC                            Enhancing Financial Awareness !2008                          Updated 8/14/12 - Page 50
people were losing jobs, and he was a great speaker. And he             them exactly what I believe-and why I believe it. I pray I am
smiled and frowned and waved a lot. And people, even                    wrong. I do not think I am. Perhaps the only hope is our vote
newspapers, were afraid to speak out for fear that his ‘brown           in the next elections.’ David Kaiser
shirts’ would bully and beat them into submission, which they
did regularly.                                                          (+ (7. //1 " (C" (G 1 % &$ *&/E (
And then, he was duly elected to office, while a full-throttled         An economics professor at a local college made a statement
economic crisis bloomed at hand - the Great Depression.                 that he had never failed a single student before, but had once
Slowly, but surely he seized the controls of government                 failed an entire class. That class had insisted that Obama's
power, person by person, department by department,                      socialism worked and that no one would be poor and no one
bureaucracy by bureaucracy. The children of German citizens             would be rich, a great equalizer. The professor then said, ‘OK,
were at first, encouraged to join a Youth Movement in his               we will have an experiment in this class on Obama's plan’. All
name where they were taught exactly what to think. Later,               grades would be averaged and everyone would receive the
they were required to do so. No Jews of course,                         same grade so no one would fail.

How did he get people on his side? He did it by promising               After the first test, the grades were averaged and everyone got
jobs to the jobless, money to the money-less, and rewards               a B. The students who studied hard were upset and the
for the military-industrial complex. He did it by                       students who studied little were happy. As the second test
indoctrinating the children, advocating gun control, health             rolled around, the students who studied little had studied
care for all, better wages, better jobs, and promising to re-           even less and the ones who studied hard decided they
instill pride once again in the country, across Europe, and             wanted a free ride too so they studied little. The second test
across the world. He did it with a compliant media - did you            average was a D! No one was happy.
know that? And he did this all in the name of justice and               When the 3rd test rolled around, the average was an F. The
change. And the people surely got what they voted for.                  scores never increased as bickering, blame and name-
If you think I am exaggerating, look it up. It's all there in           calling all resulted in hard feelings and no one would study
the history books. So read your history books. Many people              for the benefit of others.
of conscience objected in 1933 and were shouted down, called            All failed, to their great surprise, and the professor told them
names, laughed at, and ridiculed. When Winston Churchill                that socialism would also ultimately fail because when the
pointed out the obvious in the late 1930s while seated in the           reward is great, the effort to succeed is great, but when
House of Lords in England (he was not yet Prime Minister),              government takes all the reward away, no one will try or want
he was booed into his seat and called a crazy troublemaker. He          to succeed. It couldn’t be any simpler than that.
was right, though.
                                                                        (5 1 " % *6 /&1 " (
Do not forget that Germany was the most educated, the
most cultured country in Europe. It was full of music, art,             There are many books available that explain in greater detail
museums, hospitals, laboratories, and universities. And                 the topics I have attempted to summarize. It behooves you to
yet, in less than six years (a shorter time span than just two          study them. Hopefully you appreciate what was attempted
terms of the U. S. presidency) it was rounding up its own               here. Like I said, this is just a rough draft. There are more
citizens, killing others, abrogating its laws, turning                  revisions to come. It is my hope that you can see the value of
children against parents, and neighbors against neighbors.              tracking and trading your own money.
All with the best of intentions, of course. The road to Hell            The last couple of pages are worksheets I have used in class to
is paved with them.                                                     help students make decisions and track trades. They are also
As a practical thinker, one not overly prone to emotional               being updated as I find better ways to communicate.
decisions, I have a choice: I can either believe what the               Hopefully you will find them useful.
objective pieces of evidence tell me (even if they make me
cringe with disgust); I can believe what history is shouting to         (5 1 " 2$ % 2(C" B1 -E $ 2&1 " (
me from across the chasm of seven decades; or I can hope I
am wrong by closing my eyes, having another latte, and                             John Mohan Consulting, LLC
ignoring what is transpiring around me. I choose to believe                      PO Box 877 – Kirkland, WA 98083
the evidence.                                                                   425-822-0882 -- jsjmohan@gmail.com
No doubt some people will scoff at me, others laugh, or think I
am foolish, naive, or both. To some degree, perhaps I am. But
I have never been afraid to look people in the eye and tell




John Mohan Consulting LLC                          Enhancing Financial Awareness !2008                          Updated 8/14/12 - Page 51
                                                      J*1//$-I(
 ! Abandon: The act of not exercising or selling an option              ! Debit: Money paid out from an account which results in
   before its expiration.                                                 decreasing the cash balance.
 ! Acquisition: When one company buys enough security                   ! Deflation: A decrease in the prices of goods and
   of another company to take control of that company.                    services, usually tied to a contraction of money in
 ! All-or-none order (AON): A type of option order that                   circulation. Formal deflation is measured in terms of
   requires the order be executed completely or not at all.               year-to-year change.
 ! American Depository Receipt (ADR): Foreign                           ! Depreciation: Reduction in value over time.
   company equities traded on a U.S. exchange. The ADR                  ! Depression: A recession, where the peak-to-trough
   is issued by a U.S. bank in place of the foreign                       contraction in real growth exceeds 10%. A “great”
   company's shares, which are held in trust by the bank.                 depression is where the peak-to-trough contraction in
   ADRs have exposure to currency fluctuations.                           real growth exceeds 25%.
 ! American Security Exchange (AMEX): One of the                        ! Derivative / derivative security: A security whose
   major security exchanges in the U.S. in New York City.                 value is determined in part from the value and
 ! Arbitrage: The simultaneous purchase and sale of                       characteristics of the underlying security.
   identical assets in two different markets with the intent            ! Equity: The amount the investor would keep after all
   of profiting by the price discrepancy.                                 positions have been closed and all margin loans paid off.
 ! Assigned: To have received notification of an                        ! Exercise price (strike price): The price at which the
   assignment on short options.                                           owner of an option can purchase (call) or sell (put) the
 ! At-The-Money (ATM): An option is at-the-money                          underlying security.
   when the price of the security is at or near the strike              ! Expiration Friday: The last business day prior to the
   price.                                                                 option's expiration date during which purchases and
 ! Automatic Exercise: Exercising all expiring equity                     sales of options can be made. For equity options, this is
   options that are held in customer accounts if they are in-             generally the third Friday of the expiration month.
   the-money by .01 or more.                                            ! Fiat Money: Money that the government declares to be
 ! Averaging down: Buying more of a security or an                        legal tender although it has no intrinsic value and cannot
   option at a lower price than the original purchase so as to            be redeemed for money with intrinsic value, such as gold
   reduce the average cost.                                               and silver coins or any commodity. All modern paper
                                                                          currencies are fiat money, as are most modern coins. The
 ! Beta: a security's price movement when compared to the                 value of fiat money depends on the strength of the
   market as a whole: a score of one means the beta is                    issuing country's economy. Inflation results when a
   average. A plus one means more volatile.                               government issues too much fiat money.
 ! Blue Chip Security: a name given to the securitys of
   major corporations, like IBM and General Motors.
 ! Broker is a licensed professional who advises people
   about investments and may work for brokerage firms.
 ! Brokerage Firms manage security trades and other
   investment vehicles for a fee.
 ! Buy Limit Order is an offer to purchase at specific
   price or better and is only executed when that price is
   reached.
 ! CBOE: The Chicago Board Options Exchange.
 ! Close: The reduction or an elimination of an open
   position by buying or selling.
 ! Collateral: Securities against which loans are made.
 ! Cover: To close out an open position.
                                                                        ! Finance Charge is the fee paid when the entire debt is
 ! Day order: An order that instructs the broker to cancel                not paid within the time period.
   any unfilled order at the day’s closing.


John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                        Updated 8/14/12 - Page 52
 ! Float: the total number of publicly owned shares                    ! Market-on-close order (MOC): An option order that
   available for trading.                                                requires an order be executed at or near the close of
 ! Gap: When the price opens substantially above or                      trading on the day the order is entered.
   below the highest or lowest price of the previous close.            ! Market order: A trading order placed with a broker to
 ! Good-'til-cancelled (GTC) order: A limit order that                   immediately buy or sell a security or option at the best
   remains in effect until it is either filled or cancelled.             available price.
 ! Hedge / hedged position: A position established with                ! Naked Uncovered option: A short option position that
   the specific intent of protecting an existing position. For           is not fully collateralized if assignment is received.
   example, an owner of common security may buy a put                  ! Non-equity option: Any option that does not have
   option to hedge against a possible security price decline.            common security as the underlying asset. Non-equity
 ! Historic volatility: A measure of actual security price               options include options on futures, indexes, etc.
   changes over a specific period of time.                             ! NYSE: New York Security Exchange.
 ! Implied volatility: The volatility percentage that                  ! One-cancels-other order (OCO): An option order
   produces the 'best fit' for all underlying option prices on           which treats two or more option orders as a package,
   that underlying security.                                             whereby the execution of any one of the orders causes all
 ! In-The-Money: An adjective used to describe an option                 the orders to be reduced by the same amount.
   with intrinsic value.                                               ! Open interest: The total number of outstanding option
 ! Index Funds are securities that represent an entire                   contracts on a given securities.
   index. For example Spiders (SPY) cover the S&P 500                  ! Option writer (seller): The seller of an option contract.
   Index, Diamonds (DIA) cover the Dow Jones Industrial,               ! Option: A contract that gives the owner the right, but
   the QQQQs follow the Nasdaq 100, and the iShares                      not the obligation, to buy or sell a particular asset (the
   track the Russell 2000 Fund (IWM).                                    underlying security) at a fixed price (the strike price) for
 ! Index: A compilation of several security prices into a                a specific period of time (until expiration).
   single number. Example: the S&P 100 Index.                          ! OTM: (Out-of-the-money): An adjective used to
 ! Inflation: An increase in the prices of goods and                     describe an option that has no intrinsic value.
   services, usually tied to an increase of money in                   ! P/E (Price-Earnings Ratio) is the current share price
   circulation.                                                          compared to its per-share earnings. The PEG (Price-to-
 ! Interest Rate is the price paid for the use of someone                Earnings Growth Ratio) is calculated by dividing a
   else's money expressed as an annual percentage rate.                  security’s forward P-E ratio by its projected three-to-five
                                                                         year annual earnings growth.
 ! Leg: A term describing one side of a trade.
                                                                       ! Premium: Total price of an option: intrinsic value plus
 ! Leverage: A term describing the greater percentage of
                                                                         time value.
   profit or loss potential when a given amount of money
   controls a security with a much larger face value.                  ! Recession: Two or more consecutive quarters of
                                                                         contracting real (inflation-adjusted) GDP, where the
 ! Liability: Something owed for.
                                                                         downturn is not triggered by an outside factor such as a
 ! Lien: a right given to a lender over a borrower's property            truckers’ strike.
   or money when the borrower cannot pay a debt.
                                                                       ! Resistance: A term used in technical analysis to
 ! Limit order: A trading order placed with a broker to                  describe a price area at which rising prices are expected
   buy or sell security or options at a specific price or                to stop or meet increased selling activity. This analysis is
   better.                                                               based on historic price behavior of the security.
 ! Liquidity / liquid market: A trading environment                    ! Rolling: A trading action in which the trader
   characterized by high trading volume, a narrow spread                 simultaneously closes an open option position and
   between the bid and ask prices, and the ability to trade              creates a new option position at a different strike price,
   larger sized orders without significant price changes.                different expiration, or both.
 ! Long: Ownership or trade owed. ‘Short’ is a trade                    ! SEC: The Securities and Exchange Commission that is
   owed to another.                                                       an agency of the federal government in charge of
 ! Margin / margin requirement: The minimum equity                        monitoring and regulating the securities industry.
   required to support an investment position. To buy on                ! Sector index: An index that measure the performance
   margin refers to borrowing part of the purchase price                  of a narrow market segment, such as biotechnology or
   from a brokerage firm.                                                 small capitalization securitys.
 ! Market Maker is professional exchange securities                     ! Sell Limit Order is an offer to sell at specific price or
   dealer who has the responsibility of making bids and                   better and is only executed when it reaches that price.
   offers and maintaining a fair and orderly market.

John Mohan Consulting LLC                        Enhancing Financial Awareness !2008                         Updated 8/14/12 - Page 53
 ! Settlement: The process by which the underlying                     (S " (@ # . (7 &' # 2. -(G &> . (
   security is transferred from one brokerage account to
                                                                         ! Broker: What my financial planner has made me.
   another when equity option contracts are exercised.
                                                                         ! Bull Market: A random market movement causing an
 ! Short security position: A strategy that profits from a
                                                                           investor to mistake himself for a financial genius.
   security price decline. The trade is initiated by
   borrowing a security from a broker-dealer and selling the             ! CEO: Chief Embezzlement Officer.
   security in the open market. Then this strategy is closed             ! CFO: Corporate Fraud Officer.
   at a later date by buying back the security and returning
                                                                         ! FIAT Money: Financial Instrument Administering
   it to the broker-dealer.
                                                                           Theft of Money
 ! Spread: A trading position consisting of two legs, each
                                                                         ! Insanity: Doing the same thing over and over again and
   of which alone would profit from opposite directional
                                                                           expecting different results. - Einstein
   price moves. As orders, these opposite parts are entered
   and executed simultaneously in the hope of (1) limiting               ! Institutional investor: An investor who is now locked
   risk, or (2) benefiting from a change of price relationship             up in a nuthouse due to significant losses.
   between the two parts.                                                ! Liquidity: When you look at the performance of your
 ! Strike price: The price at which the owner of an option                 investments and wet your pants.
   can purchase (call) or sell (put) the underlying security.           ! Market Correction: The day after you buy securities.
 ! Security split: An increase in shares by issuing of a set            ! Miles Per Gallon: A recent study found that the
   number of shares for each share already owned such as a                average American walks about 900 miles a year.
   ‘2-for-1’ (for every share owned, another will be given).              Another study found that on average Americans drink 22
 ! Strike price interval: The normal price differential                   gallons of alcohol a year. That means that the average
   between option strike prices. Equity options generally                 American gets about 41 miles to the gallon!
   have $2.50 strike price intervals if the underlying                  ! Profit: An archaic word no longer in use.
   security price is below $25, $5.00 intervals for securities
   $25 to $200, and $10 intervals above $200.                           ! Standard & Poor: Your life in a nutshell.

 ! Tick: The smallest unit price change allowed in trading              ! Security Analyst: The idiot who just downgraded your
   a security. For a listed option under $3 in price, this is             security after you bought it.
   generally 1/16th of a point. For a listed option over $3,            ! Security Split: When your ex-wife and her lawyer split
   this is generally 1/8th of a point.                                    your assets equally between themselves.
 ! Time value: The part of an option's total price that                 ! Value Investing: The art of buying low and selling
   exceeds its intrinsic value. The price of an out-of-the-               lower.
   money option consists entirely of time value.                        ! Window: What you jump out of when you're the sucker
 ! Transaction costs: All fees associated with executing a                who bought Yahoo at $240 per share.
   trade and maintaining a position. These include                      ! Yahoo: What you yell after selling Yahoo to some poor
   brokerage commissions, fees for exercise, exchange fees,               sucker for $240 per share.
   SEC fees, and margin interest. In academic studies, the
   spread between bid and ask is taken into account as a                ! 401 Keg Plan: When these notes were first written, if
   transaction cost.                                                      you had purchased $1000 of shares in Delta Airlines one
                                                                          year ago, you have $49.00 a year later. If you had
 ! Underlying security: The security subject to being                     purchased $1000 of shares in AIG, you have $33.00. If
   purchased or sold upon exercise of the option contract.                you had purchased $1000 of shares in Lehman Brothers,
 ! Volatility: The rate at which the price of a security                  you have $0.00. But if you had purchased $1000 worth
   moves up and down. Volatility is found by calculating                  of beer when these notes were first written, drank all the
   the annualized standard deviation of daily change in                   beer, then turned in the aluminum cans for a recycling
   price. If the price of a security moves up and down                    refund, you would have received $214.00. Based on the
   rapidly over short time periods, it has high volatility. If            above, the best current investment trading strategy is to
   the price almost never changes, it has low volatility.                 drink heavily and recycle.
 ! Write / Writer/ Seller: To sell an option that is not
   owned through an opening sale transaction. While this
   position remains open, the writer is subject to fulfilling
   the obligations of that option contract; i.e., to sell
   security (in the case of a call) or buy security (in the case
   of a put) if that option is assigned. An investor who so
   sells an option is called the writer, regardless of whether
   the option is covered or uncovered.


John Mohan Consulting LLC                         Enhancing Financial Awareness !2008                        Updated 8/14/12 - Page 54

				
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