Document Sample

           The Bottom Line:
“The market will only move when there are
 more buyers or sellers on one side of the
        market then the other.”
     Sentiment Analysis

• Qualitative Sentiment
• Quantitative Sentiment
          Sentiment Analysis
•   1. Cover Stories
•   2. Sentiment surveys/forecasts
•   3. Option volume/open interest
•   4. Implied volatility
•   5. Short Interest
•   6. Analyst rankings
      Qualitative Sentiment
• Cover Stories
• - Time, Business Week, Newsweek, or
  any major magazine comes out with a
  cover story about how XYZ is facing
  tough times and might not make it in the
  business world.
• As an investor, should you get out?
Qualitative Sentiment – Cover
• What if a story reads that company ABC
  is doing fantastically?
• Should you call your broker to invest in
  some of the action?
    Qualitative Sentiment – Cover
• Magazine cover stories are a favorite indicator and help you gauge to
  what extent certain news is factored into the market, sector or stock
• The basis for a cover story evaluation is that when a stock becomes
  hot news ( bullish or bearish) it could mean that the factors driving
  the price are already built into it and the shares are fully discounted
  which means
• It is probably NEW factors that will ultimately determine the
  direction of future moves.
• If the new factors conflict with the already known, a major turning
  point could be at hand and could make a change in the trend
• That would make the COVER story a contrarian indicator.
Qualitative Sentiment – Cover
• Mainstream magazine covers tend to
  become interesting contrarian sentiment
• When a financial trend is featured on a
  magazine cover, the chances are that this
  trend is already widely known and
  accepted and has been priced into the
  price of the stock
           Qualitative Sentiment
                  Cover Stories
                   Negative Cover
• Magazine articles are useful for putting investors on
  alert that a potential turning point in the trend may
  be upon us (or very near )
• Ex: ABC gets a cover article that says “ABC:
  Troubles below the surface”
• This cover will only bring to the forefront factors
  that have already been factored into the stock price.
        Qualitative Sentiment
              Cover Stories
               Positive Cover

• In contrast, an article touting a stock
  could actually imply that the stock could
  be at risk for being “over exposed “and
  potentially overbought:
• EX. XYZ Corporation: There’s no
  stopping them now!
 Qualitative Sentiment – Cover
• “The contrarian benefit to these cover
  stories is simply a case of stock prices often
  incorporating the news before the cover
  story is released”
• However, all cover stories are not
  necessarily contrarian.
• One must do the necessary research and
  dig further into the company
     Qualitative Sentiment –
        1. Cover Stories
• Samples of Cover Stories
• Bullish                    Bearish
      2. Sentiment Surveys and
• Bull Markets climb a wall of worry
• Bear Markets decline on a slope of hope.
          3. Put/Call Ratio
• Put/Call Ratio
     Quantitative Sentiment
• 4. Option Volume / Option Open Interest
      Quantitative Sentiment
• 5. Implied Volatility
      Quantitative Sentiment
• 6. Short Interest
          Quantitative Sentiment
• 7. Analyst Rating

   A high number of “buy” ratings leaves a stock vulnerable to
   downgrades, while a herd of “sells” could leave the stock open to
   future upgrades
SIX (6) of The Most Dangerous
         Option Errors
•   1. Inappropriate Selection Methods
•   2. Betting against trends
•   3. Inability to take a loss.
•   4. Lack of Discipline
•   5. Poor money Management
•   6. Consensus Thinking
       1. Inappropriate Selection
• Selecting the right stock and the most appropriate
  option is the first step
• Some option traders will take a situation they just
  learned about or read about and make it into an
  option play. ( to instinctive )
• Others will look at longer term measures like a
  stock’s valuation as an indication of its short-term
  potential ( not the right match )
• Mismatching time frames is one of the biggest
  mistakes made by option traders
      2. Betting against trends
• Trends tend to last longer then people expect,
  that is true of up trends or down trends.
• What happens is there is disbelief in the
  existing up trend or downtrend which gives
  confirmation that the trend will continue .
• WHY?
• Because there is still money sitting on the
  sidelines that will be eventually convinced to
  buy into the trend before it ends
       3. Inability to take a loss.
• Everybody loves to hear about gains and profits,
  because that really is the bottom line.
• However, “Loss” has a negative emotion attached
  to it, the key is not to be EMOTIONAL in trading,
  but rather to remain OBJECTIVE.
• Establishing exit strategies is a mandate that all
  option traders of any type need to adhere to so that
  big losses can be avoided
• And capital can be preserved for future plays, that
  hopefully will be profitable.
      4. Lack of Discipline
• Many option traders fail even the ones
  with gains.
• WHY?
• They let them slip away , because they
  do not know when to get out and take
  a profit.
      5. Poor money Management
• All smart option traders know that even with a winning approach money
  management is crucial in building an account’s value.
• The primary consideration is how much to invest each trade every month
  ( there are various systems, we looked at one last week – Kelly System )
• Often beginners start with some nice initial gains and them assume its
  always going to be that simple. So they then let all their capital ride on
  the next trade.
• That trade of course, wipes them out and they vow never to trade options
• Option traders must acquire a discipline when entering trades as well as
  exiting them.
     6. Consensus Thinking
• Trying to rely on what everyone is doing.
• Buying at the top of markets, when all the news
  ( that has been discounted) is touting the stock.
• Going along with the heard to much
• Need to be ahead of the heard or
• Contrary to the heard at market tops or
• Easier said then done

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