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  • SMAR T OPTIONS FOR TODAY’S INVESTOR

    WINTER 2010

    12/ OPTIONS EXPIRATION WEEK: A TIMELY OPPORTUNITY

    16/ DEMYSTIFYING VIX OPTIONS 23/ EXPECTATIONAL ANALYSIS:

    INVESTOR SENTIMENT—THE SMOKING GUN

    > >

    BERNIE SCHAEFFER’S

    SIR04_cover.rd3:pages.layout 12/29/09 3:31 PM Page 1

  • Interactive Brokers LLC is a member of NYSE, FINRA, SIPC — †Lowest cost broker 2005 through 2009 according to Barron’s online broker review. *Source: The Transaction Auditing Group Inc. (TAG) a third party provider of transaction audit services. For US stocks (53 cents per 100 shares better), the analysis included all market orders of 100 shares or more, up to 10,000 shares from January - June 2009. The analysis for US options (22 cents per contract better) included all market orders with order sizes of 1 to 50 contracts from January - June 2009. **According to Barron’s The 25 Leading Online Brokers - March 16, 2009. Barron’s is a registered trademark of Dow Jones & Company, Inc. Criteria included Trade Experience, Trading Technology, Us- ability, Range of Offerings, Research Amenities, Portfolio Analysis & Report, Customer Service & Access, and Costs. Supporting documentation for any claims and statistical information will be provided upon request.

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    financial strength for individual and institutional traders.

    SIR04_Contents.rd3:pages.layout 12/29/09 3:37 PM Page 2

  • 12 Expiring with Profit If you think trading during expiration week is dangerous, think again. Not only do opportunities abound, but they can come with very little risk. The trick is knowing exactly what to do when there’s no time to lose. /

    16 Taking the Fear out of the Fear Index While popular financial media often quote the CBOE’s VIX when markets fall, the index is more than just a barometer of market mood– it’s also tradable. Learn the nuts and bolts of trading VIX options straight from the folks who created them. /

    SPECIAL SECTION

    23 Expectational Analysis Series THE SMOKING GUN While analyzing charts and company financials are the preferred methods for making trading decisions, market sentiment is dismissed by many as subjective and unreliable. Here’s why they’re wrong.

    6 The Sentiment Report If investing lexicon sets the stage for what’s to come, the words “New Economy” from 1999 lead us to think “New Normal” is a better fit— for now, anyway. /

    8 Making News, Etc. A serving of highs, lows, and relevant news for option traders. /

    11 Ask Bernie Option symbols are finally getting a makeover. And you don’t even need a trans- lator. /

    29 Confessions of a Trader How many times have you left money on the table after exiting a trade? Maybe you’ll never have to again. /

    30 Idea Lab Turning sentiment into an objective (and prof- itable) part of your trad- ing system. + SITE REVIEW: Schaeffer’s Watch List /

    Photographed by Fredrik Brodén /

    4 At the Open 2010 promises to be the year of positive change for the option industry. /

    32 .COM Where to go and what to see right now at Scha- effer’s Research online. /

    0 (34) Page Zero PRO PEARLS If you want to “follow the money,” option order flow analysis provides some clues as to where you might want to look. /

    SMAR T OPTIONS FOR TODAY’S INVESTOR

    WINTER 2010

    12/ OPTIONS EXPIRATION WEEK: A TIMELY OPPORTUNITY

    16/ DEMYSTIFYING VIX OPTIONS 23/ EXPECTATIONAL ANALYSIS:

    INVESTOR SENTIMENT—THE SMOKING GUN

    > >

    BERNIE SCHAEFFER’S

    FEATURES COLUMNS

    COVER

    REGULARS

    PUBLISHER T3 Publishing LLC EMAIL: info@t3publishing.com www.t3publishing.com

    ADVERTISING CONTACT Sadia Ashraf 513.589.3800 X1200 sashraf@sir-inc.com

    Schaeffer’s Investment Research MAIN OFFICE: 513.589.3800 MAIN FAX: 513.589.3810 CUSTOMER SERVICE: 800.327.8833 prompt #2 E-MAIL: service@sir-inc.com SALES: 800.448.2080 prompt #4

    5151 Pfeiffer Road, Suite 250 Cincinnati, OH 45242 www.SchaeffersResearch.com

    SENTIMENT is published quarterly.

    If you prefer not to receive this publication, please call 800.327.8833.

    To view SENTIMENT online, go to schaeffersresearch.com/sentiment

    Please send your comments and questions to the editor at Sentiment@sir-inc.com

    BERNIE SCHAEFFER’S

    SENTIMENT

    EDITORIAL DIRECTOR Kevin Lund

    CONTRIBUTING WRITERS Todd Salamone, Bob Kraft, Nick Perry, Rocky White, Elizabeth Harrow

    ART DIRECTOR Tom Brown, TBA+D

    ASSISTANT EDITOR Jennifer Agee

    DESIGNER Jennifer Roberts

    CHIEF PHOTOGRAPHER Fredrik Brodén

    CONTRIBUTING ILLUSTRATOR Joe Morse

    www.schaeffersresearch.com WINTER 2010 Contents 3

    SIR04_Contents.rd3:pages.layout 12/29/09 3:37 PM Page 3

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    IT STRUCK ME AFTER ATTENDING THE fourth annual FIA/OIC Equity Options Con- ference in New York this fall that numerous factors have contributed to the equity options industry’s astounding 36% compound annual growth rate since its inception more than three decades ago. Yes, the concept of exchange-traded equity options was “an idea whose time had come,” but it required an ongoing commitment to continuously improve the options product and transform a great idea into a monumental success story.

    Two shining examples were featured at this conference. Elizabeth King of the Securities and Exchange Commission announced approval of an expansion of the industry’s “penny pilot program,” whereby selected options classes trade in penny increments instead of nickels and dimes. This greatly reduces the transaction costs for individual investors by reducing the slippage created by the difference between the bid and the ask. The program has now been expanded from 60 to over 300 option classes that account for more than 80% of total options volume.

    This huge expansion in penny increment

    Letter from Bernie

    HOW FAR WE’VE COME

    NICK PERRY Executive Website Director for Schaeffer’s since 1996, he’s an expert market sentimentician and has been featured in The Wall Street Journal, USA Today, Reuters, Investor’s Business Daily, and SFO Magazine.

    ROCKY WHITE Senior Quantitative Analyst and contributor to the Mon- day Morning Outlook. He holds a master’s degree in financial engineering, and his research is quoted on Bloomberg TV, CNBC, and Fox Business News.

    Schaeffer’s Contributors to This Issue

    TODD SALAMONE Senior VP of Research and author of the Monday Morning Outlook. His market insight is featured regularly on CNBC, Bloomberg, The Wall Street Journal, and Fox Business News.

    At the Open4 S E N T I M E N TWINTER 2010

    I Bernie Schaeffer has been bringing you trading tips and market timing insight with the Option Advisor newsletter for 28 years. For a free copy, go to: www.sentiment.com/OpAd4

    options (and the corresponding growth in the universe of stocks whose option strikes trade in $1 increments) provides another major benefit to investors by significantly increasing the attractiveness of trading during option expiration week. While expiration week trad- ing has a “Wild West” reputation—the thin and fast-decaying option premiums result in huge opportunities and huge dangers for option buyers and sellers—we at Schaeffer’s take a more conservative approach in exchange for a healthy win percentage and protection from sharp, adverse moves (see page 12 for more!).

    You should also be cheered that those often very arcane and illogical symbols used to des- ignate individual option series will soon be replaced with symbols that are much more intuitive and easy to understand. The industry created the Option Symbology Initiative (OSI)—a plan that calls for the current, often enigmatic 4- and 5-character option symbols to be replaced with a new 21-character Sym- bology Key. See “Ask Bernie” on page 11.

    Rounding out yet another great issue of SENTIMENT, don’t miss our Special Focus on sentiment analysis (page 23), and check out page 16 to learn how to trade the hottest option contracts on the planet—those on the CBOE Volatility Index (VIX)—straight from the folks who invented them!

    Bernie Schaeffer Founder and CEO, Schaeffer’s Investment Research

    / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /

    >> Please let us know your thoughts. Send your feed- back to Sentiment@sir-inc.com. / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /

    ELIZABETH HARROW Senior Equities Analyst and contributor to Market Recap. She writes Option Activity Alert, hosts the Scha- effer’s Daily Q&A video series, and is a regular contributor to BloggingStocks.com.

    SIR04_AtTheOpen.rd3:pages.layout 12/29/09 3:15 PM Page 4

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