Technical Indicators, Greeks

Question 1

What does a Doji candlestick show?

Answer 1

A Doji is considered to represent uncertainty in the market. The closer the open and close are, particularly in the context of a longish high-low range, the better the chances of a meaningful reversal.

Question 2

What does a Hammer bar show?

Answer 2

The Hammer is where the open and close are relatively close together and positioned at one end of a candlestick. Consider the context before trading based on Hammer pattern.

Question 3

What are the three phases of a breakout?

Answer 3

1. Action, when the price crosses support or resistance on higher volume. 2. Reaction, when the price reverses on lower volume. 3. Resolution, when the price reverses again on higher volume, confiming the direction of the breakout.

Question 4

Why should you be cautious on breakouts?

Answer 4

Because false breakouts can occur when specialists and market makers identify extraordinary levels of interest around a support or resistance area and deliberately drive the price beyond that area to secure an advantageous position. (For example, a level with lots of sell-stop orders that get triggered).

Question 5

How can you use Level 2 quotes?

Answer 5

To see the amount of supply and demand for a security at different price levels.

Question 6

What is a double top?

Answer 6

When a high is reached twice before dropping.

Question 7

True or false: The longer the period in a bottoming (topping) pattern, the stronger the pattern becomes.

Answer 7

True.

Question 8

What does a head and shoulders pattern look like?

Answer 8

Question 9

What are consolidations?

Answer 9

When invididual price spreads are tight on each bar or candlestick, indicating that buyers and sellers are matching each other closely. It’s a sign of lower volatility.

Question 10

What is a pennant or triangle?

Answer 10

A chart pattern with lower highs and higher lows. (A sign of decreasing volatility; good for identifying straddle opportunities).

Question 11

What is a retracement?

Answer 11

It is either:

1) Price reaches a top and then falls before resuming the uptrend, or reaches the retracement level and falls.
2) Price reaches a bottom and then rises before resuming a downtrend, or reaches the retracement level and rises.

Question 12

What is a gap?

Answer 12

When a price series experiences an explosive jump or fall. Gaps are points of excessively high or low demand. The theory is that pent-up buying or selling pressure that forms the gap will be followed by more buying or selling. May indicate a move in the same direction.

Question 13

What is the Moving Average Convergence Divergence?

Answer 13

MACD is a measure of the relationship between two moving averages of the same price series. MACD is a measure of momentum. Moving averages moving further apart indicate increasing momentum.

Question 14

How does MACD show a bullish indication?

Answer 14

When MACD makes new highs but the price does not, there is a bullish divergence.

Question 15

How does MACD show a bearish indication?

Answer 15

When MACD makes new lows but the price does not.

Question 16

What is a Stochastic Oscillator?

Answer 16

A technical indicator that measures the relationship of a security’s closing price with its highs and lows for a given period. A reading of 0 percent shows that the security’s close was the lowest price that has traded during that period, while 100 percent shows that close at the highest price.

Question 17

What are significant levels for a stochastic?

Answer 17

Many traders identify the 25 percent and 75 percent bounds as being oversold or overbought. (Use with caution, as you may miss a trade setup).

Question 18

What is the Relative Strength Index (RSI)?

Answer 18

A price-following oscillator that ranges from 0 to 100 indicating oversold or overbought conditions. A buy signal is considered to be above 50, and a sell signal below the line. (It can be misleading for strong market moves.)

Question 19

What is a Synthetic Call?

Answer 19

A combination of buying a put and an underlying stock.

Question 20

What is a Collar?

Answer 20

1. Buy a stock.
2. Buy LEAP puts close to the stock price (insurance).
3. Sell LEAP calls above the stock price (finance the trade).

A riskless trade:
[Put premium paid - call premium received] + [stock pirce - put strike] <= zero

Question 21

What does Delta measure?

Answer 21

Delta measures the sensitivity of an option price relative to change in the underlying asset price. A positive delta means that the options position will become more valuable as the stock price rises. (All bought puts have a negative delta.)

Question 22

What does Gamma measure?

Answer 22

Gamma measures the sensitivity of the option delta relative to the underlying asset price movement.

rate of change in delta
Gamma = ____________________________

rate of change in underlying asset price

Question 23

When does Gamma tend to be highest?

Answer 23

Gamma tends to be highest when an option is near-the-money (NTM).

Question 24

What does Theta measure?

Answer 24

Theta measures the sensitivity of the option price to change in time left to expiration. (Time decay is fastest during the last 30 days until expiration and when an option is ATM.)

Question 25

What does Vega measure?

Answer 25

Vega measures the sensitivity of the option price to the change in the asset’s volatility.

This volatility is known as historical or statistical volatility.

(Example, if a stock is priced at $100 with a volatility of 20%, then we expect the stock to trade in a range of $80 to $120.)

Question 26

What does Rho measure?

Answer 26

Rho measures the sensitivity of the option price to changes in the risk-free interest rate.

Question 27

What does Zeta measure?

Answer 27

Zeta measures the change in option price per 1% change in implied volatility.

Question 28

What is implied volatility?

Answer 28

The volatility derived from the option’s market price using an option pricing model. Expressed as a percentage and based on the perception of where market price will be in the future.

Question 29

How can implied > historical volatility be interpreted?

Answer 29

Options prices could be overvalued as a result of higher implied volatility; therefore look to sell options premiums.

(Not guaranteed to work!)

Question 30

How can historical > implied volatility be interpreted?

Answer 30

Options prices could be undervalued, indicating good buying opportunities, particularly if you anticipate underyling asset price movement. (Not guaranteed to work!)

Question 31

What does a flag pattern potentially indicate in a breakout?

Answer 31