Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 28

Reading the Tea Leaves (1)

“We need at least to get a few fundamentals in place regarding trends,” he said. “All right,” Lon and Shorty agreed.

“The whole idea is to know enough about trends to have some sense of what a stock might do. That prepares us to make the most money. No one can read the future perfectly, of course, but it’s possible to make educated guesses and to be prepared. That’s what we want to do.”

THE OVERALL MARKET

“Before we talk more about watching the trend of a particular stock,” said Nate, “there’s something you need to know about stocks in general. It’s that 80 percent of stocks simply follow the trend of the overall market. Now if you think about it, that’s obvious, of course. In fact, it’s almost redundant. After all, 80 percent of the market practically is the market, right? So to say that the market is in a certain trend is simply to say that a high percentage of stocks are in a certain trend. Right?”

“Sure,” answered Shorty.

“But there’s still an important point that follows from this,” said Aaron. “It means that, at any point in time, any stock you pick is likely to be following the same general trend that most other stocks are following. You can always find exceptions, of course, and you can even find whole sectors of the market that will be exceptions. But finding those exceptions doesn’t matter so much when you know how to use options. Here, you can just accept the general trend of the market and, working with the stocks you’ve picked, ...