Vertical Option Spreads: A Study of the 1.8 Standard Deviation Inflection Point, + Website

CHAPTER 2

How to Be a Wizard

During the Korean War, my father appeared before a board that was considering his application for Officer's Candidate School. One of the board members described a combat scenario, then asked which weapon would be most appropriate—a machine gun, a rifle, or a pistol. Dad responded, “I would use them all, sir; and any others I might find about me.” In the following chapter, we will look at many of the weapons available to any trader. Each of these will have an appropriate application, and each is worth studying, but none should be the only weapon in your arsenal.

■ Fundamentals

Fundamental analysis involves gathering hard data about a company and the industry it is in, studying that data, and attempting to determine the potential for upward or downward movement in the value of the underlying stock. The focus of this analysis would be on the published financial statements, management discussions, and circumstances within the industry.

The financial statements would be the easiest of these to obtain. Go to finance.yahoo.com, type in a ticker, and you will have access to the balance sheet, income statement, and statement of cash flows in the lower left corner of the screen. These financial statements are abridged from the original to fit a uniform format that Yahoo! uses for all financial statements. This greatly aids users in comparing one company against another, but by forcing all financials to fit one format, the site may condense some important accounts ...