Interview with the Options Queen, Jeanette Schwarz Young

Part of a series of interviews with traders who use CQG Integrated Client, this interview is with Jeanette Schwarz Young, CFP, CMT , M.S., who has been trading since 1981. She is author of The Options Doctor: Strategies for Every Kind of Market published by Wiley Trading and she publishes her monthly The Option Queen Newsletter, offering her current view of the markets. The goal of these interviews is to illustrate why traders who begin using CQG tend to continue using CQG.

Q: What is your history in the markets?
A: I started out in the business at a big wire house called Thomson McKinnon Securities where under the guidance of Jack Solomon, who was the firm's technical analyst, I developed my analytical skills. Back then we shared our Bunker Ramo quote machines, which only provided quotes. We had a daily chart service for commodities and weekly service (Daily Graphs) for AMEX, NYSE, and options. We updated the charts by hand with a number 3 pencil and a ruler. Those were the tools of the trade.

As a technical analyst, you do pay attention to the fundamentals. You want to make good decisions using common sense, but you pay attention to the price because the price tells you what the market players think. Following the price provides insight into what the portfolio managers think the fair value per share of a company is. So, we would review the chart books to find stocks offering the best opportunities.

Q: Did you have an interest then in options?
A: Options did come to the forefront for me. Back then, in the early eighties, it was a very challenging time for people such as me generating investment ideas using equities. Money market funds were offering 16% to 17% returns and it was really hard to compete when people could get that kind of a return for doing nothing. The solution I found was convertible bonds. These hybrid securities are part bond and part equity, that is, they are convertible into securities. I would buy the convertible bond and sell options against those convertible bonds. That little bit of premium by writing the option we took in was enough to compete and beat the money market rates. Of course, it was never the intent to deliver the convertible bond; we would go out into the market and buy the stock if we had to deliver the stock because we were called. In those days we used the covered writes or very rarely, we would use option spreads.

I then bought a seat on the New York Futures Exchange. (Editor's Note: NYFE was a former subsidiary of the New York Cotton Exchange (NYCE). The New York Futures Exchange traded options and futures on the NYSE Composite Index. The NYCE was acquired by the New York Board of Trade (NYBOT) in 2003. NYBOT was acquired in January, 2007 by IntercontinentalExchange (ICE), which changed NYBOT's name to ICE Futures. Source: Investopedia.) There I learned how little I really knew about options.

Q: How so?
A: I was totally amazed. I came from the equities' side of the market and now I was on the floor and in the futures' side of the market. Futures are a much, much faster pace. I weathered those initial days and I eventually became a market maker in coffee options, the Russell 1000 and 2000 contracts, and the New York Composite Index.

Q: I bet it was a very different time back then?
A: Yes. Today, I can pick and choose my battles. As a market maker, I am either a taker or a seller, and you have to take the bad with the good. That turns you into an instant hedger.

Q: Did you see CQG on the floor then?
A: That was my introduction to CQG. Walking around the floor you could see that most traders used CQG. I was one of the first people to have a home computer and I needed intraday data so I purchased a CQG and became and I still am very attached to it. You need the best tools to make a living. CQG has always been very valuable to me. CQG is "kicks butt" software. It works, it is reliable, and your CQG is constantly improving and reinventing itself.

Q: Could you tell us about how you use CQG as part of your workflow?
A: I constantly use CQG. Before I am ready to trade on an intraday basis, I spend a great deal of time reviewing my charts. Before I make a trade, I form a technical opinion about where the market is likely to go. Of course, no one has a crystal ball, but I review my daily charts with my favorite studies, and I use trend lines, which have always worked well for me. That is how I start.

Q: Do you use multiple time frame analysis?
A: Yes, I look at daily, weekly, and monthly charts. I feel that monthly charts keep you honest. For example, the action of the daily chart could look bad, but if you look at the weekly chart, you see that the market is still in an uptrend. That is pre-open work. During the trading session I use two-, five-, ten-, and fifteen-minute charts.

Q: What are your favorite markets?
A: From the equity side I look at the S&P 500, NASDAQ 100, and the Russell 2000. You see different things from different markets. These three markets can tell you where you are as far as risk on/risk off trades. The Russell 2000 is a much more risky trade than the S&P 500. Just recently, the Russell 2000 was hit hard, but the S&P 500 barely moved.

The Russell 2000 is very volatile and as an option trader, I like volatile markets. So, I see as we speak that the Russell 2000 has broken the uptrend line. That is significant. And now I watch the down trend line over the weekly highs. This gives me a point of view regarding where I feel comfortable and where I feel nervous about trades I have on.

Q: What are your favorite options trades?
A: When I was in the pits, one of the more popular trades was packages. It is a put spread and a put ratio spread. You buy a put and you sell a put and you buy a put and you sell two puts. I was looking at this trade for the Russell 2000 and it looked like I should buy the 1050 put and sell the 1030 put, buy the 1030 put and sell two 1020 puts. When I looked at the trade this morning it was 19 dollars coming to me. This is where CQG is very helpful for me. I have to look at my deltas. With this kind of a trade, I have to hedge my liabilities. There are two ways to do that: either with futures or with more options. More often than not I choose options to hedge my risk. So, I looked at the calls. I added calls to this trade and I flattened the deltas, which removes the risk from this trade, for the moment.

Q: Do you have any favorite studies you use with your charts?
A: One of my favorites is the Commodity Chanel Index (CCI) with a 5-period Exponential Moving Average. I developed this in the 1990s. When the CCI crosses the Moving Average, I get buy and sell signals. But the footnote is if the market isn't trending then you will get whipsaw signals. I wrote an article in 1992 titled "The CCI Revisited," which was published in Stocks and Commodities magazine.

Another favorite of mine is the crossover of the 5-period Exponential Moving Average crossing the Volume-Weighted Average Price (VWAP). This is my newest toy in my toolbox. I need to do more work on this one.

Q: You will be doing a webinar in June with us?
A: Yes, and it will be recorded so for those who read this interview after June 2014, they can check out the recorded version posted on news.cqg.com.