In the same way as with roulette, where you win if you calculate correctly which square the roulette wheel will stop on, you can profit if you forecast correctly where the Index will be at some date in the future by using Index strategies (the determining date).
Indeed, the range of possibilities available in a game of roulette is available in most index strategies.
In a game of roulette, you can place all your money on a single square and win big. Or you can spread your money over a number of squares (for example, on the red squares, thereby increasing the chance of succeeding while reducing the amount won).
Likewise, each index strategy entails possibilities of extending or reducing the limits we expect the index to be at the “determining day”.
If we extend the limits, we increase the chance of success on the one hand, but on the other hand reduce the amount of profit.
Apart from the similarities between a game of roulette and index strategies outlined above, they are otherwise completely dissimilar, especially with respect to the following points:
- The chance of the roulette ball stopping on a particular square is completely random, whereas index forecasting is based on knowledge, experience and a high level of internal logic.
- Roulette runs in circles, whereas the Index only goes up or down.
This book does not give you a level of knowledge enabling you to invest in sophisticated Index strategies. In order to execute investment of this kind, extensive theoretical knowledge is necessary together with close day-to-day tracking of the prices of the various index options.
The main purpose is to teach the “roulette” rules, in other words, to understand the logic and the meaning of the various index strategies.
Before progressing, we will give a short reminder of the basic features of the CALL and PUT options.