Trading Against the Crowd: Profiting from Fear and Greed in Stock, Futures, and Options Markets

John Summa's guide on leveraging market sentiment extremes for trading, with evidence and strategies for contrarian investing in stocks, futures, and options.


Trading Against the Crowd: Profiting from Fear and Greed in Stock, Futures, and Options Markets” by John Summa offers a comprehensive exploration of contrarian trading strategies, emphasizing the psychological dynamics of financial markets. Summa meticulously examines how fear and greed influence market behavior and provides a detailed guide for traders looking to exploit these emotions to their advantage. Through a blend of theoretical insights and practical applications, Summa aims to equip traders with the tools necessary to navigate and profit from the market’s emotional extremes.

The book begins with a foundational understanding of investor psychology, illustrating how collective investor actions often lead to market extremes that contrarian traders can exploit. Summa delves into the mechanics of measuring investor sentiment, using tools such as the put/call ratio and options trading volume as indicators of market mood. By interpreting these signals, traders can identify potential reversals in market trends.

Summa further explores the application of these sentiment indicators across different market instruments, including stocks, futures, and options. He presents case studies and statistical analyses to demonstrate the effectiveness of contrarian strategies in various market conditions. Particularly noteworthy is his discussion on the use of options as a vehicle for contrarian trading, providing readers with strategies for both short-term and long-term trading horizons.

Detailed strategies for both short-term and long-term trading horizons, primarily through the lens of sentiment indicators and contrarian trading approaches.

Short-Term Trading Strategies:

  1. Squeeze Play I System: Utilizes equity-only put/call ratios integrated into oscillators for timing entries and exits in the market. For short-term trading, it specifically employs a short-term oscillator (EMA5-21), which is used to time entries. The entry strategy involves entering a long position when the EMA5-21 oscillator moves from an excessively bullish zone (moving from above to below zero) and entering a short trade when it moves from below to above zero​​.

Long-Term Trading Strategies:

  1. Tsunami Sentiment Wave (TSW) System: Aims at capturing the largest sentiment waves for longer rides, ignoring smaller ripples of inefficiency measured in less extreme bullish and bearish sentiment zones. This strategy is particularly suited for in-the-money LEAPS on stocks, allowing for greater leverage of capital with reduced capital requirement (about 10–15% of the capital needed for equivalent stock positions). It effectively acts as a surrogate for purchasing or shorting the underlying stock, thus offering a significant leverage advantage​​.
  2. Squeeze Play II and LEAPS Surrogates: Adjusts the exit plan from Squeeze Play II to include no stops and utilizes time stops for exits set at three different fixed time intervals (T + 30, T + 60, and T + 90 days). This strategy is applied to LEAPS, serving as surrogates for buying or shorting the underlying stock, thereby minimizing the impact of time value decay and maximizing leverage. The use of LEAPS allows for defined risk before entering the trade but unlimited profit potential​​.

These strategies highlight Summa’s approach to leveraging market sentiment and contrarian views to profit from trading. The short-term strategies focus on exploiting quick, sentiment-driven movements in the market, while the long-term strategies aim to capitalize on more significant, sustained shifts in market sentiment, using LEAPS to maximize potential returns with minimized capital outlay. Summa’s methodologies underscore the importance of sentiment indicators in identifying market extremes and the potential for contrarian trading strategies to exploit these conditions for profitable trading outcomes.

The book also addresses the challenges and pitfalls of contrarian trading. Summa emphasizes the importance of disciplined risk management and the need for a well-thought-out trading plan. He provides practical advice on how to develop and test trading systems, underscoring the significance of backtesting and adapting strategies to changing market conditions.

One of the book’s strengths is its ability to bridge the gap between theory and practice. Summa’s use of real-world examples and his transparent discussion of both successful and unsuccessful trades lend credibility to his strategies. Additionally, the book includes appendices with technical codes for those interested in developing their own trading systems, further enhancing its practical value.

Comparatively, “Trading Against the Crowd” aligns with works like “Contrarian Investment Strategies” by David Dreman and “The New Contrarian Investment Strategy” by David Dreman, in its focus on contrarian principles. However, Summa distinguishes his work by providing a more in-depth look at how specific sentiment indicators can be leveraged in options trading, offering unique insights into the nuances of market psychology.

In conclusion, “Trading Against the Crowd” is a valuable resource for traders seeking to capitalize on the emotional extremes of the market. John Summa’s thorough analysis and actionable strategies make this book a must-read for anyone interested in contrarian trading. Whether you are a seasoned trader or new to the financial markets, this book offers a fresh perspective on how fear and greed drive market movements and how these forces can be harnessed for profitable trading decisions.

Given the depth and breadth of topics covered in Summa’s book, readers may also enjoy exploring related works that delve into behavioral finance, such as “Misbehaving” by Richard Thaler, to gain further insights into the psychological aspects of investing. Additionally, for those interested in the practical application of sentiment analysis in trading, “Sentiment Indicators” by Renato Di Lorenzo provides a complementary perspective on the use of sentiment data in market prediction.