Welcome to the March 2011 edition of this newsletter!

This is a monthly newsletter packed full of tidbits not found on the website. This is my attempt to stay connected with those who find value on the the website and want more.

Since this newsletter is published every month, you are always up to date and empowered to be a better trader. That's because I'll be sharing lessons I've learned over the prior month, answering questions from other viewers and providing a spotlight on useful websites and trading tips. If you find this newsletter valuable, pay it forward and send it to your options trading friends.

What's Next? - March Newsletter

Welcome to the March newsletter! We started the year with two fairly strong months. As February comes to a close and March begins, we're starting to see a bit of a stutter. The question is... is this the beginning of the market rolling over? We'll have to wait and see.

In this newsletter, I'll be reviewing the month in more detail and providing my outlook for March. Also, I'll update you on the video, review some trades, talk options strategies and more. Read on...

Thanks to those that have provided feedback on the newsletter. I do value and take into consideration feedback on the newsletter content and on ways I can make it more valuable for the readers.

Please feel free to voice your opinion. If you haven't done so already, please consider taking a few minutes to visit the newsletter feedback page and let your voice be heard. I don't require an email address to submit the feedback so you can do this anonymously.

 

In This Issue

1) New on the site

2) Trade Tutorial summary

3) Options Strategy Focus

4) Answers to your questions

5) Options Outlook
 

What's new at Success With Options

February was a pretty quiet month in terms of activity. I'm still working on getting the raw video itself recorded.  At this point, I'm still looking at a March release of the final video.

The only other activity at the website has been closing trades and opening new ones. See the trade tutorial summary below for additional details.
 

Trade Tutorial Summary

I only had a few trades going this month. Two out of the three trades closed profitably. The losing trade was the DIA trade, which was the other half of the DIA put spread that closed profitably.

Here's the complete list of trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed IWM vertical spread $68 Another textbook trade. So far there have been a number of these successful trades and in fact no trades have been seriously tested (yet).
Open SPY calendar spread    
Open DIA vertical spread    

While I hate having losing trades, I find that I learn the most from them. Whether winners or losers, I'm going to start including some key thoughts/lessons learned from the past month's trade tutorials here. Here are the nuggets from last month's closed trades.

From the IWM put vertical spread:
"... In closing this trade page out, I wanted to comment on the fact that to date, I haven't had a chance to really test the case where the trade went significantly against me. Remember that I've changed my position sizing strategy with the idea that I will allow the trade potentially to experience the maximum loss. The motivation for doing this is that it gives me more room (and more time) to allow the trade to correct itself. "

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Strategy Focus

I have modified this section a little bit to focus more deeply on the details of some of the options strategies I use in the tutorials. In past issues, I've talked about how to select a strategy and using technical analysis to improve timing of entries and exits. Last month I started a discussion of trade management. In this issue I'm going to continue the discussion with a focus on using technical analysis to exit out of trades early (either to minimize loss or lock in current gains).

In a past newsletter I talked about using technical analysis to improve the timing of entries. I like to keep it simple by sticking with support and resistance. These same simple technical analysis tools can help make a timely exit.

Let's take a recent trade tutorial I entered as an example. This is the DIA put spread tutorial. In that trade tutorial I talked about using a technical trigger as an early exit rule. In this case, since the DIA had formed a temporary bottom, it made a logical 'line in the sand' that if crossed would indicate the trend failed. In this case I would exit the trade and potentially save myself a larger loss.

Let's consider another case. Let's say I'm in a put spread and the market is moving up as expected but it is approaching an overhead resistance area. I might want to consider watching that level to see if the resistance level holds. A failure to break through the resistance might be an opportunity to close the trade and lock in what profit I have.

So what technical indicators are good to use? That completely depends on the individual. There are plenty of indicators to use from forms of support & resistance (moving averages, fibonacci retracements, bollinger bands and more) to oscillators (stochastics, MACD, etc) to Japanese candlestick analysis. Any of these can be useful as long as you don't over do it.

If you are going to consider incorporating technical analysis into your trading rules, be sure to be comfortable with the indicators you use. Again... all I can say is 'keep it simple'. You might also want to visit the technical analysis page on the website for more detail on different indicators.

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Answers to Your Questions

I frequently receive email from visitors to the site with questions that aren't answered directly from content on the site. Many of these are great questions and I think the answers would be valuable to all readers. Each month I'll be posting one or two questions, so stay tuned!

I haven't really received any new questions in the last month or so. Here's a question I've answered in the past but it seems to come up a lot. However, I'm going to do a quick summary of my past answers.

Q: Why do you always exit your trades within the last 4-5 days before expiration?

A: While I've talked about this topic a few different times, I want to take time here to summarize some of my reasons for exiting early. Here are 5 reasons to close the trade early.
  1. Gamma risk - In the last few days before an option expires, the gamma value of at the money and near the money options explodes. That means that option prices can swing wildly with relatively small movements of the underlying.
  2. Market maker is in control - In the last few days before expiration, the market maker knows many options traders hold until the last minute and will tend to not give good exit prices.
  3. Trade risk - In a trade that's going well, is it worth risking existing profit (see reason 1) for the last few pennies? If the trade isn't going well, is it may be a good time to bail (see reason 1).
  4. Opportunity cost - Given a trade going well, you may be holding on to a trade for the last few pennies but the margin is still tied up. That may represent a lost opportunity to enter a different trade that has more up side.
  5. Extra premium - By closing the trade out 4-5 days before expiration, you gain an extra week (well, sort of). Because options don't melt away in a linear fashion, there's a bit of a value drop in next month options over the weekend following expiration. This is related to reason 4 and arguably a bit of a stretch.
Of course all of these reasons are interrelated. And... of course you my choose to come up with different rules. I've traded both ways and my choice is to close early.

If you would like to submit  a question, comment or feedback on the website, please visit this page.

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Options Outlook

In concluding this newsletter, I want to provide a brief outlook for what I'm expecting for the next 20-40 days. Before I do, I need to insert the following disclaimer.

 
This is not a recommendation to buy or sell stock, ETFs or options. It is simply my opinion of what I expect and how I plan to trade. As such, it may change if the charts indicate something different.
 

February is actually the third bullish month in a row, although it appears as though the trend may be faltering. Last month I summarized my outlook as follows:

"The recent pullback also took the SPX down to the 30 day moving average. This adds strength to the bullish argument. Whenever a stock pulls too far away from the moving average, I start to expect a snap back. On the other hand, if you look at the stretch from mid September to just a few days ago, we've seen a pretty long bullish run. There was a minor correction in early November but it seems like there may be more to come. In fact, I'd say if we see the SPX fall below $1275, we may see a correction all the way down to the $1250 level or lower. "

Here's how the month played out.



The SPX is currently running in a bit of a range caught between about $1345 and $1300. In fact, it looks like just a few days ago the SPX formed a lower high. If we see a break of the $1300 level, this will confirm a lower low and I'd say the trend has changed.

If we see the SPX clear the near term highs of around $1330 or so, we may see a re-test of $1345 (Note: As this newsletter goes out, it appears this may be the case but wait for confirmation). A failure to clear this level would suggest a potential double top, which is a bearish reversal signal. Given my discussion about technical exits in the Options Strategy Focus, what would this indicate for your bullish trades? For me - at the very least it means watching them closely.

Of course all of this sideways churn could simply be a byproduct of the news. It seems like every day a different set of news spawns a round of selling or buying. The important thing is to have some key indicators in place that may act as a guide to the market's next move.

Remember to stay nimble and alert. Make a point of doing market analysis every day, especially if you have open trades. If you choose to enter any trades, be sure to do your own analysis and follow your rules for entry and exit.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

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