the inaugural 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 books, websites
and tips. If you find this newsletter valuable, pay it forward and send
it to your options trading friends.
Happy New Year! - January Edition
your New Year's resolution?
In this edition, you'll see I still have a few lessons to learn. My
number one resolution this year is to trade what I see. That
means the majority of my trades need to be in support of the
intermediate term trend.
How about you? Do you have some resolutions you need to make related to
trading? Maybe it's to get more educated through seminars or reading a
book or two. Maybe it's to improve you trading through better use of a
Whatever your resolutions are, I encourage you to jot them down and review
them each month. Taking time to review your trades and your processes
each month is a key to becoming a better trader.
That's what we're all
new at Success With Options
- Index Options page - I have traded
index options in
the past and continue to do so from time to time. Many people are
interested in index options, so I put together a page that
some of the similarities and differences between index options and
regular options. Check it out!
ETF Options page - For the past year or more, I have almost
exclusively traded ETF options. Why? I answer this question and many
more on this page.
Video tutorials - I've added several new videos to my YouTube
recently. Unlike some of my first videos, these are more focused on
topics such as premium selling strategies and portfolio management.
Have a look.
Trade of the Week Summary
Over the last month, I've not put on as many trades as in prior
months. Part of this was due to the sheer craziness I was experiencing
heading into the holidays, but another part of it was due to my
uncertainty as to what the market was doing. As I'll talk about in a
later section, the S&P 500 went into a bit of a holding pattern
that left me uncertain as to the direction.
That said, I put on several trades last month and closed several
others. Here they are in a quick summary.
||Short put verticals
||This was a pair of put spreads that
were designed to offset the bearish trades I had going. One spread
closed with a loss and the other had a modest gain.
||Short SPY put vertical
||This is a new trade and is in keeping
with my current outlook, which is bullish.
||Short EWZ put vertical
||This started out as a short put
vertical that I added some call verticals to and it turned into a nice
||SPY Iron condor
|| $355 loss
||With SPY being unusually
strong, this trade killed me. This is where I decided to stop fighting
The point isn't necessarily to make a handy profit on every trade but
to trade every trade well (although profits are really nice). I don't
feel I traded well for a number of reasons, but even still, I exited
the month with only a modest loss - a tribute to good money management.
That's the one thing I felt I really did well.
For more information on all of the trades I've posted as option trading
tutorials, click here
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table of contents
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 answer would be valuable to all readers. Each month, I'll be
posting one or two questions so stay tuned!
Here's the first one...
see that you and many others have a rule to sell or buy back 4-7 days
before expiry. What is the reason that you do this?
get this question a lot and when I first started trading, I didn't
really see why I should give back money and pay extra commission to
close early. I was first challenged on this point by one of the guys
from Thinkorswim at one of the free workshops they offer in various
cities. What helped me understand was to think through a trade.
If I put on a trade (let's say a $2 wide spread)
for $.50, that leaves $1.50 in risk if I don't use any other exits.
Let's say that 2 weeks go by and the position is only worth $.10 (that
means I have a $.40 profit). With more than a week to go until
expiration, I could close the trade and lock in that profit or let it
ride, holding on for the last $.10. That means I'm really risking not
only the profit I already have but the amount I stand to lose for that
last $.10. The question is... is it worth the risk? After having a
number of winning trades turn into losers in that last week, I say no.
Since then, I have rarely held until expiration.
For a more technical reason, take a look at what happens to
gamma in the last week of an option's life. It tends to cause prices of
the option to swing wildly with only small price movement in the
underlying. That means you could have an option that is almost
worthless at one point and have it suddenly become worth quite a lot
with only a $1 or $2 swing in the underlying stock or ETF.
If you would like to submit a question, comment or feedback
on the website, please visit this page.
Back to the
table of contents
Book Review of the Month
When I first started getting interested in trading, I
was hungry for
every book I could get on trading of any kind. I went to the library, I
went to bookstore and any place I could to find good books. The book I
want to spotlight this month is one I bought early on and I'm glad I
The book is called "Fundamentals of the Options Markets" by Amy Hoffman
and Michael S. Williams.
When you are first learning about options, all the related concepts can
confusing. What are all the Greeks? What is the difference between
historical volatility and implied volatility? Why is options pricing so
I really liked this book because when I encountered it, I was new to
options and many of the concepts still weren't fully understood. This
very readable and offers great explanations on the topics of options
pricing, options Greeks, volatility and more. The authors were former
options market makers so they understand these concepts inside and out.
They do a pretty decent job of explaining things so a novice can
understand. They even introduce the idea of synthetic positions,
something I hadn't hear much about until then.
My favorite sections of the book:
The only part I didn't find that helpful was the section
Strategies (Chapter 9). I didn't like the organization and their
explanations of the trades, but your mileage may vary.
- Pricing Options (Chapter 4) - They cover all the
details of how
options are priced, including intrinsic and extrinsic value. They also
introduce option pricing models, which helped me understand how the
various factors interplay to affect price.
- Option Volatility (Chapter 5) - The difference
volatility and implied volatility and how it affects option pricing.
This relates back to the previous chapter on pricing models
since implied volatility is so closely related.
- Synthetics (Chapter 6) - I read this early on and
skipped it because
it was too confusing. I went back and read it later when I was more
comfortable with options and found it to be much easier to understand.
I'd have put the chapter much later in the book. That said, synthetics
can really be helpful in understanding ways to adjust risk. I actually
use the synthetic short (i.e. long put/short call) fairly often.
- The Greeks (Chapter 7) - Finally... I'd have
preferred this chapter
be much earlier in the book.That said, I particularly found the
explanation of the meaning and the different implications of
delta helpful as well as the discussion on theta. It helps you
understand why buying options can be riskier than selling them.
- Market Making (Chapter 10) - I thought this chapter
interesting as it gives you a picture of what is going on with the
other side of your trade. This chapter combined with listening to the
Thinkorswim instructors talk about their days in the pits really helped
That said, I still recommend this book for your library, particularly
as a stepping stone to reading "Option Volatility and Pricing" by
Sheldon Natenberg. I'll be reviewing that book next month.
For more on this book or to purchase, click here.
To see other books in my library, click here.
Back to the
table of contents
I'm concluding this newsletter with a brief outlook
for what I'm
expecting for the next 20-40 days. Before I do, I need to insert the
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.
For those that have followed my option trading tutorials
(trade of the
week), you know I've been fighting the trend because I have a hard time
believing that this rally can be so long lived without any sort of
correction. The result is that I've had more failing trades than I've
liked. Repeat after
me... "Trade what you see!". Yes, I'm repeating it to myself as well.
So, I put it to you... If you are a chart reader, what
kind of trend to you see?
right! I think it's pretty bullish, although
there was a consolidation period that lasted about a month. At that
point, the consolidation could have either resolved to the up side or
to the down side. In this case, it resolved in the bullish direction
and I wouldn't be surprised to see testing of 1200 early in
However, I also wouldn't be surprised to see a nice
correction after the first of the year. If it happens soon, then we may
see a nice fat correction down to the 1000 level. That may seem wishy
washy, so let me be more precise.
Given the above two possibilities, I believe right now,
it is more likely for the S&P to continue up to 1200 before
retracing. Since that is the case, I'm going to be looking at putting
on more bullish trades... mainly put vertical spreads. I may start
looking at a diagonal spread or two.
What might change my opinion? IF we see the S&P
fall back down into the range it was trading in for most of November
& December then I'd be a little more cautious. If we see the
S&P fall below about 1080, then I'd expect a little more
bearishness and I'd look at buying put calendar spreads and selling
call vertical spreads.
For more on technical analysis, click here.
For more on options strategies I use, click here.
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table of contents