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Success With Options - Monthly Review, Issue #37 -- January 2013 Edition
January 01, 2013

Welcome to the January 2013 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.

To access previous issues of the newsletter, click here.

2012 In Review - January Newsletter

Welcome to the January newsletter.  It's hard to believe that we are beginning the fourth year of providing this newsletter and our 5th year providing the Success With Options website content. I hope you find both valuable to you.

Did we get our Santa Clause Rally?  How did we perform overall in 2012? What's in store for 2013?  Read on...

As usual, I'll be reviewing my trade this month, talking options strategies, answering your questions and more.

I want to provide a quick update on the Vertical Spreads video I mentioned in last month's newsletter. I am starting to record the material this month and hope to be complete by mid to late January. From there I can begin to work on the final editing and compilation into something I'm hoping have available by end of Q1. I'm very excited about this project and I believe it's something you are going to find invaluable in your options trading education.

It's been a little while since I've received any newsletter feedback. If you haven't done so already (or recently), 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) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product


Trade Tutorial Summary

I had no trades going when I entered the month. I did have an iron condor that I opened at the beginning of the month but has since been closed. You may have noticed I'm not putting up as many tutorials as I have in the past due to time constraints.

I do want to encourage you if you are a fan of the trade tutorials and have a Facebook account to participate in the tutorials by commenting, asking questions, or suggesting alternative strategies. I'd like these to be more interactive than they have been historically.

In the mean time, I will continue to do trade tutorials but probably not as frequently as before. Here's the trade I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
SPY Iron Condor $114 This trade is now fully closed. It was a relatively short trade for an Iron Condor. But, it was a profitable trade and sometimes that's the most important factor.

Win or lose, I find that I learn something from every trade. I want to include some key thoughts/lessons learned from the past month's trade tutorials here.

From the SPY Iron Condor
" So, why close the trade early rather than letting it run longer for a possibly better gain? Have you heard the phrase, "Close your losers and let your winners run"? That sounds good in principle and often makes sense. However, there are times when it makes sense to manage your winners to keep them winners. In this case, the weight of evidence was indicating a more bullish bias, which would have further eaten away the profit that had been built up."

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

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Options Strategy Focus: 2012 Topics In Review

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I'm currently working on some ideas for new topics to cover in 2013. In the mean time, I think it would be good to review some of the topics I covered in 2012.

There were several themes I explored last year, including revisiting the mechanics of various options strategies, using option greeks, determining market outlook and so on. Let's look at some of these more closely.
  • Anatomy of Option Strategies - I began the year with the conclusion of a series of explorations of various options strategies. The goal was to provide a quick review of some of the mechanics of each of these.
  • Miscellaneous trading subjects - In the middle of the year, I covered a number of topics related to various higher level aspects to trading.
    • Understanding Portfolio Greeks (March 2012) - A brief review of the various greeks and in particular, focusing on how to use them on the portfolio as a whole.
    • Determining Market Outlook (April 2012) - Using various tools to determine the outlook for the market with the goal of using that information to select a strategy.
    • Leveraging The Power of ETFs (May 2012) - An exploration into why ETFs make great vehicles for the kinds of options strategies employed on the site.
    • Selecting an Options Broker (June 2012) - A quick review of some of the important criteria for evaluating an options broker. No - commission rate isn't the key criteria.
  • Trading Psychology - I concluded the year by talking about a number of topics related to trading psychology.
    • Trading an Unpredictable Market (July 2012) - I kicked off this series by exploring how to respond to a market that is so unpredictable.
    • Psychology of Losing Part 1 (Aug 2012) - I began a 3 part exploration into how to respond better in the face of a trade that may be going wrong.
    • Psychology of Losing Part 2 (Sept 2012) - Exploring what may be behind our 'refusal to lose' mentality.
    • Psychology of Losing Part 3 (Oct 2012) - Developing 5 key habits that lead to being a more objective trader.
    • Evaluating Adjustments (Nov 2012) - Coming on the tail of the 'Psychology of Losing' articles, this explores the reasons we might consider an adjustment of the trade instead of simply closing it.
I hope you found these articles useful in your options trading journey. Feel free to go back and review them as often as you like. Here's to a more consistent and profitable 2013!

Stay tuned for the next options strategy focus as we return to more strategy related topics. Any suggestions for topics? Send them in via the newsletter feedback page.

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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!

This month I received a question somewhat related to the question from last month on rolling.

Q: With a high probability iron condor, the vega risk can be quite large. How do you trade it when it goes against you.

A: This is a good question and relates to a topic many people ask about. That is, how to respond to a trade that goes against you?

I've answered various similar questions recently. So, rather than reviewing the same answers, I want to encourage you to go back and re-read some of the recent questions as well as the Options Strategy Focus topics.

I believe behind this and many similar questions is the question of how to define a trading system and related trading rules for a given strategy. This something I'm going to explore in more detail in the coming Vertical Spreads video but let me cover some points briefly here.

Here are some decisions that need to be made about the trading system you are building
  • How aggressive of a position do I take? By that I mean, do you take a lower probability trade closer to the money or a higher probability trade farther from the money? It might seem obvious that you'd want a higher probability trade (one that has a higher chance of succeeding). That would probably work for you a lot of the time. However, when you are wrong the loss can be much larger. Is that bad? No - it just means you need to take that into consideration. This point might be behind many of the questions I receive on the topic.
  • At what point do I adjust (or do I)? - To adjust or not adjust. That is the question. Rather than going philosophical on this point, I'd suggest that the need to have an adjustment strategy becomes more important when the reward to risk ratio is much lower as is the case for most high probability trades. So, having a plan to adjust for an iron condor strategy where you sell the .10-.15 delta short strikes and a reward/risk ratio of 10% becomes more important.

    Last month I talked about how to evaluate an adjustment/rolling strategy. There is no one answer. Some traders will simply close the position. Some will roll the position and some will add some other kind of position to adjust. Once you understand what your choices are, take some time to decide what approach works best for your own trading personality.
  • When do I exit - While somewhat related to adjustment, I just want to emphasize that you should have an exit strategy of some kind. At a minimum, have a strategy to close in the last week of expiration. Vega risk becomes a much larger issue in the last few trading days and a relatively minor move of the underlying can turn a mildly profitable position into a losing position.

I hope this answer, as well as those from prior months, are useful to you. Deciding how you will respond to trades that go against you is an important part of developing your trading system and related rules. I'd encourage you to take time to think this through and validate using some sort of back testing tools.

Help me ensure we have an interesting question or two to respond to next month. Submit your questions at 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.

It's been a pretty exciting year with lots of ups and downs. However, if you look at the net change from the first trading day of January to the last trading day of December, you'll see that the SPX gained roughly $168, which is about a 13% overall gain.

Last month, I summarized my outlook as follows.

"... With 8 of the last 10 days being up days, I wouldn't be surprised to see a pause around the $1425 level. A little longer term, it's very possible that we may see a late Santa Clause rally through the end of the month. Following a near term pause, expect a continued run up to test the highs. However, a potential headwind continues to be the march toward the fiscal cliff here in the U.S., and uncertainty as to whether it will be adequately addressed. This can put some downward pressure on the markets and dampen the anticipated Santa Clause rally."

Here's how the month played out.

As you can see, December played out more or less as expected. We saw a bit of a pause early in the month followed by a solid run all the way to a few days before Christmas. At that point, doubts increased about whether any kind of resolution in congress would be reached before the end of the year that would prevent the fiscal cliff. That led to further selling all the way to the last trading day of the year. As you can see, that one day erased more than half of the prior week's selling. Coincidentally (or not), the support level was found almost exactly at the 38.2 fibonacci retracement level.

What does all this mean for 2013? We could actually see a little more bullishness, especially if an ultimate resolution to the fiscal cliff concerns is seen. I'm seeing a few indicators that might cause me to be bullish for the next couple of months. First, we saw that nice strong bounce at a key fibonacci level. Second, this occurred at a point when the 30 day moving average is crossing up through the 50 day moving average. I'm going to remain cautiously bullish until I see a break over $1450, which is the first point of overhead resistance.

How does this affect my trades? We currently have no tutorial trades but it seems like a good time to add a bullish vertical spread. If I wanted to take a longer term bullish trade, I might consider a diagonal spread. Be watching in this first week of January for a new tutorial.

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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Featured Product

I'm adding a new section to the newsletter. Feel free to disregard if you aren't interested in sales type information.

For those that aren't aware, I released the first 'for sale' video about a year ago. The title of this first video is appropriately "An Introduction to Options Spreads". I say it's appropriate because this will be the first of several videos I'm working on that really are a labor of love. My goal is to provide a more in-depth and comprehensive coverage of options spreads.

To that end, this first video provides a good coverage of the basics of options spreads, including why they are preferable to other options strategies like buying options and selling naked positions. What I believe makes this video valuable is that it combines presentation with interaction. Once you have the basics down, you will be well prepared to start digging deeper into some of the options strategies employed on this website.

For a relatively small cost of $29, you can own this video, which offers over 40 minutes of material. This package is very easy to install and use.

For more information or to purchase the video.

New Video Coming
I am also in the final stages of the next video, which I'm very excited about. It features my favorite strategy - the credit spread, or short vertical spread. This video will cover everything from how the spread is constructed to how to create a trading system around it. Be watching for this video in the coming months.

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