the January 2018 edition of this newsletter!
This is (now) a bi-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 (nearly) every month, you are always
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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Portfolio Management - January Newsletter
|Wow! It has been such a crazy last few months that there has been no
opportunity to get the newsletter together and out, even though I
intended to to so for both November and December. As a result of all
this, I'm going to move to a bi-monthly (every other month) newsletter
starting this year.
How about this year end finish? I hope everyone was able to capitalize
on the nice strong trend for
some good trades to finish the year out. As
we look to 2018, what can we expect? More bullishness? Can this trend
We'll explore those questions, start a new topic on options strategy, answer your
trading questions and more. For more
details, read on...
I'm always interested in receiving feedback on the newsletter. If you
haven't done so recently, please consider taking a few minutes to visit
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
Options Strategy Focus: Portfolio Management
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials and
other topics related to options trading. This is a replay of a topic I covered a
number of years ago. As we head a new year, it
may be good time to address this topic again.
One of the harder aspects of trading is keeping a balanced portfolio,
or at least keeping a portfolio that's oriented toward your current
bias. I've covered this topic in a video on YouTube to some extent but
I want to expand on this here.
is Portfolio Management?
First, what do we mean by portfolio management? When I refer to this
term, I mean having a set of trades that collectively reflect the
current market bias and making trades that take into consideration the
risk and portfolio greeks.
In your account, you should be able to have a good idea of what the
total risk is, how the portfolio as a whole benefits or is harmed by a
move up or down, how time affects the position and how volatility
increase or decrease affects the portfolio. That in a nutshell is what
I mean by portfolio management. Much of this view comes from
understanding the greeks at the portfolio level.
I may have introduced a concept that may not be familiar to you. If you
have worked with individual option contracts, you should be familiar
with delta, gamma, theta and vega with respect to those options
contracts. If you understand that option greeks can be additive, you
can begin to see how we arrive at the idea of portfolio greeks.
If you think about
it, you can do the same thing with a vertical spread
or any other spread position. If you buy a call and sell a call to
create a vertical spread, you can add the deltas (one will be positive
and one will be negative) to arrive at a position delta. You can do the
same thing with the other greeks as well.
Now, if you think about it, you can take that concept to the next
logical level, which is to add the delta, gamma, theta and vega for
each position to arrive at a portfolio delta, gamma, theta and vega. As
an example, if you had a positive delta, it tells you that the
portfolio will benefit from an overall market increase. If you have a
negative vega, it suggests your portfolio will benefit overall from a
decrease in volatility. Ideally, your portfolio theta should always be
positive as should each of your positions if you are following the
premium selling strategies promoted on the website.
You use the portfolio greeks to
determine your overall exposure to
market factors such as volatility, time passing and market bullishness
or bearishness. You can also use the greeks to help you select a
strategy when considering a new position. First though, you need to
determine your current bias.
Any time you are set to put on a new position, you will always want to
determine bias as you would typically want to determine outlook. The
same is true when managing your portfolio. The way to do this is the
same as when entering a new trade. It's primarily through technical
analysis. My preference is to use simple techniques such as support and
resistance. You'll want to look at a two week timeframe as well as a 4-6
week timeframe. What you are doing is making a plan to adapt your
portfolio to reflect your
outlook. Since most positions are 3-6 weeks in
duration, you'll want to take the time to do this.
Once you arrive at an bias, you'll be comparing bias to portfolio bias.
Your portfolio bias is expressed in the greeks. Delta primarily
indicates directional bias. Positive delta means bullish bias. Negative
means bearish bias. The larger the delta in either direction, the more
bullish or bearish. Vega can give you an idea of volatility bias.
Positive vega means the portfolio benefits with increased volatility and
Once you have both an idea of portfolio bias and an idea of outlook, you
have one of two choices. One, do nothing since the outlook agrees with
the current bias. Two, select a position that shifts the portfolio from
its current bias more in the direction of your outlook. Of course, this
latter choice could either mean pushing the portfolio further in the
direction of its
current bias or changing the bias of the portfolio by
the position(s) you add. For example, if you want to move a mildly
positive delta to a more strong positive delta, you pick a positive
delta trade. If you want to move a negative vega portfolio to a less
negative or positive vega, you select a positive vega trade.
a strategy for the portfolio
To begin, you need to make sure you understand the greeks of each
strategy. In general, most strategies I propose are positive theta so we
won't spend time on that. Beyond that, you need to know what strategies
are positive delta and negative delta. Generally, any bullish strategy
is positive delta and any bearish strategy is negative delta. Vertical
spreads and iron condors are negative vega, while calendar spreads and
diagonal spreads are generally positive vega.
you now have the building blocks to make your decision. You know
what the current portfolio bias is. You've assessed the market and have
an idea of the market bias. You know what strategies will help you make
the necessary adjustment to your portfolio. You are almost ready to set
up the trade.
If you are using the thinkorswim platform, you have another tool in your
toolbox. You can use the thinkorswim analyze to see what impact your
trade will have. You can see what the greek impact is as well as the P&L
impact. If you use this broker, you'll want to take this additional step
of doing the analysis.
Finally, you will will enter the trade. Once entered, you can now see
the actual impact to your aggregate greeks. Be careful that you don't
try to accomplish the entire job in one trade. If a fairly large
adjustment in your portfolio is called for, do it in several trades.
This will give you a
little more flexibility and a bit more fine grained
control as well.
I know that's a lot of information to digest. There are actually a few more
aspects I couldn't cover in this newsletter given the space. For more on strategies,
check out the Options Trading Strategies page. For more on
technical analysis check out the Technical Analysis page. Also, be sure to check
out the video on portfolio management
Here are a few additional resources that demonstrate many of these
Happy trading this month!
Back to the table of contents.
Answers to Your Questions
|I frequently receive email from visitors to the site with
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!
Here's a recent question from follower of the web site on calendar
spreads on weekly options.
Q: Hi congratulations on your page, its really explicit.
I had a question regarding calendar spreads can these be done on a shorter period
basis, like weekly or every 10 days? What would be the approach?
A: First, thanks for the feedback. It's always great to hear from
readers. On to your question.
The key to keep in mind on calendar spreads is the way in which they
profit. They take advantage of the time difference between the short
(front month) option and the long (back month) option. In the most ideal
of all circumstances, you might be right at the strike on the day of
expiration for the front month. In
this case, all the time value has
drained away leaving only the intrinsic value if the option is in the
money at all. With the back month, there is still time value. The amount
of time value will depend on several factors, including volatility and
The part I want to focus on is the time remaining. If there is too
little time remaining on the back month, then the option won't be very
profitable. However, I guess if you initially bought the spread with a
small gap between long and short strike, the cost to purchase would be
smaller as well. I personally haven't done much of this, but I don't see
why you couldn't make it work. The key though is to do some testing
using paper trading. Test your theories out and learn the
characteristics of the shorter term trades.
I want to use this question as an opportunity to discuss the use of
weekly options in trading (especially in calendar
spreads). One of the
nice things I find about weekly options, for instruments that offer
them, is that I find you have more choices for long and short strike.
Instead of being caught in a situation where maybe the short option is
too sort or too long due to the 1 month typical gap between option
chains, weekly options offer more fine grained choices. That means I can
consider them pretty much any time because there is usually always an
option cycle that meets my requirements for short strike or long strike.
Additionally, weekly options often offer more rolling opportunities.
Sometimes that gives me the chance to better prices on rolling a short
strike before the final close.
If you have any thoughts or suggestions on topics that should be added
to the web site or topics that should be covered in video, please use
feedback link or
contact me link to let me know.
Help me ensure we have an interesting (and fresh) question or two to respond to
next month. Submit your questions at this
Back to the
table of contents
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
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.
expectations may change if the charts indicate something different
during the month.
It's been several months now since the October newsletter, which is the
last one sent out. As you can see a lot has happened in that time.
In the October newsletter, I summarized my outlook as follows:
"This recent move makes me quite a bit more bullish. The move over the past few days has established a trend of higher highs and higher lows - classic bullish behavior. There are a couple of factors that will likely act as headwinds though. One is that the current value of the SPX is about $50 above the moving average. This will add tension, creating the possibility of at least a pause. The second is that the VIX is pretty low right now..."
Here's how the last few months played out.
As alluded to, the market did continue to rally through most of the
month of November and really, through the end of the year. In fact, in
December, the bullish trajectory has steepened further to provide a
nice, strong finish to 2017. Only on the very last day of trading (Dec
29) did we see any
kind of pause.
What can we expect in early 2018? I have a feeling that we'll see some
kind of correction. The market has been very bullish throughout 2017.
There are a couple of factors to keep in mind. We are now within
striking distance of the 161.8% fibbonacci level. This is a kind of
extension point that often proves to be a target markets will move to
once breaking the 100% level. If you go back and look at earlier charts
and draw a fibbonacci retracement from the low back in early November of
2016 to the highs in early August, which is when the above chart was
drawn, you not only see the above chart, but you'll also see how
various levels were respected as support between the 0% and 100% levels.
As a result of all of this, I wouldn't be surprised to see selling in
January, down to one of the moving averages or perhaps maybe the trend
line I have drawn. This is actually a healthy move I think.
Based on this expectation, I've been putting on a number of bearish
positions. If the market plays out as described above, these will do
well. As we start to see the support levels get hit and maybe hold, I'll
be looking a bit longer term for some bullish positions.
As always, do your own analysis and whatever trades you enter, use good
money management and have exit strategies in place in case you are
wrong in your analysis. It's a good practice to be prepared with trades
in either direction but not to act without confirmation.
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
Back to the
table of contents
|I'm adding a new section to the newsletter. Feel free
to disregard if you aren't interested in product
One of the more recent additions to the portfolio of services and
products is the Live Web sessions. These sessions are recorded and and
available for a very reasonable price of $12 per session. I've created
a Newsletter Special. If you add all 4 sessions to your
shopping cart, you can get 4 sessions for the price of 3 by using the
discount code: WebEx4Pack
Some time back, I released the second for sale
video. The title of this video is "Mastering Short Vertical
Spreads". I now have a total of two strategy training videos for sale .
Here is a quick
summary of each.
An Introduction to Options Spreads
This 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
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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
I'm excited about this project. Many know this is my go-to strategy for
After watching the video, I'm certain you will understand why.
- Understanding the construction and how the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once
- Back testing
- Creating a trading system with the strategy
more information or to purchase this video
Special Discount offer:
If you'd like to own both videos, you can do so for a bulk discount.
Simply add both videos to your shopping cart and then enter the
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table of contents