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Success With Options - Monthly Review, Issue #92-- January 2018 Edition
December 31, 2017

Welcome to 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 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.

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 really continue?

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 the newsletter feedback page and let your voice be heard. This can be done anonymously so please consider how you can help make the newsletter better.

In This Issue

1) Options Strategy Focus

2) Answers to your questions

3) Options Outlook

4) Featured Products

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.

What 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 current 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.

Using portfolio greeks
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.

Deciding on 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 so forth.

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.

Selecting 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.

So, 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 on YouTube.

Here are a few additional resources that demonstrate many of these concepts.

Happy trading this month!

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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!

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?

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 time remaining.

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 the 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 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, 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.

More on technical analysis.

Options strategies I use

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

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Featured Products

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

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 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.

Mastering Short Vertical Spreads
The focus of the video is on one specific strategy, including all aspects of of the process. This includes:
  • Understanding the construction and how the trade progresses over time
  • Selecting the long & short strikes
  • Planning entry & exits
  • Managing the trade once entered
  • Back testing
  • Creating a trading system with the strategy
I'm excited about this project. Many know this is my go-to strategy for options trading. After watching the video, I'm certain you will understand why.

For 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 discount code 'combo10' to receive $10 off your shopping cart total.

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