the January 2012 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Flat year, What's Next? - January Newsletter
| Welcome to the January newsletter. I can hardly believe it's been 2 years
since this newsletter first started. Some of you have been subscribed
the beginning. Thank you for your patience and loyalty as the newsletter has
As we finish out the year, it seems like we're right were we were at the
beginning of the year. How did your portfolios fare? With the style of options
trading we discuss, you should theoretically have a gain. What's next for the
market? Will we see any bullishness, or will the bears rule in 2012? Read on.
Also in this newsletter, I'll be reviewing the month in more detail,
review my trades, talk options
strategies and more. As I write this newsletter, I'm traveling back from
visiting family over the holidays. I pray your holidays were blessed with good
family, good food and good rest.
As we head into 2012, it seems like a good time to ask again for any feedback
you might have on the newsletter. What would you like to see in future
Thanks again to those who have provided feedback on the newsletter in the
past. I do value and take into
consideration feedback on the newsletter content and ways I can make
it more valuable for the readers.
Please feel free to voice your opinion. If you haven't done so already
(or recently), please consider taking a few minutes to visit the
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.
new at Success With Options
|There's been a lot going on recently, mostly with small changes to the website. Last month I added a Facebook 'like' button immediately below the
left navigation menu. If you have a Facebook account and find the website
helpful, I encourage you to take the opportunity to 'like' the site. This month
I added a couple of comment areas to the newer trade tutorial pages. The intent
here is to allow you to weigh in on some of these trades yourself. If you have a
Facebook account, feel free to jump in and comment.
I also continue to look for
new topics to expand the information on the website. Perhaps you have some
topics you'd like to see covered. You can let me know using the newsletter
I entered December with one active trade,
which is now closed. I added another trade right as the month was coming to a
close. Read on for details of
Finally, I've been working on the outline and plan for the 'Mastering Short
Vertical Spreads' video, which is the next one I plan to release. Honestly, the
more I work on this the more excited I get at the potential. This video will
include three key components. First, I'll teach a concept. Second, I'll
demonstrate the concept. Finally, I'll give you a chance to practice the concept
through either simulated steps or directly on your paper trading account. I'm
sure you'll agree these three ingredients will help make sure you get the most
from the material. Look for this video in coming months.
As to the trades I opened and closed, see the trade tutorial summary
below for additional details.
Trade Tutorial Summary
|I had a few more trades going this month. The one trade
I closed was a winner.
Here's the complete list of trades I was active on this
month in a quick summary.
DIA Put spread
was another successful trade. I set a smaller profit target on this trade due to
the choppy market. Check out my commentary on this in the tutorial closing
SPY Put Spread
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. Here are the nuggets from last month's closed trades.
DIA Put Credit Spread:
"...What I'm considering more and more these days is the phrase "there's nothing wrong with taking profits". The more turbulent the market,
the more willing we need to be to simply take profit and get out. In other words, we need to be willing to adapt our strategies to the times
we're trading in. As long as the market remains turbulent, it may be better to settle for less profit if more trades are successful."
For more information on all of the trades I've posted as option trading
tutorials, click here
Back to the
table of contents
Options Strategy Focus: Anatomy of a Diagonal Spread
This section of the newsletter will 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. In recent issues, I've returned to topics more
directly related to the trading systems. Lately I've begun exploring the anatomy of various spread strategies.
Last month I looked at the the calendar spread strategy. This month, we'll look
a a related strategy, which is the diagonal spread.
The diagonal spread is interesting because it really has characteristics of both a
calendar spread and a vertical spread. Whereas a calendar spread is made up of a
long and a short option with different months BUT the same strike price, a
diagonal spread has a long and a short option in different months AND different
strike prices. Like a calendar, the long strike is bought several months out and
a short option is sold closer in. There are actually two different versions of
this spread. One where the short strike is more in the money than the long
strike and one where the short strike is less in the money than the long strike.
I want to focus on the type of diagonal spread where the short strike is less in
the money than the long strike. This is very similar to a long vertical spread.
It also has many similar characteristics to a covered call. In this version, you
want to select a long option in an option cycle several months out in time a
fair amount in the money (ITM). How far ITM is a matter of the rules of your
trading plan. A good rule of thumb is to locate a short strike having a delta
of around .7. The short strike should be in the closest option month having at
least 20 days until expiration. You want to sell a strike price that is
currently out of the money (OTM).
Like the calendar spread, this kind of spread is entered for a debit. The
interesting part of this strategy is that as you roll the short strike from the
current month to a farther out month, you will eventually end up with a long
vertical spread. The trade makes money both from the credits received from the
roll and the width of the spread (assuming it expires fully ITM). A diagonal
spread will almost always cost less to enter than the actual width of the
spread. As a result, if you are fairly bullish this trade has a high probability
of making money even without the credits for the roll.
The majority of the work in trade management is in managing the roll of the short strike.
Like the calendar spread, the ideal rolling point is when the underlying is
right at the short strike and there are somewhere around 4-5 days until
expiration. This will offer the best credit for the roll. A variation of the
calendar style roll is to roll both out to the next month and up a strike or
two, which results in a wider spread.
As the portfolio summary shows below, there are a lot of similarities in the
greek interactions to the calendar spread. For example, notice the positive vega.
Like the calendar spread, ITM diagonal spreads benefit from the increase in
volatility. This is a unique characteristic - in contrast to vertical spreads
and iron condors.
Notice also that the diagonal spread has similarities to the vertical spread in
its net delta. This is a bullish trade that will benefit from a move up in the
Notice also the unique shape of the ideal P&L graph below. There is a slight bump in the
profitability of the trade right at the short strike. This comes from the
calendar spread component. Other than that, this P&L graph looks very similar to
the vertical spread P&L graph. Like the calendar spread, it's rare to realize the
absolute maximum gain without taking the trade to the absolute last trading day
and landing right at the short strike on the roll(s). The best you can hope for
is to get a decent credit on the roll and have the underlying be completely
through both strikes near expiration.
As a final point, I wanted to talk about when this strategy makes sense. As a
rule, I prefer to use the call diagonal spread. However, a put diagonal spread
would make sense in a strongly bearish market. I tend to prefer using a diagonal
spread when the outlook (bullish or bearish) is a little longer term or the
underlying is in a bit longer trend. This is a trade that takes roughly 4-6
weeks to develop so this strategy doesn't work well in a choppier market.
For more information on this strategy, visit the
diagonal spread strategy page.
Back to the
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 answers would be valuable to all readers. Each month I'll be
posting one or two questions, so stay tuned!
Here's a question I received actually related to a service provided by
thinkorswim, now TD Ameritrade.
Q: I was using the trading log I received from you as part of the
newsletter sign-up. In using this spreadsheet, I'm wondering how you would
record adjustments (for example rolling one leg of an iron condor)?
A: This is actually an issue I've wrestled with a few different times
myself. The trouble is that the spreadsheet takes a fairly simplistic view
of a trade; one entry and one exit. In reality, trades are often a little more
complicated than that. As a result, I've actually come up with a couple of solutions that
have worked for me in the past.
A fairly straightforward way to handle this situation is to treat the adjustment
as a separate trade with its own entry. For example in the case of the iron condor adjustment,
you would enter the closing cost to buy back the existing leg. Then, you would
add a new trade that represents the new vertical spread. It makes the original trade look kind of bad, but it is
actually a fairly accurate way to look at the adjustment. If you placed the
order as one rolling trade, you may have to guess to some extent. You might
simply price out the cost of buying that same spread and use that as the closing
cost of the original spread. Then, you would use a little math to calculate the
theoretical credit for the adjustment.
Another approach you can use, especially if you are comfortable cell math is to
create a mathematical operation that includes all the debits and credits related
to the trade. You would formulate a cell entry that looks similar to this:
'=(+credit-debit+credit)'. The key to making this work is that all debits must be
preceded by a '-' and all credits must be preceded by a '+'.
In general, I've found the first approach to be a better solution for most
adjustments. The main reason is the simplicity of entries but the other benefit
is what I mentioned earlier - separate entries better represent what actually
happens. I do like to use the second approach when tracking calendar spreads and
If you would like to submit a question, comment or feedback
on the website, please visit this page.
Back to the
table of contents
|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
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 looked for a while like we were going to see that Santa Clause rally.
However, the month showed a whole lot of nothing. Last month I summarized my
outlook as follows:
"...So, will we see the continuance of the strong move over the last few days? It actually wouldn't surprise me to see the $1300 level
tested, with a pause before breaking completely trough. As a result, it may be near the end of December before we see the SPX break
completely through the $1300 level. A final point to consider is that if the SPX fails to reach above $1250, this could signal perhaps
another round of selling.
Here's how the month played out.
The month started out looking like it would break out to new highs. However, the
combination of mediocre economic news here in the U.S. and more bad news from
Europe served to trigger a bit of selling. Interestingly, the selling stopped
right at the 38.1% (I removed the fibonacci retracement lines I had on last
month) before bouncing strongly. We ended the month near the recent highs and
the year pretty much unchanged.
I mentioned in the last trade
tutorial that we are forming what looks like a triangle pattern. Some chart
technicians might call it an ascending triangle but that would disregard the
highs formed back at the end of October. Regardless, what this kind of pattern
often indicates is that the market is preparing for a strong move either to the
up side or to to the down side. I'm leaning a little more toward a bullish
breakout. HOWEVER, with all the news driving the market, we could see a failure
of this recent upward trend. If we see lows back down below $1200, we may see a
lot more bearishness in the coming months.
How does this affect my trades? I currently have one short term bullish trade in
place. I'm going to be watching what happens in the first week or so of January.
We may seen an opportunity for a longer term bullish trade (any suggestions?).
I'm also tempted to sell a call spread near these highs that would be closed out
if we break above $1275 or so. Be watching for new trades to show up in the next
week or so.
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.
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table of contents
|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 recently released the first 'for sale'
video. 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
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
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.
Expect more videos to be released in the months to come.
more information or to purchase the video.
Back to the
table of contents