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Success With Options - Monthly Review, Issue #38 -- February 2013 Edition
February 02, 2013

Welcome to the February 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.

Will 2013 Be Bullish? - February Newsletter

Welcome to the February newsletter.  Well, the year started out with a bang! In fact, all but a few days this month have been selling days. This last week, the S&P 500 touched highs not seen since 2007.

What does that mean for the remainder of 2013?  Have we missed the bullish run? What strategies can we employ if we have?  Read on...

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

I want to provide another update on the Vertical Spreads video I've been talking about in the last few  newsletters. This month I've nearly completed the recording process. At this point, it appears there will be well over an hour's worth of material. This month I'll be working on finishing up the recording and beginning final editing, capturing the hands-on exercise steps and putting together the section quizes. I remain 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 enter a calendar spread late in the month. 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 Put Calendar   I waited a while to put this trade on. The main reason was due to the huge move in the market on the first trading day. This is a bit of a counter trend trade.

Win or lose, I find that I learn something from every trade. I didn't close any trades this month so, no lessons learned. However, the lesson I'm focusing on this month is responding to changing market conditions. The trade I put on this month is an example of this.

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

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Options Strategy Focus: Making Sense of a Low VIX

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. Last month, I reviewed the articles written for 2012. I want to start off the official series of articles this year by talking about how to trade when the VIX, or volatility index is low.

What is the VIX? It's an index that measures the volatility of the S&P 500 stocks. Without going into a lot of technical detail, it can be used to determine how much fear exists in a fairly broad segment of the market. You will generally find that when stocks are rallying, the VIX is dropping and when stocks are selling off the VIX is increasing.

There are many aspects to what the VIX means and how to trade using it as an indicator. I want to focus on one key point. A low VIX means low volatility. Since volatility is a major component of options premium pricing, lower volatility generally means lower premiums for any given option. The impact of that is that if we are selling premium, we either must settle for less premium per trade or take a more aggressive position to get similar premium as we might have gotten from a higher volatility market.

Now that I've laid out the situation, I want to talk about 3 ways to take advantage of a low VIX.
  1. Use the VIX as a contrarian indicator - You may have heard the phrase "Then the VIX is high, time to buy. When the VIX is low, time to go (sell)." There is a little bit of truth to this. The combination of an extended bullish run with a VIX that is sitting at the low end of its range MAY indicate a possible reversal in the near term. What this means is that you might consider looking for some bearish trades that would benefit when the market experiences a reversal. Markets generally don't move in one direction for extended periods of time without having intermediate reversals. While this is a somewhat risky step to take, there are ways to do this while taking advantage of lower premium prices.

  2. Seek out strategies that benefit from low volatility - There are a few different strategies that can benefit from low volatility. Most of these require a net debit rather than a net credit to enter. One example is buying a calendar spread or diagonal spread. Both of these strategies benefit from buying at a low volatility point and selling when volatility increases. If you are expecting a bearish reversal, buying a put calendar or diagonal spread could be a good choice. Another strategy would be buying an out of the money vertical spread. Note that this is initially a negative theta position but will turn out well if the position goes fully in the money.

  3. Consider buying a few long options - I'm not generally a fan of long calls and puts but when the overall volatility is low, they may be a sensible addition to your portfolio. In particular, if you are expecting a bearish reversal buying a put (out of the money if you are expecting a big reversal or in the money if you are expecting a small move) might be a reasonable alternative for shorting the stock.
I hope you found this helpful in responding to the current low volatility market. For more details on the VIX check out the website page.

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 about trading when you don't have a lot of time. I'll paraphrase it a bit.

Q: I only have a limited amount of time to trade in the morning. I'm wondering if there are any particular strategies or trading habits you can suggest.

A: This is a great question. Many of us are busy with other activities and can't or don't want to spend all day in front of our trading platform. Let me talk about a few ways to tune your strategies that can work with short trading windows and limited time.
  1. Perform daily market analysis before or after market opens - The good news is that you can perform market analysis pretty much any time that is convenient to you. To make this work for you, it's important to designate a time in your day that allows you to perform consistent analysis. If you are inconsistent in performing this analysis, you will miss entry opportunities and exit signals, which will have a negative impact on your portfolio.

  2. Make trade decisions outside market window - While somewhat related to the above point, I want to emphasize that you can make your entire trade plan outside of the open market window. Based on your analysis, determine what strategy you want to trade, determine strike positions, position size and other strategy factors ahead of time so you have a plan in place when you find a small window to place your trade. The trick to this is having contingency plans in place to adjust the trade elements (strikes, etc) if the market moves significantly between analysis and entry. Also, be prepared to abandon your planned entry if changes in the market change your outlook.

  3. Size positions for max loss - There are many exit strategies that often require frequent monitoring of the trade. In situations where you don't have that much time though, sizing your positions for maximum loss based on a consistent amount is critical. As I've demonstrated in my trade tutorials, pick a percentage of your portfolio to risk on every trade. Size your position to lose no more than that amount. That way if something goes horribly wrong, it's a loss you an live with. I've found this to be the best way to have 'set and forget' type trades, although you wouldn't necessarily forget the trade but at least you can let the trade run with little worry. See item 5 below for the exit plan.

  4. Find a time period to enter your trades - Much of the analysis and trade setup can be determined outside the open market window. However, entering the trade pretty much requires you to do so when the market is open. It's true you could place limit orders to enter but many times there will be enough of a change between analysis and actual open market that you may not ever get a fill. I've found if you have the trade pre-determined and all factors figured out, entry only takes a minute or two.
  5. Create good-till-cancelled (GTC) limit and stop orders - Don't allow your trades to remain open without exit orders in place. If your platform supports it, have exit orders to at least close and lock in profit. You can also have exit orders based on certain technical triggers. You can also have stop loss orders to exit if the potential loss amount exceeds your tolerance threshold. Of course the ability to do this is dependent on your trading platform so check to see what they support.  The reason this is important is that there can be fluctuations in the daily price action that might potentially trigger an exit that you might miss if you waited to find a time window that worked for you.
I hope you find these tips helpful in trading with limited time availability.

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.

After just a slight pause right at the end of December, The market powered on to reach even higher highs. In fact, the SPX is now at a level not seen since late 2007.

Last month, I summarized my outlook as follows.

"... 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. "

Here's how the month played out.

What ended up happening is that the market went into full bullish mode starting from the first day of January to the last. As a result, the SPX closed well over the $1450 threshold I mentioned on the first trading day and from there, pushed through the overhead resistance level and on to a high of around $1510 before really pausing at all. As a result of this move, there are a few points to consider in determining our outlook for February.

First, notice that there has been an extended move away from the moving average. Combined with this, note that the VIX has been establishing a lower range between 13 & 14 and we are currently in that area. I think that poses a risk that the SPX and the broader market will have a correction that may at least test the prior resistance level around $1470 that has now become support. While there is a chance the bullish run could continue, I think it more likely the next move will be down to test the support level.

How does this affect my trades? I currently have a put calendar spread that hasn't performed too well to date but may do well if we get a selloff. In addition, I'm going to be looking for either a good call short vertical (credit) spread or a put long vertical (debit) spread to enter. However, I'll be watching the first day or so of this month to see if there is any follow through.

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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