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Success With Options - Monthly Review, Issue #50 -- February 2014 Edition
February 01, 2014
Hello,

Welcome to the February 2014 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 (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.

Fresh Start in 2014 - February Newsletter

I took the January newsletter off so this is the first newsletter of 2014. It's been a pretty wild year already. Last year was a pretty strong year as we finished up 422 points on the SPX. That's nearly a 30% gain! We began January treading water but the last week or so has seen some selling.

Will 2014 be another bullish year or will we see turbulent times ahead? What strategies can be employed? Also in this newsletter, I have answers to your questions, Options Strategy Focus and Market outlook for you. For more details on that, 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: Short Vertical Spread Quick Reference

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. As I mentioned in the December newsletter, I will be taking the next few newsletters to review some of the strategies that I use on a regular basis. However, rather than re-printing the content that's already on the website, I want to provide a sort of blueprint on the basic concepts as a kind of quick reference to all the content.

Premium Selling Overview
If you are newer to premium selling strategies, I'd recommend you check out these references.

Short Vertical Spread Overview
There is a lot of information available in a both web and video formats on the basics of the Short Vertical spread. I'd recommend starting here if you are newer to the strategy.

Short Vertical Spread Tutorials
This section will provide links to the various tutorials I've put together that demonstrate the strategy. I hope you find this summary valuable in mastering the short vertical spread strategy. Please let me know either by the newsletter feedback page or the Contact Me link what you think or if there are improvements you would like to see.

Stay tuned for more strategy quick references in future newsletters. Next month will be the Calendar spread strategy.

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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!

Last month I received a question from a day trader wanting to transition to options trading that I think would be good to address here.

Q: I currently day trade the SPY ETF and I'm looking to discover trading the SPY ETF options. I'm not sure of what's the difference between the ETF and ETF options and what are the advantages and disadvantages.

As a beginner, would you advise trading the ETF or the ETF options? I have a $10k account and am willing to risk $100-200 per trade.

A: Many of you who have followed this newsletter and content on my site could probably answer this question. However, there are many traders who are just beginning to make the transition to options trading so let me take a little time to address the questions posed.

First of all, while an ETF usually represents a basket of stocks or  a commodity of some kind, it trades like a stock. That is, you buy it and hold it potentially for a long period of time with the expectation that you can sell it for more than you paid for it. In addition, many ETFs pay dividends much like stocks do.

Options on the other hand are a short term instrument that is considered a derivative in that it derives it's price from an underlying asset - that is the ETF the options are created for. Options are contracts that give the holder the right to buy (Calls) or sell (Puts) at a given price. Options are also short term in nature. They expire at a fixed point in time.

Given these characteristics, you can often buy a Call for example for much less than the underlying stock. Yet, when the stock goes up, the value of your call does as well. So, options provide a degree of leverage that can make them much more profitable but... given their time bound nature, they also can lose money more easily simply by having the underlying trade sideways.

The above is a short overview of options. A much more detailed coverage can be found on the website and I'll provide links at the end of this section. I said all of the above to make the point that options are a more complicated instrument. As a result, you don't want to just jump in and start trading them without understanding all their characteristics. Trust me - I started trading options that way and it drained my account pretty quickly.

I want to wrap up by addressing the second question as to whether to trade the ETF or the ETF options. It is really a choice you have to make and is a matter of comfort. I'm comfortable trading options because I've taken the time to understand the characteristics, different strategies and have gained experience on paper trading. Please hear this next point.

I highly recommend NOT trading any kind of options until you understand them and have successfully paper traded them for a while. I also highly recommend NOT trading them until you have a trading system and a plan for executing your trades day in and day out.

Options will drain your account quickly if you don't understand them. That's why brokerages make you read the 'Characteristics & Risks of Standardized Options' before opening an account and being granted the right to trade options.

I hope this article doesn't scare you away from trading options. However, I also don't want to see you drain an account because you didn't have a healthy respect for options. This is largely why I started the website and this newsletter. It was to provide easy to access information about options and options strategies AND ways to safely enter and manage trades so you don't blow up an account and be out of the game.

For basic information on options in general, check out the Options Basics page on the website. Also look at the basic call buying and put buying strategies outlined. Next, have a look at the Options Strategies page for safer strategies of options trading. Finally, do NOT begin trading options until you understand the concepts of money management trading rules and trading plan, which are outlined on the Options Trading Systems page on the site.

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, expectations may change if the charts indicate something different during the month.
 

Well, here we go again. Last year had such a nice bullish trend to it. Is there more up side to 2014 or is the trend about to shift?

In December's newsletter, I summarized my outlook as follows.

"...This is the kind of setup that makes me a bit nervous. While it's possible for the SPX to continue to rally through December, it's also possible that there will be some kind of sell-off at least back town to the $1750-1775 level before continuing on. For now, I'm going to be watching for some kind of signal as to what's next. The key thing to keep in mind is that the dominant trend is still bullish.


Here's how the December and January months played out.



While it wasn't apparent in the December newsletter, the selling to $1750 back in early November formed a range that eventually broke to the up side and was later tested in early December. Since this level held, it can be considered a support level (old resistance becomes new support). We then saw a rally all the way to the end of the year. Beginning in January, the SPX really couldn't breach the highs established at the end of December and ultimately sold off back to the support level around $1775.

The real question now is whether this support level will hold. If you'll pardon a Zen-like statement - it will either hold or it won't. What I mean of course is that technical analysis isn't as much a predictor of behavior as it is an early warning system of what is happening. In this case, I believe the strength of the support level coupled with the fact that this area is also where the bottom end of a 6 month up trending channel can give us a strong indicator of the next medium term move. If support holds, we may be able to see a rally back to $1850 or higher. If it fails, I wouldn't be surprised to see selling all the way down to $1700.

In terms of my trading plans, I'm planning to hold off making any trades until the market tips its hand. In the December newsletter, I had suggested using the remainder of the year to evaluate your trades. How did you do? Are you successful trading the up side as well as the down side? Hopefully you got back into some trades in January. It was a nice time to have put on some bearish trades. While next week MAY be an opportunity to put on some bullish trades, I'd wait to see if the support holds.

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.

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.

As I announced earlier,  I just released the second for sale' video last week. The title of this video is "Mastering Short Vertical Spreads". I now have at total of two 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 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. While a long time coming, it's been a labor of love. 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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