Back to Back Issues Page
Success With Options - Monthly Review, Issue #84-- February 2017 Edition
February 01, 2017

Welcome to the February 2017 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.

Anatomy of a Trade Entry Part 1 - February Newsletter

Welcome to 2017. It sure has been an eventful month and half since the last newsletter hasn't it?

We've seen huge run ups, sideways trends and more bullishness. So what's next? We'll have answers to that question, tips on Options Trading, Answers to Your 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: Anatomy of a Trade Entry - Intro

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.

A subscriber recently submitted newsletter feedback requesting coverage of trade entries and exits. As a result, I'm kicking off the 2017 with a series of topics on just that. Let's start with looking at various aspects of a trade entry at a high level. Then, we'll explore each aspect in more detail.

Key Elements of an Entry
When I consider an entry, in my mind it breaks down into several key steps. Each one of these is important as a factor of the overall success of the trade. Here's how I see the steps.
  1. Market Assessment - This is a critical part of the overall trade. Before you can select a strategy or place a trade, you need to understand what the market is doing AND what you forecast it to be doing for the duration of your trade. This plays a tremendous part in the selection of your strategy. Some elements to consider are whether the market is overbought, oversold; whether volatility is high or low and forecast to change, etc. This can help shape the duration of your trade and the strategy you select.
  2. Strategy Selection - Having the outlook, you can now focus on selection of a strategy. Before doing so, you should consider what your objectives are for the trade. What event are you trying to take advantage of? For example, are you looking to capitalize on an anticipated reversal? Are you expecting to take advantage of collapse of volatility or an increase in volatility? All these factors can affect the strategy. Assume I am seeing low volatility and I expect a reversal. In that case, perhaps I decide to use a Put Calendar Spread as the strategy. Furthermore, understanding the duration might affect my choice of a single roll calendar or multiple roll calendar spread.
  3. Trade Analysis - Once you determine outlook and strategy, the next step is to select an actual set of options. This can be more challenging than it might appear. This is especially true with some of the index ETFs that offer weekly options and $.50 strike increments. Part of your analysis of the trade involves determining risk and reward from the trade. Part of the analysis could also involve assessing different strike selections and evaluating them against risk and reward AND probability. Don't forget to consider trading commission in your analysis of the trade.
  4. Exit Strategy - Before going further, you should have an exit strategy in mind as well. This is important because it may affect the risk amount mentioned earlier and this could potentially affect position sizing. Exit strategies can vary from letting the trade expire, closing at a target gain amount or closing at a target loss amount. Do this before going any further.
  5. Position Sizing - This is perhaps the most underrated step. Most people skip this or don't give it the appropriate amount of emphasis in the trade. Position sizing is about ensuring that you risk the same amount on every trade and that any one failed trade doesn't blow up your trading account. This is about trading consistently.
  6. Trade Entry - Again, you might be tempted to think that this is just the mechanics of pushing the button. However, I consider optimizing the price to be part of the entry as well. That means trying to get the best price possible and not settling or chasing the trade. Many times, you are looking at a few pennies per contract on a trade difference between the optimal entry and a sub-optimal entry. However, consider that over the course of a year or few years. A few pennies multiplied by 100 (the typical number of underlying stocks or ETFs in a contract) is a few dollars. Multiply that times the number of contracts you trade in a given year and it can add up.

I hope you found this topic useful and interesting. Look forward to additional discussion on these topics. As always, please send me feedback with any requests for topics or thoughts on what has already been published.

Happy trading this month!

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!

This month I didn't receive any new questions. As a result, I'll 'replay' a good one from some time back.

Q:  Is it possible to implement a strategy with iron condors similar to the strategy used for short vertical spreads (i.e. targeting 80% of the initial credit and 2X the credit to exit)?

This is a good question. It's certainly possible to come up with a strategy that's similar. However, let's take a moment to think through the strategy. The iron condor strategy I currently use is what I call the 60% strategy due to the rough probability of the short strikes I choose expiring worthless. That typically results in a credit that is 50% of the spread. For example, if I sell a $2 wide spread on each side of the iron condor, I'd look to get about $1 in credit. So, there's already a 2X rule built in. On top of that, if I set my exit rule for 20% of the credit for each side, I've effectively made it the same as putting on two vertical spreads with their own separate rules. I could set my overall target profit point to be 80% instead of 60% but that means leaving the trade on longer and that typically imposes more risk.

Maybe a better way to use a strategy like this is to chose short strikes farther OTM than what I chose. For example, what happens if we look for short strikes with a probability expiring worthless of 80%. In that case, I might expect a credit of $.60-$65 on a $2 wide iron condor. This trade has a higher probability of success overall so I may be more inclined to stay in the trade longer to allow the spreads to decay to 20% of their initial value (locking in 80%). 

The point that I want to make is that we start with a theory and begin to work the mechanics on paper. Any trade must make sense logically both in terms of the mechanics and the probabilities. Look at a few examples hypothetically. Next, we should back test the strategy thoroughly before paper trading it and finally implementing it in our real account.

Help me ensure we have an interesting question or two to respond to next month. Submit your questions at this page.

Back to the table of contents


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, a lot has happened since the last newsletter. We left the SPX pretty much at the  highs around $2275.

In the December newsletter, I summarized my outlook as follows:

"...It's very possible that we could see the projected high from the Fibonacci chart be tested. There is a school of thought in the technical analysis world that if you break the 100% retracement level, the next target high is at 161.8%, which would be $2320 or so. That's really only about $70 more. However, keep in mind that this time of year traditionally sees a kind of bullish rally often referred to as the "Santa Clause Rally". What follows in January is often some selling. With as strong a rally as we've seen it is also quite possible we could see selling at least back down to the support level around $2200......."

Here's how December and January played out.

After spending most of late December and early January bouncing between $2275 and $2250, the was finally a break just a few days ago to reach all the way up to test $2300 - a nice round number. We're very close to that 161.8% fibonacci extension level I mentioned in the last newsletter.

What happens next is hard to predict. However, let's look at some possibilities.
  1. We see a bounce from the support level at the 20 & 30 day moving average. Expect range bound movement between that level and the 161.8% fib level until a break of one or the other occurs.
  2. With the month long sideways market, there could be a powerful push to break the 161.8% level. Watch for this to occur on increasing volume on upward moves.
  3. The protracted bullish trend runs out of steam and we see a test of support at $2200. Watch the support at the 20 & 30 moving average to be broken on volume to indicate the next move may be down.
On the surface, this may not seem helpful. However, consider that each of these possibilities has with it some potential trade strategies that can be used. While it may not seem obvious what will happen, each of the above options has indicators that can tip you off as to what might happen. I recommend having some ideas ready for each possibility and monitor the market, being ready to act. With each possibility, there is also the potential to be wrong. As a result, plan to have an exit strategy and trigger planned out ahead of time.

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.

Back to the table of contents


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.

Back to the table of contents

Back to Back Issues Page