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
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.
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
so recently, please consider taking a few minutes to visit
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
Options Strategy Focus: Anatomy of a Trade Entry -
| 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.
- 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.
- 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.
- 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.
- 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.
- 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
doesn't blow up your trading account. This is about trading
- 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
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.
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)?
A: 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
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
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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.
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:
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
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
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
What happens next is hard to predict. However, let's look at some
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.
- We see a bounce from the support level at the 20 & 30
moving average. Expect range bound movement between that level and the
161.8% fib level until a break of one or the other occurs.
- 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.
- 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.
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
Back to the
table of contents
|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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
I'm excited about this project. Many know this is my go-to strategy for
After watching the video, I'm certain you will understand why.
- Understanding the
construction and how the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
table of contents