the February 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.
Straight up and no looking back! - February Newsletter
Welcome to the February newsletter. Can you believe this January?
I expected some bullishness to start the hear but holy cow! Will the
bullish run continue or stall? How did the trade tutorials fare for
2011? Read on...
Also in this newsletter, I'll be reviewing some of the updates on the site,
trades for the month, talk options
strategies and more.
want to thank those who took time to provide feedback in response to my
request in the last newsletter. I appreciate the time you took. 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
|While the market has been rather active, its been rather
quiet on the website front. Last month I added some Facebook features
to the most recent trade tutorial pages. If you have a Facebook
account, I'd like to encourage you to jump in and comment.
Participation from the community will make the tutorials even more
I also continue to look for
new topics to expand the information on the website. Perhaps you have
topics you'd like to see covered. You can let me know using the newsletter
feedback page. By the way... thanks to those who have provided
feedback already. You will start to see some of your requested topics
(in fact, I did a option strategy focus a few months back on the Iron
I entered January with one active trade,
which is now closed. I added another trade early on that has been . Read on for details of
I mentioned last month that I've been working on the outline for the
next video that will focus on mastering sort vertical spreads. I'm
pretty excited about this and continue to work on details of the script
and presentation material.
the months ahead, I have plans to go through some of the pages and do
some updates. In particular, there have been some changes with the
brokers I've reviewed so it's probably time to revisit them.
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.
SPY Put Spread
is a trade that worked out better than expected despite the fact that I
failed to put an exit order in.
|DIA Put Spread
trade is partially closed. At least the original put spread is closed.
Prior to closing that side, I made an adjustment to turn it into an
iron condor. Currently, this trade is being threatened by the strong
bullish move. We'll have to see how the trade turns out.
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.
From the SPY
Put Credit Spread:
"...I suspect what happened was that I entered the closing trade to lock in my 80% but forgot to change the order type
to 'Good Till canceled' instead of a Day order. As a result, it cleared out at the end of the trading day. The moral of
this story? Be sure you pay close attention to the order before submitting. The thinkorswim platform gives you several
chances to review the order before submitting."
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 Butterfly 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.
Over the past few months I've looked at the various options strategies
covered on the website. This month, per request from a newsletter
subscriber I'm going to look at a strategy I don't currently cover on
the website. That strategy is the butterfly spread.
turns out, we've already covered the building blocks of a butterfly
spread. A butterfly spread is essentially a combination of a long
vertical spread overlaid with a short vertical spread. This ends up
looking like the following.
If I were to enter a butterfly call spread centered around $133, this would mean purchasing a $131 call and selling a $133 call creating a long vertical spread (entered for a debit). At the same time, I'm buying a long $135 call and selling a $133 call creating a short vertical spread (entered for a credit). The long spread will realize maximum gain when if it expires anywhere at or above $133. At the same time, the short vertical spread will realize maximum gain if it expires anywhere at or below $133.
This leaves us with a bit of a
dilemma. The only place where both spreads can simultaneously realize
maximum gain is if the underlying expires exactly at $133. As the
underlying moves either higher or lower, the losses of the one position
eat away at the gains of the other. Fortunately, this trade will
typically cost next to nothing as the credit from the short vertical
spread mostly pays for the debit of the long vertical spread.
is a graph of the profit & loss for the the butterfly spread we've
been discussing. Notice visually that the range of profit is very
narrow but the return on risk is huge. A one contract butterfly costs
abut $20 but has the potential to return $180 if we hit it right at
$133 on expiration. To me, this is a bit like buying a lottery ticket.
It doesn't cost much to buy one and the odds aren't great you'll win
but if you do, you win big. In the trade below, the return on risk is
900%. That said, you won't do too badly by simply having the underlying
remain between $131.20 and $134.80 or so. That's still not a
great range of profit but the cost is pretty small.
When entered, this is going to have a slight delta skew. The center
strike of the call butterfly spread we've been looking at is slightly
below the current price of the underlying. As a result, the delta is
negative. If the SPY were to move below $133, the delta would become
positive. Remember there are now 4 distinct options (2 of which occupy
the same strike price) in this trade so each component will contribute
either positive delta or negative delta depending on where it is
relative to the underlying and whether it's a long or short option.
look at Theta and Vega as well. Since the long vertical spread is In
the Money (ITM), it will typically contribute positive theta. The short
vertical spread will also contribute positive theta so it's no surprise
then that the net theta is positive. Long vertical spreads are
typically positive vega (benefits from an increase in volatility) while
short vertical spreads are negative vega. As a result,
the net vega will be the combination of the two. Depending on where the
underlying is, the net vega could be either positive or negative.
As a final point, let's talk about when you would trade this kind of
strategy. Given that the butterfly spread is more or less a neutral
strategy, it will have a higher likelihood of success in less volatile
markets. However, the cost to enter will typically be higher when
volatility is lower. I'm not a huge fan of this strategy but if you are
willing to toss out an occasional trade, this is an ok trade to add to a larger
set of trades. I should mention that the
butterfly spread can be a decent adjustment approach when laid over one
side or the other of an iron condor. However, this is beyond the scope
of this article.
don't currently have a strategy page for the butterfly spread. However,
I may manage to put one up in the future and maybe even toss out a
sample trade just for the fun of it.
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!
month I didn't receive any questions so it seems like good opportunity
to manufacture one as an excuse to review last year's trades.
In 2010, the trades you posted in the tutorials didn't do so well (in
fact the lost several hundred dollars). How did your trades fare in
A: First of all, thank you for this excellent question! Let me start by directing you to look at the trade tutorial page
near the bottom where I continually tally the results. Notice that the
net results of all my trades was a whopping $1 gain. In other words, I
just broke even.
At the risk of sounding a bit
defensive, I want to start this discussion by reminding folks that the
primary objective of the tutorials is to demonstrate execution of the
strategies. However, a losing portfolio isn't a good advertisement for
a set of strategies let alone a good endorsement of my ability to
demonstrate said strategies. I did make it my goal this year to
practice better trade management and trade selection. Whereas in 2010 I
randomly chose strategies simply to illustrate them, in 2011 I
attempted to also make correct strategy selections in response to my
market outlook. With that in mind, let's see how the trades fared
As I said at the beginning, all I managed to do
was break even. However, let's take a look a little more closely. I
executed 18 trades last year in total. Of those trades I had
14 winners and 4 losers. Obviously then I had more
winners than losers so why did I only break even? Let's look at my
average winning and losing amounts. My average gain on a successful
trade was $65 while my average loss on a losing trade was
$281. Clearly, my average loss was much larger than my average
gain. This shouldn't be surprising since most of my trade strategies
have nearly a 3:1 risk to reward ratio.
What lesson can we draw from this? There are actually a number of
Overall, I'm pretty pleased with the results from this year. While
a nice increase in the portfolio would have been nice, breaking even
isn't too bad either as I get to stay in the game longer.
- First of all, my results this year are noticeably better than
last year, which I believe is a result of both a more focused approach
to strategy selection and to my change in trading rules for the short
vertical spread strategy, which made up the bulk of the trades last
- I also believe the results could have been better had I
managed them more closely. If any of you have done much paper trading,
I'm sure you've experienced this phenomenon. You will generally always
pay closer attention to trades that have real money on the line than
ones that don't. This is definitely the case for me. My personal trades
got more of my attention and I often didn't give the virtual trades the
tutorials are based on as much attention. I will attempt to do a better
job of this in 2012.
- The fact that losses weren't greater I think is still a
result of good money management when it comes to position sizing.
Results could have been definitely worse had I not employed strict
money management rules.
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
|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.
I mentioned at the beginning of the newsletter, I had expected some
bullishness but not to the degree we saw. With that said, I did talk
about a triangle technical pattern last month that was building. These
tend to have some pretty powerful moves once they break out of the
triangle. Last month I summarized my outlook as follows.
"...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. "
Here's how the month played out.
As the chart above shows, it's been pretty much straight up since the
beginning of the year. In fact, there have been several major jumps.
There are several ways to look at this run. First of all, notice that
we're now approaching a new resistance area around $1350 or so. Second,
in a triangle pattern, there is a projected possible movement that is
roughly equal to the width of the wide side of the triangle.
In this case, that width is about $130 ($1170 to $1290). Theoretically,
that would make the target $1420. Let's weigh that against the fact that
the underlying has already moved quite a ways away from the moving
average. While there's no guarantee that the underlying will snap back
to the moving average, it often happens. While the $1420 price target
may still be realistic, I'm not sure we'll get there without a few
How does this affect my trades? I currently have one short call spread in place
that is left over from a put spread turned into an iron condor. That
spread is currently being threatened but hasn't been overrun yet. If we
see some more strength, I'll need to adjust. In the meantime, it may
make sense to begin thinking about another bullish trade? Any
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 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