the March 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 books, websites
and 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.
A Whole 'Lotta Nothin' - March
| This month was up a little, down some more, up again
and we're actually up a little from where January closed - actually
about 32 points on the S&P 500.
Last month I said I was becoming a little more bearish and so
far, it has been a good thing. Given this move, will my bias change
back to a bullish one? I think a few more days are required to be sure
but read on for my March outlook.
Also this month I've been busy putting together some videos
with more in the works. I've had a few good trades with more on the way
I hope. I've also made a few updates on the website.
For more on this, read on...
new at Success With Options
Other than adding trade pages, I haven't made any major additions or
changes to the website. As promised, I did update the broker pages for
both TD Ameritrade and Thinkorswim.
I have also recently added a couple of new videos out on YouTube
I am in the process of putting together additional videos on the Iron
Condor strategy. As I did with the initial vertical spread and calendar
spread videos, I'll be going into more detail and showing an example
trade that I'll follow to completion.
Trade of the Week Summary
|February's trades have gone much better than my January
trades. While most of the trades I put on this month are still open,
they are well on their way to being profitable.
Here are the trades I put on this month in a quick summary.
was the first trade I put on in February
with my new neutral to bearish bias. It was a textbook trade.
is a one month calendar spread that is still
open. As it stands, the position is still worth almost what I paid for
it even though the DIA hasn't exactly gone as expected.
SPY put vertical
trade is doing nicely. I sold 8 contracts of
the put vertical and later sold just a few contracts of the 114/112
call vertical because the opportunity was there. I closed out
1/2 the put spread contracts for just over what I'd set for my target
exit price. Monday morning the remainder of the put spread closed
for the target price.
EWZ put vertical
is my newest trade and is another bullish
position. I put this trade on based on my assessment that EWZ was
potentially forming a higher low, which is more bullish. I may be wrong
but my stop is in place if that's the case.
The jury is still out on the trades I've put on. I believe the majority
of them will close profitably, which will help make up for January's
As I've stated before, I believe
the longer term strategy of consistently trading the trend and
trading plan will prove out.
For more information on all of the trades I've posted as option trading
tutorials, click here
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Options Trading Tip of the Month
|In one of my recent trade tutorials, I used a trade
management technique that I wanted to take some extra time to address
in this month's trading tip.
When we first learn about trading strategies, we tend to think of
entering a trade all at once and exiting the trade all at once. While
that is often the case in my trades, I will occasionally break the
trade up into multiple partial orders to either improve my entry or
remove risk. Let me be more specific.
In my SPY put vertical spread, I entered the trade with 8 contracts
sold. I had a limit order to close the position when I could do so for
$.09, which locks in 80% of the initial credit. However, I chose to
close 1/2 the position early by paying a little more than I initially
Why is this a good strategy? Many times, we're faced with uncertainty
in the market. While we may have a good outlook and a plan for profit
on a trade, we simply can't know what the future holds. I often employ
this technique when I am experiencing uncertainty as to the next market
move. Sometimes I will have a plan regarding a particular trade or a
trade adjustment but I'm not sure if it is right and I don't want to
commit myself 100% to that plan.
In that case, I can choose to only commit a certain percentage to that
decision. In the case of the trade last week, I was uncertain as to
whether the SPY would continue the bounce and decided to close 1/2 the
position early. Did I give up a few cents in profit to gain some peace
of mind? Yes, but sometimes I feel it's worth it and is simply wise
How do you know when to use this technique and how much of the
position to adjust? Let me tell you when NOT to use it. It's important
to not be driven strictly by fear (either of losing your current gains
in the trade or having a losing trade). This is a trade adjustment
technique, not a fear management technique. The best time to consider
this is when you are seeing technical indications that might make the
case for an early exit but the case isn't strong enough to make an
absolute exit. When you feel pulled between two actions, why not do
both? Take one action with half the position and take another action
with the other half. I also look at this as risk management. When I see
the risk going up of either increasing loss or decreasing profit, I may
employ this technique to remove risk.
As you begin to use this technique, I'd recommend starting by only
adjusting a small percentage (say 25% to start). You may also consider
doing this in a paper trading account first just to get comfortable
with the process. Over time, you'll become more comfortable
with this technique and can increase the percentage as appropriate.
For an example trade where I used this technique, check out this put credit spread (2/9/2010)
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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!
Here are a few good ones...
Which do you consider to be more risky: purchasing two one point
vertical spreads or purchasing one two point vertical spread.
first question relating to a 2 contract $1 wide spread vs. a 1 contract
$2 wide spread is an interesting one. On the surface it would seem the
risk is the same. A $1 wide spread has $100 of risk so two contracts
would have $200 in risk. A $2 wide contract has $200 in risk. Let's say
you are paying $2/contract in commission. That means you'd pay $4 for
the 1 contract $2 wide spread (making it a total risk of $204).
However, you'd pay $8 for a $1 wide spread for a total risk of $208.
This may be even worse if you take into consideration the commission
for closing the trade.
The other thing to consider is the credit received (I'm talking
strictly about credit spreads right now). The true risk in the trade is
the width of the spread minus the credit received. I've found that
sometimes I might get slightly more as a net credit for two $1 wide
spreads than I could for one $2 wide spread, which can offset the
additional cost of commission. In short, before making a decision,
compare prices and don't forget to factor in the commission.
you have a minimum
credit you typically look for in a credit spread?
regard to the second question, I don't usually have a minimum credit
in a dollar amount but I do typically have a target ROI. However, since
I often trade the same $2 wide spreads, I've found that ROI roughly
equates to the same range of expected credit for the trade. Some other
factors to take into consideration though are the current implied
volatility and the time until expiration. Even when I regularly sell a
short strike with a probability of expiring of 30-35%, these other two
factors can have a large impact on my ROI. Just for quick reference, if
I can get $.40 on a $2 wide spread, that's about 25% ROI. Sometimes,
even when there are more than 20 days until expiration, volatility is
low enough that I need to sell more time and I'm forced to look to the
If you would like to submit a question, comment or feedback
on the website, please visit this page.
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Book Review of the Month
|Since we're in the middle of tax season, I thought it
would be a good time to review a book on taxes for traders.
The whole subject of trader taxation is a bit murky and intimidating,
so any book that can help bring some clarity is worth reading. That's
just what this book, The Tax Guide for Traders
by Robert A. Green provides. There is a lot of good information found
here that helped clear up many questions I had on the subject.
I want to point out that this book is not a substitute for a good CPA
is well versed in these issues. However it can help you become more
informed so you even know the questions to ask when you talk with your
What I liked right off about this book was that its purpose was to
teach the trader how to deal with the IRS and lower taxes legally. I'm
not interested in trying to find sneaky ways to get out of paying taxes
but I'm also not interested in paying more than I have to. This book
provides an excellent balance.
Rather than doing a chapter by chapter review as I've done previously,
I want to outline some of the key questions I had when first
investigating the issue of taxes and trading and how this book helped
As you can see, there is a lot of great information crammed into this
book and it deserves to be on the shelf of every trader who is trading
as a business or considering trading as a business. I'm glad I bought
it and have it to refer to from time to time.
- How are
my trades taxed? - From previous experience I knew about
short term and long term capital gains. I also knew that as an
individual investor, the losses I could deduct in any given year were
limited. What I learned from this book was that as a trader with trader
tax status, I could potentially deduct all of my trading losses.
- What is
trader tax status and how does it help me? - I had heard
about 'trader tax status' in some of the trading circles I participate
in but didn't know what it took to join this 'elite' sounding group.
It turns out this is one of those murky areas of taxation that requires
some careful investigation, planning and navigation. This book spent
several chapters discussing different aspects of trader tax status and
how the IRS looks at it. This information alone was worth the price of
the book to me.
- What is
Mark-to-Market accounting? - This was another intimidating
term I knew nothing about prior to reading the book. My question was:
"What is it and how does it help me?" This book more than answered the
question. One of the things I learned was that Mark-to-Market
accounting is one of the steps necessary to be able to fully deduct my
trading losses. Of course that's only important if you have trading
I form some kind of business entity for my trading business?
- This was another question that I had wondered about. The idea of
forming a business entity seemed time consuming and fraught with
potential pitfalls. Not only did the book talk about when an
entity was necessary but also which one might be appropriate given my
are Section 1256 contracts and how does that benefit me? -
I had heard about the 60/40 rule for long term/short term capital gains
in trading but didn't know how to take advantage of it. From the book I
was able to understand why I might want to consider trading options on
some of the broad market indices.
More on this book or to purchase...
books in my library
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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.
Last month I summarized my outlook as follows.
"Given the two instances where support has been broken, I wouldn't be
surprised to see continued selling all the way down to the $1030 level,
which would represent about a 10% correction from the recent high."
"This month, I'm
going to be more inclined to buy a put calendar spread
or two, sell some call credit spreads and maybe sell an iron condor."
Shortly after last month's newsletter went out, a round of selling took
the SPX all the way down to a low of $1044 before a hammer formed
followed by a nice little short term rally. As of Friday, the last
trading day of February, it was unclear if the rally would continue or
fail. Since this newsletter is going out a day late, I'm going to
include Monday in the analysis. So what do you think?
morning, the markets opened up fairly strongly and remained near the
highs throughout the day. The evidence is beginning to point to a
resumption of the bullish
I am now cautiously bullish. Notice that there is still resistance at
the higher highs around $1150. We could see another re-test of that
resistance with a failure. A failure to break through this high area
would leave me a bit more neutral.
- We saw support hold in the area where I had outlined
some months back
- We then saw a higher high form with another one just
a week later
- We also had a higher low formed
How will this affect my trades going forward? Unless I see indications
to the contrary, I'm going to be putting more bullish positions on.
Expect to see some bullish credit spreads, maybe a diagonal and a
skewed iron condor in up coming trade tutorials. It should be a fun
on technical analysis.
Options strategies I use.
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