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Success With Options - Monthly Review, Issue #39 -- March 2013 Edition
March 02, 2013

Welcome to the March 2013 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 and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Market Shrugs Off Sequester? - March Newsletter

Welcome to the March newsletter.  So far, we've had two bullish months in a row. Despite the fact that there have been a number of headwinds like the fiscal cliff earlier in January and now the sequester here in the US that goes into effect as of March 1. Does that mean that we will continue to see bullish months ahead? Read on...

As usual, I'll be reviewing my trade this month, talking options strategies, answering your questions and more.

I want to provide another update on the Vertical Spreads video I've been talking about in the last few  newsletters. This month I've nearly completed the recording process. At this point, it appears there will be well over an hour's worth of material. I've got most of this recorded and edited. I'm still working on the production work to finish this off. I remain very excited about this project and I believe it's something you are going to find invaluable in your options trading education.

It's been a little while since I've received any newsletter feedback. If you haven't done so already (or recently), please consider taking a few minutes to visit the newsletter 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.


In This Issue

1) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product

Trade Tutorial Summary

I had one trade going when I entered the month. This is a calendar spread I entered late last the month. The short put expired and I made an adjustment. See below for more details. You may have noticed I'm not putting up as many tutorials as I have in the past due to time constraints.

I do want to encourage you if you are a fan of the trade tutorials and have a Facebook account to participate in the tutorials by commenting, asking questions, or suggesting alternative strategies. I'd like these to be more interactive than they have been historically.

In the mean time, I will continue to do trade tutorials but probably not as frequently as before. Here's the trade I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
SPY Put Calendar   Short put has expired but I added an adjustment making it a short vertical spread. Trade is still open.

Win or lose, I find that I learn something from every trade. I didn't close any trades this month so, no lessons learned. However, the lesson I'm focusing on this month is responding to changing market conditions. The trade I put on this month is an example of this.

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Strategy Focus: Trading in the Face of Uncertainty

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. Last month, I talked about how to trade when the VIX, or volatility index is low. Now, with the increased volatility and uncertainty ahead. It seems like a good time to talk about how to trade into an uncertain future.

Here's the problem we often face as a trader. I get up Monday morning at the start of a new month. I look at a chart that looks like the one below and I have no idea which way to trade it.

The problem is that this kind of  chart is that there is no way to tell if the next major move is up above resistance at $153 or down through support at $149. You can almost visualize a triangle forming where the movement up or down gets smaller as you head toward the apex of the triangle. What we know is that it will move one way or the other but the direction hasn't really been established - yet.

Now that I've laid out the situation, I will briefly outline three actions we can take.
  1. Don't trade at all - Perhaps the wisest course of action for a trader in this case is to sit on our hands until we see a break above the highs or below the lows. However, I'm guessing at least part of you is thinking that if you wait, you'll miss out on the part of the move. That's true but you also expose yourself to less risk in case you took the wrong trade. Traders who tend to trade (or not trade) with this philosophy will typically not have as large of returns but will tend to have more winning trades.

  2. Trade smaller position sizes - If you absolutely have to take a trade, the next wisest choice might be to trade smaller position sizes. What this means is that if you are usually in the habit of risking 2% on every trade, you might take a 1% or 1/2 % just so you feel like you are participating in whatever move occurs. Realize though that your chances of having a losing trade are probably a bit higher. If you are willing to risk that in exchange for being 'in the game' then this approach might work for you.

  3. Trade with tight exits - With this approach you might take a typical position size but use technical analysis as a way to bail out of a trade early if warranted. I don't mean we don't use technical analysis in other times but in this case, we can use technical analysis to trigger exits earlier. As an example, let's say I am making a bet that the trend will ultimately break to the up side. I might sell a put short vertical spread. However, if the underlying falls below support at around $149 or so, I would exit this trade. This kind of closing order can be easily set up on the thinkorswim platform for example.
I hope you found this helpful in determining a course of action in the next few weeks. For more details on technical analysis, check out the technical analysis page on the website.

Stay tuned for the next options strategy focus as we return to more strategy related topics. Any suggestions for topics? Send them in via the newsletter feedback page.

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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!

This month I received a question that has come up from time to time. I'll paraphrase it a bit.

Q: I'm wondering who you are and why you are providing this website. Can everything there really be free?

A: This is a fair question. Most questions I get of this nature really boil down to several key areas. Who am I and what do I have to offer those who visit the site? Do I make money on this stuff somehow or am I doing it as a charitable activity? Let me take a little time to answer some of these questions.

Who a I? - I'm just a trader who has been trading options of various types since around 2006. I started out learning trading on my own through trial and error. However, I soon took advantage of the excellent education provided by InvesTools. While expensive, the material was quite good. I eventually found that I liked the way premium selling strategies worked better than other strategies. However, what I found was that there is really not much information about trading these kinds of options strategies that didn't cost a fortune. 

My motivation for creating the website was that it gave me an outlet for my 'inner teacher'. I really enjoy this kind of educational medium and it seemed like a natural fit. My feeling was though that any site I created had to provide compelling value to the visitor otherwise it was just like every other site out there that hooked you in and then tried to sell you a bunch of stuff where the 'real' value was.

What do I have to offer? - Just my own experiences really  (both good and bad). I've learned some hard lessons and my hope is that I can share some of those lessons with visitors to the site. I've learned that it's one thing to know the mechanics of a strategy. It's another thing altogether know when to trade, when to exit and how to preserve your capital. You'll find that the content on the web site is focused largely on having a trading strategy, trading plan, good money management and a disciplined approach. Many comments I've received from visitors confirm to me that this kind of content is of value to them.

Do I make money from the site? - One visitor asked "Do you offer all this for free?" The answer is 'yes' and 'no'. As I said above, my goal is to offer useful content without requiring subscriptions or huge price penalties on visitors. As a result, I use a more passive approach through Google AdSense links. In addition, I will be occasionally be including direct advertising - but only if it offers value to visitors to the site.

Finally, I do have an introductory video for sale with plans for more on the way (see the introduction to this video). I don't promote this very heavily yet because there isn't much to offer in this regard. Stay tuned though as more videos are released. Think of these as premium features. I will charge a reasonable price for those but the majority of the content on the site will remain free as long as I can continue to 'keep the lights on'.

I hope that answers your question(s). One of these days I'll probably add this information as an 'About Me' 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, it may change if the charts indicate something different.

With two bullish months in a row, one has to wonder if we'll see continued bullishness in the coming months.

Last month, I summarized my outlook as follows.

"... First, notice that there has been an extended move away from the moving average. Combined with this, note that the VIX has been establishing a lower range between 13 & 14 and we are currently in that area. I think that poses a risk that the SPX and the broader market will have a correction that may at least test the prior resistance level around $1470 that has now become support. While there is a chance the bullish run could continue, I think it more likely the next move will be down to test the support level. "

Here's how the month played out.

There was a bit of a fake out early in the month and the result was that the market powered higher before finally doing some selling. By the end of the month we were only just a little higher than on the first day of the month. However, that makes two months this year and really 5 months in a row that we've had a positive finish.

At the moment, there are a number of conflicting indicators. What I liked was that the selling went almost all the way down to the support level around $1475. I'd have been happier if it would have touched or even penetrated that level a little bit. For me, that argues for a bullish continuance. As you can see there has been a bit of consolidation over the last few weeks. It's possible we'll see this consolidation resolve to the down side as well and either fully test the support level or sell even farther. At the moment though, there are no real clues.

How does this affect my trades? I currently have the remaining trade open that was converted into a $1 short put vertical spread. For now, I'm going to wait to see a resolution in this consolidation. A call to action would take place if we saw a close above around $1530 or below $1485. I plan to have some trading ideas ready for either case.

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 Product

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 released the first 'for sale' video about a year ago. 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 options spreads.

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 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.

New Video Coming
I am also in the final stages of the next video, which I'm very excited about. It features my favorite strategy - the credit spread, or short vertical spread. This video will cover everything from how the spread is constructed to how to create a trading system around it. Be watching for this video in the coming months.

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