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Success With Options - Monthly Review, Issue #63 -- March 2015 Edition
March 01, 2015
Hello,

Welcome to the March 2015 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.

S&P All-time High - March Newsletter

After a month of consolidation, it's beginning to look like we've broken out to new highs in February. Will we see additional bullishness into the spring?

We had another great live Web session this last month where we covered Calendar Spreads, projecting potential profit, strategies for entry & exit and overall management. More information below.

In addition, I have answers to your questions, Options Strategy Focus and more.

Finally, we'll close as usual with a Market outlook for you. 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) Exciting Announcement

3) Answers to your questions

4) Options Outlook

5) Featured Products


Live Web Sessions

Recently, we launched a new service in the form of periodic live Web sessions. These sessions have been quite successful as we had a number of attendees join and participate in the discussion. Additionally, they've turned out to be popular with people who couldn't attend the session as well. The most recent session has been posted and is available for those who weren't able to attend. Check the Options Trading Videos page for additional sessions.


Date/Time Topic Registration
Recorded
2/9/2015

 
Calendar spreads entry & management
Calendar spreads can be a complex spread to trade. In this session, we cover the following important topics:
  • When they make sense - key characteristics
  • Ways to analyze potential profit
  • Entry & exit strategies
  • Management (rolls and adjustments)

Level: Intermediate

Purchase Recorded Session (MP4)
Cost: $1
2

Add to Cart
More Info

I've pretty much exhausted the list of topics I could think of and ones that have been requested. If you have any other topics of interest, let me know. Use this survey to have your say.

Stay tuned!!
 


Options Strategy Focus: Are you a contrarian?

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I'd like to pose a question for you to consider. Are you a contrarian or are you likely to trade with the trend?

Interestingly, the answer to this question will help you determine what strategies you will select in various market climates. I've come to realize that different individuals see the market in different ways. Some people invariably have an optimistic outlook and will expect a trending market to continue to trend in the same direction. Contrarians tend to expect that any move in one direction will eventually be followed by a move in the opposite direction.

Realizing that you have a 'bias', if you will, can affect the way you trade. Additionally, realizing how you look at the market can help you improve your effectiveness - or at least realize if you have an Achilles heel when it comes to your trading. Let's take a look these different outlooks and examine both the risks and ways to leverage that tendency.

Trading with the trend
If you have this bias, you will tend to want to enter a trade in the midst of a move - or even near the top. You'll likely trade the trend until the trend proves no longer viable. As markets continue to rally, the volatility will typically drop to the point where it's difficult to realize any decent credits - unless you switch to buying instead of selling. On the other hand, falling markets result in rising volatility. Selling calls can be profitable as long as there isn't a turn.

When there are prolonged trends in place, you will likely find that your strategies pay off nicely. You tend to trade opportunities as they come and reap the benefits. However, there is a risk that one or two failed trades when the market turns can wipe out the gains of many successful trades. Another risk you face is that you may have a fear of quitting the trend too early and missing out on the continued move.

Learning to rely on technical analysis and having clear indicators of trend change can help minimize the risk but can also keep you trading the trend too long. In other words, you typically don't know the trend has changed until it's changed and that often results in some losing trades. Having plans in place to exit early when technical triggers occur can help.

Being a contrarian
Contrarians continually expect the market to change from it's current direction. This becomes more true as the move becomes prolonged. The risk is that contrarian trading is often like catching a falling knife. You run the risk of perhaps being contrarian too soon in the market cycle. Being wrong can often be costly and losses can add up as you persist in fighting the trend. Staying with your strategy requires having the stomach to watch trades go against you.

On the other hand, if you have enough time in the trade and the market does eventually turn as anticipated, your trades can pay off handsomely. You will likely find you enjoy and anticipate the swings in the market as you reap the benefits of watching those swings pay off. The risk is that markets sometimes change rhythm and switch to more prolonged trends that can be costly if not caught.

Technical analysis can be beneficial to the contrarian as well. It can be used to indicate if swings are prolonged and can also be used to create projections as to how far a market might trend before reversing. Learn to use these tools consistently and practice anticipating changes in trend.

Regardless of your style, it's important to realize you will never be 100% correct. I run the risk of repeating myself but money management and consistent risk sizing is really the only way to ensure you are realizing consistent gains. If you place 10 trades of which 8 or 9 are correct, it could be that one trade you chose to risk more on that could be your undoing. Money management is the only way to be consistent in your trading outcomes. Understanding yourself and developing techniques that can take advantage of your approach and help protect you from your weaknesses can be a huge step in improving your results this year.

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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!

I recently received a question that I'd like to rephrase and explore.

Q: I would like to follow some of your strategies but find that the commissions for entry and exit are too expensive and eat away at my profit. For example, my broker charges $9.95 + $1.25 per contract in and out. Do you have any recommendations?

A: This is a great question and it comes up from time to time as subscribers and visitors to the website run up against this issue. Your concern is a valid one. After all, it comes down to giving up some of your hard earned profits to the broker. I cover this to some extent on the website under the Options Brokers page on the website.

There is quite a bit of diversity in commission schedules offered by various brokers. Many times the same broker can offer different fee schedules as well. I took a little time to run the numbers because I wanted to understand what the effect of various commission structures were against different trading quantities.

If you look at the table below, you can see that it's still possible to be profitable even with various commission structures. For reference, I used some numbers based on my vertical spread trading strategy and the average gross profit from selling both a $2 wide and $5 wide and closing by locking in 80% of the initial credit.

Gross Profit Fee Structure Net Profit: 2 Contracts Net Profit: 10 Contracts
$2 wide vertical
$.36/contract
Fixed $1.50 commission
 
$66.00 $330.00
$2 wide vertical
$.36/contract
$9.95 + $1.50/contract
 
$46.10 $310.10
$5 wide vertical
$.80/contract
Fixed $1.50 commission
 
$154.00 $770.00
$5 wide vertical
$.80/contract
$9.95 + $1.50/contract
 
$134.10 $750.00

The question is: How much can you stomach giving up to your broker? Or... does it really matter if you're realizing a profit?

Commissions & profits aside, I want to explore a couple of considerations. First of all, are there trade strategies that can be employed that take the commission into consideration? Second, are commission schedules really set in stone?

Trade Strategies: There are ways to adjust your strategy to minimize the impact of commissions. In some case, you can realize the profit from the trade without requiring an actual closing transaction. For example, vertical spreads can profit simply by selling the position and letting the options expire worthless. Other strategies require both a buy & sell transaction to realize the profit. Focusing on strategies that only require the sell side can help minimize the 'hit' of the commission.

In addition, look again at the above trades. Compare the $2 wide spreads and $5 spreads and the net you can keep for a similar amount of risk. What I did was compare a 2 contract $2 wide spread with a similar risk (dividing the $5 wide spread by 2.25). It appears you can realize slightly more profit with fewer contracts and wider spreads in some cases.

Negotiable Commission: You may find that by talking with your broker, you can negotiate a better commission rate. Check out different brokers and see if they are willing to give you a different rate. There are a lot of different ways for brokers to get their money. It's often in their best interest to work with you to help you be successful in trading while they get their money. While I can't promise all brokers will work with you, some are willing and it's worth a try to see if they'll work with you.

The best way to understand the impact of your broker's commission is to run the numbers. If you are comfortable with spreadsheet tools like MS Excel or OpenOffice Calc, it can really help. Evaluate different strategies with potential profit fitting your typical trades. Even if you can't change your commission, you can optimize your trading around the commission you have to work with.

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, expectations may change if the charts indicate something different during the month.
 

This month we finally saw a resolution to the sideways action of January. It's looking like the next move is up.

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

"... We are now at a crossroads. If we see this support continue to hold and the market begin to rally, I believe we'll likely see more bullishness into February. However, we may see this support break, in that case we could see selling down to $1950 or even $1925, which are approximately the 50% and 38.2% retracement levels. That in turn could set the tone for the first half of the year anyway ..."

Here's how the February played out.



Notice that each time the SPX sold off, it rallied several times off the 61.8% retracement. This last time, there was no looking back. This is likely due to the lack of any worrisome news as much as any strong financial news. With this last move, the SPX has reached an all time high.

At the risk of making an obvious statement, there are three possible next moves. The SPX, could run up to the top level of the channel around $2150. The SPX could sell off down to the support level around $2060. The SPX could also just trend sideways absorbing the the recent push up. Of these three, the likeliest next move is up to the top of the channel. As always, it's difficult know what may come in the weeks ahead in terms of news and company financials that could affect the future price action.

As the market continues to push up, my inclination is to begin selling call vertical spreads and buying put calendar spreads with the expectation that what goes up must come down. However, I'd be looking at any selling as an opportunity to enter put spreads. Of course every day requires careful analysis and consideration of the market action.

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.

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Featured Products

I'm adding a new section to the newsletter. Feel free to disregard if you aren't interested in product information.

Some time back, I released the second for sale' video. The title of this video is "Mastering Short Vertical Spreads". I now have at 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.

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