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
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.
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,
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
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.
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)
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.
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
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.
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.
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
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
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.
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!
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
Net Profit: 2 Contracts
Net Profit: 10 Contracts
$2 wide vertical
Fixed $1.50 commission
$2 wide vertical
$9.95 + $1.50/contract
$5 wide vertical
Fixed $1.50 commission
$5 wide vertical
$9.95 + $1.50/contract
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
realize the profit. Focusing on strategies that only require the sell
side can help minimize the 'hit' of the commission.
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
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
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.
This month we finally saw a resolution to the sideways action of
January. It's looking like the next move is up.
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
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
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.
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.
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
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
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.
- 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
Back to the
table of contents