the March 2016 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.
The Ups and Downs of the Market - March Newsletter
|What an interesting month. We ended the month pretty much at the point
where we started. Is the worst of the market turbulence over? Is the
next move up or down?
In this edition we'll tackle that question, begin to explore option synthetics
and answer a question that was recently submitted by a reader.
Finally, we'll close as usual with a Market outlook for you. For more
details, read on...
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
Options Strategy Focus: The Synthetic Triangle
| 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
introduced the topic of options synthetics, focusing on a specific
example of simulating a long call position. In this issue, I want to
continue forward with a further explanation of synthetics. However, my
intent is not to present this as a purely academic exercise, but to show
in a follow-on article some basic usages of synthetics applied to our
options trading strategies.
The Synthetic Triangle
I mentioned in the last issue the notion of a synthetic triangle. The
idea is that a synthetic position for any one element of the triangle
can be constructed from the other two. I also showed some examples of
creating synthetic long and short stock positions as well as creating
synthetic long and short call and put positions as well. The following
illustration shows the relationship between these three components.
The point is that it's possible to create a long stock synthetic
position from a
call and a put. It's possible to create a synthetic call
from a put and a stock and so forth. I won't bore you with writing them
all out here. The point I'm trying to get to is understanding the basis
for my next point.
If you take the concept of the synthetic triangle to it's logical
conclusion, I should be able to describe a synthetic short put vertical
(let's say a SPY 194/192 short put vertical spread. I do this in the
- Short $194 put = Short $194 call + short stock @ market
- Long $192 put = Long $192 call + long stock @ market
Notice that in the process, you are buying a long stock and selling
the stock (essentially short). These two would basically cancel each
other out leaving just the 1 long $192 call and 1 short $194 call. I could say that synthetically a short $194/192 SPY put
vertical is the same as a long $194/192 SPY call vertical.
of this is in looking at the two P&L charts side-by-side.
You can see that in terms of the profit and loss analysis, they behave
exactly the same.
In the next issue, I'll explore the use of synthetics for adjustments.
In the mean time, you might take some time to play around with this
yourself using your favorite analytics tool. If you use the thinkorswim
platform, you may want to
Analyze Tab tutorial to become more familiar with this powerful but
sometimes intimidating feature.
Thinking in terms of synthetics
Are these two trades exactly the same? No. While both are positive
delta, the short put vertical spread is currently positive theta, while
the long call vertical is negative theta. In addition, the long call
vertical is positive vega (increases in value with increase in
volatility), while the short put vertical is negative vega.
This means I can build the same risk profile in different market
climates. This is the key point I want to get to in this issue. It's
possible to construct approximately the same position synthetically but
do so in a way that takes
advantage of different market climates. To
apply this, what would I do with a market that is high in volatility
with an anticipated bullish bounce? I'd sell a short put vertical. In a
different market where volatility is low but I expect sustained
bullishness and possible even lower volatility? I'd buy a call vertical.
This is only one application of synthetics. It doesn't always work this
way for all options positions. However, with a little careful
calculation, you may find it's possible to construct many positions and
adjustments using synthetics. If you find you're not sure if you've got
the synthetic right, use a tool like thinkorswim's Analyze tab to
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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!
l periodically receive emails about commission structures and how to
profit with strategies such as I discuss on the website.
Q: I opened an account with
<pick your brokerage> and this is the pricing structure says that options are
$9.99 + $.75 per option. If my vertical only makes 41 dollars (@80%) then how can I make money if it costs
$10.74 to open and $10.74 to close? On a $2 spread that is thin.
A: This is a great question and gives
me an opportunity to visit this topic again. I want to address this
question in two parts. First, explore the cost/profit potential of
different commission structures. Second, I want to discuss options for
possibly getting a better commission rate.
Let's tackle the analysis first. You are right in your initial analysis
of P&L given a $9.99+ $.75 commission. You would make about $18.02 on
one contract (recall, you usually have to pay $.75 on both contracts of
a vertical spread). However, if you raise number of contracts to 2, your
profit jumps to $56.02. When it jumps to 4 contracts, your profit is
$132.02. A structure like you mention is skewed more toward larger
Is it possible to shop around for better rate? Sure. Is it
possible to negotiate a rate with your broker? Sometimes. Some brokers
will actually offer a few different structures. You can occasionally
contact the accounts department and ask if they offer different
structures. Before you make a change, be sure you run some example trade
scenarios that reflect your trading habits to see how the commission
affects your net profit.
I can't leave this topic without
touching on the topic of brokers &
commission. I made a point of stating this in the
options brokers page on the website. While it may not always seem
like it, commission isn't everything. There is sometimes a tradeoff
between how low the commission is and the service and support you get
from your brokerage. Discount brokers often don't provide the breadth of
services you would typically expect from higher fee brokers. In other
words, you sometimes get what you pay for. Don't use the commission as
the sole deciding factor in your broker choice.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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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
expectations may change if the charts indicate something different
during the month.
We certainly saw a lot of volatility through December and into January.
It's actually quite a bit more than I had anticipated.
In the February newsletter, I summarized my outlook as follows:
"...I think it's always good to step back at the end of a year and get the
big picture. For that reason, I included an inset showing the 2 year
monthly chart. You can see that where we found a bottom recently around
$1800 is pretty close to the October 2014 low. In the longer term, we
are still in bullish territory. However, in the medium term (6 month
timeframe), things look a lot more neutral. Of course near term (4-6
weeks), things are
much more bearish.
We saw a bit of a rally on Friday that may signal more bullishness.
However, given the climate, I'd approach any rally with a bit of
skepticism. There are still a number of head winds, both technically and
fundamentally in the market. ..."
Here's how February played out.
We haven't really seen much resolution over the past month... or have
we? Notice that this month showed more selling to test the low
established in January. This was followed by a rally all the way to the
50% retracement level and then a bit of consolidation. That leaves us
with the question; will the next move be up or down?
The bullish argument suggests that with the double bottom and subsequent
rally, there is a likelihood that in March, we
may see additional
bullishness. The bearish argument considers the near term weakness and
the fact that any rallies we've seen recently haven't been on high
volume. It's possible we'll see both scenarios. In the coming weeks, we
may see the first move as down to test the 30 day moving average again.
If this holds, my outlook becomes much more bullish.
I currently have some bearish trades from last month that I'm looking
for an opportunity to close. Additionally, any selling would also offer
an opportunity to enter some more bullish trades. I'm watching the
market closely realizing that it's very news driven and pinned to oil
prices. Keep an eye on this. If you are one who likes bullish
opportunities, what's the flip side of oil? Check out GLD!
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.
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table of contents
|I'm adding a new section to the newsletter. Feel free
to disregard if you aren't interested in product information.
One of the more recent additions to the portfolio of services and
products is the Live Web sessions. These sessions are recorded and and
available for a very reasonable price of $12 per session. I've created
a Newsletter Special. If you add all 4 sessions to your
shopping cart, you can get 4 sessions for the price of 3 by using the
discount code: WebEx4Pack
Some time back, I released
the second for sale
video. The title of this video is "Mastering Short Vertical
Spreads". I now have a 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.
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 includes:
I'm excited about this project. Many know this is my go-to strategy for
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
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
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