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Success With Options - Monthly Review, Issue #27 -- March 2012 Edition
March 04, 2012
Hello,

Welcome to the March 2012 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.

Time to Sell? - March Newsletter

Welcome to the March newsletter. I could almost duplicate my comments for January for this month's newsletter. Last month, my outlook suggested there might be a pullback. How did February turn out? How did that affect my trades? What might the March hold? Read on...

Also in this newsletter, I'll be reviewing some of the updates on the site, trades for the month, talk options strategies and more.

I want to thank those who took time to provide feedback in response to my request in the last newsletter. I appreciate the time you took. I do value and take into consideration feedback on the newsletter content and ways I can make it more valuable for the readers.

Please feel free to voice your opinion. 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) New on the site

2) Trade Tutorial summary

3) Options Strategy Focus

4) Answers to your questions

5) Options Outlook

6) Featured Product
 

What's new at Success With Options

Based on feedback from an observant subscriber, I've taken time to update the reviews for TD Ameritrade and thinkorswim. As you might expect, things never remain the same for the brokers. Each is attempting to offer new and exciting value to their customers. That good for you and I. Be sure to check out these reviews to see what's new.

Here's a late breaking update on the thinkorswim platform. They just released an update on the platform this weekend and one of the cooler updates is the ability to specify probability of expiring ITM (Probability ITM) and probability of expiring OTM (Probability OTM). The reason this is cool is that Probability OTM is basically the probability of success so it's no longer necessary to do math to determine this. I've updated the my trade tab accordingly.

While not a new feature, I want to continue to promote the fact that all the new tutorials allow you to make comments if you have a Facebook account. I encourage you to jump in and participate.

I also continue to look for new topics to expand the information on the website. Perhaps you have some topics you'd like to see covered. You can let me know using the newsletter feedback page. By the way... thanks to those who have provided feedback already. You you have already seen some of your requested topics show up in the newsletter. Keep them coming!

I entered February with one active trade, which is now closed. I added another trade early on that has been . Read on for details of the trades.

I mentioned last month that I've been working on the outline for the next video that will focus on mastering sort vertical spreads. I've finished planning the first section and will begin recording soon. I'm very excited about this video and look forward to getting it completed and made available to everyone.

As to the trades I opened and closed, see the trade tutorial summary below for additional details.
 

Trade Tutorial Summary

I had a few more trades going this month. The one trade I closed was a winner. Here's the complete list of trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Open
DIA Put Spread
$110
I closed this trade finally. Not at an ideal price but at a better price than the original trade would have done. Definitely a lesson in taking profit whenever possible.
Open SPY Iron Condor    

Win or lose, I find that I learn something from every trade. I want to include some key thoughts/lessons learned from the past month's trade tutorials here. Here are the nuggets from last month's closed trades.

From the DIA Put Credit Spread:
"...Could I have done better? Of course, Friday might have yielded a better price but at that point it looked like there might be more selling ahead. Could I have waited for Wednesday when there was more selling? Sure, but there's no way to tell this was coming. Sometimes you've got to just take your profit and be happy. In the end, this trade made more money than the original credit spread was supposed to that that's good enough!"

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

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Options Strategy Focus: Understanding Portfolio Greeks

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. In past issues, I've talked about how to select a strategy and using technical analysis to improve timing of entries and exits. In recent issues, I've returned to topics more directly related to the trading systems. One area I've referenced a few times but haven't gone into detail on is portfolio greeks.

Trading according to the greeks of you portfolio can be an important way to maintain a more balanced portfolio of trades. Rather than taking time to review the meaning of the greeks here, I'd like to refer you to the option greeks page on the website. Rather, I'd like focus mostly on how the different greeks might influence our future trades.

On the page I gave above, I go into some detail about how the various greeks might influence our strategy decision. Let me first mention that of all the greeks, the two that are most important to me is the delta and theta. You may have noticed that if you follow any of the trade tutorials as I always conclude the trade setup discussion with a portfolio impact analysis.

If I could summarize what delta represents, I would say it gives me a sense of the directional bias of the portfolio. A portfolio delta of +100 would have a bullish bias - that is, the portfolio would benefit from a bullish move. Likewise, a portfolio delta of -100 would suggest a bearishly biased portfolio. That does NOT necessarily tell me how I should select my future strategies. It only tells me what is the case with my portfolio.

My next step is to determine what I want my future delta to be. If I wanted to move the portfolio delta to a more neutral level, that would tell me I should be considering bearish strategies. If I wanted an even more positive delta (because I was pretty bullish), then I would consider finding more bullish strategies.

The other greek I pay attention to is theta. In general, I try to make all the trades I enter positive theta because that means my trades benefit simply by time passing. So when I consider possible bullish or bearish trades, I'm thinking about trades that are also positive theta. That means I won't be buying any long calls or puts as a rule.

The final greek I consider is vega. Vega is important because it gives me an idea to my overall portfolio's sensitivity to changes in volatility. A positive vega means the position will benefit from an increase in volatility. A negative vega means the position would benefit from an decrease in volatility. What causes volatility to increase or decrease? Generally, it's the upward or downward movement of the underlying stock or ETF.

Let's put it all together now. Whenever I'm considering a strategy, I first look at my portfolio greeks to assess my bias. Is my portfolio bullishly or bearishly biased? Will it benefit from an increase or decrease of volatility? Is my theta positive? Next, I consider my outlook. Do I expect the market to move up or down? How will that affect volatility? These decisions help me make a decision as to what strategy to select.

There's a lot more that could be said, particularly about selecting a strategy to accomplish my portfolio objectives. Rather than devoting time here duplicating text that is already on the website, I'd like to recommend you go to the page on option greeks and read the discussion where the last two sections cover portfolio greeks and strategy selection in a fair amount of detail.

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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 great question posted on one of the videos posted on YouTube.

Q: How does it work if you sell an option (say a call) and then the stock price rises above the strike? Are you obligated to buy the shares or can you buy out of the call that you sold so you don't get assigned and don't have to buy the shares?

A: This is a great question and is a good opportunity to go back and review some of the basics that we sometimes take for granted about premium selling and spreads.

First, let's look at what would happen if we simply sold a naked call (not that I advocate doing so). If you held a short call and that call was overrun, you would eventually be obligated to sell them 100 shares of the underlying for every contract you are short. If you don't own the shares, you would end up with a short position (that is short 100 shares). You may find that you don't want to be short the shares or you may find your account can't afford the margin required to sell short. In that case, you could simply close the position by buying back the short position. Of course more than likely you would have lost money in the trade. How much would be based on how far in the money you were when assigned.

Rather than letting yourself be assigned, you could simply buy back the short call option. Of course if you were overrun by much, you would pay much more to buy back the short option than you received in selling it. However, you may be able to limit the loss somewhat. Again, how much will depend on many factors and could in fact be a quite large loss.

Let's look at the same situation but include buying a call to create a short vertical spread. Let's say you bought a long call $2 farther out of the money than the short call. First of all, that means the most you could lose is $2 per contract. Actually, since you received a credit initially for the trade, the loss would be less than $2. Keep in mind that the loss would actually be $200 per every contract since the contract typically represents 100 shares.

One issue that could still come up is that the options could expire with the underlying between the short and long option. In this case, you would still potentially be assigned. The lesson here is that you should never let the spread go to expiration. In fact, you shouldn't let this trade remain open in the last week or so because the likelihood of someone deciding to exercise their option goes up in the last week or so. That's one reason I often close my spreads 4-5 days before expiration.

There are several resources available that cover these concepts in more detail including the vertical spreads page on the website and the introduction to spreads video I recently made. Both are great resources if you are interested in building a good understanding of premium selling and spreads concepts.

  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.
 

I had really expected a little more of a pause this month given the bullishness of January. However, the market just kept marching on up. Last month I summarized my outlook as follows.

"...In this case, that width (recent highs to lows) is about $130 ($1170 to $1290). Theoretically, that would make the target $1420. Let's weigh that against the fact that the underlying has already moved quite a ways away from the moving average. While there's no guarantee that the underlying will snap back to the moving average, it often happens. While the $1420 price target may still be realistic, I'm not sure we'll get there without a few pauses. "

Here's how the month played out.



The key thing to note here the sheer duration of the move away from the moving average. I went back and checked and there hasn't been a stretch this long in quite a while. While this doesn't mean there has to be a pullback, I'd say the odds favor it. Remember though, last month I said there was a projection to $1420. I see these two points as the tension that will pull the SPX back and forth.  

Has anyone else noticed that the market seems to be shrugging off bad news recently? This is an interesting contrast to last fall when nothing seemed to make the market happy. I suspect that the thing that will help swing the sentiment one way or the other is whether the bad news picks up.

How does this affect my trades? I currently have an iron condor in play and am considering another trade. I honestly have a hard time entering a bullish position with the market this far extended but I also am reluctant to enter a bearish trade with the strong upward trend. The SPX is currently sitting right at the highs established almost a year ago. How the SPX resolves over the next week or so will likely give us an idea of what to expect and then I'll probably know better what bias my trades will take.

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 recently released the first 'for sale' video. 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.

Expect more videos to be released in the months to come.

For more information or to purchase the video.

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