the April 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.
Through the Roof! - April Newsletter
| Whereas February was a fairly quiet month, March was a "Through the roof"
month - in more ways than one. This month has seen a $75 run with hardly any
There's been a lot going this month behind the scenes. Of course I've put on a
few trades and closed a few trades. In addition, I've put up a new page on
option greeks that I hope will be valuable.
Also this month I've been busy putting together some videos with more in the
works. I've had a few good trades with more on the way (I hope).
For more on this, read on...
new at Success With Options
Other than adding trade pages, I haven't made any major additions or changes to
the website. I did add a new page on option greeks when I realized I had
neglected to put together a page on this topic.
I have also recently added a couple of new videos out on YouTube. I had promised
to put together some videos on the Iron Condor strategy. The first two are
Here's what one visitor had to say about these videos:
"I came across your web tutorial about iron condors on YouTube when I was searching for some info online. Your tutorial is very instructive and helpful."
Be watching for a video update on the Iron Condor trade as I discuss ongoing trade
After sending out 3 newsletters, I'm anxious to receive some feedback on the
content and on ways I can make this newsletter more valuable for the readers.
Please consider taking a few minutes to visit the
newsletter feedback page and let your voice be heard.
Trade of the Week Summary
|February's trades have gone much better than my January
trades. While most of the trades I put on this month are still open,
they are well on their way to being profitable.
Here are the trades I put on this month in a quick summary.
this trade early because it was clear the trend had changed and I didn't see any
point in remaining in the trade. In retrospect, I'm glad I exited when I did.
SPY put vertical
would have done better if I'd have not put the call spread on because, as I've
noted, the market starting showing a lot of strength in March. Nevertheless, I
managed it well enough to lock in some profit.
EWZ put vertical
another textbook trade. I put it on and was out in just over a week's time.
spread on IWM
||This is a
one contract long diagonal spread. The spread is $7 wide and is well in the
money with one roll already completed for $.51. With any luck, I'll get one more roll
before closing for my final profit.
||I put this
trade on in conjunction with a video tutorial I also released (see 'What's new'
above). The put side
of this iron condor is closed (no surprise) and the calls are slightly being
overrun (also no surprise). I've done a little trade management on this position
that will help.
is progressing nicely and will likely close in the next week or so.
condor spread I put on at the beginning of the week.
This has obviously been a better month than the first two months of the year. Is this simply
because the market has turned bullish again or is it because I'm trading the
trend and following my rules?
probably too soon to tell, but I'd like to think I'm learning from my mistakes.
By the way, I want to take a moment to address a question/observation a few
made regarding my trade results for this year and last year. They observed that
the results I listed weren't a great testament to the strategies I'm promoting.
For the most part, I'd have to agree. As I acknowledged at the beginning of the
year, I fought the trend for much of the latter part of 2009 and paid the price
However, my personal account did much better. Why? Because for the trade
deliberately chose trades (and still do) to illustrate trading strategies and trade
management - not so much to prove they can make money. Additionally, I don't put
out a trade page on every strategy I personally trade or consider trading.
That said, I will be striving to make better choices on my trades as a
demonstration of selecting the appropriate strategy for the market climate and my outlook. My expectation
that 2010 will show much better results.
For more information on all of the trades I've posted as option trading
tutorials, click here
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Options Trading Tip of the Month
|This month, I want to tackle a topic that isn't so much about the mechanics
of trading but the psychology of trading. This isn't going to be a deep
discussion since there isn't really room to go into detail. However, a trading
friend and I were talking about the interesting tendency that we have to second
guess our trading rules. Let me give you an example.
Let's say I put on a short vertical spread trade with an exit rule to close if
the debit reaches twice the initial credit. For example, I sold the spread for
$.40 and have a target exit to close when the debit would be $.80. A few weeks
go by and the trade goes against me, ultimately resulting in my exit being
triggered and I'm out for a loss of $.40 times the number of contracts. Let's
make it an even $400.
A few days later, the market reverses and I notice
that if I'd have just stayed in the trade, I would have been able to lock in my
target profit. So, I resolve to myself that next time
I put on the trade, I'm going to wait a day or so just to make sure the trade is
really going against me. However, I don't make any other changes to my trading
rules (like position size).
Sure enough, as before, this trade goes against me but instead of getting out, I
decide to wait it out. This time though, the reversal continues and my potential $400 loss
turns into $800 before the pain becomes too much and I decide to get out. Now I'm confused and angry and
afraid to take the next trade. This experience hit me not only in my account but
in my psyche.
Does this sound familiar? I'm guessing anyone who has traded for
any period of time has had this experience. This is what happens when we lose
sight of the big picture. We have a trading plan and a set of rules hopefully
based on some amount of testing that has shown that the strategy is sound long
term. Even when we have a few bad trades in a row, our question shouldn't be
"What's wrong with my plan?" but "Did I follow my plan?".
This is not
to say we shouldn't fine tune our trading plan from time to time. However this
should be done using a fairly scientific approach. Change one thing at a time.
Back test it and forward test using paper trading until we know whether this
helps or hurts our success rate. There's obviously a lot more to trading
psychology than what I just covered. However, I've found this one issue comes up
over and over with traders I talk to - myself included.
Visit the website for a quick review of
options trading systems including creating a
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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!
Here is a great question I received recently...
Is it possible to implement a strategy with iron condors similar to the strategy
used for short vertical spreads (i.e. targeting 80% of the initial credit and 2X
the credit to exit)?
A: This is a good question. It's certainly possible to come up with a
strategy that's similar. However, let's take a moment to think through the
strategy. The iron condor strategy I currently use is what I call the 60%
strategy due to the rough probability of the short strikes I choose expiring
worthless. That typically results in a credit that is 50% of the spread. For
example, if I sell a $2 wide spread on each side of the iron condor, I'd look to
get about $1 in credit. So, there's already a 2X rule built in. On top of that,
if I set my exit rule for 20% of the credit for each side, I've effectively made
it the same as putting on two vertical spreads with their own separate rules. I could set my
overall target profit point to be 80% instead of 60% but that means leaving the trade on
longer and that typically imposes more risk.
Maybe a better way to use a strategy like this is to chose short strikes farther
OTM than what I chose. For example, what happens if we look for short strikes
with a probability expiring worthless of 80%. In that case, I might expect a
credit of $.60-$65 on a $2 wide iron condor. This trade has a higher probability
of success overall so I may be more inclined to stay in the trade longer to
allow the spreads to decay to 20% of their initial value (locking in 80%).
The point that I want to make is that we start with a theory and begin to work
the mechanics on paper. Any trade must make sense logically both in terms of the
mechanics and the probabilities. Look at a few examples hypothetically. Next, we should
backtest the strategy thoroughly before paper trading it and finally
implementing it in our real account.
By the way, if you are a Thinkorswim customer, Thinkback or OnDemand are great
ways to do this.
If you would like to submit a question, comment or feedback
on the website, please visit this page.
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|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. As
such, it may change if the charts indicate something different.
In the March newsletter, I summarized my outlook as follows.
"I am now cautiously bullish....
... Unless I see indications to the
contrary, I'm going to be putting more bullish positions on. Expect to see some
bullish credit spreads, maybe a diagonal and a skewed iron condor in upcoming
March has been pretty much nothing but up days starting at about 1105 and
pushing all the way up to just over 1180 at one point.
Where does that leave the outlook for April?
Last month I mentioned that we were bumping up against resistance that might
cause a sell-off. The other possibility was a breakout. The latter is what ended
up happening and now that old resistance area becomes support. Notice also that
after the breakout, there has been almost 2 weeks of consolidation, which means
there may be another push up. I'll remain bullish until we see a break of the
support level at $1150. A new bullish move could take us all the way up to the
$1200 area before pausing or turning downward. The iron condor I recently
entered has its short strike at $120 on the SPY, which is perfect!
What's the bearish argument? Right now, the VIX (the volatility or risk
indicator for the S&P 500) is sitting near lows not seen since before the market
sold off back in 2008. There is a chance that volatility could jump
accompanied by a sharp sell-off. The other way to look at the recent
consolidation is that it could be a sign of the bullishness starting to weaken,
which could be a precursor of a near term bearish turn.
The truth is that there's no way to know for sure until a move one way or
another takes place. As we conclude the month of March, we are also concluding
the first quarter of the year so things are relatively quiet. This coming Friday
is also Good Friday, so the markets will be closed. I wouldn't expect anything
significant to happen until the next week.
In summary, I'm still bullish but I'm starting to look at more neutral
trades. I'll probably wait until next week to enter any new trades just to see
if a move makes it more apparent as to the move the market will make. I will
treat any pullbacks to the support level as opportunities to take more bullish
trades like short put vertical spreads.
I have a diagonal spread on the IWM that is pretty deep in the money. A sell-off
could actually give me a chance to get a good roll. If that doesn't happen, I'll
close for a nice profit anyway. This bullish sentiment is putting a squeeze on
my older iron condor spread but I recently adjusted that with a call calendar
spread to hedge off some of the upside risk.
Beyond that, we'll just have to
sit back and wait for a move to develop and adjust the outlook accordingly. By
the way... I do this analysis more than once a month. It's important to review
the trend and outlook at least weekly to stay on top of changes that are taking
More on technical analysis.
Options strategies I use
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feedback on the newsletter.
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