the April 2013 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Is It Time For a Correction? - April Newsletter
to the April newsletter. We've now had three bullish months in a row.
The market at the moment appears to be shrugging off any negative news.
However as we know, what goes up must come down at some point. Will this
be the month were we see some kind of a correction or will we see more
bullishness? Read on...
As usual, I'll be reviewing my trades this month, talking options
strategies, answering your questions and more.
I want to provide another update on the Vertical Spreads video I've
been talking about in the last few newsletters. I've got all the recording
completed and have actually finished final editing on several of the
sections. However, this has been much more time intensive that I had
anticipated so there will still be more work to do before the final
project is complete. As a result, what I wanted to do was create a
special sampler package of the first section to give you a flavor of
what this project will look like when it's complete. I'm making this
available for free for a limited time exclusively to subscribers of the
newsletter. Please visit this page for details on how to get your free
copy and how to get an additional discount on the final product when
Thanks for the feedback I received from one subscriber. To answer your
question, I sell premium mostly on the major ETFs such as SPY, DIA and
IWM. I occasionally trade on commodity ETFs such as GLD or
sector/geographic ETFs such as XLU or EWZ. Most of the tutorials are
examples of the kinds of trades I use regularly myself.
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.
Trade Tutorial Summary
had one trade going when I entered the month. This is a
calendar spread I entered late last the month. The short put expired
and I had made an adjustment. That trade has since closed and I have a
new trade going. See below for more details. You may have noticed I'm
up as many tutorials as I have in the past due to time constraints.
I do want to encourage you if you are a fan of the trade tutorials and
have a Facebook account to participate in the tutorials by commenting,
asking questions, or suggesting alternative strategies. I'd like these
to be more interactive than they have been historically.
In the mean time, I will continue to do trade tutorials but probably
not as frequently as before. Here's the trade I was active on this
month in a quick summary.
| SPY Put Calendar
The adjustment worked as expected and turned this trade from a loser
into a break even one.
DIA Put Vertical
I just recently entered this trade as it looks like there may be
still some room to the up side in the market.
Win or lose, I find that I learn something from every trade. I didn't
close any trades this month so, no lessons learned. However, the lesson
I'm focusing on this month is responding to changing market conditions.
The trade I put on this month is an example of this.
SPY Put Calendar
... I've mentioned before that I'm not a huge fan of adjusting
simply for the sake of adjusting. However, there is a time and a place
for it. It was clear from the overall market outlook that I was wrong
in my original trade. The adjustment changed the trade from a bearish
one to a bullish one, which was consistent with my new outlook. The
bonus was that if the adjustment turned out to be a losing trade as
well, I would have minimized the loss of the original and if the trade
turned out as expected, I would have broken even on the trade.
For more information on all of the trades I've posted as
tutorials, click here
Back to the
table of contents
Options Strategy Focus: To Trade or Not To Trade -
Over Trading vs Over Analyzing
| This section of the newsletter will focus more deeply on the details
of some of the options strategies I use in the tutorials. As I've
analyzed my own impulses and answered questions received over the past
few months, I've begun to realize there are tendencies in us to either
over trade or over analyze. Either one of these can cause us to trade
inefficiently so I want to take this month's Option Strategy Focus to
explore that in more detail.
Let me start with some example scenarios. See if you find yourself
having similar thoughts. You get up in the morning determined to be a
profitable trader. You look at the market and aren't seeing any clear
indicators as to what direction to trade. However, your livelihood is
made from selling premium so you decide you'd better put something on to
generate premium. Once on, your trade is now going against you so now
you decide it would be good to put together an adjustment that will
limit the loss or profit from the change in direction. At the end of the
month, you look at your portfolio and realize at best all you've done is
break even or maybe lost a little.
How about this scenario. It's a new trading month. The old option month
has expired and you are ready to enter new trades for the next month.
You look at the market and realize that there has been a steady climb
for the last few months. The underlying you are evaluating has pulled
away and seems to be going up for ever. You realize that at some point
there must be a correction. As a result, you hesitate putting on any
kind of a trade waiting for the correct to occur. A week later, there
still has not been a correction and the underlying is up even more. Now,
you're wishing you'd have entered that bullish trade but are thinking
that it's probably too late and as soon as you enter, the expected
correction will happen. At the end of the month, you still haven't made
If you find yourself in either one of these example scenarios, don't
feel bad. I realize that I've been there too. What is it that causes us
to enter a trade when there is no trade to be had? Or... what is it that
causes to hesitate when the technical signals are there? Perhaps it may
be fear. Fear of missing out on the move or fear of entering and
experiencing a loss. The real question is; why does this fear rule us
and cause us not to just simply follow our rules?
I'm not sure I have this entirely figured out but here are some thoughts
that occur to me.
- "You can't win if you don't play" - I know I have
found myself in the situation of feeling like I have to put on a trade
whether market conditions dictate it or not. What is that compulsion all
about. I think many of us have that mentality that you can't win if you
don't play. While there is some truth there, the reality is that trading
for the sake of trading offers no better odds than the craps table in
Las Vegas. As I've analyzed my own motivations I've had to talk myself
down from making a trade in many cases because there simply is no clear
indicator as to the direction of the market. Patience is what's called
for to wait for an indicator and act decisively when action is required.
- "I've missed out on the move" - On the other hand, I
realize I'll look at the current move and hesitate to participate
because it 'seems' like the majority of the move has already taken
place. In other words, I'm expecting a correction around the corner so
why not wait. Again, there is probably some truth to this. In reality
though, none of us knows when that correction will occur It could happen
tomorrow or 3 weeks from now.
- Our unspoken trading rules - As I was thinking about
the above two situations, it occurred to me that we trade not only by
our written trading rules but also by rules that live so deeply inside
us that we often don't realize they are there. Maybe you are already
realizing this. However, let me pose some questions to get you thinking.
- When you set up and enter your next trade, do your rules indicate
that you should? Can you point to the rule or rules that dictate that
you should enter?
- If you are looking at the market and decide NOT to enter a trade, is
it because your rules told you not to? Put another way... did your rules
indicate you should enter (maybe for technical reasons) but you
- What is it that is causing you to disregard your rules (either to
enter or not to enter)?
I think you'll find
as I did that there are rules we are operating by that don't exist in
our trading plan. They cause us to act or not act according to fears and
impulses that we often don't realize we have.
As they often say in recovery groups, the first step in recovery is
realizing you have a problem. If you saw yourself in these examples,
first realize you are in a group that is well represented. Second,
realize that once you recognize some of these tendencies you can begin
to act to change them. Take some time to analyze and document some of
the emotions you experience while trading. Also, if you find yourself
trading or not trading and you can't identify a written rule to justify
it, take some time to determine what internal 'rule' is behind it and
capture these as well in your trading journal.
I know these topics feel a lot more like trading psychology and I think
they are. The longer I've traded the more I realize the hardest part
about trading is not the mechanics of the strategies but understanding
and mastering myself. I don't have any additional information on the
website (yet), I highly recommend reading Alexander Elder's book
"Trading for a Living". It offers some great insights into the internal
process of trading.
Stay tuned for the next options strategy focus as we return to more
strategy related topics. Any suggestions for topics? Send them in via
the newsletter feedback page.
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!
This month I received a question that has come up from time to time. I'll paraphrase it a bit.
I'm wanting to learn how to use TOS to make selections with regard to
implied volatility. I want high IV for selling IC's, but how do I use
TOS to determine what is high IV? I'd like to see you produce a video
covering that. I have enjoyed your other videos, but I need something a
little more advanced regarding the greeks.
A: There are actually several questions in the above question and I
think they are all good questions worth covering here in the newsletter.
Let me address them one at a time.
Selling Iron Condors using high implied volatility: In regards to that,
let me address this from a couple of perspectives. First, the
thinkorswim platform does make that information pretty easily available
on the option chain as the image below indicates.
While it is possible to get implied volatility set as one of the columns
for each strike price, I think it isn't nearly as helpful as looking at
the aggregate value represented above. This represents the average of
implied volatility for that option cycle. You can see relative values
and can of course compare to other underlying instruments. There are
also some nice visual tools provided by the Widget 360 too (which is now
called Product Depth as one of the charts under the Charts tab)
Another question or request was regarding producing a video around this
topic. That is, selecting iron condor positions based on implied
volatility. To be honest, this is not an area I have much experience in.
That is, I don't really use implied volatility as a criteria for
selecting trades, nor do I have enough familiarity with these features
on the platform to provide the level of detail I think that is being
requested. That said, let me recommend you check out the thinkorswim
user guide, which can be accessed at:
as it has a pretty good section on the Widget 360 (Product Depth
I think there may have been an additional question in there about
producing something on using the option greeks for trading and balancing
your portfolio. This is certainly a topic I have been considering for
some time. I would like to possibly expand on through a video. So let me
ask other subscribers to please weigh in on this subject and help
provide some direction on what this might encompass.
Please use the
link to send a quick mail to me indicating your preferences on
format (video vs web site page), desired details to cover (questions you
may have about using the greeks) and so forth. I'll begin working on a
plan to address these questions in more detail.
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. As
such, it may change if the charts indicate something different.
Now that we've had three bullish months in a row, one has to wonder if
the trend will exhaust itself soon.
Last month, I summarized my outlook as follows.
At the moment, there are a number of conflicting indicators. What I
liked was that the selling went almost all the way down to the support
level around $1475. I'd have been happier if it would have touched or
even penetrated that level a little bit. For me, that argues for a
bullish continuance. As you can see there has been a bit of
consolidation over the last few weeks. It's possible we'll see this
consolidation resolve to the down side as well and either fully test
the support level or sell even farther. At the moment though, there are
no real clues."
Here's how the month played out.
The first part of the month was strongly bullish and clocked a gain of
roughly $50 before going into a sideways consolidation pattern. However,
the last few days of the month started showing signs of resuming the
trend with Friday's close finishing above the consolidation area.
We are at an interesting point. The SPX has broken out above the
consolidation area on average volume. This currently the highest close
EVER but we're about $6 away from the all time high for the SPX. I'd be
surprised if we don't fail the first attempt to break above that level
but the consolidation area is now going to provide some support. Notice
also that the 30 day moving average is moving up to add more support
into the $1540-1550 area. It's possible that there may still be a little
more bullishness in this market.
How does this affect my trades? I currently have one put spread on
that is a bullish position. Depending on what the next week looks like,
there may be an opportunity to sell a call spread to turn it into an
iron condor. I'd stick with short term trades for now as the trend could
change at any moment.
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 sales type information.
For those that aren't aware, I released the first 'for sale'
video about a year ago. The title of this first video is appropriately
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
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
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.
I am also in the final stages of the next video, which I'm very excited
about. It features my favorite strategy - the credit spread, or short
vertical spread. This video will cover everything from how the spread
is constructed to how to create a trading system around it. Be watching
for this video in the coming months.
Back to the
table of contents