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Success With Options - Monthly Review, Issue #40 -- April 2013 Edition
April 02, 2013
Hello,

Welcome to 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 and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Is It Time For a Correction? - April Newsletter

Welcome 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 complete.

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.

 

In This Issue

1) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product
 

Trade Tutorial Summary

I 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 not putting 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.

New/ Closed Trade Gain/Loss Comments
Closed
SPY Put Calendar -$3 The adjustment worked as expected and turned this trade from a loser into a break even one.
Open 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.

From the 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 option trading tutorials, click here

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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 a trade.

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.
    1. 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?
    2. 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 hesitated anyway?
    3. 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.

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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 question that has come up from time to time. I'll paraphrase it a bit.

Q: 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: https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA5950.pdf as it has a pretty good section on the Widget 360 (Product Depth features).

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 Contact Me 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 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.
 

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.

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 released the first 'for sale' video about a year ago. 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.

For more information or to purchase the video.

New Video Coming
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.

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