the April 2015 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.
March's Wild Ride - April Newsletter
|First, I apologize for getting this newsletter out a few days late.
Travel got in the way of getting this sent back on Wednesday.
Well, March has certainly turned out to be quite a roller coaster
ride, hasn't it? We've seen a few ups and downs. What can we expect
heading into April?
I've cleaned up the newsletter somewhat. Since the live Web sessions are
old news, I've moved info about them to the
product section at the end
of the newsletter. I don't have any new sessions planned but if you have
any ideas, please use this
survey to have your say. My goal is to make these session interactive and
highly valuable to those who attend.
In this edition as usual, I have answers to your questions, Options Strategy
Focus and more.
Finally, we'll close as usual with a Market outlook for you. For more
details, read on...
I'm 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: Working with Weekly Options
| This section of the newsletter will focus more deeply on the details
of some of the options strategies I use in the tutorials. Back in the
November 2013 newsletter, I shared some tips about trading weekly
options so I won't duplicate that coverage here. This month, I'd like to
explore the issues with trading weekly options and ways to work past the
Despite the advantages that trading weekly options offers, there are
several key things to be aware of that could get you in trouble in your
Odd expiration dates - Weekly options expire each Friday.
If you have opened a position that is build using weekly options, you
need to be very aware of exactly when the chain you are trading expires.
This is especially true if you've been in the mindset of expecting the
third Saturday after the third Friday expiration as with traditional
options chains. I've found that almost every Friday I have options that
are expiring and I need to take time to seek them out in my positions
and ensure I close them within my typical 3-4 days before expiration
Low Open Interest - Unlike traditional options chains,
there is a higher likelihood that there are strikes in a weekly option
chain that have low open interest. What that translates to you as an
options trader is that you'll usually find terrible bid/ask spreads and
your order has the potential to alter
pricing of the options. One other
issue with low open interest is at time to close. As with entry, you'll
typically not get good fill prices. However on exit, you are usually
more intent on closing the trade and that often forces you to take a
less than optimal price.
Before taking a position in a weekly options chain, be sure to know what
the open interest is on each leg. I've started actually including that
as one of my columns displayed in the options chain so I can see
immediately the open interest. As with typical trading rules, you'll
want an open interest that's 5-10 times the number of contracts you're
Unusual strike spreads - Weekly options often have $.50
strike intervals. While this sounds great and often is for vertical
spreads, it can pose problems for spreads with a calendar component in
them, such as Calendar spreads or Diagonal spreads. Here's why. Imagine
that you've set up a calendar spread that's a SPY $202.5 put calendar
with a long & short on weekly options cycles. If you intend to roll and
the month you want to roll to is a normal options chain, there won't be
a $202.5 strike to roll to.
In fact, there are several potential issues that could arise. First, the
option you want to roll to has low open interest as outlined above.
Second, the fact that there is no $.50 strike interval for the month you
are considering means you either have to skip that month, giving up a
possible roll or select the next even strike above or below the one you
are considering. This adds a vertical component to the spread and
changes the nature of it. That's not necessarily a bad think if that's
what you want to happen but can be an unfortunate circumstance if you
don't want to change the nature of the spread.
Don't get me wrong, I love trading weekly options and they
to be part of my trading strategies. However, I also trade them with
while being mindful of the above issues. If you choose to trade weekly
options, simply be aware of these characteristics and take the
For more information check out the
ETF options page, where I cover some of the points regarding ETF
options and $1 wide spreads. Also, stay tuned for a related page to be
added that covers many of these points in more detail.
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!
I didn't receive any new questions this month. If you have a burning
question you'd like answered, be sure to contact me using the link at
the end of this section. In the mean time, here's a "blast from the
past". These are a couple of questions from one of the first few issues of the
Which do you consider to be more risky: purchasing two one point
vertical spreads or purchasing one two point vertical
first question relating to a 2 contract $1 wide spread vs. a 1 contract
$2 wide spread is an interesting one. On the surface it would seem the
risk is the same. A $1 wide spread has $100 of risk so two contracts
would have $200 in risk. A $2 wide contract has $200 in risk. Let's say
you are paying $2/contract in commission. That means you'd pay $4 for
the 1 contract $2 wide spread (making it a total risk of $204).
However, you'd pay $8 for a $1 wide spread for a total risk of $208.
This may be even worse if you take into consideration the commission
for closing the trade.
The other thing to consider is the credit received (I'm talking
strictly about credit spreads right now). The true risk in the trade is
the width of the spread minus the credit received. I've found that
sometimes I might get slightly more as a net credit for two $1 wide
spreads than I could for one $2 wide spread,
which can offset the
additional cost of commission. In short, before making a decision,
compare prices and don't forget to factor in the commission.
you have a minimum
credit you typically look for in a credit spread?
regard to the second question, I don't usually have a minimum credit
in a dollar amount but I do typically have a target ROI. However, since
I often trade the same $2 wide spreads, I've found that ROI roughly
equates to the same range of expected credit for the trade. Some other
factors to take into consideration though are the current implied
volatility and the time until expiration. Even when I regularly sell a
short strike with a probability of expiring of 30-35%, these other two
factors can have a large impact on my ROI. Just for quick reference, if
I can get $.40 on a $2 wide spread, that's about 25%
even when there are more than 20 days until expiration, volatility is
low enough that I need to sell more time and I'm forced to look to the
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.
expectations may change if the charts indicate something different
during the month.
Well, I was wrong. I admit I expected to see some additional buying up
to the top of the channel but didn't happen. Neither did the selling
stop at the support level I identified.
In the March
newsletter, I summarized my outlook as follows:
At the risk of making an obvious statement, there are three possible next moves. The SPX, could run up to the top level of the channel
around $2150. The SPX could sell off down to the support level around $2060. The SPX could also just trend sideways absorbing the the
recent push up. Of these three, the likeliest next move is up to the top of the channel. As always, it's difficult know what may come
in the weeks ahead in terms of news and company financials that could affect the future price action. ..."
Here's how the March played out.
Almost from the beginning of the month, we saw selling down to the
bottom of the channel. That turned out to be a good thing. Remember, I
said selling would be an
opportunity to enter put spreads. Hopefully you
didn't enter too early. We then saw an attempt to rally off the bottom
of the channel and reach new highs. While this didn't happen on the SPX
or the DOW, it did on the RUT. If you've been trading the RUT or IWM,
you've seen some unusual relative strength lately.
As you can see, there are two forces that are acting on the market, so
to speak. First is the ongoing and fairly lengthy up trend that has
acted as support for a while. The second force is the lower high formed
in the most recent run up in relation to the prior high at the beginning
of March. That essentially forms a triangle that will compress the up &
down action. If this continues to the point of the triangle, what often
happens is a violent move up or down. When that happens, we could see
the SPX fall down out of the channel and sell off to the $2,000 level or
break out above the diagonal
resistance and push up to the upper side of
I've already taken bullish positions so at this point, taking any more
could be somewhat risky until the market resolves a little more. I'm
fine with not taking any trades for a while. Making little to no money
this month is better than losing money. In the mean time, I'm watching
the behavior relative to the converging support and resistance levels.
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.
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 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
special 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 at 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.
more 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 options trading.
After watching the video, I'm certain you will understand why.
- Understanding the construction and how the trade
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
more information 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
Back to the
table of contents