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Success With Options - Monthly Review, Issue #64 -- April 2015 Edition
April 03, 2015
Hello,

Welcome to 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 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.

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 the newsletter feedback page and let your voice be heard. This can be done anonymously so please consider how you can help make the newsletter better.


In This Issue

1) Options Strategy Focus

2) Answers to your questions

3) Options Outlook

4) Featured Products



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 issues.

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 trading.

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 timeframe.

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 trading.

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 will continue 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 appropriate precautions.

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.

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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!

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 newsletter.

Q:  Which do you consider to be more risky: purchasing two one point vertical spreads or purchasing one two point vertical spread.

A:
The 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.

Q: Do you have a minimum credit you typically look for in a credit spread?

A: In 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% ROI. Sometimes, 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 next month.

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, 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 the channel.

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.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

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Featured Products

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.

For more information or to purchase the video.

Mastering Short Vertical Spreads
The focus of the video is on one specific strategy, including all aspects of of the process. This includes:
  • Understanding the construction and how the trade progresses over time
  • Selecting the long & short strikes
  • Planning entry & exits
  • Managing the trade once entered
  • Back testing
  • Creating a trading system with the strategy
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.

For 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 total.

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