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Success With Options - Monthly Review, Issue #86-- April 2017 Edition
April 08, 2017
Hello,

Welcome to the April 2017 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.

Anatomy of a Trade Entry Part 3 - April Newsletter

After several months of constant bullish behavior, we seem to be taking a bit of a pause. How long with that last? Is the next move up or down?

We'll have answers to those questions, a continuation of Trade Entry discussion, answers to your questions and more. 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: Anatomy of a Trade Entry - Strategy Selection

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials and other topics related to options trading.

A subscriber recently submitted newsletter feedback requesting coverage of trade entries and exits. As a result, I'm kicking off the 2017 with a series of topics on just that. This month, we're focusing on strategy selection. For the overview, check out the Feb, 2017 article.

Key Elements of an Entry: Strategy Selection
Once you've done an assessment of the market, the next step is to pick a strategy. I want to open this discussion by first acknowledging that there are often several strategies that can fit a given assessment. I will talk briefly about characteristics of different strategies. However, it's ultimately up to you to decide what strategy might work for you.

With that said, let me talk a little about factors that can influence your decision of strategy and with that, some thoughts on a strategy that fits the factors.
  • Anticipated direction - This is the most obvious. As a beginning options trader, you were taught that if you were bullish, you bought a call and if you were bearish, you bought a put. In the light of high probability trade strategies, you have a few more choices.
    • Bullish - Short Put Vertical Spread, Long Call Vertical Spread, Call Calendar, ...
    • Bearish - Short Call Vertical Spread, Long Put Vertical Spread, Put Calendar, ...
    • Neutral - Iron Condor, Calendar spread (call or put), ...
       
    As you can see, the choice of a specific strategy isn't so obvious. More factors may need to go into the decision. However, you may find for each of the above directions, you have your 'go to' strategy. I know I do.
     
  • Anticipated volatility move - This is one that many people don't consider. If you've been trading for a while though, you may have noticed fluctuations in volatility often reflected in the VIX. The VIX is really only one indicator that focuses specifically on SPX volatility. Perhaps you've noticed in times of low volatility that it's hard to get a good premium on a vertical spread for example. However, at the same time, Calendar spreads and long vertical spreads can actually be cheap. That's due to an option greek called Vega.

    Some strategies benefit from an increase in volatility over time (Vega  positive). Others benefit from a decrease in volatility over time (Vega negative). Short vertical spreads for example are Vega positive while Calendar spreads and Long vertical spreads are Vega negative. What this means for you is that knowing where volatility is and where it's likely to go can help narrow the list of choices to one or maybe just a couple of strategies.
     
  • Duration of outlook - It's important to recognize that different strategies tend to play out or realize their maximum profit over different timeframes. For example, Vertical spreads (both long and short) tend to be fairly short in duration. They could last from 15-30 days. On the other hand, Calendar spreads often take a bit longer and can often last for up to 60 days depending on how you set them up. What that means to you is that if your outlook is bullish but only for a short time, then you want a strategy that will play out in a shorter timeframe.
In summary, what we're talking about here is considering three key factors in your strategy selection; directional bias, volatility move and duration of outlook. When you take these three factors into consideration, you may find you are much more successful in selecting a winning strategy. For additional detail on many of the strategies I've mentioned above, check out the Option Trading Strategies page on the website.

 As always, please send me feedback with any requests for topics or thoughts on what has already been published.

Happy trading this month!

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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 frequently get questions about the list of stocks I trade from. Last month I received a really nice email from a follower of the web site that asked a very similar question. So, let me answer again here.

Q: ... Can you give some insight on your stock list? I trade generally AAPL, GOOGL, AMZN, TSLA, CMG, PCLN, PNRA etc. If you have a list of stocks you trade please share with me....

A: I want to answer this in two ways. First, I will tell you what I trade. But, I also want to direct you to some tools to build your own list of stocks to trade.

I personally trade primarily three or four ETFs. These are SPY, DIA and IWM. Occasionally I'll also trade the GLD. The first three are the index tracking ETFs for SPX (S&P 500), Dow Jones and Russell 2000 indexes. I like them because they are in fact trackers of the broad market and for options strategies I employ, these work quite well. If you haven't figured it out yet, GLD is the ETF that represents gold. In fact, it represents shares of gold and is backed by gold itself. I like to trade this when I see opportunities to take advantage of bounces heading for longer term moves. That's it... I pretty much stick to these. Why? Because I can accomplish my objectives easily without having to search for other stocks and be subject to the periodic whims and moves that drive an individual stock.

Many people find the hunt for a good stock to trade part of the fun of trading. There are certainly a lot of other stocks and ETFs out there that are both optionable and can offer good opportunities. How do you find them? It turns out there are nice tools in most trade platforms that can help. I really like the search tools in the thinkorswim platform. In fact I recorded a video some time back on exactly how to do that kind of searching. You can find it on the videos section of the website. Look in the "Miscellaneous Videos" section for a video called "Finding Optionable ETFs". While you may not want to find only ETFs, it can give you some good background for finding any stock or ETF to trade.

If you have any thoughts or suggestions on topics that should be added to the web site or topics that should be covered in video, please use the feedback link or contact me link to let me know.

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.
 

The market appears to be digesting the strong upward move. While we've seen some pullbacks of late, they aren't massive selling events either.

In the March newsletter, I summarized my outlook as follows:

"Is there more to go? With no overhead resistance, I see the odds favoring a push to some position that is fairly overextended. A breakout such as this should match the last support to resistance range, which is about 48 points above the breakout line. I am expecting at some point to see a re-test of the support level. It seams reasonable that after running up for some time, the current bullishness would run out of momentum and fall back to re-test. The real question is when that happens. It's fairly difficult to judge at the moment..."

Here's how March played out.



Little did I know when I wrote that last month on the evening of March 1, that day would be the high day for the remainder of the month. That represented a gap up and exhaustion that you cans see played out all the way through March. The low was pretty much at the 50 day Moving Average and, while not fully down to the support level I mentioned, is a pretty good place to pause.

The real question is; what next? While there has been a bit of a bounce from the 50 day MA, I wouldn't say that was definitive. In fact, you can see that there have been a series of lower highs that could indicate more bullishness. At the very least, I wouldn't be surprised to see more sideways action. (Note: 7 days into the month, that appears to be playing out so far). The two things to keep an eye on to get a better idea of what happens next are that support level of the 50 day MA and the current progression of lower highs. If either of these gets broken, that could indicate a change and that should cause you to change your trading posture.

What this means for me is that I've cautiously taken some bullish trades near the lows. I'm also currently looking at some fairly neutral trades for the next few weeks. I'm waiting for the market to give me more of an indication of where it's heading next.

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 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 a 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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