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Success With Options - Monthly Review, Issue #28 -- April 2012 Edition
April 02, 2012
Hello,

Welcome to the April 2012 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.

New Highs in April? - April Newsletter

Welcome to the April newsletter. In March we did see some initial selling that addressed the concern I raised about the prolonged buying streak. But after that pullback, we saw the SPX push to new highs. Will April be the month we see even higher highs? Read on...

Also in this newsletter, I'll be reviewing some of the updates on the site, trades for the month, talk options strategies and more. 

Please feel free to voice your opinion. 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) New on the site

2) Trade Tutorial summary

3) Options Strategy Focus

4) Answers to your questions

5) Options Outlook

6) Featured Product
 

What's new at Success With Options

It's been a pretty quiet month as far as updates go. Last month, I updated a number of pages. This month there haven't been any changes other than new trades. Behind the scenes though, I have been making small progress on the new Vertical Spreads Video. Unfortunately, it's going slower than expected.

While not a new feature, I want to continue to promote the fact that all the new tutorials allow you to make comments if you have a Facebook account. I encourage you to jump in and participate.

I also continue to look for new topics to expand the information on the website. Perhaps you have some topics you'd like to see covered. You can let me know using the newsletter feedback page. By the way... thanks to those who have provided feedback already. You you have already seen some of your requested topics show up in the newsletter. Keep them coming!

I entered March with one active trade, which is now closed. I added a call spread early on in March that is already closed for a small loss. We exit the month with one active trade. Read on for details of the trades.

I mentioned last month that I've been working on the outline for the next video that will focus on mastering sort vertical spreads. I've finished planning the first section and will begin recording soon. I'm very excited about this video and look forward to getting it completed and made available to everyone.

As to the trades I opened and closed, see the trade tutorial summary below for additional details.
 

Trade Tutorial Summary

I had a few more trades going this month. The one trade I closed was a winner. Here's the complete list of trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed SPY Iron Condor $198 This trade turned out better than expected due to an adjustment that was made.
Closed DIA Call Credit Spread -$8 This trade was a bet that the market had found a top. The reason it only lost $8 was due to an early exit
Open SPY Pub Credit Spread    

Win or lose, I find that I learn something from every trade. I want to include some key thoughts/lessons learned from the past month's trade tutorials here. Here are the nuggets from last month's closed trades.

From the SPY Iron Condor:
"...The iron condor can do well in a trending market as long as it isn't strongly trending. With the ups and downs of the market there are chances to close both sides. What helped this trade work out so well is that the sell-off and then bounce happened in the last few weeks of the option cycle, where most of the option premium is found close to the money. As a result, value drops off quickly as the underlying moves very far from the short strike."

From the DIA Call Credit Spread:
"...It's about capital preservation. There's no reason to stay in a trade when you are clearly wrong and this particular trade setup had obvious indicators to tell me if I was wrong. I'll simply walk away from this trade and look for another good setup."

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Strategy Focus: Determining Market Outlook

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. In past issues, I've talked about how to select a strategy and using technical analysis to improve timing of entries and exits. An important part of making a decision about what to trade is market outlook.

Market outlook can be described as arriving at a perspective or bias on the overall direction of the market going into the future. We might arrive at this bias by simply stepping back and looking at the trend that is established. However, that is a bit simplistic. A key aspect to the outlook is timeframe. Are we looking at days, weeks or months? For the rest of this article, I want to focus on three key points; timeframe, technical analysis and strategy selection.

When talking about market outlook, it's important to realize that you can come to a different conclusion depending on the timeframe. You may have already noticed that you can see an up trend on a 10 day window and a sideways trend on a 30 day window. We need to realize that when we are considering most of the options trades discussed on the website, the timeframe needs to be at least 20-30 days and perhaps a little longer again, depending on the nature of the trade. Diagonal spread spreads for example are a longer term trade and would require a longer term outlook.

As you may have observed from many of my trade tutorials and the market outlook at the end of the newsletter, I use some basic technical analysis tools for determining my bias. The first is overall trend. With trend, I'm trying to get an idea of whether the market is moving up, down, or sideways. Obviously, the market doesn't trade all up or all down or all sideways. It's made up with up days and down days. The key is identifying whether we are seeing higher highs and higher lows - an indicator of an up trend or lower highs and lower lows - an indicator of a down trend.

Sometimes it can help to draw a tend line connecting the lows on an up trend or the highs on a down trend. This can serve two purposes. 1) Making it easier to identify the trend and 2) It can serve as a support or resistance line. This brings me to the next tool I use. Support and resistance can be another way to gain a perspective - many times in a shorter time period.

Here's an example. We might see the market in an up-trend such as we are in currently. Yet, we see some selling taking place. If I saw a sell-off to some form of support (up trending line, moving average, horizontal support level, etc), and then bounce, that would give me confidence in a continuing up trend. If instead I see a failure of the support level, I might begin to change my bias - at least in the short term. In a similar way, if I saw an up trend reach a point of overhead resistance, it might make me begin to expect some short term selling.

How does this affect options trading? Once I come up with an outlook, which may include multiple timeframes, I can now choose a strategy that would work with that outlook. As an example, let's say that in our current up trend we are now approaching a point of overhead resistance. That might lead me to have a longer term (30-40 day) bullish bias but a shorter term (10 day) bearish bias. As a result, I might be inclined to enter a short term bearish position. A good example of this would be a short call vertical.
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I'm obviously packing some rather complex topics into a short newsletter article. For more detail on any of these topics, I recommend visiting the following pages.

For an example of using these techniques to arrive at an outlook, read the 'Options Outlook' article farther down the newsletter.

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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 another video related question; this time related to portfolio management.

Q: Do you have videos for managing options portfolios i.e. something that will show you how to setup and exit portfolios. Also how to adjust portfolios using the greeks? I see a lot of videos on youtube, but they are kind of hard to see.

A: First of all, thanks for the question. I find despite having a menu of videos on the website that it isn't always obvious where to find certain videos that I've created. Let me answer your question directly and then I'll provide a broader discussion of some of the videos I've made.

To your immediate question, yes I do have a video specifically about portfolio management. It can be found on YouTube here. This is a short video that talks specifically about how to make trade decisions that at the portfolio level specifically using a combination of analysis of the greeks and market outlook. I hope you find this video helpful.

On a broader level, there are quite a few videos I've created that are hosted on YouTube and freely available. To make it easier to locate a specific video you may be looking for, I provided a video summary page that provides a nice organization of the videos with a summary of each.

Finally, I just want to mention that I have one more extensive video that provides an introduction to options spreads. You can find more details about it at this information page. In addition, be watching for more videos specifically on some of the strategies that I discuss on the website.

 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.
 

As I had expected, the market did sell off all the way to the 30 day MA (and a little bit more) before rocketing to new highs. Last month I summarized my outlook as follows.

"...The key thing to note here the sheer duration of the move away from the moving average. I went back and checked and there hasn't been a stretch this long in quite a while. While this doesn't mean there has to be a pullback, I'd say the odds favor it. Remember though, last month I said there was a projection to $1420. I see these two points as the tension that will pull the SPX back and forth. "

Here's how the month played out.



We did indeed see a pullback and as I expected, the SPX bounced off the 30 day MA. This gave the market the confidence to push to highs that came very close to the $1420 level I've been suggesting for the last few months. It turns out that the $1425-1430 level is another area of overhead support. It wouldn't surprise me to see the market consolidate in this area before making a move one way or the other.  

Which direction will it resolve to? Keep in mind we are in a longer term (3-4 months) up trend. This means that until indications show otherwise, I'm going to maintain a cautiously bullish stance long term with a neutral outlook in the nearer term (10-15 days). If we see a break through resistance, I think we can expect even more bullishness longer term. If we see a failure of the support around $1375, I'd say we're in for some medium term (1 month or so) bearishness.

How does this affect my trades? I currently have a put vertical spread on. I'm expecting the combination of time passing and a little more buying to help close this one out. As I said, I expect some consolidation in the next few weeks. What's a good trade to put on in a range bound market? Stay tuned for a new trade to show up in the next week that answers this question.

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 recently released the first 'for sale' video. 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.

Expect more videos to be released in the months to come.

For more information or to purchase the video.

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