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Success With Options - Monthly Review, Issue #16 -- April Edition
April 03, 2011

Welcome to the April 2011 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.

Flat March, April? - April Newsletter

Welcome to the April newsletter! As I said in last month's market outlook, things could go either way but we need to watch for signs to indicate such. As it turned out, we saw a lot of selling followed by a lot of buying. What's up for April? Read on...

In this newsletter, I'll be reviewing the month in more detail and providing my outlook for March. Also, I'll update you on the video, review some trades, talk options strategies and more. Read on...

Thanks to those who have provided feedback on the newsletter in the past. However, I haven't received any recent feedback though. Keep in mind I do value and take into consideration feedback on the newsletter content and on ways I can make it more valuable for the readers.

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

What's new at Success With Options

March was a busy month in terms of my activity, however not necessarily with work on the website. Unfortunately I was travelling a lot this month, which left little time to work on the video. I did manage to get the raw content recorded but the hard part, which is the editing still remains. At this point I am shooting for completing this by the end of April.

The only other activity at the website has been closing trades and opening new ones. See the trade tutorial summary below for additional details.

Trade Tutorial Summary

I had a few more trades going this month. So far, all trades closed profitably. 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 calendar spread $102 While not perfectly executed, this trade did turn out fairly profitably.
Closed DIA vertical spread $14 This trade worked out fairly well considering it went completely against me at one point.
Open SPY Iron Condor   Half of this trade is closed. Just waiting for an opportunity to close the other side or adjust.
Open IWM Vertical spread    
Open GLD Diagonal spread    

While I hate having losing trades, I find that I learn the most from them. Whether winners or losers, 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 put calendar spread:
"... I want to conclude this tutorial with a review of the considerations for managing the trade from the last update. I mentioned that I could simply close the trade at that time for smaller profit (but locking in what I had), I could wait to get a better price, or come up with some sort of adjustment. In this case waiting turned out to be the best approach. However, had we not had this latest selloff, that wouldn't have been the case. I point this out because every decision comes with a risk. "

DIA put credit spread:
"... First of all, I should have exited the trade as planned since I had a rule to close the position if within 4-5 days of expiration. However, at that point, I had nothing to loose as the trade was near maximum loss. This leads to the second point, which is that it really was the flexibility to allow this trade to go to maximum loss that enabled me to take the trade to the absolute limit. "

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

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Options Strategy Focus

I have modified this section a little bit to 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. The last few issues have focused on trade management, discussing how and when to close out trades. In this issue I'm going to conclude this topic by talking about trade adjustments. Specifically, I'll talk about when to adjust, how to adjust and whether to adjust. Obviously there's not room to go into great detail but here goes...

To begin, it's important to realize that any adjustment strategy imposes risk in some other area. For example, let's assume I have a call spread that is at risk of being overrun. I might decide to add a call calendar spread to mitigate some of the upside risk. However, what happens if the underlying suddenly reverses? The original trade may end up closing profitably but the calendar spread will likely not. As a result, the profit of the first trade is eaten up by the loss of the second. Think of this adjustment as insurance.

The first decision to make then is whether to adjust at all. If the trade was initially put on within reasonable risk limits then it may be that the trade should be left alone. There is a time to adjust and that's when it's clear that the reason for the trade is no longer valid.

Once a decision is made to adjust then the next question is what kind of adjustment to make. The first and most obvious adjustment would be to simply close the position. Be careful that the decision to adjust isn't simply a desire to avoid the pain of experiencing a loss. A decision to add a position as an adjustment must make sense in itself. In other words, a calendar spread put on as an adjustment must make sense even if it was the only trade.

I want to quickly list some adjustment approaches. These aren't the only strategies that can be used but are some of my favorite ones.

  • Add a calendar spread in the direction of the risk. If the anticipated move isn't too large, a calendar spread can minimize the downside risk of the trade.
  • Remove a few contracts of the position. Depending on how many contracts were initially entered, sometimes the best approach is to simply remove some risk by removing the trade itself.
  • Add a positive theta position in the opposite direction, which should bring the delta to a more neutral level. For example, if a call spread is being overrun, add a put spread. The credit from the put spread will offset the potential loss of the call spread. If the underlying happens to land right between the two spreads, you get a double win.
  • Add a long or short future position to offset the delta risk. I haven't talked about futures much but I intent to in the next few months. Futures can be a nice short term way to compensate for extreme delta conditions by creating a trade that adds either positive or negative delta as required. Stay tuned for more information on this in the coming months.
Ok, so when to adjust. The key thing about making an adjustment is ensuring that there is enough time. Pretty much any adjustment is going to be a positive theta trade, which needs at least 20 days to be very effective. It's also important not to jump too quickly into an adjustment just because an adjustment could be made.

As I said at the beginning of this column, there is a lot more that can be said about trade adjustments. Perhaps I'll also create a page or two on the website on this topic. In the meantime, have a look at the video on portfolio management for ideas on adjustments.

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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've received several questions on the platform that I'll include here

Q: I'm not able to download the desktop platform so I'm using the web version. I can't duplicate some of the analysis you use for calendar spreads and diagonal spreads. Is there any way I can do this?

A: Unfortunately neither the web-based platform nor the new Trade Architect platform currently have this capability. I demonstrated in several strategy pages for the calendar spread strategy and the diagonal spread strategy pages. I also answered this question in a newsletter several months back. In that newsletter, I mentioned that the alternative tool I had used was provided by the Options Industry Council (OIC) and called the Position Simulator.

The bottom line is that both these other tools will have some limitations and functionality that is slightly different than the desktop platform. Each tool can serve a purpose yet isn't meant to be the full featured solution that the desktop platform provides.

Q: Hey, I notice a number of changes on the thinkorswim platform. Since I notice you use the desktop platform in your trade tutorials, can you tell me what some of these changes mean?

A: I'm not sure what changes you're referring to exactly but let me go over some of the ones I'm aware of.
  • First of all, you may have noticed an extra tab on the Support/Chat window called seminars. This now gives you direct access to the Friday market wrap sessions and occasional Wednesday sessions as well. Some of these sessions may include overviews of new features.
  • Next, on the watchlists you may have noticed a column called a strength meter. This is a migration from the TD Ameritrade platform. It attempts to measure the percent change over the prior 3 weeks. Greater than +10% change is an up trend, less that -10% is a down trend and anything in between is a sideways trend.
  • One of the most recent additions is several new studies, one of which is called 'Monkey Bars'. I haven't had time to check it out, but the most recent release notes contains some discussion of this.
The one thing that is certain about the thinkorswim from TD Ameritrade. There are always new features showing up. Some of which may be of use to you and many that won't necessarily be something you'll use. If you don't know what something does, attempt to contact someone on the technical support desk via Support/Chat and ask.

If you would like to submit  a question, comment or feedback on the website, please visit 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.

March was an interesting month in that it ended at nearly the point that it started. Last month I summarized my outlook as follows:

"If we see a break of the $1300 level, this will confirm a lower low and I'd say the trend has changed. If we see the SPX clear the near term highs of around $1330 or so, we may see a re-test of $1345. A failure to clear this level would suggest a potential double top, which is a bearish reversal signal. "

Here's how the month played out.

We see that the $1300 level was breeched and a lower low was formed. This could indicate a bearish scenario except that after reaching $1250, the SPX promptly rallied and is near the highs.

I wouldn't be surprised to see the SPX consolidate at the highs... even up to the highs near $1340. If we see the SPX remain near the highs, I'd expect eventually to see the resistance broken. However if we see the $1300 level broken significantly again, I wouldn't be surprised to see even lower lows be established... perhaps even down to the 200 day moving average.

How will this affect my trades? I currently have a bullish IWM trade and a bearish SPY trade on, as well as the diagonal spread on GLD. Fluctuations in the market may provide opportunity to close both the IWM and the SPY profitably. In the meantime, I'm expecting the GLD to float above all of this as the dollar weakens again. Of course this last item may be more wishful thinking than anything else.

If we manage to break above the $1340 level I will certainly be looking for more bullish trades to enter. I may also be looking for bearish positions as we drift near the highs using a break above the $1340 as an early exit signal.

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

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