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Success With Options - Monthly Review, Issue #65 -- May 2015 Edition
May 02, 2015
Hello,

Welcome to the May 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.

Treading Water - May Newsletter

It seems like we've been simply treading water in the market for the last few months. The great news is that it's still possible to make money with options strategies such as vertical spreads, calendar spreads and iron condors.

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: Trading ForEx with Options

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. This month, I wanted to explore an interesting idea. The idea is to trade the ForEx (or Foreign Exchange) market using options.

If you've been involved in trading for long, you may have heard about the foreign exchange (ForEx) market. This market is in the business of trading one currency against another with the idea that one of those currencies will gain in value relative to the other. Ability to trade in the ForEx market is available through a variety of platforms but is offered in a highly leveraged way such that relatively small moves in the underlying currency values can cause some rather large swings in the associated position value.

I'm not here to promote this market directly, largely because I'm not all that familiar with the details of trading the in the ForEx market. However if you've ever wanted to participate in currency pairs trading without having to leave the stock or options market, look no farther than currency ETFs. These days, there are a number of ETFs that can be used to trade an individual currency or even a currency pair.

While it's possible to trade the ETF directly, either long or short, my preference is going to be to trade the underlying options. Not all currency ETFs have options so if that's something of interest, make sure you verify that options are offered and that there is sufficient open interest. My favorite plays here are going to be short vertical spreads. I like these for trading the short term ups & downs that exist.  Of course, if you are interested in trading longer term trends, long diagonal spreads make a great proxy for a long (or short) stock position without the necessary heavy capital investment required for an equivalent number of shares of the ETF.

As an example, take a look at the FXE, an ETF of the Euro. While beaten down over the last year or so, this could have been a very nice series of put diagonal spread trades. Now that there seems to be a bottom in place, if you wanted to be long the Euro, simply enter a call diagonal spread on the the FXE options. If your outlook is more short term, use a short put vertical spread on a month-to-month basis.

There are a number of these ETFs that have a good options market. The Currency Shares ETFs seem to be some of the best for options traders. Here are a few fun ones that may get you in the currency market.
  • FXE - Euro ETF
  • FXY - Japanese Yen
  • FXA - Australian Dollar
  • FXB - British Pound
  • FXC - Canadian Dollar

Note: This list is NOT a recommendation to trade these instruments but is merely offered as a representative list. Always do your own research before entering a trade.

There are of course more ETFs with more emerging every day. I want to stress that before you enter into any trades with these ETFs or their options, you do research on the nature of the instrument and factors that affect pricing. Always, always research open interest and volume on the options chain to become familiar with how liquid they are before entering.

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!

Again this month, I didn't receive any new questions. 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". This is a question from one of the first few issues of the newsletter.

Q:  Is it possible to implement a strategy with iron condors similar to the strategy used for short vertical spreads (i.e. targeting 80% of the initial credit and 2X the credit to exit)?

A:
Though I don't currently use the 2x exit strategy any more with vertical spreads, the concept is still worth exploring.

It's certainly possible to come up with a strategy that's similar. However, let's take a moment to think through the strategy. The iron condor strategy I currently use is what I call the 60% strategy due to the rough probability of the short strikes I choose expiring worthless. That typically results in a credit that is 50% of the spread. For example, if I sell a $2 wide spread on each side of the iron condor, I'd look to get about $1 in credit. So, there's already a 2X rule built in. On top of that, if I set my exit rule for 20% of the credit for each side, I've effectively made it the same as putting on two vertical spreads with their own separate rules. I could set my overall target profit point to be 80% instead of 60% but that means leaving the trade on longer and that typically imposes more risk.

Maybe a better way to use a strategy like this is to chose short strikes farther OTM than what I chose. For example, what happens if we look for short strikes with a probability expiring worthless of 80%. In that case, I might expect a credit of $.60-$65 on a $2 wide iron condor. This trade has a higher probability of success overall so I may be more inclined to stay in the trade longer to allow the spreads to decay to 20% of their initial value (locking in 80%). 

The point that I want to make is that we start with a theory and begin to work the mechanics on paper. Any trade must make sense logically, both in terms of the mechanics and the probabilities. Look at a few examples hypothetically. Next, we should back test the strategy thoroughly before paper trading it and finally implementing it in our real account.

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.
 

It's been a strange couple of months in the market to say the least. There haven't been any of the extremes that were evident in the latter parts of 2014 and earlier this year.

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

"... 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."

Here's how April played out.



I had expected a somewhat strong continuation when the market poked its head above the descending overhead resistance line a week or so back. Instead, we saw a retreat from that move back down to the lower trend line. That actually worked out OK for me because I had some short call spreads that I was concerned about that benefitted from that action.

I still believe what we have are two forces in play. A dominant up trend that has been in place for more than a year, and shorter term range-bound trading that is effectively a sideways trend. That has made it difficult to successfully trade longer term strategies. However, at some point this will need to resolve as we see these two forces converge. I still believe a break in either direction will result in a strong continuation of that move so be prepared. As long as the bullish trend has been in place, it's possible we could see stronger selling to the down side on a break in that support. Keep in mind we're heading into the summer months. Markets tend to be quieter and may be less bullish - though that wasn't the case last year.

I've already begun taking some bullish positions when the recent selling brought the market to the bottom of the trend line. I also plan to have both bullish and bearish trades prepared for coming days as we see some resolution to the converging trends. I'll also be watching my existing positions and be prepared to exit on breaks of support or resistance.

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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