the May 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
What's Next for May? - May Newsletter
Welcome to the May newsletter. In April, we saw the first negative month of the
year. The first few days of May look like more of the same. Is the old trading
adage "sell in May, go away" true? Read on...
This newsletter is getting out a few days late as I was travelling and literally
had no time to devote to the newsletter. Too bad they can't just write them
selves! Some of the things I'm discussing in this newsletter include reviewing
trades for the month and talking about some changes I'm making to the tutorial
process, talking options
strategies, answering your questions 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
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.
Trade Tutorial Summary
|I had one trade going this month that closed early with a stop loss
trigger. Some of you may have noticed that the number of trade tutorials
has decreased quite a lot over the last year or so. This is partly
because I've had less time to analyze, set up, and write up the trades.
In addition, since I've added the Facebook comment section to the
tutorials, I've seen no comments being submitted. I had hoped this would
be a much more interactive area - a place where trade ideas, questions,
debates on entry & exit rules and so forth would be conducted. I'm
left to wonder if this feature of the website is as valuable to visitors
as I had hoped. Use the feedback form to let me know
how you feel about this.
In the mean time, I will continue to do trade tutorials but probably not as
frequently as before. Here's the trade I was active on this
month in a quick summary.
SPY Put Credit Spread
This was another losing trade, although the amount of the loss was
significantly limited by the stop loss order I had in place.
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
"...As it looks now, placing the stop loss order to protect from further potential loss was a good idea. Any time there are good technical
reasons to exit a trade early, I believe it makes sense to do so. Having a trading rule in place ahead of time makes it much less of an
emotional decision. In fact, because it was simply a OCO order, the decision to close was pretty much made for me."
For more information on all of the trades I've posted as option trading
tutorials, click here
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table of contents
Options Strategy Focus: Leveraging the Power of ETFs
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 strategies, entries and exits, trading
psychology and more. In this issue, I want to talk about the power
(benefit) of trading options on ETFs.
There are four main reasons why I prefer to trade ETF options. Let me
summarize them here.
I don't want to conclude this article without pointing out some of the
risks of ETFs. First, realize not all ETFs are created equal. Before you
trade any ETF, make sure you know how it works, what fees are built in,
what instruments it represents and so forth. Also, not all ETFs have
high liquidity. Check the ETF volume as well as the option's open
interest before deciding to trade that instrument.
You often hear it said that you should diversify your portfolio.
This can often mean many different things but one thing that is
often referred to is having a diverse set of stocks (or options on
stocks). The obvious reason is that your portfolio is less impacted
by the performance of an individual stock.
Most ETFs represent a basket of stocks for a particular market
sector or could even represent a broad index like the S&P 500 or the
Russell 2000. Is that diverse enough for you? If you wanted to trade
the entire financial sector, or the entire retail sector, there are
many ETFs that allow you to do so.
There are many traders that prefer to trade these ETF instruments so
the volumes are higher on the ETF itself and also on the options on
those ETFs. What this offers is liquidity - lots of buyers and
sellers. That translates to narrow bid/ask price spreads and rapid
- Tighter strike increments
I don't know if you've noticed this but on many stocks the strike
price increments for $50-$200 stocks are in $5 or $10 increments.
I've found this to be a little annoying because I've had a harder
time selecting a short strike that is in my tolerance range for
probability of expiring (ITM). A side effect of this is that the
margin requirement for just one contract is also higher.
As a result, I've found that the $1 wide increments offered by many
ETFs really help me to find the optimal strikes. In fact, I've been
using ETFs with $1 strike increments so long that I'm never really
happy when I look at trades on stocks themselves any more.
- Access to commodities
A fourth feature that just occurred to me as I'm thinking about why I
prefer ETFs is that it's a great way to directly trade commodities like
gold and silver. Think about it. If you wanted to buy an ounce of gold,
you'd be paying about $1600 right now. You could buy in smaller
increments at gold and silver dealers but you often get scalped on the
Since there are ETFs for gold (GLD) and silver (SLV), I can take a
position for a much smaller cost and only pay the standard brokerage
There is a lot more
that could be said here related to trading ETFs, for example on how to
research ETFs. For more detail, I recommend visiting the ETF page on the website for more
Back to the table of contents
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 a question about some of my terminology and also
about a new feature of the ToS platform.
I was looking at your portfolio management video. You said you were going to
sell a put. And then you said it was about 30% and then you
said it had a chance of success of 68%. Can you explain. Also, how does this relate to the new Probability ITM in the newest ToS platform?
A: I believe there are
several questions to be answered here. First, let me address the features of the
platform (probability ITM and probability OTM).
Until several months ago, there was one choice on the thinkorswim
trade page called 'Probability of Expiring'. This attribute expressed the option
expiring in the money (ITM) by a penny or more. The problem with that is that
many traders wanted to know the probability of the option expiring worthless (or
OTM), which could also be thought of as probability of success for many premium
selling strategies. Of course, it was a simple process of doing the math (100-
Recently, the developer team for the trading platform decided to add the
feature to do that calculation. As a result, you can now directly select as one
of the columns on the trade page the probability of expiring OTM (or Prob OTM as
it's called on the trade page).
Regarding my strategy for strike selection, when I talked about a probability
of success of 68%, I was arriving at this percentage by doing my own math based
on the probability of expiring ITM described above. For
strategies like short vertical spreads, you could say that the probability of
the short option expiring OTM (that is worthless) IS the same as the probability
of success of the trade.
Keep in mind that the portfolio video was made BEFORE
the new feature was available so I always had to refer to that value as the
probability of expiring ITM and then do the math to get probability of success.
I believe in the video I mention my goal is to find a probability of expiring (OTM)
of 30%. In reality it is often a little different. In this case, the probability
would have been 32% making my probability of expiring OTM (or the probability of
I hope that helps clear up any confusion of my terminology
Help me ensure we have an interesting question or two to respond to next month. Submit your questions at this page.
Back to the
table of contents
|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
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.
We didn't really see any resolution last month that would lead to a
longer term outlook.
Last month I summarized my outlook as follows.
"...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. "
Here's how the month played out.
The month started out right at the $1420 area before selling off again
and then consolidating around the $1370 area or so. It turns out the
area between $1350 and $1370 is a longer term support area that bears
watching. A failure of this level probably means longer term bearishness
where we could see selling all the way down to $1300.
On the other hand, we could see the support level hold as we continue to
remain range bound for a while. Keep in mind that the adage 'sell in
May, go away' refers to the fact that many traders aren't as active
until the September timeframe. As a result, we could see some additional
volatility through the summer months. Earnings season is almost over and
there may not be may big market moving news in the next few months.
How does this affect my trades? I hinted last month that I may be
looking for some good trades for range bound markets. I had considered a
trade tutorial on an iron condor but didn't get that set up on the
tutorial page. Had I done so, it probably would be doing quite well
right now. I'll try to be watching for a similar trade to set up for
this coming week.
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
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table of contents
|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
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
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.
more information or to purchase the video.
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table of contents