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Success With Options - Monthly Review, Issue #42 -- June 2013 Edition
June 01, 2013

Welcome to the June 2013 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.

The Video is Here!! - June Newsletter

Welcome to the June newsletter. 

Before I get into the traditional topics of the newsletter, I just want to announce that the "Mastering Short Vertical Spreads" video is finally out! Many of you may have received an email last weekend with that announcement. I just wanted to give another shout out here. For more info, check out the Mastering Short Vertical Spreads offer link on the website. As I mentioned in the prior email, I am currently offering two special discounts.

Discount #1
The first is a 10% discount off the purchase price of the new video. Once you've added the 'Mastering Short Vertical Spreads' video to the shopping cart, enter the discount code mastering10 and select 'Update Cart' to apply the discount. This offer expires June 30 so act now!

Discount #2
The second discount is a $10 combination discount. If you would like to purchase both the 'Introduction to Spreads' and 'Mastering Short Vertical Spreads' videos, add both videos to your shopping cart, then enter the discount code combo10 to receive $10 off your total order. This will be a permanent offer to newsletter subscribers.

Ok, on to the remaining newsletter content. After 4 1/2 straight bullish months we saw some fairly heavy selling over the last week or so.  Will we finally see 'sell in May - go away' or is this a 'buy on the dip' opportunity? Read on...

As usual, I'll be reviewing my trades this month, talking options strategies, answering your questions and more.

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) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Products

Trade Tutorial Summary

To be honest, I have not entered any trades for a while.  You may have noticed in general I'm not putting up as many tutorials as I have in the past due to time constraints.

I do want to encourage you if you are a fan of the trade tutorials and have a Facebook account to participate in the tutorials by commenting, asking questions, or suggesting alternative strategies. I'd like these to be more interactive than they have been historically.

Do folks find this section helpful? Let me know.

In the mean time, I will continue to do trade tutorials when I find time and the opportunity arises but not as frequently as before.

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

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Options Strategy Focus: Adjustments - Exit, Roll or Convert

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 want to talk about adjustments to existing trades. Will you simply exit the trade, roll the trade or convert it into something else. Those are pretty much the three choices you have so let's take a little time to explore each of them.

To set the context, let's assume you have already entered the trade and it has run for a few weeks. Because it is a premium selling strategy, you likely would have seen some small gains simply from the passage of time. Suddenly, the trade has started to go against you because the underlying has changed directions. What can you do?

Exiting the trade - The most obvious choice is that you can simply exit the trade and look for a new opportunity. This of course is easier said than done. Exiting the trade at the moment will likely result in a loss. Psychologically, this is often a difficult choice. Exiting now could have two outcomes. You would be out of the trade and would avoid further loss if the underlying instrument continues to go against you. On the other hand, this move could be short term and exiting might mean missing out on the trade ultimately working out. It's often VERY difficult to know how a given choice will work out.

Rolling the trade - Generally for short vertical spreads and iron condors, you can give yourself some additional room in the trade by performing what's called a roll. Rolling can be performed in one of two ways. You can roll a short vertical spread position up (for call spreads) or down (for put spreads), which allows a little more room for the underlying to go against you. You can also roll out - that is, roll to the next trading month.

Be aware that either of these choices will end up costing you something. You will pay a debit to roll - no matter what. The danger of this approach is two fold. First, rolling may still result in facing a loss if the move of the underlying is strong enough or prolonged enough. The second risk is that it may simply be a way of avoiding the inevitable. That is, it can often be used by traders having a 'refusal to lose' mentality, which I discussed several months back.

I'm not saying you should never use this strategy. What I am saying is that if you do, you must have a set of good reasons for doing so. More in a minute...

Converting the trade - What I mean here is that a trade of one kind is converted into a trade of another. Generally, it's a way of changing a trade from a bullish to bearish or visa-versa, although it's also possible to turn a directional trade into a neutral trade as well. There are many ways of converting, whether it's selling an additional spread, buying back a short strike, buying a calendar spread or something else.

The key point in converting a trade is that your outlook has changed and that change may affect your existing trade(s). Almost every conversion strategy comes with some kind of cost. For buying back a short option, it's the cost of buying the option. For buying a calendar spread, it's the debit of the calendar. Depending on the conversion strategy, the resulting change in the market needs to be large enough to overcome this cost AND make up for any potential loss in the original trade.

Exit, Roll or Convert : My take - Sometimes the best approach is the simplest approach. The more I trade, the more I favor keeping things simple. While the decision to exit is initially somewhat painful, I usually experience an immediate relief as I'm out of the trade and my risk is removed. I do occasionally roll or convert a trade but there have to be some pretty good reasons.

The main thing is to have a set rules that are determined AHEAD OF TIME, not in the heat of the moment. Usually, these rules will be based in certain technical analysis techniques. It may be a break of support or resistance or a bounce off support or resistance or something of the kind. Make sure that if you decide to employ one of the above approaches that you have an objective set of rules for when you apply them.

Interestingly, I talk quite a lot about this in the Mastering Short Vertical Spreads video because it's a critical component of your trading system.

For more information on different technical analysis techniques, visit the Technical Analysis page on the website.

Stay tuned for the next options strategy focus as we return to more strategy related topics. I'm always looking for additional topics that are helpful to readers. Send them in via the newsletter feedback page or the Contact Me link.

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!

Surprisingly, it has been a quiet few months. I haven't seen any new questions come in for a while. So... nothing to post this month. If you have burning questions, fire them in!

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.

After the breakout and even more bullishness in the early parts of May, we finally saw some selling that may indicate some kind of pullback. Even still, May ended up over 30 points from the prior month.

Last month, I summarized my outlook as follows.

"... Given this initial behavior, I'm guessing we won't see the strong selling I was expecting. However, it's still possible we'll see some weakness heading into late May and June as is typical for that time of year. That said, there is still a lot of cash not in the market that may be looking at pullbacks and an entry. Clearly we don't have a double top so my outlook is more bullish than before. A potential medium term target might be $1650 given the range between prior highs and the recent low around $1550."

Here's how the month played out.

Following the breakout of May 3, there were 2 strong weeks of buying followed by a short term top forming. The S&P came very close to hitting $1700 before ultimately beginning some selling. As of Friday, the last day of the month, the S&P had sold off nearly down to the 30 day moving average. I added a Bollinger Bands view to show how we are now seeing some contraction in the width of the bands. You can see how extended it got before selling off.

I wouldn't be surprised to see a little more selling down to the 30 day moving average, or even farther down to the support level established by the prior breakout. This should be around $1600 or so. It also may be that this selling will be a trigger for some sluggishness as we head into the summer months. For now, I'm going to treat this as a pullback and an opportunity to enter bullish positions. However, I will wait a day or two more to see what develops.

I currently have no tutorial trades. Actually, I did enter a short call spread that I never got written up. As of now, it's doing fairly well and I'll remain in it. I'll be looking to sell some put spreads and maybe even enter a bullish diagonal spread in the coming weeks. Stay tuned...

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 sales type information.

As I announced earlier,  I just released the second for sale' video last week. The title of this video is "Mastering Short Vertical Spreads". I now have at total of two 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 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. While a long time coming, it's been a labor of love. 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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