the June 2014 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
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.
New Highs - June Newsletter
|Well, it's been an interesting last week or so to the month. The
market was quiet for nearly 3 weeks before spending the last week and a
half pushing up above the range it had been in. Given this new move,
what will June look like?
I have exciting announcement this month. For the occasion I've added an
extra section to the newsletter. In addition, I have answers to your questions, Options
Strategy Focus where we'll examine
the how to trade in the summer months. 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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
Announcement: Live Web Sessions Coming
I have an exciting announcement this month. I've been asked numerous times
about doing some kind of individual
mentoring. It has never really been
my intent to do individual mentoring and there are some great mentors out
there that are in that particular business. What I have started planning though is
a series of live web sessions, probably about an hour long and probably
during trading hours. I'm interested in hearing from you about some of
these decisions as I'd like to make it most beneficial to those who will
I already have some ideas of potential topics that might
This is in the planning phase at the moment but expect to see a
tentative schedule with topics by the next newsletter. In the mean time,
now is your chance to suggest times & topics. Use
this feedback form to have your say.
- Technical Analysis for Options Traders
- Short Vertical Spreads Entries & Exits
- Projecting profit on Calendar Spreads trades
Options Strategy Focus: Trading the Summer Blahs
| This section of the newsletter will focus more deeply on the details
of some of the options strategies I use in the tutorials. As we head
into the summer months, I wanted to talk through some different
strategies for trading what is generally considered a lower volume
You may have
heard the saying
"Sell in May, go away". The implication is that many
intuitional traders take all or part of the summer off from trading. As
a result, volumes can be low even though the markets often drift higher.
So what's a trader to do in a market like this? Actually, there are a
number of different choices available to you. The first but maybe not
most obvious choice is to take the summer off. That's right, there's no
reason you have to trade through the summer. Enjoy the free time.
Alternatively, just cut back your trading activity. Maybe do one trade
or a few trades per month through the summer.
Another alternative is to trade long vertical spreads. I don't spend a
lot of time covering long vertical spreads (or debit spreads) as I
prefer the short variety. That said, one of the nice benefits of a long
vertical spread - especially a bullish one is that when volatility is
low, they can be inexpensive
to enter. If you buy a call long vertical
with the long strike ITM and the short strike OTM, you can get a pretty
decent ROI right now. I briefly cover long vertical spreads in the
Introduction to Spreads video.
So, those are 4 different ways to deal with the summer blahs
often found in the market this time of year. Pick the one that appeals to you. If you are
considering one of the trading strategies I mentioned, be sure you are
comfortable with it before trading with real money. Nothing would make
your summer more stressful than to risk money using a strategy you
aren't that comfortable with. Maybe instead take the summer off from
trading real trades and use the time to get familiar with a new strategy
using paper trading instead.
Another strategy is to keep trades short term in nature. For that
reason, in addition to long vertical spreads, I just trade more short
vertical spreads than anything. The reason is that these trades can
often close profitably in 2-3 weeks. Right now, that's a perfect
If you are bearish heading into the summer and expect volatility to
actually rise, another strategy to use would be a calendar spread. There
is plenty of info on the website including the
Calendar Spread strategy page. Check out this
as well as the
for more information.
Back to the table of contents.
Answers to Your Questions
|I frequently receive email from visitors to the site with
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!
Last month I received a question from a day trader wanting to
transition to options trading that I think would be good to address
Q: I know we wouldn't hold to expiration but what would happen if
the short strike went ITM and got exercised early? What would the max
A: This is a great question and maybe
one that has occurred to
others who frequently trade spreads strategies. First of all, let me
remind you that a spread is generally a defined risk strategy. That
means you know going in exactly what your risk is. Second, most spreads
not only are defined risk but have relatively low risk. For example, a
vertical spread's maximum risk is the width of the spread. A calendar
spread's max risk is the debit for the entry.
What can happen though is that if you are assigned on your short strike,
scary things can happen to your account. Assignment happens for a number
of reasons but generally it happens when the short strike is ITM and you
are getting close to expiration. At this point, the holder of that
option exercises their right to sell you the stock (for a put) or buy
the stock from you (calls) for the strike price.
Usually what happens when you are assigned is that you'll be notified by
email. Next, when you look at your account, you may see some note that
your account is on hold. If this is a new experience to you, first take
a deep breath and then call your broker. They can walk you through what
Bottom line, you have three possible courses of action.
- Do nothing - There a possibility that the resulting position you
have is exactly what you want. For example, if you sold a naked put, you may
in fact be wanting to buy the stock for the strike price so being assigned
is what you expect.
- Close the position - Usually the easiest and safest course of action is
to simply close the resulting position. You would only do this if you were
ITM for the short option but OTM for the long option. That is, the
underlying is somewhere between the long & short strikes.
If you were assigned on a put, you would sell to close the stock that was
sold to you. If
you were assigned on a call, you would buy to close the
short position that was created. In either case, you would probably lose
money on the trade but it will likely be less than your anticipated max loss
for the spread.
- Use your long option to exercise - If both options are fully ITM, it's
usually better to use your long option to exercise your right to buy or sell
your position at the long strike price. If you are ITM, this will be a
better price than if you had closed the position at market.
Again, I want to emphasize that you shouldn't panic. Your first
course of action should be to call your broker who can walk you through your
choices. Once you have had this happen a time or two, it won't be so scary
and you'll be able to figure out the right course of action on your own.
By the way, this is one of the scenarios I cover in the
Mastering Short Vertical spreads video on managing your trade.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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.
expectations may change if the charts indicate something different
during the month.
Well, it started to look like May would be another sideways month. In
fact, the first half of the month pretty much just ground up & down a
little but mostly sideways... until last week.
May newsletter, I summarized my outlook as follows.
"...With another month of sideways movement, the market's likely winding up for something. For the moment,
earnings haven't been impressive enough to bring out the buyers and multiple factors seem to be putting a
damper on additional bullishness. It's hard to say at the moment what's going to happen except I'd encourage
you to consider some of these additional factors. The VIX (SPX volatility index) is at the lower end of it's
range, which could signal potential near term selling. The Russell 2000 and Nasdaq 100 indices are both relatively
weak compared to the Dow and the SPX. That makes me a little worried that something is brewing.
Here's how the May played out.
You can see the SPX managed to break out of the box
it was in for the
last few months. You can also see that the long term upward channel is
still intact so our long range outlook is still bullish. However, a more
intermediate resistance exists that I think will be the test of how
bullish we'll be going into summer. Other indicators are kind of
interesting. The Russell 2000, an index of small cap stocks is still
much weaker relatively speaking. So, while the SPX is making new highs,
the RUT hasn't even recovered half of what it gave up in selling since
As we head into June, we have some interesting signals to watch. We need
to watch that overhead resistance that the SPX is currently sitting at.
A further move above that resistance without some kind of a pullback is
fairly bullish. Also, watch the VIX, which is currently near 2 year
lows. The combination suggests there MIGHT be a pullback in the first
few weeks of June. I believe we're due for a
pullback but it's not clear
just how much of a pullback there will be. The SPX could come back down
and test the top side of the box it was in as 'old resistance becoming
I'm going to start planning some bearish trades and watch to see if that
overhead resistance gets breached at about $1925. As I said in the
Options Strategy Focus section, I'm going to keep my trades short term
so they will largely be the vertical spread variety. However, if I was
expecting a pullback and an increase in volatility as a result, what
would be a good strategy? Hint: It's a bit longer term in nature.
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.
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.
Back to the
table of contents
|I'm adding a new section to the newsletter. Feel free
to disregard if you aren't interested in product 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
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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
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.
- Understanding the construction and the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
Back to the
table of contents