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Success With Options - Monthly Review, Issue #66 -- June 2015 Edition
June 02, 2015

Welcome to the June 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.

Summer Doldrums? - June Newsletter

As we head into the summer months, the one has to wonder what we'll see in the market. Last year, the 'sell in May, go away' rule didn't really apply. We had a rather strong summer. Will this year be the same?

In this edition we'll tackle that question, answer an interesting question that was submitted by a newsletter subscriber and discuss options strategy.

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: Counter Trend Trading

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'd like to discuss counter trend trading or trading against the trend.

I've probably touched on aspects of this concept a time or two in the newsletter as well as in a live Web session I recorded last fall. When a market has calmed down and tends to be trending or maybe making smaller moves over say a 4 week period, a strategy like this can make sense. The essence of the concept is that you sell a bearish trade when the market has moved bullishly for an extended period of time and/or reached overhead resistance. Conversely, you sell bullish trades when the market has pulled back to a support level.

Of course, this approach has some risk in that you are taking a chance before you've seen the market actually switch directions. As a result, it may be that the market will continue to move against you. However, if you've waited for technical indicators such as support and resistance or an extended move away from the moving average, you improve your odds. In fact, for technical analysis, you effectively have a line in the sand. If the underlying stock, index or ETF crosses the line definitively, you may have a early exit to preserve your capital.

Honestly, the best strategy for this kind of trading is a short term strategy, such as the short vertical spread.  In fact, if done within a short enough timeframe, you may end up with an iron condor as you but the call spread on at the top of cycle and put on the put spread at the bottom of the cycle.

I've actually been using this technique now for several months. I find it has been a little bit easier to do this with shorter market moves than earlier this year when the average move week over week was much larger.

Let me just spend a little time on some of the details of the trade itself. I still use the same trading rules for the selection of the short strike. That is, I look for a short strike with a 65-70% probability of expiring worthless (that is, OTM). For those that don't have probability of expiring OTM on their trading platform, that translates to a delta of about .30 (positive or negative depending on whether call or put).

When the market was trending more strongly, I had a tendency to not immediately enter my 80% exit to lock in profit. The reason was that with risk on both top & bottom, if I was at risk of having my calls being overrun (for example), I was less willing to give back some of the credit on my puts (for example). What I often was able to do was close for $.03-.04 less debit or simply close the short strike, leaving the long strike on in case there was a sharp reversal.

For more information on technical analysis, check out the Technical Analysis page on the website and also have a look at the recorded Technical Analysis WebEx session as this strategy is mentioned.

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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!

This month, I received an interesting question related to one of the educational products I've recommended on the website.

Q:  I was wondering if you were still impressed with the Iron Condor course you mention on your site. Like many, I'm interested in iron condors and it seemed like you may have altered or tweaked your style based on what you learned from that course.

I want to take a bit of time to delve into this question. The pages the question refers to are the Options Education page site and specifically, the Iron Condor Course I recommended.

This is a pretty basic conservative iron condor strategy and is what I've referred to as a 90% iron condor. That's because the strikes that are chosen result in roughly an 80-90% probability of success. One other aspect to this strategy is that it has a planned exit to lock in profit, targeting about 80% of the initial credit. There's obviously a lot more to this but that's the basic idea.

What I like about the course is not just the strategy itself. I sometimes like to throw on an iron condor this way. However, the best thing about this site is the education you get on this one strategy. I cover some basic concepts on the strategy on my iron condor pages. However, this course provides a more robust coverage, including entries, exits, analysis, adjustments and more. Even if you don't end up using this exact trading plan, it's still good if you love iron condors and want to develop your own strategy.

I've actually traded a strategy similar to the one proposed in the course for years. Over time, I've adapted and added some of my own rules. I've also drifted to more of an aggressive technique that has roughly a 1:1 reward/risk ratio. I like to use these as well and will often put them on one side at a time to improve my chance of success. That said, I still love the various resources that are found on the site, including the e-books, tutorials and examples.

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.

I continue to be a little bit surprised by the resilience of the market.

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

"...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. ."

Here's how May played out.

Last month I drew in lines showing an ascending triangle pattern developing. This pattern usually resolves in a bullish way and can indicate a new bullish trend. Instead, what we saw as a bit of a peek above that resistance line around $2125 and then another sell-off.

Stepping back a little but, I want to point out that we've seen a long running up trend that really began back in 2012. Along the way, there have been some strong pushes up and some selling as well to create some wide swings. In fact, most of 2014 was made up of dramatic moves up & down but with the dominant trend remaining bullish. What I'm seeing in the last few months is much smaller moves, both up and down. Yet, the basic trend line remains intact.

I point all that out to suggest that we may well see a continued drifting upward as we head into the summer months. Don't expect the wild swings of the past - unless there is market-moving news. I'm thinking about such things as Fed announcements regarding the current monetary policy and potential changes that have been hinted at.

I will be continuing to trade as I have in recent months, which is to place counter-trend trades at extremes. By that, I mean I'll take bearish trades when we've seen the market cycle up away from the moving average and bullish trades near the up-trending support area. I suspect this will be a little more difficult if the market is making much smaller swings so I'll probably be trading much more cautiously heading into June & July.

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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