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Success With Options - Monthly Review, Issue #77 -- June 2016 Edition
June 04, 2016

Welcome to the June 2016 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.

Are we on the up swing? - June Newsletter

It's beginning to look like the market is back in near term bullish territory. It's maybe a little early to call it, but one has to wonder if we're finally going to see some stability in the market. Given that, will this be a summer of buying, selling or more up and down?

In this edition we'll tackle that question, discuss a rookie mistake I recently made and answer a question that was recently submitted by a reader. 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: Rookie Mistake

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 need to make a confession. I made a rookie mistake and would like to share it in hopes you don't make the same mistake. I've been an advocate of sometimes buying back a short option in vertical spreads (or iron condors) - especially when you can do so for $.05 and avoid the commission at thinkorswim. Sometimes though this can come back to bite you.

The setup
Last month, I put on an iron condor (May 2, 184/182/178/176). My plan was to take advantage of the wild up and down movements to close the opposing side of the trade. This was actually going fabulously on the call side. However, as we got closer to expiration, the put side was at risk. In fact, it had gone in the money (ITM) several times. On one case where the DIA moved above my short put far enough, I decided to buy back one contract of the short 178 put leaving one long 176 put uncovered and the remaining vertical spread.

This had the benefit of reducing my assignment risk and freeing up margin. As we got closer to expiration day, I realized this spread was never going to expire OTM, so I closed the spread for roughly a $2 debit. This left me with only the long 178 put but thinking I was out of the woods as far as my risk in the trade, right? Can anyone see the mistake yet?

The mistake
While it's true the risk of assignment before expiration was removed, I still have a situation where my long put will be exercised on my behalf by my broker if it's ITM by a penny or more on the Saturday following expiration Friday. My mistake was that when I closed the vertical spread, I breathed a sigh of relief and walked away, forgetting that I needed to come back at the end of the day (before market close) and ensure it wasn't ITM.

Guess what? The market sold off right at the end of the day on Friday and my option expired ITM by about $.50. Had I been on top of the trade, I could have closed the put for a profit, thus reducing the loss I had to take on the vertical spread I closed earlier. Instead, I woke up Monday morning finding I'd been assigned, meaning I had to 'put' or sell 100 shares of DIA I didn't have. To make this work, the brokerage basically invokes an order to sell short 100 shares of DIA. To make things worse, the market rallied first thing in the morning. So now, I'm not only short 100 shares, that position is losing money.

To get out, I had to buy to close the short position. The result then is that I sold 100 shares @ $176 by virtue of my brokerage exercising my ITM $176 put option. I then closed the position by buying to close at $177, meaning I lost $1 per share on that transaction. For those who may not have followed this, the premise selling stock short is to sell high and buy low. You effectively borrow stock from the market, sell it and then buy back at a lower price. This is quite the opposite of 'buy low, sell high', which is what most people do with stock.

Lessons to learn
The moral of this story is that with options, you need to keep an eye on them at expiration. If you are OTM, there's really nothing to worry about AND that's the whole point of premium selling strategies for the most part. Let me just close with a few additional points that I hope you can add to your thinking process.
  • Always, always close your ITM positions before expiration
  • Always monitor your open positions as you approach expiration on the chance that an OTM option becomes an ITM option right near close
  • Be very careful when deviating from your trading plan. You really should never do this but if you do on occasion, it calls for extreme vigilance and awareness of the risks.
  • Be careful of getting sloppy - really my big mistake on this trade. The more experience you have, the easier it can be to skip steps and start to pay less attention.
  • Money management - Even though this trade lost money, it didn't lose more than my planned max loss. Also, my other successful trades balanced this out leaving me with a small profit this month. I can't emphasize enough that money management is critical to avoid getting wiped out by a mistake or an unforeseen market move.
Hopefully these lessons can be added into your trading processes. I know they will be more a part of mine.

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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'm paraphrasing a question I received from a visitor to the website.

Q: I'm relatively new to options trading. Do you have any information or training on beginning options?

A: I honestly have very little basic or beginning options information on the site. When I initially created the web site, the goal was to provide something for individuals wanting to learn more about premium selling strategies like I prefer to trade. The assumption was that the audience would already be familiar with the basics. And frankly, I wanted to get right to talking about my favorite strategies.

Now that the site has stabilized to some extent, there is potentially an opportunity to do more. For the record, there is some material but it's not very extensive. You can find this at:

One other great resource I used in the early days is at the Options Industry Council. This is a group who's goal is to provide education to create informed options investors. They have some decent material on basics at: I think this is a really great starting point.

I would be curious if readers of the newsletter and visitors to the website would find this kind of information valuable. I have been considering possibly creating a set of beginning options videos (similar the short vertical spreads videos). If you have opinions on this, please contact me at When you do contact me regarding this, please include some of the following details.
  • Where are you at in your learning journey with options?
  • What is your preferred learning style (reading, videos, hands-on)?
  • Which of the following topics would make sense?
    • What is an option (i.e. how is it different from a stock)?
    • How options are priced
    • How to buy/sell an options - what does it mean to be short or long an option?
    • Basic option buying/selling strategies (ex long call, long put, covered call, etc)
    • Factors affecting profitability of options spreads
    • Others?

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.

The market made a little progress over the month as it experienced first additional selling and then a subsequent rally.

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

"...What we saw last week (the first week of May) was additional selling to a low and consolidation area established in the early part of April. This itself could act as support as Friday's action suggests. If that fails, there are two additional levels of support. It's possible the 200 day moving average might act as support around $2012. It's also possible that the first fibonacci level might also act as support closer to $2000. On the upper side, there are pretty much no real areas of resistance until we get back to the November high around $2115. Given the recent selling the odds may favor at least a short term rally. The next logical movement is to attempt to break through the upper resistance area. I'd expect that to be the move in May...."

Here's how May played out.

We didn't see the rally I had initially expected. Instead, there as a move to return nearly to the 200 day moving average before finding support. From there we are now back at the highs established in mid April. Notice on the way down, there was a clear pattern of lower highs and lower lows. This was broken the last week of May with a higher high. Has the tide turned? Let's look at the evidence.

With the higher high made back on May 25, I begin to see a stronger possibility of additional buying in June. There are some head winds though, including the high around $2110 that the SPX has failed to get past. It wouldn't surprise me to see some choppiness over the next week or so as the 20 and 30 day moving averages catch up and then have these act as support to propel the SPX through that overhead resistance. Look for higher lows to be established followed by new higher highs, which now need to be above $2100.

I took the opportunity to enter my bullish trades a week or so back. Pull backs may offer additional opportunities to enter bullish trades. Opportunities may exist to enter VERY short term bearish trades above the overhead resistance but I'd be very careful of any break above $2115 because that will likely signal another leg up and your bearish trades will get crushed. As you can tell, I like to trade the exhaustion of a move (a contrarian strategy). However, this can be very tricky and I've been bitten a few times of late when I didn't pay attention to the trade.

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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