the June 2017 edition of this newsletter!
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on the the website and want more.
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Anatomy of a Trade Entry Part
5 - June Newsletter
|New highs heading into summer! It seems like the old trading adage;
"sell in May, go away" may not apply this year. Is there still time for
this to change? Is the market running out of gas?
We'll have answers to those questions, a continuation of Trade Entry
discussion, answers to your questions and more. 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
Options Strategy Focus: Anatomy of a Trade Entry - Planning the Exit
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials and
other topics related to options trading.
A subscriber recently submitted
newsletter feedback requesting coverage of trade entries and exits. As a
result, I've devoted
the 2017 newsletters to covering a series of topics on just that.
This month, we're focusing on planning the exit. For the overview, check out
Feb, 2017 article.
As important as all the other elements of the entry are, planning your
exit is just as important. The tendency of many newer traders is to put
a trade on assuming it will play out as expected. However, that's often
not how it works in reality. In this segment, I want to cover three
considerations for an exit and discuss several mechanisms or triggers
To Exit or Not Exit - that is the question
First, I want to mention that in most cases, you are not obligated to
exit your trade at all unless that is the means to achieve profit, as in
the case of calendar spreads. Many
trades, such as vertical spreads and
iron condors achieve maximum profit by simply expiring worthless.
That said, there can be several motivations for exiting a trade before
- Exiting to prevent loss - In this case, you often have a
maximum loss amount in mind. You might say; "I will exit when the loss
on this trade is $200". I used to employ this style of exit a lot more
frequently in my earlier trading days. However, as I looked at the trade
when all was complete, I realized that a good percentage of the trades
I'd exited because they had hit that threshold would have turned around
and profited. What I realized is that good money management in the trade
can offer a similar benefit without forcing me to exit prematurely.
- Exiting because you realize you're wrong - This type of exit
can be very good when you are feeling less certain of the market outlook
still want to place the trade. In this scenario, you might say; "I
think the SPY will go up and so I'll place a bullish order. However, if
it drops below the moving average, then I know I'm wrong so I want to
exit." This type of exit is a little different than the first in that
the indicators are more technical than simply trying to limit loss. It's
about using technical analysis to draw a line in the sand at which you
realize the trade you entered no longer makes sense.
- Exiting to lock in profit - Where the first two exits address
what to do when a trade goes wrong, this exit addresses what to do when
the trade goes right. Trades like calendar spreads, require a planned
exit. For example, you might say; "I'll close this trade when it's
achieved a 30% profit on my original debit". You can also use this on
trades that don't explicitly require a closing trade to realize profit.
You may have
read one of my many comments about exiting early (before
expiration) and the reasons why I do so. I happen to address this again
below in the "Answers to Your Questions" section. Without going into detail here,
I'd simply say that there is room in any trade strategy to have an exit
to lock in profit.
As you may have noticed in the list of motivations for exit above, there
are multiple triggers that can lead to an exit. Some of these are very
concrete and easy to automate an exit for and some are not. Triggers can
come in the form of an absolute stop loss amount, they can come in the
form of technical analysis and they can come in the form of a target
limit. Let's explore how to set something like this up in your trade
- Limiting loss - Most trade platforms allow you to specify
stop-loss triggers, even for spreads. Usually, this
looks like an exit
with a stop trigger. Often the default exit type is a LIMIT order, which
we'll get to shortly. You should be able change the order type to a STOP
order and set the amount to an absolute amount that will act as the
trigger. That trigger will turn the exit into a market order.
- Technical exits - These are often harder to turn in to some
sort of 'mechanical' exit. If you have a price level of the underlying,
many trade platforms allow you to exit as; "close this spread at market
if the SPY drops below $240". Using other technical indicators like
ascending support lines or descending resistance lines or even a moving
average are much harder to automate. Check with your broker to see if
this is possible.
- Locking in profit - As with limiting loss, there is a way to
use your trade platform to enter an order to lock in profit. It's often
referred to as a LIMIT order.
This will behave differently if your net
order is a debit or a credit. When you exit vertical spreads and iron
condors, you do so for a debit. Your limit order would look something
like; "exit when the cost of the debit is less than or equal to $.09".
In the case of a net credit exit as in the case for calendars, it would
look like; "exit when the credit for selling this calendar spread is
$1.90 or higher".
- Combining exits - That's all well and good, but what happens
if you want to have both a LIMIT order AND a STOP order? Most platforms
allow you to enter in both in the form of a ONE CANCELS OTHER (OCO)
order. What that means is you put the order in as a pair using the OCO
mechanism and when one triggers, the other is automatically cancelled.
Check with your broker to see if they support this powerful exit
Building an Exit Strategy
thinking about a particular trading strategy or trading plan you
build around a particular options strategy such as a vertical spread,
it's a good idea to build your exit into this plan. In other words, your
exit should be something you employ consistently in most cases,
especially if you are using an exit to lock in profit. That way, every
trade ends up having the same basic parameters for max loss and max
Of course there are times when the circumstance dictates a special exit
plan. This is often the case for me with technical exits. I don't always
employ them. I often only use them when I have a trade I want to enter
but I'm not 100% certain of my outlook -or- there is a VERY clear line
in the sand that can act as an early exit trigger signaling that I'm
I began this segment by talking about the fact that planning your exits
should be part of your entry.
You will find after a period of time of
consistently doing this that thinking about your exits will become
automatic. Remember, as many times as your trades go right, you only
need one or two trades to go wrong to wipe out the profit from a nice
series of successful trades.
For additional detail trade setup and analysis, check out the
Option Trading Strategies page on the
website. Also have a look at the individual strategy details because
much of the details of how you calculate risk and reward and how you
select strikes is covered there.
As always, please
send me feedback with any requests for topics or thoughts on what has
already been published.
Happy trading this month!
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!
This month I coincidentally had a question submitted about exits in
particular, which offers a nice compliment to the Options Strategy Focus
My question is how can I put a stop loss on a
credit vertical spread or iron condors? Does it work in both cases by x2 the
credit received? I use IB. ITS A BIT confusing , is it better to split the trades in 2 in case of an iron condor. and just put a stop loss on the short puts and calls , as
I don't want to be assigned? Also why should we take profits early if we know its going to expire out of the money.
A: Ok - there are several questions packed into just a few
sentences. Let me try to address each of them.
- Stop loss on a short vertical spread - Most platforms make it
pretty easy to enter a stop loss order. You simply have to determine
your target price. In the past, I've used the '2x' method where a set my
loss to be 2x my credit. The way that would work then is that if I sold
the vertical spread for $.50, I'd have a stop loss set for $1.00. To
enter on most
platforms, you simply select the trade to close, change
the order type to "STOP" or "STOP-LOSS" and then set the target amount.
That target amount acts as a trigger that will translates to a market
order when the cost to close reaches the specified trigger amount.
- Splitting an exit on iron condors - I've done this both ways. You
can have one order for the entire iron condor or you can close each side
independently. I believe I tend to do more of the latter these days. It
simply seems easier to do this with the market moving up and down. In
this case, you enter two separate LIMIT orders for each side of the iron
- Why take early profits - This is probably the most frequently
asked question I receive. The answer is that for me, it's better to lock
in profit and not have to have the trade open the final week of the
option's life. Gamma is really high in that final week,
wild swings of the option price. Sometimes I can get out on Monday of
the expiration week for a better price than I could by holding until
Thursday or Friday.
As to why close early at all... you really only need
to have a couple of trades that were going well all month go horribly
wrong on that last day or two before you realize that taking what profit
there is trumps holding on for that last $.05 of credit to drain off.
Put another way... I sell a spread for $.50 and over the month leading
up to expiration $.45 melts off leaving $.05 in remaining credit in that
final week. Do you hold onto that trade, risking the $.45 in unrealized
gain just to get that last $.05 or do you close early, happy to have the
$.45? Watching my $.45 disappear in the last few days of the trade on
several of my trades was enough to convince me.
I hope that answered your questions.
have any thoughts or suggestions on topics that should be added
to the web site or topics that should be covered in video, please use
feedback link or
contact me link to let me know.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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|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.
As we head into
the summer months, we're seeing a push to new highs.
In the May newsletter, I summarized my outlook as follows:
"So, what's next? Given this new bullishness, I'm inclined to expect more bullishness. However, we are also near the all-time highs established back in February. It's possible we might see one more test of the support around the moving average before breaking through to new highs. Obviously we'd need to watch support and resistance for any clues as to the next moves...."
Here's how May played out.
After all that, we saw the SPX just peek above the past highs before
selling off with just a slight scare when it closed below both the 30
day and 50 day moving averages. However, the following day saw a rally
to even higher highs.
Will this month defy the "sell in May, go away" adage? We're already a
couple of trading days into June and it does appear there is more buying
ahead. I'd be somewhat cautious that the market is fairly news-driven
but remain more bullish heading into this month. I suspect we'll see
some additional bullishness initially and then more pausing to digest
I've already entered some bullish trades and will look for an
opportunity to enter more. With volatility bouncing around the lows, you
may find it harder to get good credits on short vertical spreads and
iron condors. What other trades favor entry when volatility is low?
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.
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 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.
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. Many know this is my go-to strategy for
After watching the video, I'm certain you will understand why.
- Understanding the construction and how 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
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