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Success With Options - Monthly Review, Issue #18 -- June Edition
June 03, 2011

Welcome to the June 2011 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.

Sell in May, Go Away? - June Newsletter

Welcome to the June newsletter! You may have heard the saying "Sell in May, go away", meaning major investors close a lot of positions and there won't be much action until Fall. That may or may not be true for holders of stocks and ETFs, but what about those of us who sell option premium? What can we do to take advantage of the potential market churn over the summer? Read on...

In this newsletter, I'll be reviewing the month in more detail and providing my outlook for June. Also, I'll update you on the video, review some trades, talk options strategies and more.

Thanks to those who have provided feedback on the newsletter in the past. However, I haven't received any recent feedback though. Keep in mind I do value and take into consideration feedback on the newsletter content and on ways I can make it more valuable for the readers.

Please feel free to voice your opinion. 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) New on the site

2) Trade Tutorial summary

3) Options Strategy Focus

4) Answers to your questions

5) Options Outlook

What's new at Success With Options

I entered May with a number of active trades and all but two are closed. Those that I closed were closed for a profit.

The big news is that I've completed the video!

I was able to work on the final production to get this thing packaged up and ready to deliver. For those new to the newsletter, this video is the long awaited 'Introduction to Spreads' video, which I initially made available as an early access edition back in November 2010. This edition is the final product incorporating feedback and extended to provide additional detail.

You can find more information about the video and purchase on the website at As promised, newsletter subscribers can enter a discount code: newsletter30 to receive your 30% discount. The discount offer will be available for next 2 weeks (through June 16).

As to the trades I opened and closed, see the trade tutorial summary below for additional details.

Trade Tutorial Summary

I had a few more trades going this month. So far, all trades closed profitably. Here's the complete list of trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed GLD Diagonal spread $15 With such a nice profit locked in, I let this one almost turn into a loss with the sell-off in GLD
Closed Put Calendar Spread $135 I thought this one was going to be a loss but the sell-off in SPY helped this trade.
Open IWM Vertical Spread    
Open Spy Vertical Spread    

Win or lose, I find that I learn something from every trade. I want to include some key thoughts/lessons learned from the past month's trade tutorials here. Here are the nuggets from last month's closed trades.

From the GLD diagonal spread:
"... The big lesson here is to have clear plans for exit and stick with them. I should have probably closed this trade earlier (shortly after buying back the short strike) as it could have gone badly for me. Fortunately a rally gave me a chance to get out of the trade with a a small gain. Now that we're more than a week past the date I executed the closing trade, it is now 'obvious' that had I stayed in, I might have done better but you never know that when looking at the hard right edge of the chart."

SPY put calendar spread:
"... In concluding this trade tutorial, I want to go back and discuss the strategy I employed of closing just one contract earlier when the trade was showing some profit. I mentioned in the previous update that the decision to close early to lock in some profit poses a risk of missing out on future gain. The benefit of splitting this decision and closing a portion of the position means I can both close to lock in profit and stay in the trade to realize additional gain. Of course I would have made more had I remained fully in the trade but hindsight is 20/20. "

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

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Options Strategy Focus

I have modified this section a little bit to focus more deeply on the details of some of the options strategies I use in the tutorials. In past issues, I've talked about how to select a strategy and using technical analysis to improve timing of entries and exits. In the last issue I talked about position sizing. In this issue I want to focus on another topic related to trading strategies. This month, I'll discuss the use of a trading journal.

As I've mentioned on the website, a trade journal is a way to maintain an ongoing discussion regarding a specific trade. Put another way, each trade I enter should have a trade journal that allows me to track the history of the trade as it unfolds. The value of a trade journal is that it offers a way to review the trade on entry, during the trade and any time after. It contains a snapshot of the thought process on each entry.

What should be part of a trade journal? There are no set standard items but I here are some suggestions.

  • Entry details
    I think it's critical to capture the entry parameters including what trade was entered and expected results, as well as a discussion of the rationale of the trade.
  • Ongoing trade decisions
    It's a good idea to periodically review the trade and log thoughts on the progress of trade. This is a great opportunity to record thoughts on the trade; why stay in the trade, why exit, why make an adjustment - or why not.
  • Closing results
    At the end of the trade, one of the key items to capture is a summary of the results. Was the trade profitable? Additional items to capture might include ROI, profit amount, affect on portfolio, etc.
  • Thoughts/evaluation of the trade
    In addition to raw numerical results, it's also good to capture post trade thoughts. You might include thoughts on what went right in the trade, what mistakes were made, any additional lessons learned or observations.
Obviously you can tailor the journal any way you want. These are simply my suggestions. If you take a look at the trade tutorial pages I've used on the website, these attempt to capture many of the essential elements of the trade journal. In fact, I patterned the template after a trade journal since that's one of the primary goals of doing tutorials.

I'd like to make one last point regarding this topic related to journal format. The actual format isn't as important as having a consistent format and consistent usage. However, let me just list a few possible formats. One might (as I did initially) have pre-printed journal template that I hand wrote my notes on. Another format I've used is to record the trades in a MS Word document and save to my local file system. Alternatively, one could be more elaborate and write each journal as a web page that can be viewed collectively. Possibilities are really only limited by your imagination. Get out and start using a trade journal.

The trade journal is part of a larger set of topics related to option trading systems. Feel free to visit the website and dig deeper!

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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!

Here's a question I've received recently on preparing to trade full time.

Q: How much do you think I would need invested to make a few thousand a month trading the options strategies you discuss?

A: This is a bit of a difficult question to answer as there are so many factors to consider. I have to begin by stating that I can't give any kind of direct advice in this regard. What I can do is provide some factors to consider.

The critical factor to consider is what you (insert your name here) expect to achieve as an average  monthly return. This is a difficult number to come up with until you've been trading for some time. Once you come up with this number, it's pretty easy to work backward.

Let's start with some assumptions, which may or may not be correct. Let's assume you are experiencing an average return on risk of 20% (taking into consideration typical losses). If you wanted to make just $1000/month, you'd need to risk $5000. Next, you need to decide how much you want to risk per month. It has to be an amount you can live with if the entire risked amount is lost. Let's say you are willing to risk 15% of your portfolio per month, you'd need roughly $33,000 per $1000 you expect to gain. That's an estimated 3% monthly gain on your portfolio by the way. Even that estimate may be too liberal.

So now, let's consider how much you want to make on a monthly basis. If you wanted to make approximately $4,000 per month, you'd need about $132,000 in trading capital and risk a total of $20,000 monthly! With that said, you should NEVER put all your trading capital into options trading. You should really have an equal to larger percentage of your capital in other investment types such as stocks/ETFs, foreign currencies, commodities, etc. This creates a more balanced overall portfolio that is less subject to monthly market fluctuations.

I want to conclude this discussion by re-stating my earlier point. Before you can begin any kind of plan to trade full time, you must first establish a track record (longer than a few months) that will allow you to project a future gain. There are other factors to consider as well. What reserve cash do you maintain that allows you to weather the storms of flat to losing months? Depending on your standard of living, it would be good to have a pretty decent reserve ($100k - $200k) that isn't affected by market cycles such as we experienced in 2008/2009.

If you would like to submit  a question, comment or feedback on the website, please visit 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, it may change if the charts indicate something different.

May seems to have been a selling month pretty much from the first day of the month. The real question is whether June will be any different. Last month I summarized my outlook as follows:

" Notice that it appears to have formed a reverse head & shoulders. If that's the case, then the projected target price for the SPX would be $1380 or so.... Given the strong move recently, I wouldn't be surprised to see some sideways trading while the market consolidates before making another push up. I also wouldn't be surprised to see the $1340 level tested in the process. If this level fails to act as support, my outlook would change to be more bearish short term. "

Here's how the month played out.

Notice how the SPX has been in a downward trending channel for the last month. Just a few days ago  (actually the last day of May), the SPX attempted to break out of this channel only to fall back in. So is this a fakeout? Time will tell. In the meantime, we have the next level of support right around $1300.

What I expect for the next month or so is a lot of volatility. We've already seen the VIX jump up a little bit. I anticipate with some of the traders going away for the summer, the volume will be lighter and news may cause more churn with larger buying and selling days. Now that we've broken the $1340 level I mentioned last month, I wouldn't be surprised to see $1300 tested.

As far as my current trades are concerned, I have two bullish trades on at the moment. These may prove to be the wrong kind of trade to have on if we see $1310 - $1300 being tested. As a result, I may simply close them and look for more neutral to bearish trades. In fact, I'm considering a neutral iron condor trade for tomorrow or early next week. This is the perfect kind of trade to take advantage of increased volatility and market churn.

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

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