the July 2013 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Summer Thrills - July Newsletter
to the July newsletter.
In May we saw some fairly heavy selling but yet the month itself was
another gainer making 7 straight gaining months in a row for the S&P. This
last month (June), we've
seen a bit more of a roller coaster and the first negative month in
quite a while. What does July hold in store? Will we see more buying?
Selling? Flat? Read on...
As usual, I'll be reviewing my trades this month, talking options
strategies, answering your questions and more.
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.
Trade Tutorial Summary
|I have not entered any trades for a while but finally did so last
Friday. You may have noticed
in general I'm
up as many tutorials as I have in the past due to time constraints. I'm willing
do do more if folks are interested but I need to hear from subscribers
to know if this is valuable.
SPY Put Vertical
I just entered this trade after going a while without any trade
tutorials in place. We'll continue to monitor based on the rules I
have in place for the trade.
I do want to encourage you if you are a fan of the trade tutorials and
have a Facebook account to participate in the tutorials by commenting,
asking questions, or suggesting alternative strategies. Seriously, I think the
tutorials would be much more valuable if folks weighed in on the trades.
Do folks find this section helpful?
Let me know.
In the mean time, I will continue to do trade tutorials when I find time and the
opportunity arises but not as frequently as before.
For more information on all of the trades I've posted as
tutorials, click here
Back to the
table of contents
Options Strategy Focus: From Strategy to Trading Plan
| 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
want to talk a little about getting from the point of understanding a
trading strategy to having a trading plan for trading that strategy.
This is an important distinction. Let me take some time to outline what
A strategy is a way of constructing a position such as a short
vertical spread, iron condor, calendar spread, etc. It's really more
about the mechanics than the how & when of the trade. I might trade
the short vertical spread strategy but how do I select my strikes? When
do I enter the trade? When do I exit? What adjustments will I make? How
do I determine how large of a position to take? That's really what the
trading plan is all about.
When I was first learning to trade options, the frustrating thing I
found was that no one could tell me exactly what I should use as my
criteria for the above questions. Then I realized that this is a very
subjective process. It's important to know that there are many different
choices that must be made that are all factors of the trade. Let me give
you just one example.
For a short vertical spread, I have many different entry possibilities.
I could enter the trade on a technical indicator such as a bounce off
support or resistance. Alternatively, I could enter at any arbitrary
time. Which approach should I use? That depends on factors such as how
much time I have to devote to trade analysis, my objectives for return
per trade and success rate or some other driver for me personally. So
you can see that this is really a very personal decision.
The first step to creating a trading plan for a given strategy is to
determine all the choices that are available to you as a trader. The
next step is to begin to identify what rules you will you employ
regarding those decisions. The
rules you come up with need to be very specific. A good measure of the quality of your
trading rules is whether you could give the rules to another trader and
have them place and manage trades the same way you would. The final step
is to write them down and print them out so that you can look at them
all the time.
As a final component, you should be using a trade journal to capture
your trades. Use this journal as a way to keep yourself accountable to
follow your rules. If you faithfully log every decision to act or not
act (and why), you'll soon begin to see how consistently you follow your
Once you begin to identify and consistently follow your rules, you'll be
surprised at how consistent your track record will become. I don't
promise that following your rules will give you a stellar return. That's
something only you can determine via back testing and testing out the
strategy over time. However - this is an important step in your
journey toward successful options trading.
In the recently released video,
Mastering Short Vertical Spreads
I talk quite a lot about what choices you have for one specific strategy
- short vertical spreads. In addition, the video covers topics like selecting rules to fit
your style, creating a trading system from those rules and back testing
to validate the rules. Additionally, you can visit
the website at the
Options Trading Systems page where you will find useful but more
general information about trading rules, trading plans, journaling, etc.
Stay tuned for the next options strategy focus as we return to more
strategy related topics. I'm always looking for additional topics that are
helpful to readers. Send them in via
the newsletter feedback page
Contact Me link.
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!
Q: I notice you sell
your short vertical spreads with the short strike fairly close to the
current price. I've seen other strategies where you pick the short
strike having a delta of around .10. Isn't your approach more risky?
A: I've been asked about this a number of times so it's
worth taking time to answer that here. How convenient that I had already
planned to cover part of this point in my Options Strategy Focus section
anyway. Answering this question will give me a chance to provide a
concrete example of what I was talking about regarding different choices
that can be made around one specific trade element.
First, realize that for this and any strategy you are considering there
are many different choices available to you for how you pick your strike
prices. In the case of the short vertical spread, it comes down to how
aggressively you want your trade to be as to how close to pick your
strike. While I'm at it, I want to just take a moment to acknowledge
different ways to pick the short strike (sort of a freebee from the
Mastering Short Vertical Spreads video I just released)
- Selection based on probability of expiring out of the money - The point
here is to pick a strike that has an acceptable probability of expiring
worthless. Therefore, this probability really represents the probability
of success. Since we can't have both a high probability of success and a
high return on risk, choosing an acceptable probability is a matter of
both preference and back testing to ensure consistent returns.
- Selection based on short strike delta - In a way, delta can be a proxy
for probability. In this case, delta can be thought of as a rough
approximation for the probability of expiring ITM by a penny or more.
Therefore, it's the opposite of the probability of success. To get
probability of success (approximately), you'd subtract the delta of a
particular strike from 1. Therefore, if you were considering a delta of
.1, that means you a probability of success of 90% (1 - .1 = .9 = 90%).
- Technical analysis - This approach tends to be a little more
subjective. Usually what this means is picking a value below support for
a bullish trade and above resistance for a bearish trade. The idea is to
choose a short strike you believe through technical analysis has a high
probability of not being hit.
None of this really answers the question, which is why I choose to
select my strike prices a little more aggressively than others might or
than what you may have heard about before. Here's the point I want to
make - and it's one I often try to make in both the newsletter and in my
Every choice is about tradeoffs. Think of probability of
success and return on risk as two people sitting on opposite sides of a
see-saw (some call it a teeter-totter). When one person goes up, the
other always goes down. There's no way around it (unless the board
breaks). That illustrates is that you are
always giving up one factor to improve the other. The choice you make will be driven from a number of factors that are very personal, which is
why I can't just spell out a set of numbers here. Let me wrap up this
answer with the factors I consider worth considering.
I hope that gives you a better understanding of why I use the
approach I do for strike selection. I've gone through the process over
many years of trading of determining a rule that I can live with for my
short strike selection. It works for me. If it also works for you,
great! However, feel free to come up with your own, test it and then
implement and monitor for a while. If necessary, make minor
modifications and repeat the testing process.
- Rate of winning trades - In the end, you have to figure out
how many winning trades you need to overcome one losing trade. The more
conservative the trade, the lower the reward risk. That means you risk
more per dollar you stand to make. Can your trading plan sustain several
losses in a row? How many successful trades are required for every
losing trade to just break even?
- Money management and exit rules - This will play a huge part
of how the prior point plays out for you. If you are taking larger risks
in order to make a trade 'worthwhile', it means one bad trade can wipe
you out - not to mention make you a very emotional trader. Money
management and exit rules determined ahead of time can help make you
more objective and can improve your win/loss ratio to some degree.
- Stomach for risk and losing in a trade - Finally, you have to
assess your own tolerance for loss and risk. How do you feel when trades
become losers? If you take a more aggressive position, it means you will
have more losing trades. That's just the way it works. However, when you
are right, you make more per trade. If you have a harder time accepting
losing trades, you may feel compelled to be more conservative. That
means your probability of success is higher but also means your risk per
trade is higher. That means you must adopt money management and trade
management rules to compensate.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at
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.
As such, expectations may change if the charts indicate something different
during the month.
We started to see the hints of selling back in May. This month we saw
more follow through. While we did see our first official negative month,
we're still up nearly 10% on the S&P for the year.
Last month, I summarized my outlook as follows.
I wouldn't be surprised to see a little more selling down to the 30 day moving average, or even farther down to the support level established by
the prior breakout. This should be around $1600 or so. It also may be that this selling will be a trigger for some sluggishness as we head into
the summer months. For now, I'm going to treat this as a pullback and an opportunity to enter bullish positions. However, I will wait a day or
two more to see what develops.."
Here's how the month played out.
It looked initially like the 50 day moving average was going to act as
support as the S&P fell through the 30 day MA and then rode the 50 day
MA up for a few days. However, we saw another round of selling that
sliced through the 50 day moving average and down to a level of support
that is built off the congestion area established back in the
March/April timeframe. Coincidentally, this corresponds to the 38.2%
fibonacci retracement from the November low to the May high.
It still remains to be seen whether this will act as ultimate support or
not. I see this as a fairly thick line in the sand. To break the level
around $1560 means we could see even more selling down to the $1520-25
level. We could also expect more erratic buying and selling days over
the next few months as the summer plays itself out. That will contribute
to additional volatility and volatility is good for premium sellers.
By the way, even with the selling, some of my own put spreads worked
out just fine. There were a few days toward the end of the options cycle
when I was a little worried but things worked out. I just recently
entered a SPY put spread. I think it's a good position so far as long as
the S&P stays above that $1560 level. I may be looking for a
corresponding call spread to create an iron condor as the S&P reaches
the highs around $1650.
By the way, if you find this kind of up & down market hard on your
stomach, you may just be better off sitting in cash. Take a vacation and
enjoy the rest of the summer!
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 sales type 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
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.
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
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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table of contents