the July 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
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.
Brexit! - July Newsletter
|Wow! What a month we've had. If you erase the last week or so, it
wasn't too exciting. However, there was indeed some excitement
surrounding the results being announced of the UK decision to exit the
European Union. What does that mean for the remainder of the summer?
In this edition we'll tackle that question, explore the emotions surrounding a
move like last week
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
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: Surviving Brexit and Beyond
| 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.
If you missed the
Brexit vote and the related market gyrations, you must
have been asleep. In this issue I want to talk a bit about this move and
similar moves the market may make and how it affects your trading.
What just happened?
A few weeks ago, a public vote took place in the UK to determine whether
the UK should remain or leave as a member of the European Union. I won't
go into the fundamentals of what this may or may not mean for markets.
The important point for traders is that an inflection point happened
that triggered a market moving event.
In retrospect, we see that two days of heavy selling was followed by 4
days of buying to leave us nearly where we were before. What I want to
focus on though is the emotions you feel as a trader with positions in
play watching this move play out.
How do you respond?
If you were long on Thursday evening (June 23), you were probably
feeling pretty good. However, you probably woke up Friday morning seeing
the DOW down 500 points or so. You may have been thinking "Oh my God,
get me out of these trades!". I remember a similar situation quite a few
years back when I was first trading. The market made a similar move and
in on trading day, I went from profitable trade to potential max loss.
It was a heart-stopping experience for me and it made me behave in very
irrational ways. I actually lost more money as I ran around trying to
'fix' my losing trades.
Looking back, I think it was a good experience for me to gain
perspective. Markets go up and markets go down. Sometimes they do so
very rapidly. Fortunes can change in the space of a day or two. Fast
forward to last week. When I got up
Friday morning and saw the markets,
I was initially shocked. In fact, I was resolved to the fact that I had
a few trades that would lose money. However, I've been trading long
enough that I'm not too surprised to see the kind of behavior we had
following the 2 days of selling. I wasn't counting on it but I also
I believe there needs to be some sort of emotional detachment that
allows you to be less emotional about trades. I've had quite a few
losing trades between my first sell-off and this most recent one. I
believe being more detached allows you to make more rational decisions.
For example, instead of focusing on the loss I may be facing on a few
trades, perhaps I could view the selling as an opportunity to get some
new trades on at a good price. Better still, those few trades that were
at risk of max loss last week now appear to be profitable again.
What can be learned from this most recent event?
How did you do last month? Was this your first major sell-off event?
What did you learn? As you can see, there is so much more to options
trading than just mastering the mechanics. That's the easy part.
Learning to master your own emotions as you trade is the critical part.
I hope this discussion has raised some points for you to consider as you
grow in your mastery of options trading.
- Emotional detachment is critical - Fortunes are not made or lost on one or
two trades. It's actually good to experience some losses to get used to
the feeling. Once you have a few, you are able to put things into
perspective. I'm not suggesting you should take a loss you can avoid,
but being willing to face a loss allows you to stay the course.
- Money management is key - The reason I could be so emotionally
detached is that I had 3 trades that were facing max loss but that would
not kill my account. It would suck but it wouldn't blow up my account.
- Anything is possible - We constantly look at the 'hard right
edge' of the stock chart. It only tells us what is at the given moment.
So many times, we get sucked into assuming what happened today will
continue tomorrow or hoping that what happened today will be
tomorrow. The truth is we don't know, so plan accordingly (see the prior
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'm paraphrasing a question I received from a visitor to the
Q: What could make an ETF call option, with three months left till expiration and a strike price that's in the money, actually go down in value even as the ETF share price increases?
A: This is a really great question and one that gets at the heart of what makes options tricky. Options are priced on a number of factors, including price, volatility, interest rate,
time until expiration and so on.
In terms of pricing, options have two components. The intrinsic value - the amount the option is ITM and extrinsic value - the amount of 'fluff' that is added to the option price that accounts for the additional price over and above the intrinsic value.
Realize that extrinsic value can be affected by a number of things besides price. Volatility going up or down could have a fairly large affect. Time until expiration also can be a factor. Imagine an SPY call that is $1 ITM but also has $1.25 in additional premium. That option is worth $2.25. As time goes by, even if the underlying ETF doesn't change, the option will drop in value as the time premium part melts off. Also, if volatility drops, the extrinsic value will be affected - even if the underlying price doesn't change.
My guess without knowing many details is that as your underlying ETF was increasing in price, the time premium and volatility components
were causing the extrinsic value to bleed off. If that happens faster than the intrinsic value is increasing due to the rise in the ETF value, then you would experience the option value drop you described.
One of the reasons I created the "Introduction to Options Spreads" videos (available here:
http://www.success-with-options.com/options-trading-videos.html) is to explain some of the pitfalls of trading long options. I prefer to be the one on the selling side benefiting from the time premium melting off.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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.
expectations may change if the charts indicate something different
during the month.
As I alluded to at the beginning of the newsletter, we've had a rather
wacky month. If you had gone on vacation at the beginning of June and
come back last Friday, you'd have thought not much had happened. However
we certainly had a week last week that is one for the record books.
In the June newsletter, I summarized my outlook as follows:
"...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...."
Here's how June played out.
As I had hinted, there were some head winds that would pose a challenge
to moving higher. As a result, we had some selling early in the month
followed by a rally to those same highs. The results of the
Brexit vote were announced causing the market to sell off and then
rally back nearly to where it started. The result is that we are pretty
much at the same point we were last month at this time.
What does this all mean for July trading? My outlook is pretty much what
it was last month. Realize that we are very close to the recent highs
around $2120 and the all time high around $2130. I wouldn't be surprised
to see a little hesitation before pushing up through those levels. Watch
this area very carefully. If we fail to break this time, I fear we may
see some neutral to bearish trading for a while.
Despite the craziness of the last week, I'm about to close out my
remaining July trades for a profit and looking for new entries. For now,
I'm looking at short term selling as an opportunity to get long
positions (short puts and long call diagonals, etc). I'm also exploring
short call spreads as we near the current highs.
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
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 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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table of contents