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Success With Options - Monthly Review, Issue #78 -- July 2016 Edition
July 04, 2016

Welcome to 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 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.

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 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: 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 wasn't surprised.

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.

Lessons to learn
What can be learned from this most recent event?
  1. 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.
  2. 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.
  3. 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 reversed tomorrow. The truth is we don't know, so plan accordingly (see the prior point).
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.

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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: 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: 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 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.

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 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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