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Success With Options - Monthly Review, Issue #31 -- July 2012 Edition
July 03, 2012

Welcome to the July 2012 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.

News Driven Market - July Newsletter

Welcome to the July newsletter. Wow! We saw the recovery of nearly all the prior week's loses in one day due to news that Europe may finally be getting serious about the financial crisis there. Is this a signal that the bulls have returned early from summer holiday? Will more news add additional volatility to the market? Read on...

As usual, I'll be reviewing my trade this month, talking options strategies, answering you questions and more.

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) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product


Trade Tutorial Summary

I had one trade remaining this month from an iron condor I entered in June. Some of you may have noticed that the number of trade tutorials has decreased quite a lot over the last year or so. This is partly because I've had less time to analyze, set up, and write up the trades.

In addition, since I've added the Facebook comment section to the tutorials, I've seen no comments being submitted. I had hoped this would be a much more interactive area - a place where trade ideas, questions, debates on entry & exit rules and so forth would be conducted. I'm left to wonder if this feature of the website is as valuable to visitors as I had hoped. Use the feedback form to let me know how you feel about this.

In the mean time, I will continue to do trade tutorials but probably not as frequently as before. Here's the trade I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Open DIA Iron Condor   This trade is still open but I've closed the put side of the spread. Is it time to consider an adjustment?

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. This month, I didn't have a trade that closed, however, check out the updates on the iron condor trade for insight into adjustments.

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

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Options Strategy Focus: Trading An Unpredictable Market

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. In past issues, I've talked about strategies, entries and exits, trading psychology and more. In this issue, I want address a topic many of you may be thinking about given this news-driven market.

My brother in-law first voiced what I think many people are starting to believe regarding the market. He said the market seems to be unpredictable and and appears to be 'rigged' by the institutional investors. Therefore, he doesn't feel safe having his investments in the market. There are two aspects of this question that I want to address.

  • Is the market rigged?
    It does appear sometimes that the market is rigged by the institutional investors. I'm not in a position to say for sure if it is or isn't. However, my feeling is that most investors (institutional or otherwise) are looking for direction in an economy that is largely floundering.

    I think this perspective comes from looking back at historical performance of the market and trying to determine where the market might be going next. The trouble is that we haven't experienced a period such as this in a long time - if ever. Consider that we are much more driven by world markets than ever before. I believe investors in general are searching for any useful information that would help make a decision but every day there are different and conflicting bits of information available. There's certainly no shortage of opinions on what it all means.

  • What should an option trader's reaction be?
    Regardless of whether the markets are 'rigged' or not, we as options traders are not constrained to making money only when the markets are up. At a time when markets can be up one day, down the next and back up the day after, what is an options trader to do?

    We have strategies that make money when markets go up, down and sideways. The trick is knowing when to select which strategy. Not too long ago, I did a series of articles in this newsletter on this very topic: understanding the character of various strategies and knowing when to to use them given short term and long term outlook.

    Right now, I'm favoring short term trades since trends seem to change in a period of weeks. What's the best short term strategy? Vertical spreads (bullish or bearish) are a strategy that tends to perform well in a fairly short time (weeks many times). You may have noticed I've been using a lot of these in the past months.

Be sure to review the newsletter articles again starting in October of last year. Also check out the Options Trading Strategies page to get familiar with the various strategies at your disposal.

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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 received a question about how to set up an OCO order in the thinkorswim platform.

Q: I like your way of exiting a vertical spread (by having both a limit order and a stop loss order). How do you set up the OCO order so that you can have a limit and a stop loss on the stock price?

A: First of all, this is a great question. Setting this order up isn't quite as straightforward as one would like. The simplest way to set the order up is to follow these basic steps:
  1. Enter the initial order to close the trade as a limit order for the target debit amount to lock in the 80%.
  2. Change the Advanced Order pull down to 'OCO'
  3. Right mouse click over the blue button just to the left of the order and select 'Create Duplicate Order'
  4. Change the order type to a 'Market' order
  5. Change the options for the order by clicking the gear at the far right  of the new order
  6. In the new dialog, under 'Order Conditions' click below the symbol (the underlying symbol should show up), click on 'method' and make sure 'Mark' is selected, click 'Trigger' and select 'At or above' (or 'At or below') and finally select 'Threshold' and enter the threshold amount for the underlying. Select 'OK' to save.
  7. Click 'Confirm and Send' and visually verify that you have gotten both parts of the order correct.
It's critical to make sure you practice this a few times in a virtual trading account before attempting on a live account.

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, it may change if the charts indicate something different.

Well, the first trading day of the month set the low and the last trading day of the month set the high. Does this mean the bearish slump is over? Last month I summarized my outlook as follows.

"...The upshot is that I think we've moved to a more bearish to neutral outlook. HOWEVER, notice that we're currently sitting at a fairly strong level of support (combined with sitting at the 200 day MA). It's possible we may see a weak bounce from here that I think may be an opportunity to sell bearish trades. It would take clearing the level above $1330 to cause me to be more neutral to mildly bullish. "

Here's how the month played out.

It did turn out that the support level held and we saw a pretty strong bounce from there. The trouble with this is that sitting at the recent highs, it isn't clear yet if this is the end of the run or just the beginning. We had a nice little pop on Friday due to some promising news out of Europe.

If we see a push over the current highs (around $1365), that would make higher highs and there may more bullishness all the way up to $1400. We could also see some consolidation for a week or so, which might lead to a stronger continued bounce.

How does this affect my trades? I currently have a call spread remaining from the iron condor trade. I'm looking at an adjustment currently to protect the up side. In addition, I'll be looking for another trade of a more bullish nature. Given the short term nature of the current trend, vertical spreads are the logical choice.

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 Product

I'm adding a new section to the newsletter. Feel free to disregard if you aren't interested in sales type information.

For those that aren't aware, I recently released the first 'for sale' video. The title of this first video is appropriately "An Introduction to Options Spreads". I say it's appropriate because this will be the first of several videos I'm working on that really are a labor of love. My goal is to provide a more in-depth and comprehensive coverage of options spreads.

To that end, this first 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.

Expect more videos to be released in the months to come.

For more information or to purchase the video.

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