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Success With Options - Monthly Review, Issue #19 -- July Edition
July 03, 2011

Welcome to the July 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.

Summer Blahs or Summer Bounce? - July Newsletter

Welcome to the July newsletter! June certainly gave all indications of adhering to the 'Sell in May...' adage. However, the last week nearly recovered all the losses of the earlier part of the month. Will July be more of the same or will it spark a new rally? Read on...

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

Thanks to those who have provided feedback on the newsletter in the past. However, I'm always open to receiving feedback. 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 June with a two active trades and one still remains. Read on for details of the trades. Last month I announced the release of the 'Introduction to Options' video. Since then, I haven't done much  this month with new content.

As this month kicks off with a US holiday, I thought I'd offer a special on the video in honor of July 4th. You can find more information about the video and purchase on the website at Simply enter the discount code: july04 on checkout to receive your 20% discount. The discount offer will be available for next week (through July 8).

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. The one trade I closed was a losing trade. Here's the complete list of trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Close IWM Vertical Spread -$296 This trade is my first losing trade in a while. Unfortunately the June selling got the best of this trade.
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 IWM credit spread:
"... I could have potentially taken action given the indications of breaking support. I said I might close on a break of $84, which happened not once but twice. In retrospect, the failure to stay above $84 might have been a good indicator of an exit. However, I want to be careful of complicating my basic strategy until we see whether it proves to be a better strategy."

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 recent issues, I've returned to topics more directly related to the trading systems. In the previous issue I talked about using a trading journal. In this issue I want to focus on related topic, which is the use of a trade log.

Like the trade journal, I feel that keeping a trade log is an important part of any trading system. The trading log is a little different in that it's purpose is to provide a long term history and summary of the trades. In other words, goal is to get an idea of the trend of your trades.

There are a number of details that are critical to track and some items that are more optional and personal preference. Let's start with the required items.

  • Entry date
    While it may not seem important, entry date helps identify the trade as well as a providing a starting point for determining the duration of the trade.
  • Entry price (credit or debit)
    This represents the starting point in the trade. I typically capture this as the base trade price for a single contract. I'll usually use the number of contracts as a multiplier to calculate net gain/loss.
  • Number of contracts
    This will be used as a multiplier for calculating net gain or loss. I'll discuss this more later.
  • Closing date
    As with the entry date, this is used to frame the trade to determine length of the trade. While somewhat optional, I prefer to have both dates.
  • Closing price (credit or debit)
    The closing price represents either the credit received for selling & closing the position (as in calendar spreads and long vertical spreads) or debits to exit the trade (as in short vertical spreads). This will be used in combination with the entry price to calculate the net gain or loss.
  • Total Gain/Loss
    The total loss or gain will be the difference between the opening price and the closing price. It could be that you choose to not consider the number of contracts, but to obtain a true profit or loss amount, multiplying by the number of contracts and then times 100 will give you the actual gain or loss for the trade.
There are a few other parameters that could be captured per trade that I consider more optional. These would include a trade description, symbol commission and other comments. You might also want to capture the trade risk just to track it on a per trade basis.

By themselves, the information captured on a per trade basis can provide some interesting summary data and trend indications. I find keeping a running total of cumulative gain/loss, winning trades and losing trades, average gain amount and average loss amount are valuable. From there, I can calculate other useful statistics like win/loss ratio and expectancy.

There are a number of ways to capture this information. My personal preference is to use spreadsheet software such as Microsoft Exel. The tabular nature of this sort of tool makes it easy to set up a table that suits your individual needs. Furthermore, calculations are easily done with this kind of tool. If you signed up for this newsletter, you should have received access to a package that contains a sample of how I like to use a spreadsheet.

The trade log 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 the use of weekly options.

Q: Do you utilize your options strategies with weekly options, particularly on index ETFs?

A: I have not so far traded any option strategies using weekly options. I think they are interesting but I have preferred to focus on instruments I've had experience with.

The fact is that weekly options are a time sensitive instruments just like the monthly options. They have time value but their life is obviously much shorter. As a result, I could employ many of the same strategies I use with monthly options. For example, I could sell a vertical spread on the SPY for next week. I could use a very similar strategy of selling the short strike having a probability of expiring (ITM) of 36%. That would be the $133 put, which means I could buy the $131 put to cover and have a resulting spread worth a total of $.38 credit.

On the surface, it seems like this kind of trade doesn't pay as well. However, you could potentially be placing these kinds of trades every week. Does it make sense to trade weekly options instead of longer term options? The advantage is the options are shorter term. The disadvantage is the options are shorter term...

What I mean by this is that while your trades might play out faster if you are right, you have less time for the trade to correct itself if you are wrong. My suggestion is if you are considering a strategy such as vertical spreads on weekly options is that you paper trade them for several months to get the hang of their particular characteristics. You may find they are very similar to monthly options but I have a hunch there may be some particular quirks that are unique to weekly options.

Before concluding this discussion, I want to point out that I'm not sure longer term strategies such as calendar spreads or diagonal spreads would make much sense. Again, it would make sense to spend time studying these strategies against the shorter term options. You will likely find many similarities but also perhaps some key differences that would affect how you want to approach trading them.

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.

Whereas the May selling was fairly controlled, June started with the market pretty much falling off the cliff only to recover most of that loss in the last week. The real question is whether July will have more volatility or show a continued recovery. Last month I summarized my outlook as follows:

" 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. "

Here's how the month played out.

From the first day of the month until the last week of the month it seemed like the market was in a selling mood, breaking through the $1300 level I mentioned last month. However, notice that most of the selling took place in the first week, followed by about two weeks of consolidation. The combination of the action for the month results in what appears to be a rounded bottom pattern. I haven't personally discussed this pattern before but it can be a powerful reversal pattern. If you add to that the consolidation and subsequent bounce from the 200 day moving average and the break above the 30 and 50 day moving averages it makes a compelling argument for continued bullishness.

It wouldn't surprise me to see a little pullback after such strong buying over the last week. This kind of selling could further build what is known as a cup and handle pattern, which is another pattern that could indicate some bullishness mid to late July. Of course there is nothing certain looking into the future. A failure from here would certainly indicate fairly strong bearishness.

As far as my trades are concerned, I'm going to look for a bullish trade or two. I may perhaps consider a neutral iron condor trade as well. This would provide an opportunity to profit from the ups and downs that may develop over the next month. I'll also be looking for an opportunity to close my existing put vertical spread.

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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