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Success With Options - Monthly Review, Issue #007 -- July Edition
July 04, 2010

Welcome to the July 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.

What's next? - July Newsletter

Happy July 4th! May was a big down month and June was up and down. So what's the outlook for July? Stay tuned...

Given the market turbulence I didn't do much trading. In fact, I only put on two trades. It's just as well because this market is pretty wild. Certainly not for the feint of heart.

I mentioned last month that I'm starting to plan a longer video. This will be one that won't be available from YouTube but will be hosted elsewhere (to be determined) and will be for sale for a small fee. I've been asked a number of times about more extensive videos and mentoring and this effort is in response to those requests. The first video will be made available on a limited basis with the intent of obtaining feedback for further videos. Once I fine tune this a little bit more, I'll probably be rolling out more videos over the remainder of the year. If you have particular topics you'd like covered, please use the contact me page on the website to make a suggestion.

I'm still anxious to receive feedback on the newsletter content and on ways I can make it more valuable for the readers. Please feel free to voice your opinion. I've received a few responses, but I'd really like to receive more feedback before considering any more changes. If you haven't done so already, 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) 5 Reasons I Love thinkorswim

4) Answers to your questions

5) Options Outlook

What's new at Success With Options

As I mentioned, I haven't managed to get as many pages added or updated as I'd have liked. I always seem to underestimate the work I have to do and overestimate the time I have to do it in. I did manage to get the option volatility page up although I'm still working on re-organizing the options basics topic and linking it in properly there.  I also updated the thinkorswim by TD AMERITRADE broker review page with some updated news on their latest Barrons' ranking as #1 broker. It's in my plans to revise that page completely as well as update the TD AMERITRADE broker review page as so much has changed lately. I didn't really do any new videos this month. I'm kind of out of ideas for short videos. As I mentioned earlier, I am working on ideas for a longer video to be a part of a longer series eventually. I'm open to ideas on either one of these.  Feel free to contact me with those.

Watch for a few more updates in July...


Trade Tutorial Summary

I was not so active with trade tutorials for June. The reason was simply that it was difficult to determine a market bias and I didn't want to trade without a clear idea of what I expected the market to do. As a result, I only put on two trades, one of which closed profitably. Once the market establishes a clear direction, I'll be a bit more active in trade tutorials.

Here are the trades I put on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed SPY call Calendar spread -$336 This position was the remainder of an adjustment I put on back in early May before the selling began. I probably should have closed the trade out much sooner when it was apparent the market was selling off so hard. This is an example of the price you pay when not following the rules.
Closed IWM put credit spread -$329 Here's an example of a trade that started to go well and then the market turned - again.
Closed Pairs trade EWZ/SPY -$184 I entered this trade the last week of the month as an experiment and to illustrate the concept of a pairs trade. At the time, EWZ was showing weakness but I closed the trade early when that was no longer the case
Closed DIA Iron Condor +$198 I put this trade on early in the month. The market began to rally but I mentioned that I wasn't yet too bullish. As it turned out, the market climate was perfect for this trade.
Open EWZ put credit spread   I put this trade on a little later in the month when the market was starting to look a bit more bullish. At this point, EWZ was showing more relative strength. I've since partially adjusted this position with some calls.

Sometimes I'm my own worst enemy when it comes to trading. Many of the losses above could have been minimized or prevented simply by following my own trading rules.

In terms of the open trades, time will tell how they work out. The point of these trade pages is to teach trade analysis, entry and management techniques. It's nice to get a lot of winners but it's also hard to learn anything from them.

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

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5 Reasons I Love thinkorswim

Instead of doing a typical trade tip, I wanted to devote this month to covering some of the reasons I like the thinkorswim by TD AMERITRADE platform. If you've followed my option tutorials or any of the videos, you've probably seen the platform in action. While I have and still do trade on other platforms, thinkorswim is my favorite and I thought I'd take some time to provide some reasons why.
  1. Trade entry is as easy as 1-2-3-4. From the trade tab, it's literally 4 steps to enter a trade.
    1. Select an option month
    2. Select an option (call or put)
    3. Right mouse over that option and choose a strategy (buy or sell)
    4. Confirm and send

    That's all there is to it. Of course there are minor adjustments you might want to make to the buy/sell quantity or to the price but that's pretty much it. I've never traded another platform where it was so easy to set up a trade. And with one mouse click, I could jump to the analyze tab and analyze the trade before submitting it.

  2. I can enter any trade I want - even if it overrides an existing trade. The frustration I've had with other platforms is that I can't enter a new trade that overlaps a trade I already have. For example, if I I had a short 100/98 put spread already in place and I wanted to enter a new 98/96 put spread, I would be prevented from doing so because the $98 short put I'm trying to sell in the new trade would wipe out the $98 long put from the original trade. I know when you're first beginning trading this is perhaps a good thing, but I overlap trades all the time. Besides, it really helps you begin to see that every trade simply adds or removes inventory from your portfolio.

  3. I love the summary page with aggregate option greeks. As I've learned to manage my trades from the perspective of portfolio greeks, I've come to really depend on the quick summary I get from the main position statement page. This is easily customized so I can add or remove items to display only what I want to see.

  4. The analysis tab is way cool. I know it can also be way intimidating. There are still plenty of functions I don't know how to use. However, I've discovered all kinds of nifty ways to analyze a new trade, analyze an existing trade or even my entire portfolio when considering adjustments. I demonstrated this to some extent in this video.

  5. New features arrive frequently. In the 3 years or so that I've been using the thinkorswim platform, I've seen dozens of new features arrive. Some I never take advantage of while others I love the minute they show up. For example, the latest release included a new feature I've been waiting forever to see. On the monitor tab, you can now group trades by the way they were executed, which makes tracking results of individual trades easier. I'm dying to get a chance to play around with this one. In addition another cool feature from TD AMERITRADE's Option 360 platform has made it into the thinkorswim platform. That's the heatmap - a really cool way to view a market like the S&P 500 as a whole. It's an awesome feature that allows me to look at a market segment to see who's relatively strong or weak within the overall market. I'll probably be demonstrating some of these features in a video down the road.
This is certainly not an exhaustive list; however, these are definitely my top five features. Over the years as I've used the platform more and discovered existing features or taken advantage of new features, I've come to believe there's no other platform or company that compares.

I'm so impressed with the platform and the company that I have no reservations about showing off the features or bragging about the company. Recently I have been able to set up an affiliate relationship with thinkorswim through its parent company, TD AMERITRADE. Through this relationship I'm kept up to date on the latest features as well as any marketing programs, which I can then pass on to visitors to the site.

If you are looking for a broker for your options trading, I highly recommend thinkorswim. By opening up an account and funding it with just $3500, you get access to all the features I demonstrate in the videos and on the site. In addition, you can paper trade with almost the exact same platform (there are a few small differences).

One of the bonuses thinkorswim is offering as an incentive to open an account is a free high speed internet rebate. That means if you open an account and fund it with $3500 and make more than 40 options trades in a month, they'll pay up to $39.95 to cover your internet service. On top of that, they'll pay up to $100 to reimburse the ACAT fee for transferring funds from another brokerage.

Visit the website to see more details on the thinkorswim broker review or just go directly to the latest thinkorswim promotion page.

thinkorswim, Division of TD AMERITRADE, Inc. and Success With Options are separate, unaffiliated companies and are not responsible for each other's services and products.

Marketing services disclosure

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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 past month, I didn't receive any new questions directly. However, I did come across a question on a trading forum that I'm betting many of you may be wondering about...

Q: I'm trying to find an easy way to back test a strategy that I'm considering. What is the best way to do that?

First of all, kudos for considering back testing before beginning to trade the strategy live. There are actually a number of different ways to back test. There are some platforms out there that let you write entry and exit rules using a programming language or scripting language. The trouble is that many people don't have that kind of background.

In my opinion, there are at least two ways you can back test using the Thinkorswim platform.
  1. You can use ThinkBack. ThinkBack is a feature that's been available in the platform for quite a while. With ThinkBack, you can take advantage of historical closing prices of stocks, ETFs and the options on them. That means you could select a date for trade entry that's in the past, enter the trade based on your entry rules and quickly spin forward to the point where you find your exit triggered based on your rules to find out how the trade resulted. You can then log that information in a spreadsheet for tracking. The one limitation with this approach is that the charts are still based on the current point in time so to get an accurate picture, you'd have to zoom in and adjust the chart to make the right edge reflect the individual days. Another limitation with this approach is you can't set up limit and stop orders to close the trade automatically. The nice thing though is the data goes back quite a ways in time. You can use this feature on either the live platform or the paper money platform.

  2. You could also use OnDemand, which is a cool new feature of the platform that allows you to turn your entire platform into a time machine. What I mean is you can pick a point in history (currently only as far back as 12/6/09) at any time of the day and begin re-playing the data. This gives you a live feel to the trading. When you go into OnDemand mode, it affects nearly every feature of the platform as it will adjust the charts, analysis tab and everything. To keep from confusing yourself with your real trades, they disable real trading and you enter a kind of virtual environment much like paper money. Not everything is quite hooked up to this yet. ToS charts are available but Prophet charts aren't. While you can't go back in in time before Dec, 2009, the overall feature set is nice because you can trade tick by tick intra-day just as if you were there. So, you can re-live the 'flash crash' of May 25 and see how you'd handle it. The advantage of this approach is that you can set up closing orders (limit & stops) and test them.

There are probably other ways to do this and lots of variations on that theme. If you know of some other ways to do back testing feel free to contact me and I'll post them in next month's newsletter.

To learn more about the Thinkorswim platform, you can visit my broker review page.

If you just can't wait to get your hands on these features, you can just go to the website and open an account.

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.

In the June newsletter, I summarized my outlook as follows.

"It's difficult to say at the moment which way the SPX will go. I'd say if a new high is formed above $1100, then the recent low may be the bottom of the sell-off but I wouldn't expect a raging rally because of it. If the recent lows are broken, I'd expect the SPX to sell off further - maybe even to $1000."

Talk about a fake out! It's times like these that make it difficult to trade and why money management is so important. After rallying up to just over $1125, the SPX suddenly reversed and has had 10 down days out of 11 since the reversal.

I also threw this little tidbit in just because of the where the SPX was in relation to the fibonaccci retracement lines I drew in.

"As the chart shows, we came close to hitting the 38.2% retracement level. ...I mention that because it wouldn't surprise me to see this level tested before a bottom is in place".

And... look where we ended up.

SPX Market outlook

Last month I added the fibonacci retracement lines to the chart measuring from the low in March of 2009 to the recent high in May. Not surprisingly, the SPX did come down and touch the 38.6% level on Thursday. I say 'not surprisingly' because on one hand, it's typical for the next level of support to be tested once a prior level has been broken. However, the higher high formed in mid June did cause me to start being more bullish so I was surprised to see the prior low broken after such a breakout.

What's next? I'm not exactly sure. Right now, I'm a bit bearish. I believe the next few days will reveal more. If the $1000 level is broken, then expect more selling. If we start to see more buying, watch for overhead resistance because it may just be another opportunity to sell into the short term rally. Right now, I'm watching $1050 to be broken as resistance before I switch to a more cautiously neutral stance.

Last month, I mentioned that there's nothing wrong with sitting on the sidelines waiting for a trend to be established. If you are uncertain, it's better to sit on your hands than throw money down on a trade with a high risk of losing it. I still recommend paper trading in the mean time. Think of it as a no cost way of trying out your market assumptions.

I'd also look for some possible bearish, bullish and neutral potentials to trade. It's always good to be ready when the market establishes a direction. For now, I'm going to treat any rallies as an opportunity to sell call spreads or maybe buy a put calendar spread. A break above the $1050 level might cause me to sell some more neutral trades like iron condors.

Stay alert and nimble. Make sure you are doing market analysis more than once a month. In this climate, every few days would be a good timeframe to re-evaluate.

More on technical analysis.

Options strategies I use

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