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Success With Options - Monthly Review, Issue #56 -- August 2014 Edition
August 03, 2014
Hello,

Welcome to the August 2014 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.

Still Higher Highs - August Newsletter

This has been an interesting summer so far. The general expectation is that the summer months are quieter as many traders head off on vacation. This year has been a bit different. With this extended bullishness through the summer, will August finish strong as well?

For the last few months, I've been talking about a new service I'll be starting soon. That is live web sessions featuring specific topics of interest to you. I have some announcements in that regard later in the newsletter. In addition, I have answers to your questions, Options Strategy Focus where we'll examine the how to trade in the summer months. 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) Exciting Announcement

3) Answers to your questions

4) Options Outlook

5) Featured Products


Announcement: Live Web Sessions Schedule

A few months back I began discussing a new service that will be offered by Success With Options. That is periodic live sessions delivered over the Web. Last month I made a strong request for input on topics and schedule. The majority of suggestions so far lead me to offer the first session after market close. We'll do the first one then and evaluate time and topics. Here's the schedule as it stands now.
 
Date/Time Topic Registration
8/12/2014
5PM MDT
Technical Analysis for Options Traders
This hour session will offer tips for technical analysis tools for improved timing of entry and exit of spreads trades. We'll introduce different technical analysis concepts and highlight ones that may be best for options traders. We'll plan about 30-40 minutes of formal presentation with 20 minutes of Q&A.
Seats limited to 25 so don't wait to sign up.
Session cost: $18
Add to Cart
More Info
Sept TBD Short Vertical Spreads Entries and Exits
This session will focus on different entry and exit strategies for short vertical spreads. We'll examine strike selection, position sizing, entry timing, exit rules and more. We'll plan about 30-40 minutes of formal presentation with 20 minutes of Q&A.
Stay tuned
Oct TBD Calendar spreads entry & management
Calendar spreads can be a complex spread to trade. In this session, we'll cover ways to analyze potential profit, entry strategies, exit strategies and management.
Stay tuned

Each session will be recorded and made available to attendees. If you can't attend a session, don't worry. Once the session has completed, the recording will be made available for a very reasonable price. They'll be announced and listed on the Options Trading Videos page as well as in future newsletters so stay tuned.

We are still in the planning phase at the moment so continue to use the feedback form to make suggestions and requests for future sessions. Use this feedback form to have your say.

Stay tuned!!
 


Options Strategy Focus: Tips for Busy Traders

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I had a request via the newsletter feedback to discuss strategies of trading for busy traders. 

Let's face it. Many of us live busy lives. We have jobs to work, things to do around the house, we're on vacation, etc. That may not always lend itself to us sitting in front of our trading platform for the 6 1/2 hours that the market is open. What if we can't be around when a critical event occurs such as a trade going against us? What if we can't be available to place an order when the market is open?

I want to talk about five tips that can help busy traders enter and manage trades.
  1. Accept that you'll miss ideal entries & exits
    The fact that you can't be available at critical market events means you will miss ideal entries. Accept it. That doesn't mean you have to sit on the sidelines. It just means that your portfolio will grow more slowly than if you had opportunity to enter and exit at ideal points. The beauty of most of the premium selling strategies I discuss is that they can still profit even if entries and exits aren't ideal.
  2. Allocate a time to do your analysis
    To be successful in this approach, you need to have an established daily routine where you devote 20-30 minutes to assessing the market and your positions. At this time, you will be determining the current market bias and outlook for the next 20-30 days. You will also be assessing your current positions to determine if exit rules need to be applied based on outlook. Finally, you will be looking for new trades to consider based on outlook. You should always have a few trades planned even if you don't enter right away.
  3. Make sure every trade you enter has an exit plan
    When you set up a trade, you need to have a plan for when the trade will exit under both profitable and loss limiting conditions. This is really no different than trading in any other conditions. However, you will need to make use of stop orders primarily or limit orders to lock in profit. The benefit is that these can fire while your hard at work doing something else, thus giving you peace of mind. At a minimum, you should consider a good-til-cancelled (GTC) order to lock in profit. Depending on money management strategy, you should also have a stop order in as well.
  4. Consider entry limit orders
    While there are no guarantees, using entry limit orders allow you to specify a desired position you want to enter for a price you are willing to accept. For example, let's say I want to enter a short put vertical on the next morning and I'm expecting a credit of $.48. I can enter an opening order (day order) with a limit that allows me to only enter if I can get $.48 or more for the spread. The benefit is that my order can be filled any time the next day based on market movement. The risk is a) the market runs away from me and I never get filled or b) the market turns and I get filled but now wish I either didn't enter the position or wish I could have gotten a better price.
  5. Always, Always use good money management
    It's important to use good money management in general. However, it is critical to do so with this kind of trading. Not being able to sit in front of your computer and act as significant market movement is happening can be expensive on your trading account. The benefit of good money management is that if the worst possible thing happened, your absolute maximum loss would be some amount that while painful, wouldn't be devastating. When I say money management, I really mean your position size and it's associated max risk.
I hope you found these tips helpful. Some of you who have found a way to trade successfully while working full time  may have tips of your own. If so, pass them on to me via the contact me link and I'll pass them on in the next newsletter.
 
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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!

I am frequently asked questions about my rationale for selecting $2 wide strikes vs $1 vs $5 and so on. This question came in again recently. While I have answered this question in the past, I want to take some time here to answer again.

Q: Why trade $2 wide spreads vs $1 wide spreads vs $5 wide spreads? What are the advantages and disadvantages of each?

A: At the end of the day, your choice of spread width on your strike prices will likely be a matter of personal choice. However, there are a number of factors you need to consider. You'll find there is probably a fair amount of interdependencies between these but I just want to call them out.
  • Commission rate - Commission rate can have a lot of impact on your choice of spread width. For example, do you take 1 $2 wide spread or 2 $1 wide spread contracts, which will have the same risk? If your commission rate is per contract, then you'll pay twice as much for 2 $1 wide spreads as you will for 1 $2 wide spread and so on. What about flat fees? Many platforms will charge a flat $12 per trade fee. As a result, it costs no more to sell 2 contracts than it does to sell 1 contract.
    When analyzing, make sure you are comparing the same risk. Generally, a 2 $1 wide spreads will have the same risk & reward as 1 $2 wide spread. If you're considering a $5 wide spread, you may have to do a little extra math do do even comparisons. That would be 5 $1 wide spreads but a $2 wide spread doesn't divide evenly. You get the idea though...
     
  • Total tolerable risk - You need to also look at your total tolerable risk. If you have a smaller portfolio, you won't be able to take on larger risks if you plan to stay within a 2% risk per trade policy for example. That alone might prevent you from taking even a 1 contract $5 wide spread as you'll likely have a risk exposure of anywhere from $3-4 (or $300-400) depending on the credit you receive.
     
  • Adjustment flexibility - This can be an important consideration if you plan to do adjustments. Some adjustment strategies involve closing part of your position or buying back part of you short strike positions to create a back spread. If your choice is to have the widest possible spread and just 1 contract, you automatically prevent yourself from employing this kind of adjustment.

Hopefully this helps you better decide how wide your strikes should be. As you can see, it isn't quite as simple as you might think to come up with a solution that works for you. In the end, it really is pretty specific to your situation and objectives.

By the way, I talk a fair amount about spread width, contract size and adjustment strategies in the Mastering Short Vertical spreads video.

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.
 

In the two months since the last outlook, we've seen a lot of action. It's actually been quite bullish given this is supposed to be a more quiet time of the year.

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

"...As we head into June, we have some interesting signals to watch. We need to watch that overhead resistance that the SPX is currently sitting at. A further move above that resistance without some kind of a pullback is fairly bullish. Also, watch the VIX, which is currently near 2 year lows. The combination suggests there MIGHT be a pullback in the first few weeks of June. I believe we're due for a pullback but it's not clear just how much of a pullback there will be. The SPX could come back down and test the top side of the box it was in as 'old resistance becoming new support'."

Here's how the May played out.



You can see that for the months of June and most of July the SPX had broken above the midpoint of the channel and just simply rode it up using that line as support. On the last day of July, we suddenly had a break of that support level in a very definitive way. At the same time, the VIX had been bouncing along the low point of around 10.5 or so, which was a low not seen since 2006/2007. While not shown on the chart, we now know that Friday (Aug 1) was also a selling day, which takes us nearly down to the bottom end of the channel. If you had some bearish trades prepared and you were quick enough, they are now paying off. I managed to get a couple in early last week and they paid off nicely.

As we head into August, the question is; will we see more selling or is there some sort of bottom? Let me cover a few possibilities. As of Friday, the sell-off has only been 3% from the high of $1991. I would not be surprised to see closer to 5% as we haven't really had that kind of selling since late January. In addition, 5% would be just about at the point of the lower end of the range I've drawn above. A break below that level even would signal a more major sell-off. In addition, the VIX is high but not as high as it was in other recent sell-offs. On the bullish side, we are near (but not at) the bottom of the channel with a candle on Friday that could be a bullish hammer - but needs to be confirmed on Monday.

At the moment, I don't see anything actionable. Based on what I see today, I wouldn't take a bet on either bullish or bearish trades. Instead, I'd have both kinds ready for when the market reveals its bias. Look for either 1) Confirmation of the bullish hammer with a definitive follow through or 2) failure of this candle pattern. If the latter, then wait for some other support to establish, such as the bottom of the channel. If we do see definitive confirmation of the bullish hammer, then this may be a good point to be putting on bullish trades.

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.

As I announced earlier,  I just released the second for sale' video last week. The title of this video is "Mastering Short Vertical Spreads". I now have at total of two 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 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. While a long time coming, it's been a labor of love. 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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