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Success With Options - Monthly Review, Issue #68 -- August 2015 Edition
August 01, 2015

Welcome to the August 2015 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.

Active Summer - August Newsletter

Well! A lot has happened since the last full newsletter in June. We've seen quite a swing in both directions. What does the rest of the summer hold in store?

In this edition we'll tackle that question, explore an interesting trading strategy for this market and revisit an older question that was 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: Variations on a Theme

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. This month, I'd like to discuss a trading strategy that is really a variation on the traditional vertical spread trading strategy.

This approach I'm suggesting is also related to the strategy I proposed in June's newsletter where I talked about trading against the trend.

To set this up, recall that the typical vertical spread strategy I propose is to sell a call or put vertical spread for a certain credit with the expectation that you will give back 20% of that credit to lock in 80%. I won't go into all the reasons for that but it's really a strategy that has worked quite well for me personally (and hopefully for you as well). I usually enter the closing order as a GTC (Good 'Til Cancelled) limit order as soon as I'm in the position. That way there is no deliberation in the future and it often triggers while I'm busy doing something else.

A variation I've recently adopted is to NOT enter the closing order immediately. Here is my rationale for that. If you recall from June's article, I suggested that you can do quite well with counter trend trading, that is selling at extended highs or lows. The challenge is that you don't always know what the absolute extreme points are. In an ideal world, you could sell call spreads at the highest point of the swing and sell put spreads at the lowest point of the swing. However we all know that that is pretty difficult to do. Knowing that means that I could sell a call vertical for example and have the market continue to charge upward and potentially through my spread.

My rationale for not buying back the spreads immediately comes from having the holistic perspective of my portfolio. While my calls are being over run by a relentless bullish move, my put spreads are doing quite well. What can you do about your calls being over run? You have three choices; 1 - do nothing, 2- adjust, 3-exit. Given that I size my positions to allow me to sustain a maximum loss on that position without too much pain on my portfolio, I'm not too inclined to adjust or exit. Instead, I leave my put spread on a little longer with the idea that while my calls are being threatened, my puts are making money.

I came upon this idea due to my understanding of how an iron condor works with margin withholding at most brokerages. For a true iron condor position, the broker will often hold margin on one side of the spread. Why? Because it's not possible for both sides of the iron condor to expire in the money (ITM) at the same point in time. The same is true with my positions, which may not be a true iron condors but have many of the same characteristics. My theory is that if I'm going to take a loss on my call spreads, why give back 20% on my puts. Instead, what I try to do whenever possible is hold out until I can close my short strike only for $.05 or less.

I have two reasons for this approach. First, my broker (thinkorswim) lets me do this and not charge commission. It's kind of like a free trade. Second, if there's enough time left, there's always the outside chance that the market will reverse and the remaining long strike could gain in value AND I could actually make additional money selling it. While that doesn't happen often, I've had it happen on more than one occasion.

I don't want to leave this topic without acknowledging that there is some risk in this strategy. The scenario I think about every time I use this approach is the case where the market reverses before I have a chance to close my put position. I could have closed for $.09 (my 20%) but now I either have to give back more to be out or face the risk that my puts could be over run. If there isn't enough time for this to play out fully, you end up being forced to pay more than you planned to close the position. That's also happened to me more than once.

A final point I'd like to make about this approach is to acknowledge that this does take more management time. You need to be monitoring your positions more closely, being prepared to take advantage of opportunities to close your short strike for example. It also takes a bit more of a 'big picture' view of your portfolio. You have to realize that while one part of your portfolio is at risk, another is doing quite well. In a case like that, you may want to be more cautious about giving back a percentage of your credit.

For more information on the Vertical Spread strategy, check out the Vertical Spread strategy page on the website and also have a look at the recorded videos specifically related to vertical spreads.

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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!

Again this month, I didn't receive any new questions. If you have a burning question you'd like answered, be sure to contact me using the link at the end of this section. In the mean time, here's a "blast from the past". This is a question from one of the first few issues of the newsletter.

Q:  I'm curious how you find good stocks and ETFs to trade options on. Do you use any particular search tools or websites?

Below is part of the answer from the original post but I want to enhance the answer somewhat.

Partial original answer
The short answer is that in the past I have used search tools to look for good stocks when I traded options more on stocks than ETFs and I traded other strategies besides premium selling strategies. I believe certain strategies rely more on fundamental analysis of the stock and industry. However, these days I trade options more on index-based ETFs such as SPY, IWM, and DIA.

With that said, I'll talk a little bit about tools I have used. One of the best tools I've encountered for searching for good, fundamentally sound stocks is on the Investools website. They have some really fabulous search and analysis tools that I think are unrivaled in the industry. However, access to the site requires a monthly subscription of about $25/month after some form of purchased education. Their education is also really good so if you go that route, I don't think you'll be sorry.

My personal preference is to find a number of ETFs that trade fairly large volume and have options with high open interest. By large volume, I mean ETFs that trade at least several million shares a day and have front and back month (i.e current month and next month out) option open interest that is at least 500. This guarantees that I get good fill prices on my orders and I can get in and out of the trade easily. I simply maintain a watch list of these options and look for potential trade setups daily.

Updated response
Since I wrote the above response, I've added two items specifically focused on searching for optionable ETFs. One is a page I added some time back specifically on ETF options and why I like to trade them. On that page, there are some sites you can go to for some of the leading ETFs.

At the end of that page there is also a link to a free video I recorded and placed up on YouTube specifically about how to use the thinkorswim platform to search for optionable ETFs based on a number of criteria. One of the advantages of using the search tools is that you can also use it to search for any stocks that may fit a certain criteria using a very similar approach to what I demonstrate on the video.

I believe both of these can be good tools for you to take advantage of if you are interested in trading ETF options.

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.

The last few months really have started to get a bit more choppy and in fact, we've finally seen some of the changes I was suspecting were coming.

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

"...Stepping back a little bit, I want to point out that we've seen a long running up trend that really began back in 2012. Along the way, there have been some strong pushes up and some selling as well to create some wide swings. In fact, most of 2014 was made up of dramatic moves up & down but with the dominant trend remaining bullish. What I'm seeing in the last few months is much smaller moves, both up and down. Yet, the basic trend line remains intact.

I point all that out to suggest that we may well see a continued drifting upward as we head into the summer months. Don't expect the wild swings of the past - unless there is market-moving news. I'm thinking about such things as Fed announcements regarding the current monetary policy and potential changes that have been hinted at.

Here's how June and July played out.

The most obvious change has been a breakdown through the bottom of the channel I've had drawn for quite some time. Last month, I showed a multi-year up trend. That trend has finally broken somewhat. Keep in mind that trends are all about perspective. If you are looking at a 5 year trend, one might say the trend hasn't changed - just paused. This one year chart would indicate we've moved more into a sideways range-bound trend. If you were to narrow in further to the last few months, you might even begin to think the trend has become a bit bearish.

At the very least, this should provoke a degree of caution. As we remain within the range I've outlined above, there are really only a few possible outcomes.
  1. We continue for a while in this range, which is about 75 S&P points wide
  2. We eventually push out over the top of the range for a resumption of the up trend
  3. We see the range support, which could indicate moving into a bearish phase
You might be saying, "Thanks, Captain Obvious, but I could have come to those conclusions." However, part of doing the analysis is to first identify what you expect might happen or could happen. Once that's done, you might decide to determine what are the more likely outcomes AND prepare for the case when the other possibilities might occur.

For the moment, we are in a range and I'll trade the extremes of the range until I have a different outlook.  By that, I mean I'm going to use the techniques I outlined in the Options Strategy Focus section to take advantage of the market swings. This has been working out well for me so I'm going to keep at it until I see a breakout over the range or down under the range.

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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