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
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
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
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
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
spread trading strategy.
This approach I'm suggesting is also related to the strategy I
June's newsletter where I talked about trading against the
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%)
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.
Back to the table of contents.
Answers to Your Questions
|I frequently receive email from visitors to the site with
that aren't answered directly from content on the site. Many of these
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
Q: I'm curious how you find good stocks and ETFs to trade options on. Do you use any particular search tools or websites?
A: 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.
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
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
Back to the
table of contents
|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
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.
expectations may change if the charts indicate something different
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
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
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
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.
- We continue for a while in this range, which is about 75 S&P points
- We eventually push out over the top of the range for a resumption of
the up trend
- We see the range support, which could indicate moving into a bearish
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
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
Back to the
table of contents
|I'm adding a new section to the newsletter.
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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
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.
- Understanding the construction and how the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
Back to the
table of contents