the August 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Turbulent Summer? - August Newsletter
| Welcome to the August newsletter! Well, I expected
some degree of pullback but the entire month was pretty much up and
down days ending by giving back much of June's gains. All eyes are on
the news as we watch to see what happens with the vote to raise the
debt ceiling. Will we see some confidence return to the market or will
decision not to raise the debt ceiling cause more fear and selling?
In this newsletter, I'll be reviewing the month in more detail and
providing my outlook for August. Also, review some trades, talk options
strategies and more.
Thanks to those who have provided feedback on the newsletter in the
past. I'm always open to receiving feedback. 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
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.
new at Success With Options
|I've been on the road a lot and so, haven't had much
chance to update the website. However, I did make some minor updates to
the options education page. I entered July with a one active trade,
which is now closed, and added another trade. Read on for details of
the trades. It's now been two months since I released the 'Introduction
to Options' video. See the end of this newsletter for details on that
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.
SPY Vertical Spread
||I chose to
remain in this trade and it turned out ideally. This is yet another case where
remaining in the trade seems to be a better approach.
DIA Iron Condor
side of this trade has closed leaving the put spread, which now appears to be at
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.
As of this trade, I've traded 6 times using this new exit strategy. Of those trades, only one was a losing trade. As it stands, my gains in
the successful credit spread trades this year almost exactly equal the loss amount of my one losing trade. Had I closed the trade as planned,
then I would have been slightly negative on this strategy. I point this out because while it doesn't seem exciting to have 5 gains wiped out
by one loss, I did a lot worse last year using my 2X exit strategy. Of the trades I've done this year, I would have exited two of them early
had I followed my 2X rule.
For more information on all of the trades I've posted as option trading
tutorials, click here
Back to the
table of contents
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 the use of a trade log. In this issue, I want to focus on a
slightly different topc; the psychology of a trade.
I've mentioned this a time or two in some of the trade tutorials, but I
want to spend some time here talking about understanding your thoughts
and emotions when a trade goes against you. I found when I
first began to trade that my
thoughts and emotions seemed to work against me in my trades
What I mean is that the rational
part of me would set up a trade according to my rules, I'd enter the
trade and then when the trade started going against me, I'd start to
doubt the trade and would often bail out or adjust the trade. This kind
of think gan wreak havoc on our trading and our confidence if we don't
attempt to master it.
To begin, let's identify some of the key emotions we experience in
situations like I decribed above. In any activity that involves our
hard earned money (such as trading), we naturally experience two main
emotions; fear and greed. I'll come back to greed in a moment. What is
it that we fear when a trade is going against us? Usually our fear is
that the trade will ultimately take our money. That fear is based on
what we see at the moment, which is not a freflection of what WILL
happen but what MIGHT happen.
The real question is... what makes us fearful? Is it because we have a
lot of money at risk? Perhaps we have too much money at risk on a
particular trade or set of strategies. Is it fear of being wrong? You
know, some of us are just so competitive or are wired in such a way
that having losing trade just kills us because we take that as a sign
of personal failure.
Whatever the source is, it's important to try to identify it and
understand what drives us in trades. Once we understand the source of
our fears we are better equipped to take steps to address those fears.
For example, if the fear is simply a fear of loss, perhaps we can
reduce our risk in the trade to a level we are willing to live with. If
it's fear of failure, perhaps we can work on re-defining our idea of
Perhaps we can develop new skills that allow us to make adjustments to
our trades such that no trade is a matter of winning or losing but how
much we win. The truth is our emotions have a powerful influence on us
and can mess with our more rational thinking. We can't deny our
feelings exist. Rather, we must understand the source of them and find
ways to manage our emotions and maybe even get them to work for us.
What if we journal our feelings as well as our objective thoughts
regarding a trade? There may be several benefits in doing so. First,
using the medium of writing allows us to slow down and examine those
feelings more objectively. Second, after we spend time doing this for a
while, we can go back and review the journal entries against the
results. We might just discover some interesting trends. Armed with
this kind of information we might just be able to get our emotions
working for us instead of against us..
While I currently don't have a page specifically on trading psychology, there is
plenty of information on trading
systems and technical analysis,
which can help be better equipped. Feel free to visit the website and dig
Back to the
table of contents
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: I have a trade that is going against me. Can you tell me what
financials to consider when deciding whether to exit early?
A: This is a very interesting question.
There are certainly a number of factors to consider including the financial
aspects. I will get back to the financial question in a second but I can't pass
up the opportunity to point out that there is a psychological aspect to this as
well. The decision to stay in or get out can have a significant impact our
trading psyche. Do we stay in and chance that the trade will turn around or do
we get out and risk that the trade might turn around? You get the idea...
In terms of the financial considerations though, let's look at the various
choices in front of us. Let's first consider what happens if we let the trade go
all the way to maximum loss. In this case, you simply face the maximum loss,
which should be your worst case scenario. In this case, you should have sized
the position so as to not be too serious of a loss.
Let's now consider what happens if you leave the trade open and it straddles the
closing price. In other words, what happens if the underlying price closes in
between your long & short position. You risk assignment, which could have a
serious affect on your portfolio. Worst case scenario, you may be assigned a
short position or be forced to buy a long position of the underlying. This could
leave you in a negative capital situation, which will require you to contact
your broker to get it worked out.
Finally, if you were to close early, you need to consider the potential loss (or
gain). In order to do so, you need to look at the current closing cost versus
the entry. If you entered a debit trade, that means you would subtract your
closing credit from the entry debit to determine the gain or loss. If you
entered a credit trade, you would subtract your closing debit from your entry
credit to determine your gain or loss. Closing early will generally result in a
smaller loss than the max loss.
Those are the cold hard facts. Let's now return to the psychological aspect. You
have to think about this: What happens if you close the trade early and the
trade reverses only to have turn out as expected? Or... what happens if you
decide to let the trade run only to have the worst happen when you could have
gotten out early for a smaller loss? You are always going to be faced with the
question of what would have happened if you had taken the opposite action. I've
found that by managing my position size to keep losses minimal, it's easier to
live with the worst case.
If you would like to submit a question, comment or feedback
on the website, please visit this page.
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. As
such, it may change if the charts indicate something different.
July started out with a strong couple of days only to sell & bounce. The problem
is the bounce was weak. This month started out with a lot of selling. The question is,
what will happen the rest of the month. Last month I summarized my
outlook as follows:
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. "
I have to admit this sell-off caught me off guard.
Here's how the month played out.
After the first few days of continuing the rally from June, the market turned
down. It actually looked like the cup and saucer pattern would play out as
expected, but the first clue this wasn't going to work out is the lower high
formed. The second clue was the break of support just a few days later. Notice
the range between the most recent high near $1350 and the prior low around
As Dave Johnson is fond of pointing out, if you have a break of support or
resistance, a likely next target would be an equal distance past the break. In
this case, the target would be around $1250. I let things go a few extra days to
see how it would play out. Today, it appears as if a bottom has formed.
However, time will tell whether this is the case. If indeed a bottom
has formed then this last candlestick
pattern is a hammer formation that will require another day to confirm or
invalidate the pattern.
As far as my trades are concerned, I'm going to look for a bullish
trade or two (I know I said that last month as well). Of course I will wait for
confirmation first. If we see a failed hammer pattern, I will look for bearish
trades. I still have a put spread that is the remainder of an iron condor trade.
I'll be looking for an opportunity to close that on any bounce.
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. Feel free to disregard if you
aren't interested in sales type information.
For those that aren't aware, I recently released the first 'for sale' video. The
title of this first video is appropriately "An Introduction to Options Spreads".
I say it's appropriate because this will be the first of several videos I'm
working on that really are a labor of love. My goal is to provide a more
in-depth and comprehensive coverage of options spreads.
To that end, this first 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.
Expect more videos to be released in the months to come.
more information or to purchase the video.
Back to the
table of contents