the August 2012 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.
Choppy Trading - August Newsletter
to the August newsletter. As we'll see later, the market has traded in
a fairly wide range for most of July. With the push to newer highs,
will this signal a bullish trend? Is the slump over? Read on...
As usual, I'll be reviewing my trade this month, talking options
strategies, answering you questions and more.
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 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.
Trade Tutorial Summary
had one longer term trade remaining that I closed this month. I also
added a new trade that is in keeping with my recent outlook (see
below). Some of you may have noticed that the number of
trade tutorials has decreased quite a lot over the last year or so.
This is partly because I've had less time to analyze, set up, and write
up the trades.
In addition, since I've added the Facebook comment section to the
tutorials, I've seen no comments being submitted. I had hoped this
would be a much more interactive area - a place where trade ideas,
questions, debates on entry & exit rules and so forth would be
conducted. I'm left to wonder if this feature of the website is as
valuable to visitors as I had hoped. Use the feedback
form to let me know how you feel about this.
In the mean time, I will continue to do trade tutorials but probably
not as frequently as before. Here's the trade I was active on this
month in a quick summary.
trade finally closed for a nice little profit. This trade had a
lot of ups and downs but in the end turned out nearly as expected.
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. This month, I didn't have a trade that closed, however,
check out the updates on the iron condor trade for insight into
From the DIA Iron Condor:
"...This trade turned out successfully due to two key
principles I try
For more information on all of the trades I've posted as
tutorials, click here
- When then trade is going successfully, follow your standard
- When the trade isn't going as well and existing profit is
threatened, consider an exit to lock in existing profit
Back to the
table of contents
Options Strategy Focus: Psychology of Losing - Part 1
This section of the newsletter will focus more
deeply on the details of some of the options strategies I use in the
tutorials. In past issues, I've talked about strategies, entries and
exits, trading psychology and more. In this issue, I want to re-visit the topic
of I've touched on once or twice but I believe deserves more attention.
The real question is: how do we face a trade that appears at the moment to be
going wrong? Depending on how we view being wrong, we might experience
fear, panic, mild anxiety, or maybe calm. I want to talk about 3 key
factors in evaluating an existing trade that may be losing at the
The point of reviewing these three factors is to reach a point in your
trading where you can look at a trade that appears to be losing and make
an objective decision as to what action to take. That action could be 1)
do nothing 2) make an adjustment or 3) close the trade completely.
I'm really talking about two things here. First, I mean how much time
has elapsed relative to the time until the trade expires? I once knew a
trader who would put a trade on and 5 minutes later regret the trade
because of a slight intra day reversal. Given that most of the trades we put
on are 3-6 week trades and are somewhat fault tolerant, we shouldn't be
seriously concerned about minor fluctuations in the price of the
underlying. In reality then, the trade may appear to be losing but it's
really too early to tell.
Related to this is the fact that most of the premium selling trades I
advocate benefit from time passing. So if you are looking at a trade
with 2-3 weeks of time remaining, you may be able to relax a little bit
knowing that what you lose in the underlying instrument going in the
opposite direction you expected will be offset somewhat by the time
erosion of the options. However, if you are within a week or so of
expiration, most of the premium has melted away and you may want to
consider the next two points.
I'm not suggesting that all reversals should be ignored. In some cases,
moves of the underlying may in fact signal a change in outlook. I've
shown in recent trade tutorials that there is a point at which I decide
my initial outlook was wrong. I've used that as a signal to simply exit
the trade. If you are evaluating the market without having this kind of
exit plan in place, the key thing
is to be able to step back and evaluate the market and the underlying
instrument objectively, independent of the existing trade.
As you consider what to do with a change in outlook, that's where trade
adjustments come in. It may make sense, as I've often done, to simply
exit the trade. In some cases, there may be a case for an adjustment as
well. The decision to adjust should be made carefully. In the 'Answers
to Your Questions' section below, I talk a little about a 'refusal to
lose' mentality. I intend to go into this in more detail in the next
- Position risk
The final piece to this is position risk. The key to being able to
approach a given trade objectively and calmly is to not be overly
extended. If you follow my trade tutorials, you know that my absolute
rule of placing a trade is that I only risk 2% of the portfolio value on
any given trade. Ask yourself if you could tolerate a 2% loss on your
account. While not exciting, it's not life altering. If 2% seems too
high, then consider position sizing to limit your risk in any trade to
If you have more risk in a given trade than you are comfortable with,
then close all or part of the trade - right now! You'd be surprised how
much of a relief you experience. Trust me, I've had to do just that on
Be sure to review the Options Trading Strategies page to get familiar
with the various strategies at your disposal and their behavior over time. In
addition, review the Trade Adjustment
page to get an idea of adjustments at your disposal. Finally, be
watching for next month's newsletter where I'll talk more about 'refusal
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
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 month I received a question about "rolling" a trade.
Q: Can you please explain or do a video on "Rolling" an option trade?
To me it seems like just closing a losing trade and and initiating a
A: Thanks for the great question. I'd like to answer it in two
First of all, rolling in essence is just closing the existing
trade and opening a new one. Let me give an example from last month's Iron
trade. I had a $130/128 call spread on and for a while it looked like
the short strike was being threatened. I could have effectively
'rolled' the spread up by buying back the $130/128 spread and selling a
$132/130 spread. I basically rolled up the spread $2. The net debit
may be relatively small depending on when in the option month I did the
roll. As a side note, this is effectively the construction of a
While it is possible to perform the roll, the
real question is; should you? I have found personally that I employed
this strategy as a kind of "refusal to lose" mentality. Many times, I
found it cost me more in the end to stay in and roll up then in just
closing the trades when I found they went wrong. I heard one of the
folks from thinkorswim one time say that any time you make any kind of
adjustment that the trade that represents the adjustment must make sense
on its own. Therefore, if I planned to roll up, then the sale of the new spread must make sense to be in given the market outlook at the
For more information, have a look at the trade adjustment page on the website.
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. As
such, it may change if the charts indicate something different.
This has been an interesting month. On one hand, it looks like there is
a near term up trending channel forming. However, if you look at the
beginning and the end of the month, there hasn't been that much of a
change. Last month I summarized my outlook as follows.
"...If we see a push over the current highs (around $1365), that would make higher highs and there may more bullishness
all the way up to $1400. We could also see some consolidation for a week or so, which might lead to a stronger continued bounce.
Here's how the month played out.
It looked for the first few days of the month that we were indeed going
to see a push above $1365 and a continued bullish move. However, the
market is still very news driven and so, we saw a few days of selling
before a few days of buying. The end result is that we're only about $10
higher at the end of the month than at the start.
In the meantime, a up trending channel has formed that is bullish in the
near to medium term. In addition, all of the moving averages have
started trending upward as well. All of this has caused me to become
more bullish in my outlook. However there are some cautionary signs as
well. We are approaching overhead resistance at around $1420. Expect to
see some kind of pause and consolidation at this point.
How does this affect my trades? I currently have a put spread on that I entered
a few days ago. I will probably be considering another bullish trade but
will also be looking for an opportunity to sell call spreads as we
approach $1420. I'd also expect this choppiness to continue into
September and beyond until we're past elections in November.
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
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
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