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Success With Options - Monthly Review, Issue #32 -- August 2012 Edition
August 04, 2012
Hello,

Welcome to 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 and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Choppy Trading - August Newsletter

Welcome 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.

 

In This Issue

1) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product

 

Trade Tutorial Summary

I 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.

New/ Closed Trade Gain/Loss Comments
Closed DIA Iron Condor $156 The 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.
Open
SPY Credit Spread


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 adjustments.

From the DIA Iron Condor:
"...This trade turned out successfully due to two key principles I try to follow.
  1. When then trade is going successfully, follow your standard exit rules
  2. When the trade isn't going as well and existing profit is being threatened, consider an exit to lock in existing profit
For more information on all of the trades I've posted as option trading tutorials, click here

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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 moment.
  1. Timeframe
    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.
     
  2. Outlook
    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 newsletter.
     
  3. 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 just 1%.

    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 occasion.
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.

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 to lose'.

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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!

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 new one.

A: Thanks for the great question. I'd like to answer it in two different ways.

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 Condor 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 butterfly spread.

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 moment.

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 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, 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.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

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Featured Product

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.

For more information or to purchase the video.

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