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Success With Options - Monthly Review, Issue #008 -- AugustEdition
August 01, 2010
Hello,

Welcome to the August 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.

Has the Market Tipped Its Hand? - August Newsletter

July was quite a bit different than June was. Just few days after the last newsletter went out, the market turned bullish and remained that way for almost the entire month. Now we're at an interesting point. I'll talk more about the future outlook in the 'Options Outlook' section at the end of the newsletter.

I didn't do a lot of trade tutorials this month but did manage a variety of trades including a call credit spread, an iron condor and a diagonal spread. Talk about mixing it up!

I also have some exciting news regarding the video I've been talking about. Plans are progressing and I have a topic and an outline together as well as a delivery plan.

I'm still anxious to receive feedback on the newsletter content and on ways I can make it more valuable for the readers. Please feel free to voice your opinion. I've received a few responses, but I'd really like to receive more feedback before considering any more changes. If you haven't done so already, 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) New on the site

2) Trade Tutorial summary

3) First Video Available Soon

4) Answers to your questions

5) Options Outlook
 

What's new at Success With Options

I've re-worked the thinkorswim by TD AMERITRADE review page to reflect a number of new features as well as correcting some of the branding issues related to the fact that TD AMERITRADE now owns thinkorswim. In addition, I've updated the TD AMERITRADE review page to reflect that the Options 360 platform, which I previously reviewed has been discontinued. It's currently being reviewed by TD AMERITRADE compliance since I now have a marketing services agreement in place with them. That page should be posted early this month.

It always seems to be the case that I plan for more than I'm able to complete in a month. I had intended to re-write the 'Options Basics' and related pages this month. However it just didn't happen. It's still in the plan for August so hopefully you'll see those changes this coming month.

Updates completed and pending:

I didn't do any new videos on Youtube this month. I'm working on a longer video to be a part of a larger series eventually. More on this later in the newsletter.

Watch for a few more updates in August...

 

Trade Tutorial Summary

I was not so active with trade tutorials for July. Between being very busy myself and the crazy market action, I wasn't in a hurry to enter a lot of trades. If the market follows through this month I may be entering more trades. I only put on three trades, all of which are still open.

Here are the trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed EWZ put credit spread - $223 Man! Talk about not being able to catch a break. This trade had the perfect setup. Fortunately I was able to minimize my loss by selling some call spreads.
Open SPY Iron Condor    
Open DIA Call credit spread    
Open IWM Diagonal Spread    

While I hate having losing trades, I find that I learn the most from them. I'm going to start including some key thoughts/lessons learned from the past month's trade tutorials here. This last month I only closed out one trade but here is the nugget from that tutorial.

From the EWZ put credit spread:
"...This comes back to the question I've discussed before about sizing for max loss and letting the trade run. Now that we're a week past the initial event, it's clear that I could have stayed in the trade and it would have been ok. However on July 1, that wasn't so obvious. The trick here is to pick a strategy and stick with it. My strategy is to size for a loss equal to the credit. If you are tempted to try the other approach, I encourage you to back test it and then paper trade it to prove the strategy out..."

For more information on all of the trades I've posted as option trading tutorials, click here

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First Video Available Soon

For a few months now I've been talking about a video I'm putting together that I plan to make available on a limited basis. The reason I plan to limit the number of copies I make available is because I'm still in the process of working out ways to cover information and make it as useful to people as possible.

This video will be available for a small fee but it also has a built in incentive to provide feedback. I'll talk more about this later.

I have chosen a topic for this video and it's one I'm very excited about doing. I hope you'll be excited as well. The title of the video is "Introduction to Spreads". This will be a 30 minute video/multimedia product that will include video material, trade examples and interactive quizzes. Here  is a brief outline of what will be covered.

  1. Overview of options
    In this section, I will briefly lay the ground work by reviewing the basics of puts and calls as well as intrinsic and extrinsic value. This is critical in understanding spreads.
  2. Why sell premium?
    I'll be covering probabilities in option movement and how the movement of the underlying affects the extrinsic (time premium portion) value.
  3. Vertical spread  overview
    From there, I'll go directly into different kinds of vertical spreads, discussing why spreads offer limited risk in a trade. I'll be comparing risk in spreads to our initial long call & put options as well as naked positions.
  4. Wrap up
    This will be a summary of all that was covered as well as references to additional resources. The wrap up should also include a final quiz to test your understanding of what was covered.

                             Now, here's the part where you come in

I'm looking for about 50 people to fully use the material including quizzes and provide feedback on ways to improve the content. I will be selling the video initially for about $20 but will provide a $10 refund to anyone who completely fills out the evaluation form. Once I've processed the feedback and made adjustments, I'll be re-releasing the video to a broader audience.

I expect to have the video completed and available by the end of August so look for an official announcement and more details in the next newsletter.

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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 past month, I received a question regarding trading strategies around diagonal spreads.

Q: I was reading about rolling diagonal spreads and doing so multiple times in the same month. Is that a strategy you employ or recommend?

A:
First of all, I can't recommend any strategies for anyone to trade. I'm not an authorized broker or dealer. That said, I have heard of a variety of strategies regarding managing diagonal spreads and some do include multiple rolls in a given month. The key thing to remember is that any time you are rolling the short strike, you should be receiving additional credit. The goal of rolling is to reduce the cost basis of the trade, which in turn reduces risk and increases potential profit.

The trick though is timing. Regardless of the rules you employ, timing the rolls can help maximize the profit. Usually, you will look to roll a short strike when there is little premium left in the current month and rolling allows you to sell premium in a later month. When you are farther away from expiration on the short strike, this is more difficult to achieve.

It is also possible to roll the long strike. You might consider doing this any time the delta drops to a certain level. You will be doing this for a debit, but the idea is to position yourself with additional time in the trade as well as for a continued move of the underlying.

I talked about this somewhat in my 3/21/2010 IWM diagonal spread trade tutorial page. Check out the 4/21 update. The key thing is to know and understand your trading strategy well before trading with real money. I'd recommend back testing and paper trading this approach before trying it in a real money trade.

I'd also recommend developing a clear trading plan for your diagonal spread strategy that includes initial strike selection as well as when and how to perform rolls.

If you would like to submit  a question, comment or feedback on the website, please visit 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.
 

In the July newsletter, I summarized my outlook as follows.

"What's next? I'm not exactly sure. Right now, I'm a bit bearish. I believe the next few days will reveal more. If the $1000 level is broken, then expect more selling. If we start to see more buying, watch for overhead resistance because it may just be another opportunity to sell into the short term rally. Right now, I'm watching $1050 to be broken as resistance before I switch to a more cautiously neutral stance."

It's amazing how much can change in one month's time. Last month, we were at a turning point with a potential of more selling. I'm not saying there couldn't be new lows established, but look at the market move we've seen.



What we've seen is an established higher low and higher high BUT we are sitting right at an overhead resistance level right around $1125. What we saw over the last few days could be simply a pause and pull back before making another attempt at breaking this resistance OR it could be a cause to turn around and test the support levels at $1050 or below. Furthermore, the VIX is sitting at lows not seen since April before the big sell off. From here the VIX could drop below 22.50 (substantiating a bullish move) or spike higher (indicating more selling).

That may sound a little wishy-washy but until the market reveals its bias, we can't project our expectations on the charts. If we see a nice break of resistance, then I'm prepared to become much more bullish. In the mean time, I'm neutral to mildly bullish. I'll remain so until one of two things happens. 1) The SPX breaks out above the resistance level at $1125 or 2) the SPX falls below the last low at around $1050.

How will that affect my trades? I currently have a bearish trade, a neutral (ish) trade and a bullish trade. I will be treating this pullback as an opportunity to enter another bullish trade, such as another put credit spread. I'm especially looking for an opportunity to balance out my bearish SPY call spread that was initially an iron condor. If I can get a good entry Monday or Tuesday with a put spread, I'll take it.

It still wouldn't hurt to be looking for some possible bearish setups because if this latest run is a failed attempt, then there may be an opportunity to sell some call spreads prior to another leg down.

These are all just some trade ideas to consider. We never know from day to day what the market will do and it pays to be prepared for a move in any direction.

Stay alert and nimble. Make sure you are doing market analysis more than once a month. In this climate, every few days would be a good timeframe to re-evaluate.

More on technical analysis.

Options strategies I use

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

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