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Success With Options - Monthly Review, Issue #33 --September 2012 Edition
September 01, 2012
Hello,

Welcome to the September 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.

What Did You Do This Summer? - September Newsletter

Welcome to the September newsletter. What did you do this summer? Now is about the time when everyone comes back from vacation and asks this question. It only seems reasonable that we should consider the same question. At the beginning of the summer, I talked briefly about the old saying "sell in May, go away". If you believed that adage, you would close your trades out and not come back until September.

What did the markets do this summer? Most indices were actually up three months in a row. The SPX briefly poked its head above the April highs. So, what can we expect for this fall? Will it be more buying or more turbulence as we head into another election season? Read on...

As usual, I'll be reviewing my trade this month, talking options strategies, answering your questions and more.

Thank you to the many readers who have recently provided feedback to the newsletter. 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 have one trade that I put on late in July that is still open. I had another call spread trade I had considered but didn't get the tutorial written. 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.

I want to encourage you if you are a fan of the trade tutorials and have a Facebook account to participate in the tutorials by commenting, asking questions, or suggesting alternative strategies. I'd like these to be more interactive that they have been historically.

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
Open
SPY Credit Spread
I entered this trade late in July and it is still open but very close to reaching the target gain.

Win or lose, I find that I learn something from every trade. I haven't closed a trade this month so no real lesson to draw out.

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 2

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. In the last newsletter I introduced the topic of how to calmly face a trade gone wrong. In this issue I want to talk about the 'refusal to lose' mentality and explore how it can affect our trading and adjustment strategy.

Initially, we may not recognize the 'Refusal to Lose' mentality. We may believe we are simply adjusting and entering trades based on our specialized trading strategies. That may be true but I encourage you to take some time to do a self evaluation as I was forced to do some years back.

Let's first talk a little bit about personality types. There are a few different personalities or mentalities that I've seen either in myself or in others.
  • Competitive - This personality tends to compare themselves to others and strive to win at all costs in competitive activities. This can translate to trading as me against the rest of the market. I trade with mentality that I must 'beat the market'. How do you react when the market seems to be against you?
     
  • Loss = Failure - Maybe you've found yourself in this situation (I know I have) where having something I've invested energy in goes wrong. It's easy to feel a sense of failure in this situation. It can often be that way in trading as well where a losing trade feels like a failure. Of course, we hate to lose money but it may be more than that. How do you respond to a losing trade? Can you walk away and know you did your best or are you compelled to 'Fix It'?
     
  • Objective - An objective personality is able to consider all circumstances and walk away with a realization they did all that was possible. Instead of feeling failure or loss, they use the opportunity to learn from mistakes and improve. Whether in trading or in life in general, this should be our goal.

If you find yourself in either of the first two categories, take some time to figure out what is driving you. There are many good books available that talk about trading psychology. One I especially liked was Alexander Elder's 'The Complete Trading for a Living".

Let's now consider how personality and mentality affect our trading. Perhaps you will see yourself in some of these responses. Trust me, these come mostly from my own experiences with my own trading habits in the past.

  • Refusal to exit - Have you been in a trade and it starts to go bad and you find yourself thinking; "I should probably exit" but the time passes and the situation gets worse? Now, you're thinking; 'It's too late, maybe it will come back and I'll get a second chance to exit". The end result is that you ride that trade all the way down to the maximum loss. When you look back, you have that knot in your stomach because you know now that if only you had taken the small beating earlier, you wouldn't have the large beating you are now experiencing.
     
  • Revenge trading - This is often a response to the ultimate losses we've faced from the prior behavior. It also is a symptom of competitive personalities. In this case, I'm motivated to trade to 'get even' with the market or recover some of my losses. We often find ourselves taking riskier trades because they can enable us to recover from our losses quickly.
     
  • Over trading - This can manifest itself in my making many adjustments every time the market shifts a little bit. I'm quick to plan an adjustment and just as quick to compensate for the adjustment. We may sometimes end up with a winning trade but have given up a lot in commission as a result.
     
  • Adjusting rules - A calm, objective trader will evaluate a series of trades and make objective decisions about changing the trading rules. It will be done in an objective manner after careful evaluation and perhaps even some back testing.

If you see yourself in any of the first three trading habits, take some time to step back from trading and evaluate your processes. Frankly, any of these first thee habits pose an extreme risk to your trading capital.

Next month, I'm going to finish out this series by talking about some good habits we should have that allow us to be more objective, trade according to rules and make adjustments accordingly. Remember, learning to trade successfully is a journey that often requires minor course corrections. In the end, mastering ourselves may be more difficult than mastering any trading strategy.

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 about positive habits for traders.

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!

This month I received a question about a special type of OCO closing order.

Q: I'd like to set up a vertical spread closing order as an OCO that closes by buying back at $.10 or if the value of the spread doubles from the original sale price. How can this be done?

A: This is a really good question and employs a strategy I've used in the past. First of all, it's important to realize that not every trading platform supports the ability to buy back a spread as a stop order. Most platforms I've used support a limit close order on spreads though. So, the first step is to check with your broker to make sure it is even possible.

On the thinkorswim platform, it's pretty easy to set up an order like this. The first thing I do is create the limit order to close for $.10. Then, on the order itself, I'll change the advanced order type from 'Single' order (which is the default) to 'OCO'. Next, I'll right mouse click on the little blue dot to the left of the initial order and choose 'Create Duplicate Order'. Alternatively, I could simply go back to the portfolio page and simply chose to create another closing order.

On the first order, leave its order type as 'Limit', change the duration of the order from 'Day' to 'GTC' and change the limit price to your target price. On the second order, change the order type from 'Limit' to 'Stop'. Change the duration from 'Day' to 'GTC' and change the price to your target stop order price.

With these two orders in place, you have a 'Good till Cancelled' order that will trigger if either condition is reached and will automatically cancel the other order.

For a demonstration of this, have a look at this video tutorial for a vertical spread. It's a bit old but illustrates the process.

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 month played out more or less as I outlined last month. After pushing up to the resistance area, we've had a bit of a pause for the last few weeks. Last month, I summarized my outlook as follows.

"...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. "

Here's how the month played out.



After a day or so of selling, the market rallied and pushed all the way up to the highs (peaking briefly above the high established in April). Since then, we've seen a bit of consolidation that has allowed the 30 day moving average to catch up so to speak with the price.

I want to talk briefly about some of the factors that are driving the market right now. You might call these the fundamentals. There continues to be conflicting news from Europe regarding their monetary policies. In addition, there is speculation here in the U.S. of further monetary action. Any monetary easing will likely trigger bullish behavior in the market. On the other hand we are also heading in to the final two months of the election cycle, which will undoubtedly add additional turbulence (volatility).

Now, to the technical aspect. We see a continued up trend that is confirmed by both the channel I've drawn as well as the three moving averages. All of these are bullish signals in general and I continue to be bullish. It would not surprise me to see a push now above the $1425 level that currently acts as resistance. However, as a cautionary note, I need to point out that the SPX is currently near the lower end of the range and very near the 30 day moving average. A failure of these levels might cause me to alter my outlook.

How does this affect my trades? I currently have a put spread on that is nearing ready to close. I will be considering another bullish trade. I will also be looking for an opportunity to sell call spreads as we approach $1425, especially if we see another pause. With anticipated the choppiness ahead, iron condor trades aren't a bad choice either.

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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