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Success With Options - Monthly Review, Issue #80 -- September 2016 Edition
September 05, 2016

Welcome to the September 2016 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 (nearly) 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.

Fall is Here - September Newsletter

Welcome back from a month off. We've had a busy summer to be sure. For the last few weeks, we've seen some range-bound trading. The question is, will this hold into the fall?

In this edition we'll tackle that question, look at the flexible short vertical spread and answer a question that was recently submitted by a reader. Finally, we'll close as usual with a Market outlook for you. For more details, read on...

I'm always interested in receiving feedback on the newsletter. If you haven't done so recently, please consider taking a few minutes to visit the newsletter feedback page and let your voice be heard. This can be done anonymously so please consider how you can help make the newsletter better.

In This Issue

1) Options Strategy Focus

2) Answers to your questions

3) Options Outlook

4) Featured Products

Options Strategy Focus: Short Vertical Spreads in All Climates

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials and other topics related to options trading.

We've just spent 7 weeks trading in a roughly sideways trend (see Options Outlook below for more). What's a trader to do in terms of picking a strategy? One of my favorite trading strategies is the short vertical spread. I like it because it can be used in so many different market climates and traded in so many different ways. I'm not saying the other strategies don't have a place here, but the short vertical spread can be used in the middle, top, and bottom of the range. What's even better is that you can put two vertical spreads together and create an iron condor to capitalize on the range-bound trading.

What I love about short vertical spreads is that they are short-term trades. They can reach their potential in 3-4 weeks or less when the market goes your way and can still reach their potential even when the market doesn't cooperate immediately.

When trading short vertical spreads in a trading range such as we've seen recently, it's more common to enter in a contrarian sort of way. That is, I enter a bullish short vertical spread at what I suspect will be the lowest extent and I enter a bearish short vertical spreads at the highest point. Of course I'll rarely find the exact highs & lows. The short vertical spread is flexible enough to be a little wrong about the high and low.

These are just a few examples of ways the short vertical spread can be traded. I hope you found this to be useful in this current climate of sideways trending markets.

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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 we have a question relating to becoming a proficient trader.

Q: From a beginner: Increased my paper trading acct. by $1100 in 6 wks utilizing $6000 in buying power. Trades were made up of a few iron condors plus call and put spreads. Did nothing naked only went for premium. Had a max of 30 positions. $1100.Increase in acct. did not include TDs brokerage fees. I feel that I'm on the right track, but its clearly evident that I need more training. I had only purchased 1 contract per trade. Any helpful input ?

A: It sounds like you are at least on the right track. It's hard to tell from the details exactly how large your account is to get an accurate portfolio growth number. A return of $1100 on $6000 buying power yields an OK ROI but could obviously be better. For the record though, it's important to include all the costs of trading, including brokerage fees.

My initial recommendation is that you begin adopting a more structured trading system. Start with the Options Trading Systems page on the web site. It's really important to use the system to manage your trading because it gives you three key things that are critical to your success.
  1. A repeatable 'playbook' that guides you in the selection of trades, sizing of trades and management of your trades. This will help ensure you are consistent in your trading. This is especially critical in the beginning stages of trading.
  2. A long term record that allows you to track and manage your trades over time via a trade log. This log can help you see your progress from month to month. As the number of trades grows, you can begin to see the trend of your trading and can begin to locate opportunities for improvement.
  3. A trade journal that allows you to track the details of each trade. This may seem cumbersome and time consuming but pays dividends in that it can help reveal any flaws that may exist in your strategy or in your execution of the strategy
Some areas you might have a look at to improve your returns might include the following.
  • Position sizing: Are you sizing your position correctly and consistently? I generally recommend that you size the position to limit risk to 1-2% of the portfolio. It's possible if you are trading 1 contract trades, you might have positions that are too small.  This can sometimes be as harmful to your portfolio as having too large of a position size.
  • Number of trades: The rule of thumb here is a little less strict. It has a lot to do with your trading preferences and ability to manage. However, it often makes sense to have several trades (3-6) at any given time but perhaps entered over weeks. I find this helps keep my portfolio balanced and adaptive to the changes in the market.
  • Entries and exits: How are you timing your entries and exits? Sometimes entering too soon or exiting too soon or late can affect the profitability of your trade. Be sure to analyze the ROI of the trade going in and make sure it makes sense. A trade with too low an ROI means you are risking a lot for the potential return and only makes sense if the corresponding probability of success is higher.
  • Trade rule refinement: Most of the above items really are part of your trade rules (or should be). This is a separate item because the way you go about refining the rules is important. Be careful not to be constantly changing things. This needs to be a very scientific process where you change one thing, monitor and adjust as necessary.
How do you know which of the above items to focus on? That's why having a trade log and trade journals is so important. These can tell you how you have been doing. They can give you areas to look at as possible areas of improvement. Be patient with yourself and the process as you work through this. I found it was one of the more challenging aspects for me - being deliberate and methodical about any changes I made.

Be sure to look over the Options Trading Systems page on the web site and delve into all the items there. I can't emphasize enough that this is a critical part of your trading journey.

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, expectations may change if the charts indicate something different during the month.

With two months passing since the last 'Options Outlook', what's been going on? Well, a lot, and nothing. We are certainly well above the highs I talked about in the last newsletter, but then again, once there, we've been treading water.

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

"...What does this all mean for July trading? My outlook is pretty much what it was last month. Realize that we are very close to the recent highs around $2120 and the all time high around $2130. I wouldn't be surprised to see a little hesitation before pushing up through those levels. Watch this area very carefully. If we fail to break this time, I fear we may see some neutral to bearish trading for a while..."

Here's how July and August played out.

I had hinted that perhaps there would be a pause or pullback near the recent highs. While we had a day or so of pause, the SPX went on to forge new highs around the $2190. For the last 7 weeks or so, there has been more of a range-bound trading behavior as the market absorbs this most recent round of bullishness.

Any time you see the market range bound like we have, there is a likelihood that it will break either to the up side or down side outside the prior range. It will likely do this in a forceful way. The longer the sideways action, more violent the breakout could be. This range is now $2150 at the bottom side and $2190 or so at the top side. Given that the dominant trend is still up, I'm leaning toward the next big move being a bullish one. I'm also being watchful of a potential breakdown of the trend. It's always good to be prepared for the worst case scenario as well.

I've used the recent pull backs to put on more bullish trades while also taking into consideration that we could see range bound trading for a while longer. Does this give you any ideas of trades? While I'm currently bullish in my trading, I'll have some potential neutral to bearish ideas waiting in the wings?

As always, do your own analysis and whatever trades you enter, use good money management and have exit strategies in place in case you are wrong in your analysis. It's a good practice to be prepared with trades in either direction but not to act without confirmation.

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 Products

I'm adding a new section to the newsletter. Feel free to disregard if you aren't interested in product information.

One of the more recent additions to the portfolio of services and products is the Live Web sessions. These sessions are recorded and and available for a very reasonable price of $12 per session. I've created a Newsletter Special. If you add all 4 sessions to your shopping cart, you can get 4 sessions for the price of 3 by using the discount code: WebEx4Pack

Some time back, I released the second for sale video. The title of this video is "Mastering Short Vertical Spreads". I now have a total of two strategy training videos for sale . Here is a quick summary of each.

An Introduction to Options Spreads
This 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.

For more information or to purchase the video.

Mastering Short Vertical Spreads
The focus of the video is on one specific strategy, including all aspects of of the process. This includes:
  • Understanding the construction and how the trade progresses over time
  • Selecting the long & short strikes
  • Planning entry & exits
  • Managing the trade once entered
  • Back testing
  • Creating a trading system with the strategy
I'm excited about this project. Many know this is my go-to strategy for options trading. After watching the video, I'm certain you will understand why.

For more information or to purchase this video

Special Discount offer:
If you'd like to own both videos, you can do so for a bulk discount. Simply add both videos to your shopping cart and then enter the discount code 'combo10' to receive $10 off your shopping cart total.

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