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
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.
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
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
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
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.
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 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.
Some areas you might have a look at to improve your returns might
include the following.
- 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.
- 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
- 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
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.
- 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
- 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.
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
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.
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
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
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.
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 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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
I'm excited about this project. Many know this is my go-to strategy for
After watching the video, I'm certain you will understand why.
- Understanding the construction and how the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
Back to the
table of contents