the September 2017 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.
Anatomy of a Trade Entry Part
7 - September Newsletter
|I realize you may have just received a newsletter a few weeks back,
but I want to get back on schedule.
It's been an interesting few weeks as the market appears to have stalled.
Are we in for a Fall rally or a larger selloff?
We'll have answers to those questions, a wrap up of the Trade Entry
discussion, answers to your questions and more. 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: Anatomy of a Trade Entry - Trade Entry
| 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.
A subscriber recently submitted
newsletter feedback requesting
coverage of trade entries and exits. As a
result, I've devoted the 2017 newsletters to covering a series of topics on just that.
This month, we're focusing on position sizing. For the overview, check out
Feb, 2017 article.
And so, we finally reach the point of entering the trade - that point
where we actually set the trade up in our trade platform and submit it.
You might think that perhaps after going through all the other steps
that you would just put the trade in and be done with it, right?
The truth is that it's both very simple and more complicated than that.
You see, the final step of entering the trade involves determining the
price at which you are willing to enter the trade. When you look at any
given stock or option, there is a bid and an ask
price. Depending on
liquidity, the spread between bid and ask can be wide or pretty narrow.
The same is true for a spread. You will notice that there is a bid price
(the price for which the market is willing to pay for the spread) and
the ask (the price the market is asking for the spread). The bid
price will always be lower than the ask price.
As someone who is entering a trade, you will typically sell at the bid
price and buy at the ask price. That means you are somewhat at a
disadvantage from a pricing perspective. However, in an open and liquid
market, it is often the case that someone may be willing to buy a spread
you are selling at a price higher than the bid price.
Some platforms will allow you to put a trade in (especially spreads) at
the mid price. This is a price mid way between the bid and the ask. It's
not unusual to have this trade accepted. However, you may have to wait
a little bit. In other words, you need to be patient.
Think about this. You have gone through all the above steps to analyze,
select and position size your trade. Now, you just want to get in the
trade. How badly? For every trade you enter, there is someone on the
other side of the trade who may be just as anxious to take the trade and
may be willing to give a few pennies to do so.
Why is it so important to make sure you get the best prices? It's odd
that most people who trade will fight to get the best price on exit but
will often be willing to give up a few pennies per contract to get in
the trade. In reality, it should be the opposite. Fight to get the best
price to get in the trade and be willing to give a little to get out.
The reason that you want to pay attention to price on entry is that for
every trade you enter and are willing to give up a penny or two per
contract, this adds up.
Remember first of all that one contract
represents or controls 100 shares. That means in reality a penny you
give up costs you a dollar of potential profit. Let's say you enter 5
contracts. That's $5. Let's say you enter 5 trades a month like that.
That's $25 per month, every month of the year for a total of $300 you've
left on the table.
One other reason I advocate holding out for a good price is that it can
help keep you from making a 'desperation' trade. What I mean is that
sometimes you just really want to be in a trade - maybe because it seems
like an easy win or maybe because you need to get a trade in. When
you're willing to be in a trade at any price, it may make you less
objective. Having a fixed price you are willing to hold out for can keep
you from getting in a bad trade. That's happened for me several times.
We've reached the final step and consequently the last article
series. At this point, there's nothing left to do once you submit the
trade but wait for the trade to fill. What happens if it doesn't? You
wait and wait and the price moves away from your ask price. Maybe it's
good to just let the trade go. You may have missed the opportunity, but
I almost can guarantee another one will come along.
What happens if you get the trade filled? Now the fun begins! You get to
wait for the value to bleed out of it - for the trade to develop so you
can collect the profit from the trade.
For additional detail trade setup and analysis, check out the
Option Trading Strategies page on the
website. Also have a look at the individual strategy details because
much of the details of how you calculate risk and reward and how you
select strikes is covered there.
As always, please
send me feedback with any requests for topics or thoughts on what has
already been published.
Happy trading this month!
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
posting one or two questions, so stay tuned!
Short month, no questions, so here's one from some time back.
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
3/2/2010 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
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 have any thoughts or suggestions on topics that should be added
to the web site or topics that should be covered in video, please use
feedback link or
contact me link to let me know.
Help me ensure we have an interesting (and fresh) 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.
This last few weeks have seen a bit of a shakeup in the bullish trend
that's been in place all summer.
In the August newsletter that came out a few weeks back, I summarized my outlook as follows:
"At this point, we are pretty much at the 20/30 day moving average support. Further selling is likely to take us down to the 200 day moving average for the next level of support. I'm inclined to be cautiously bullish - expecting a bounce. However, I'd also be very careful about the recent lows. A close below that level is a strong indication there is more selling to come..."
Here's how the remainder of August played out.
I was wrong about one thing. When we saw the break below the earlier
lows, I was pretty convinced that we'd see selling all the way down to
the 200 day moving average. However, there is a kind of support that's
been established at the prior consolidation area from back in June. The
was enough to cause the market to rally back to former highs. In the
process, we've seen a fresh round of higher highs and higher lows.
I'm still a bit cautious heading into fall. There has been a history of
selling in late summer into the early fall timeframe. That coupled with
the fact the the SPX is back near all-time highs suggests caution is
called for. If the resistance levels near $2480 hold and we see another
retreat, we may see that selling soon. If we can get a solid break above
the highs established back in July, then we may see
a fresh rally into
the last few months of the year.
My trades I put on were in rough shape for a week or so while the market
sold off, but are back in profitable status. I'd consider it too late to
enter any bullish trades and probably a bit early to enter any
counter-trend bearish trades. Best to keep an eye on things and
make a decision once the market gives us additional information about
where it's heading.
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
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
table of contents