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Success With Options - Monthly Review, Issue #57 -- September 2014 Edition
September 01, 2014
Hello,

Welcome to the September 2014 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.

Strong Summer, Strong Fall? - September Newsletter

This has been an interesting summer so far. In fact, looking back, it's really been an interesting couple of years of nearly pure bullishness. We've seen all of July's losses recovered in August and then some? Will we see a strong Fall as well?

For the last few months, I've been talking about a new service I'm starting. Well, it started last month with a live web session on technical analysis. Check out information on that as well as up coming sessions later in the newsletter. In addition, I have answers to your questions, Options Strategy Focus where we'll supplement the web session with some discussion of using fibonacci retracements to time entries and exits. 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) Exciting Announcement

3) Answers to your questions

4) Options Outlook

5) Featured Products


Announcement: Live Web Sessions Schedule

This month, we launched a new service in the form of periodic live Web sessions. This month's session was quite successful as we had a number of attendees join and participate in the discussion. If you missed it, you can still obtain the recorded session. See below for more details.

The next session will be held during market hours so we can actually play around with some spread entries and actually execute the trade in a virtual account. I've received requests for a variety of topics, one of which is on Calendar Spreads. I will get to that one but felt it would be good to follow the prior technical analysis session with this entry & exit session. Here's the schedule as it stands now.
 
Date/Time Topic Registration
Recorded
8/12/2014
Technical Analysis for Options Traders
This hour session offers tips for technical analysis tools for improved timing of entry and exit of spreads trades. We introduce different technical analysis concepts and highlight ones that may be best for options traders.

Level: Beginner - Intermediate
Purchase Recorded session.
Recording cost: $12
Add to Cart
More Info
9/12/2014
7:30 AM MDT
Short Vertical Spreads Entries and Exits
This session will focus on different entry and exit strategies for short vertical spreads. We'll examine strike selection, position sizing, entry timing, exit rules and more. This will be a great follow-on topic to the technical analysis session. We'll plan about 30-40 minutes of formal presentation with 20 minutes of Q&A.

Level: Intermediate
Seats limited to 25 so don't wait to sign up.
Session cost: $18
Add to Cart
More Info
Oct TBD Calendar spreads entry & management
Calendar spreads can be a complex spread to trade. In this session, we'll cover ways to analyze potential profit, entry strategies, exit strategies and management.

Level: Intermediate
Stay tuned
Nov TBD Portfolio Management
This session will focus on a number of topics related to portfolio management including how many trades to have, balancing the portfolio for market bias, using portfolio greeks to make additional trade decisions and more.

Level: Advanced
Stay tuned

Each session will be recorded and made available to attendees. If you can't attend a session, don't worry. Once the session has completed, the recording will be made available for a very reasonable price. They'll be announced and listed on the Options Trading Videos page as well as in future newsletters so stay tuned.

We are planning additional sessions so continue to use the feedback form to make suggestions and requests for future sessions. Use this survey to have your say.

Stay tuned!!
 


Options Strategy Focus: Fibonacci for Options

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I touched on Fibonacci retracements briefly in the live web session last month but I wanted to spend a little more time on them here. In particular, I want to focus on using them to time entries and exits of options trades. 



I want to use the SPY chart above for our discussion. Without getting into too much detail, a Fibonacci retracement requires a bit of setup. As you can see, it began back before I really knew what the market was doing. I simply noticed a low and a high point followed by some selling. I drew the Fibonacci from those two points to get an idea of where the SPY might (emphasis on might) retrace to.

As it turned out, the SPY sold off to the 61.8% level and briefly bounced. Initially, it looked like that support level would hold. When it failed, where did it retrace to? The 50% level. Because a trader can only consider the hard right edge of the chart, at either of these points, I'd have suspected there might be a bounce. The nice thing is that both are definitive points that can also be used as an early exit.

As I said, I really want to explore this as a way to enhance entries and exits. So, let's use some examples.
  1. Let's say entry A was the day of the bounce from the 61.8%Fibonacci level. I might have taken a bullish entry on a short put vertical spread. To protect myself, I could have entered a stop loss that would have closed the trade when the SPY dropped below the 61.8% level, which is $182.44. In this case, that would have saved me a bigger loss as the SPY reversed and fell through that level - potentially a long way.
  2. As it turns out, entry B is only a little ways farther down at the 50% level ($180.49). The market again finds support and bounces. I could again enter a something like a short put vertical spread with a stop just a little below $180.49 for protection. As it turns out, this one runs all the way back through that 61.8% level and back up to the 100% level. This trade would have been successful.
  3. There may have been a possible bearish entry as the SPY reached the 100% retracement level. I personally didn't like the way the SPY was caught between resistance overhead and the support provided by the 30 moving average. As a result, I chose to wait.
  4. Entry C might be the break of the 100% level ($188.74) on the principle that old resistance becomes new support. That support now gives me a firm exit point. If the SPY falls below $188.74 by much, then bullish assessment was wrong and therefore the trade is wrong. As it turns out, this was a good entry that again paid off.
  5. The next entry (entry D) doesn't come until the 161.8% level (198.94). This is currently resistance and so a good bearish entry point. The only thing that would make me cautious on the first touch of that level is that there is pressure on the lower side by the rising 30 day moving average. What makes me confident to enter the trade here is that I know if the SPY moves definitively above $198.94 then I have an early warning sign to exit.
Notice that the goal here isn't to avoid loss, it's to minimize loss and maximize gains by taking high probability entries. I hope you can begin to see how a tool like Fibonacci retracements can help give you a definitive point to enter and exit trades. If you want to learn more about Fibonacci retracements, you can visit the fibonacci page on the website.

I hope you found these tips helpful. Some of you who have found a way to trade successfully while working full time  may have tips of your own. If so, pass them on to me via the contact me link and I'll pass them on 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!

I just recently received a question regarding ETF options.

Q: Could you possibly post a list of the most liquid ETF options that you trade?

A: I recently posted a video on how to perform a search using the thinkorswim platform. You can find this video here. I would personally recommend that you set up and run your own searches. I'm not aware of any other trading platforms that can do a search for liquid optional ETFs.

That said, I understand that some subscribers to this newsletter may not have access to the thinkorswim platform. My next suggestion is to stick to the the main index ETFs. By that, I mean the SPY, DIA and IWM (possibly the QQQ as well). The main advantage of these 3 or 4 ETFs is that they represent a fairly broad segment of the market. That means when the market is up, your ETF is up and so forth. The ETFs themselves are very liquid as are the options on them. They offer quarterly options as well as weekly options. They are actually my favorite vehicles to trade options on.

There are others that can be traded but it's important to understand any ETF before trading. Be sure to check out the Index Option trading page and the ETF Options page for more background.

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.
 

In the last month (well actually all summer) the market has continued to rise. Except for a small pullback in July, we've seen constant bullishness.

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

"...As we head into August, the question is; will we see more selling or is there some sort of bottom? Let me cover a few possibilities. As of Friday, the sell-off has only been 3% from the high of $1991. I would not be surprised to see closer to 5% as we haven't really had that kind of selling since late January. In addition, 5% would be just about at the point of the lower end of the range I've drawn above. A break below that level even would signal a more major sell-off. In addition, the VIX is high but not as high as it was in other recent sell-offs. On the bullish side, we are near (but not at) the bottom of the channel with a candle on Friday that could be a bullish hammer - but needs to be confirmed on Monday.."

Here's how the August played out.



As you can see in the chart above, the selling did indeed continue all the way to the bottom of the channel. Once that happened, we saw constant buying until the SPX returned to the 50% line. If you look along the entire year, you can a pattern where the SPX returns to that center line. It either rides the under side of it or the top side of it. That of course leaves the question as to what will happen now as we are right at the line. Just to add some perspective, I added a monthly chart showing the last 20 months. Notice that with a few exceptions, there have been an awful lot of positive months in the last 20. In fact 16 out of the last 20 were bullish.

As we head into the Fall timeframe, one has to wonder if the bullishness will continue. I find myself wondering if the market is getting a little tired. Now, of course it's too early to know for sure. However, I believe the 50% line of the channel will be a test. If the SPX can move decisively above this level in the next day or so then maybe we do have more bullishness. If we see a failure to cross decisively over this level that could indicate that the sentiment is shifting. Keep in mind that the longer the bullishness lasts, the more pressure that is created for a correction.

Just to muddy things up further, consider the discussion in the Options Strategy Focus. While there is the possibility of the market turning over and correcting. There is also the possibility that we'll see additional bullishness. One argument for that comes from the current Fibonacci retracement that I drew on the SPY (the ETF for the SPX). If this level holds, it will be a support level that could

As with last month, we are at a point where I wouldn't consider taking action until I see the market move one way or the other. That doesn't mean I sit idle. I'd be looking at both bullish and bearish trades. I would probably look at shorter term bullish trades and longer term bearish trades. My rationale is that we saw a short lived correction recently. Another correction at this point will likely be deeper and longer lasting. The technical analysis web session we recently recorded might be good to get and watch to help you prepare for market changes.

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.

As I announced earlier,  I just released the second for sale' video last week. The title of this video is "Mastering Short Vertical Spreads". I now have at total of two 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 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. While a long time coming, it's been a labor of love. 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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