the October 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Off To The Races! - October Newsletter
to the October newsletter.
After a bit of a pause last month, this month was another bullish
month. How long with this bullish trend continue? What's up for
October? 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.
Trade Tutorial Summary
|I had one trade when I entered the month. I had
another trade that I entered and closed this month as well. 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.
entered this trade late in July and finally closed at the beginning of
Credit Spread (pairs)
trade turned out
double well since I basically put the same trade on twice with
different width spreads and different quantities of contracts. It
basically allowed us to explore the effect of different spread widths.
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.
From the SPY Credit Spread
Usually credit spread trades will reach a point of exiting
profitably at around 3 weeks or so. Why did this one take a few extra
weeks? First of all, when I chose the September option cycle, the
August cycle had 18 days (too short really) and the September cycle had
53 days. By choosing the September cycle, I automatically built in a
longer trade cycle because premium really starts dropping off only in
the last few weeks.
The second reason this trade took longer was that the market didn't
just go straight up. It had many ups and downs and the past several
weeks were kind of a consolidation period. The result was that this
trade required a little more patience to let it develop. But... waiting
paid off! "
For more information on all of the trades I've posted as
tutorials, click here
Back to the
table of contents
Options Strategy Focus: Psychology of Losing - Part 3
| 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 few newsletters I been discussing the topic of
calmly face a trade gone wrong. In this issue I want to finish out the
series by focusing on 5 key healthy habits that enable us to trade
calmly win or lose.
Whether we realize it or not, we are creatures of habit. We bring our
ways of thinking, our ways of reacting, really our entire personality
to the trading game. Sometimes those habits can help us be more
successful and sometimes they can be detrimental. One of the things
that happens with newer traders is that they don't realize this is the
case and take a more deliberate approach.
While it's easy to focus on learning the trade mechanics, our habits
and ways of thinking are just as important. I think you will find that
as you begin to adopt these healthy habits, your trading will be more
calm and you may actually see your account grow instead of shrink.
Here are 5 key habits that can help you be more of an objective trader
whether your trade is winning or losing at the moment.
Other experienced traders may have additional habits that they have
found make them more successful. I don't pretend these are the only
habits to focus on. In fact, if you have some additional habits you've
found help you be more successful, feel free to send them to me either
via the contact me link or by replying to this email.
- Understand the strategy
While I commented earlier about focusing on the strategy mechanics, I
don't want to take away from the importance of understanding how the
strategy works. The number one habit we should adopt when trading is to
take the time to understand how the trade works. That means how you
enter, how you exit, how the trade profits and how to make adjustments
The best way to understand the strategy is to practice paper trading
for a while. While it may not seem 'fun' to trade and not make any real
money, the point of paper trading is to become familiar with all the
mechanics and ways a particular strategy may play out. In addition,
it's a good way to test out exit rules and adjustment strategies.
- Having well defined exit
A key factor in being able to trade calmly is to know in advance what
your exit rules and adjustment plans will be. That way you aren't
scrambling in panic mode trying to come up with a plan to 'fix' the
trade when it goes wrong. The way to make sure you aren't acting in a
reactionary way is to have your plan in place ahead of time, preferably
before you enter the trade.
Of course, having rules in place will only be of value if you routinely
monitor your trades and act on your rules when applicable. The word
that comes to my mind is that you have to be ruthless in executing your
rules. If you have a rule that says exit when 'x' happens, then do
so - no matter what.
- Implement the exit rules
with stop losses and limit orders
One way to execute on your rules consistently is to utilize the trading
platform. Most trading platforms have ways to trigger limit orders and
even stop loss orders for spread strategies. As an example, I routinely
establish a limit order to close out my credit spreads when I can do
so by locking in 80% of the initial credit. This can be
implemented using a limit order on the price where the target price is
20% of the initial credit.
Check with your broker to find out how to automate various exit
strategies with the platform. Then, practice using paper trading if
possible before trading with real money. A key to successfully
employing this habit is familiarity with the platform and various
- Use a trade journal
If you want to see how you are performing in your trades over time,
make use of a trade journal. The trade journal serves two
purposes. First, it can slow you down and make you think about your
trade, plan your exits and so forth before ever entering a trade.
Second, it can serve as a record of how well you executed your plan and
what lessons you learned.
The benefit of the trade journal is that it acts as a longer term
record of your thoughts, feelings and actions as you executed the
trade. You can later go back and review them to see how well you have
established your good habits and see what habits need to change.
- Correct position sizing
I left this as the last habit but it is perhaps one of the most
important. I've found largest factor in allowing me to be
objective in my trades is to not be over committed in any one trade. My
recommendation is to determine what amount per trade you can tolerate
without getting sick to your stomach or losing sleep. This ideally
should be a percentage that allows the actual risk amount to grow and
shrink as your portfolio grows and shrinks.
I've found this is probably the most significant change I've made to my
trading that allows me to be very objective. I consider my trade, I
determine how much risk is in the trade and I enter the trade according
to my position sizing rules based on tolerable risk. Then, when a trade
goes bad, I exit or adjust according to my rules knowing that the most
I'll lose is an amount I can live with.
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, have a look at the Options
page for more information on good trading habits and tools.
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 I received a question about why I trade $2 wide spreads
instead of $1 wide spreads.
Q: I notice most of your credit spreads are $2 wide
spreads, as are your iron condor spreads. In many cases, $1 wide
spreads seem to have a better price. Is there a reason you prefer $2
A: This is a really good question. It's one I haven't
discussed for a long time so now is a good time to revisit the topic.
On the surface, if you compared a $2 wide credit spread that had, let's
say, a credit of $.45 and a $1 spread with the same short strike for a
credit of $.27, it would seem on the surface that you could make more
by selling 2 $1 wide spreads than by selling one $2 wide spread while
maintaining the same basic risk profile.
Where this turns out not to be the case is when you begin to factor in
the cost of commission. In general, the more you pay per contract on
commissions the less benefit the $1 wide spread offers as it gets eaten
up by commission on twice as many contracts.
In reality though, it's not even as simple as that. Some brokers have a
minimum rate until a certain number of contracts are traded. The result
is that you will need to make sure you understand your broker's fee
schedule well before making a determination as to whether this makes
sense or not.
To illustrate this principle, I put on a pair of trades this last month
that compared the
two. Take a moment if you haven't already done so to read through this trade
tutorial to see how commission can affect your trade profit.
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. As
such, it may change if the charts indicate something different.
This month played out more or less as I suggested last month. After
pushing up to a high of $1470 mid month, there was left the SPX about
midway between the low at the beginning of the month and the high of
the month. Last month, I summarized my outlook as follows.
"...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. "
Here's how the month played out.
As expected, the fundamentals did indeed work in the market's favor as
both Europe and the US took steps toward monetary easing. This as well
as the technicals worked to push the market to highs not seen since
2007. What can we expect as we head into the last month of the US
Looking ahead to the next month, I wouldn't be surprised to see
volatility return to the market. The SPX has pulled back approximately
half way between the highs and lows of the month and is sitting both on
the 30 moving average and the midway point on the upward channel. I
suspect the next move may be up but there is also room to come down and
test the bottom end of the channel.
How does this affect my trades? I recently exited a pair of call credit
spreads and I'm thinking the next trade might actually be another iron
condor given my expectation for volatility. What other trades are you
readers out there considering?
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 sales type information.
For those that aren't aware, I released the first 'for sale'
video about a year ago. The title of this first video is appropriately
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
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
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.
I am also in the final stages of the next video, which I'm very excited
about. It features my favorite strategy - the credit spread, or short
vertical spread. This video will cover everything from how the spread
is constructed to how to create a trading system around it. Be watching
for this video in the coming months.
Back to the
table of contents