Back to Back Issues Page
Success With Options - Monthly Review, Issue #34 --October 2012 Edition
October 01, 2012

Welcome to 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 and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Off To The Races! - October Newsletter

Welcome 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.


In This Issue

1) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product

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.

New/ Closed Trade Gain/Loss Comments
SPY Credit Spread $74 I entered this trade late in July and finally closed at the beginning of the month.
SPY Credit Spread (pairs) $154
This 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 option trading 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 how to 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.
  1. 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 if necessary.

    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.

  2. Having well defined exit rules
    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.

  3. 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 trading mechanisms.

  4. 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.

  5. 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.
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.

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 Trading Systems 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 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 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 wide?

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 page.

Back to the table of contents

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, 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 election season?

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.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

Back to the table of contents

Featured Product

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 "An Introduction 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 options spreads.

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 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.

New Video Coming
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

Back to Back Issues Page