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Success With Options - Monthly Review, Issue #46 -- October 2013 Edition
October 02, 2013
Hello,

Welcome to the October 2013 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.

Back From Break! - October Newsletter

Welcome to the October newsletter. 

Looking back on the Summer, it has turned out to be fairly unexciting. We've had some modest gains but not a lot of excitement. As we head into Fall, what does October hold in store? Will we see more buying? Selling? Flat? Read on...

There will be a few minor changes to the newsletter this month and maybe going into the future. Of course I will still be packing the newsletter with good stuff so don't be alarmed. For more details on that, read on...

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 Products
 

Trade Tutorial Summary

As you may have noticed, I have not been posting any trade tutorials. I have continued to place my own trades that pretty much follow the guidelines I outline on the website and have been teaching in the videos I've recently announced. These have been producing consistent gains over the last few months despite the ups and downs of the market.

Unfortunately, capturing the trading details and producing the tutorial pages has taken more time than I have at the moment. I've written quite a few tutorials on all of the strategies I promote and are worth going back and reading if you want to understand my thought process on evaluating, placing and managing these trades.

Do you have thoughts about the value of the tutorials or ways to improve them? Let me know.

In the mean time, expect periodic tutorials but only when I find opportunities that are interesting enough to write a tutorial on..

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Strategy Focus: Trade Entry Timing

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. This month I wanted to talk about trade entries.

What I want to focus on specifically is whether to enter a that perfect moment technically speaking or whether to enter a trade when you have an opportunity. I know many of you are busy individuals who don't have time to constantly monitor markets and trading instruments. As a result, waiting around for the perfect setup isn't always practical.

Many of the strategies I promote on the web site can be entered virtually at any point in time. All you need to do is identify your outlook (bullish, bearish or neutral) and your timeframe (short term or longer term) to come up with a strategy. Then, with a little work reviewing your watchlist you can quickly set up a trade and enter it. I've done that a fair amount for various trade tutorials I've presented.

That said, using technical analysis to time an entry almost always results in more profitable trades and trades that are more consistently right. Why do I say that? With technical analysis, there are better opportunities to take slightly more aggressive positions. That isn't always the case, but many times the breaking of resistance or bouncing off support can allow you to take positions that are a little tighter many times. That's half the equation anyway.

The other half is that those same indications (support, resistance, etc) can give you early exit signals. That results in minimized trade losses. More trades placed using this technique can mean successful trades are slightly more profitable and losing trades lose less. The total effect is that your overall trading is more profitable.

That said, if your busy schedule doesn't allow for constant monitoring and analysis, there's still good news. Most positive theta trades such as the ones I like to employ don't absolutely require perfect technical analysis as long as you are willing to watch your portfolio grow a little more slowly.

If all this sounds a little bit wishy-washy, let me just summarize this way. If you are looking to maximize your profits, by all means consider using more technical entries and exits. If you are time constrained and can live with slower portfolio growth, then entering nearly any time will work. It's far more important to correctly identify the direction than timing the perfect entry.

That's easier to say than do. Some amount of technical analysis is necessary to even determine the direction. Getting this right is even more important when you don't have the edge of more profitable trades and early exit signals.

I cover the entry timing in more detail in the new Mastering Short Vertical Spreads video. In addition, you can find more information about using technical analysis on the website.

Stay tuned for the next options strategy focus as we return to more strategy related topics. I'm always looking for additional topics that are helpful to readers. Send them in via the newsletter feedback page or the Contact Me link.

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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!

Q: Have you developed any courses for Diagonal Spreads? It seems these would be very effective with weekly options (short weekly and buy monthly).

A: There are really two questions there I want to address. The first is related to additional course material on Diagonal Spreads. The answer is... not yet. At the moment, the only two official courses (besides what's on YouTube) are the Introduction to Spreads and Mastering Short Vertical Spreads videos. Beyond that, my plan is to first to a video on calendar spreads because the calendar spread and vertical spread are building blocks to understanding how a diagonal spread works. Stay tuned for the calendar spread course next year.

In terms of trading using weekly options in a diagonal spread trade, I haven't specifically covered that before (on the website). However, let me take a little bit of time to discuss this here. For those that aren't aware, weekly options are options that have many of the same characteristics as the traditional monthly options except that they expire in weeks other than the typical 3rd Friday.

Weekly Options initially only traded for a very short timeframe (8 days). These days, multiple weeklys options chains exist. The rules were amended to allow up to 5 consecutive Weekly Option cycles. Weekly cycles are created only for weeks that don't have either standard options expiration or quarterly options expiration.

How does that help the diagonal spread trader? One of the main ways to recoup the cost of entering a long diagonal spread is through rolling the short strike from a close in month to a month farther out in time. This roll will typically reduce the cost of the trade by up to half. That will make the final long vertical spread fairly profitable. As a result, if you can squeeze in additional rolls even in a typical 1 month diagonal, you have the chance to squeeze out a little more profit. That's one benefit.

Another benefit is that having weekly options available means that you aren't forced to go way out in time to set up a diagonal spread just so you have a short strike with 20 or so trading days left in it. The catch to this whole thing is that 1) weekly options are only offered on a fairly limited number of instruments... mostly index ETFs and 2) you need to do your due diligence to make sure that using weekly options is indeed beneficial to your trading strategy. That means back testing then paper trading and finally tracking trades in a trade log. 

If some of the concepts I've covered here don't make sense, be sure to review the Diagonal Spread strategy pages on the website.

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.
 

We started to see the hints of selling back in May. This month we saw more follow through. While we did see our first official negative month, we're still up nearly 10% on the S&P for the year.

Last month I didn't do an outlook so no quick recap here...

Here's how the last two months played out.



As you can see in the chart above, there have been some fairly wild swings up and down over the last few months. However, notice that the longer term dominant trend is still up.

At this point, it's not entirely clear how the market will work itself out. It looks like there is still some room for the S&P to move down to the $1675 level without breaking any kind of serious support. On the other hand, there is the convergence of the 50 day and 30 day moving averages in the same approximate area. I'm still bullish overall but we may still see some churn in the near term.

In terms of my trading plans, I'm looking for any dips down to the $1675 level and even the current level as opportunities to enter bullish trades. I will be closely watching this same level thought to make sure it holds as a support level. I'd expect to see a nice bounce from here as confirmation that the trend has resumed. In the mean time, I've got some call spreads that are currently doing quite well with this sell-off. These were entered with the S&P near the highs around $1700. A bounce at this point could put them at risk.

A lot could happen at this point with the market returning to being very news driven. As we enter into the October timeframe, the market should return to being earnings driven. Also, keep in mind we're going to be entering in the the holiday season that is often a bullish time. Stay tuned to see how this turns out.

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 sales type 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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