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Success With Options - Monthly Review, Issue #58 -- October 2014 Edition
September 30, 2014

Welcome to the October 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.

Fall Weakness - October Newsletter

Welcome to fall! As we enter exit September and begin the final months of the year, it appears we are finally starting to see some weakness. Will this continue into October and beyond? Is a rally coming?

I recently began a series of live web sessions on a number of topics suggested by subscribers. While not attended in large numbers, we've had good participation. Check out past sessions as well as up coming sessions later in the newsletter.

In addition, I have answers to your questions and Options Strategy Focus where we'll talk about market analysis, building a watchlist and identifying trade setups. While you may find similarities in high level points this month between the Q&A section and the Options Strategy Focus, I think it provides opportunity to explore the same concepts from a little bit different perspective. The choice to align these was somewhat intentional.

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

Recently, we launched a new service in the form of periodic live Web sessions. These sessions have been quite successful as we had a number of attendees join and participate in the discussion. If you missed them, you can still obtain the recorded session. See below for more details.

The next session will be held after market hours to allow those with work schedules to attend. As promised, this next one will be on Calendar Spreads.  Here's the schedule as it stands now.
Date/Time Topic Registration
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 (MP4).

Recording cost: $12

Add to Cart
More Info
Short Vertical Spreads Entries and Exits
This hour and a half session focuses on different entry and exit strategies for short vertical spreads. We'll examine strike selection, position sizing, entry timing, exit rules and more.

Level: Intermediate
Purchase Recorded session (MP4)

Recording cost: $12

Add to Cart
More Info
5:00PM MDT
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
Seats limited to 25 so don't wait to sign up.
Session cost: $18

Add to Cart
More Info
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
Dec TBD thinkorswim Analysis Tools
This session will provide a look at a section of the thinkorswim platform that often intimidates even experienced traders. The goal will be to demystify many of the features so you can unlock the potential for better trade and portfolio analysis.

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: High Probability Trades - For Fun and Profit

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I recently received a question that is really too in-depth to cover in a simple Q&A. Instead of answering there, I'm going to address it in this column.

The essence of the question is how to select a basket of stocks to trade and identify setups and potential strategies against those setups. There are many different aspects to consider here so I'll try to tackle them one at a time.

Selecting Underlying Instrument - I'm also addressing this below in the Q&A section of the newsletter. Basically you have three choices in my mind when determining what you'll trade. You have the easy choice, the more complicated choice and the most complex choice. Let me elaborate.
  • Easy - The easiest approach is to go with a handful of broad based indices. Pick your favorites. Mine are SPY, IWM and DIA. You may add QQQ into that mix as well if you like NASDAQ stocks. These represent a fairly broad set of stocks and are both easy because you only have 3-4 charts to monitor and safe because they won't be influenced by actions or events related to a given company. You can broaden this with a few additional items like GLD (Gold tracking ETF), emerging markets (EEM), etc. You can further expand this list by looking at the Sector SPDR ETFs that track various sectors within the broader S&P 500. Check out the ETF page for more on this.
  • More complicated - If you want to trade a diverse set of ETFs, you first need to locate ones that are optionable. Not only that, you want ones that are themselves fairly actively traded and have options open interest that is reasonably high. Typically this involves a lot more searching, which is why it's more complicated. However, you are rewarded with a watchlist of many choices. I recently recorded a video on how to do that. Check this video out.
  • Most complex - This is much more complex first, because there are so many stocks in so many different industry segments. There are large cap stocks, small cap stocks, financial stocks, retail stocks, etc. Of these, some are optionable, but not all. Furthermore, when trading on stocks, it's best to know the fundamentals to determine if they support the direction you are trading. Typically, this requires some decent search capability. While I've found tools to help with this, I find it much too time consuming.
Identifying Strategies - Strategy selection can be a bit more challenging. First of all, you need to have already defined what strategies you will use. It's a good idea to know your strategies and what timeframe and market conditions they are good in. For example, short vertical spreads can be traded in 3-4 week timeframes whereas calendar spreads and diagonal spreads usually take longer to play out.To successfully identify strategies, you will need to know the outlook 4-6 weeks (or longer) out. This is why I take the time each month to do an Options Outlook. Depending on your strategy, it's good to have an even longer term outlook.

So do you let the outlook determine the strategy, or do you let the strategy determine the timeframe for the outlook? It's a great question. More often then not, it's a mix of both. I start by trying to have an outlook, both near term and longer term in mind. Then I evaluate strategies to fit. If I expect a potential reversal, maybe my short term outlook is bullish for example while my longer term outlook is bearish. In that case, I might select a bearish calendar spread for a longer term trade while using a bullish short vertical. This combination can actually provide some degree of protection as well and adds balance to the portfolio.

Identifying Setups - The trick to identifying setups is to monitor your charts frequently (daily). Even for busy traders, you should set aside 10-20 minutes to take a quick look at the charts in your watchlist (before market open or after market close). While longer term trends help you identify what strategies you might want to employ, daily monitoring helps you identify when you may want to enter (or exit). Usually you will use some form of technical analysis to do this. It can be as simple as moving average & support/resistance or as complicated as adding lots of chart studies (ex oscillating indicators like Stochastic and MACD, etc).

Furthermore, your longer term outlook can give you an idea of what setups you are looking for. As I often talk about, there will be longer term continuation patterns that can signal the trend will continue as expected. These usually have some sort of setup indicator associated. For example a bounce off the moving average or fibonacci lines you've drawn. Just remember that a setup can also be used as an early exit indicator. By that, I mean that a failure of that setup means you were wrong so you can often create a stop order that will exit your trade if the initial setup fails once you've entered it.

There are a lot of components to consider here and the space does not permit full coverage on any of these. However, be sure to look at some of the free videos posted on YouTube as well as the videos and live sessions recently recorded. These contain a lot of this kind of material in more detail.
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!

Here's a multi-part question about trading plans. This actually came in back in June but seems to work out well with the above Options Strategy Focus topic.

Q: I have a number of questions related to your trading plan section on the website
  1. How do you define which stocks need to be added to the watch list?
  2. What are the indicators that you use to setup your entry rules?
  3. Can you explain to me the correlation between market conditions and the trade?
A: Well, there's certainly a lot to be addressed in these questions. If you noticed, there these questions are somewhat related to the prior question that prompted the Options Strategy Focus topic for this month. So, let's get right to it.
  1. Stocks in the watchlist: This is a fairly personal choice. The easy way to do it is to pick from highly liquid broad based ETFs. If you've followed my tutorials and the website, you know these are primarily the SPY, DIA and IWM. These three track the SPX, Dow Jones Industrial and Russell 2000 indices. My preference is to trade these almost exclusively.

    If you want a little more variety, you can find a number of optional ETFs that are both highly liquid and have large open interest on the options. I recently recorded a video on how to perform a search on the thinkorswim platform. Check out this video for more info.

    Finally, you can trade any number of optionable stocks that are out there. There are actually quite a few. The trouble is that any time you pick just one stock, the potential behavior of that stock is subject to not only the broad market behavior but also any corporate influences such as earnings announcements, CEOs getting fired, company buy-out actions, etc. Not only that, but it becomes more important to find stocks with decent fundamentals if you are trading bullishly.
  2. Indicators for trade setups: Again, everyone's preferences will be a little bit different. However, for me, I tend to stick largely with the moving average and support/resistance for setups. On an up trending stock, the 30 day moving average and/or some kind of support can provide powerful indicators for trade entries. I discuss this a fair amount in both of the recent web sessions that are recorded and available for a very reasonable price.

    Of course, you can pick any that suit your preferences. If you are a strong market technician, then perhaps you may choose to include various oscillating indicators as part of your trade setup. Beware that technical analysis is not a guarantee. As I've said recently in a number of places, it's better thought of as a line in the sand. That line tells you when your market assessment is wrong. The main thing is to have a set of indicators and use them consistently - and back test any you decide to use before putting real money on the line.
  3. Market Conditions and the Trade: I'm not 100% sure I understand the question but I'll make an assumption this is about trading with the current market trends and not against. It's a good idea to trade with the prevailing trend. That's why I promote having a 4-6 week outlook when trading. This gives me an idea of whether I'm trading bullishly, bearishly or in a more neutral fashion.

    While it's possible to take trades in opposition to the broader market, you've probably heard the phrase "a rising tide floats all boats". That means any broad market movements will eventually act as a buoy or anchor on the underlying you are trading. Given that it can be a fairly tough to consistently get the entry & exit right, I'm a believer in using the trend to improve my odds.
As I said, there was a lot packed into that question and certainly much more than I have room to devote to in one article. It's interesting that many of these questions relate back to some of the first Web sessions I did. Stay tuned as more of these are scheduled.

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 may have finally seen some kind of break in the unrelenting bullishness that has been the trend over the entire year really since Feb/March. It's probably just a little early to tell though.

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

"...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 ...

Here's how the September played out.

As you can see in the chart above, that 50% line indeed acted as resistance and the SPX had difficulty getting above it. We've now seen the two moving averages, the 30 day and 50 day averages fail to act as support as well. Keep in mind though that we saw a similar swift sell-off followed by recover back in July.

For October, it is probably too early to tell how sever the weakness will be. It could just be a short term weakness that will pass in a week or so or it could be the beginning of something longer term in nature. Keep in mind I've been suggesting we need to see a correction and this may be it (emphasis on MAY). At a minimum, expect the selling to continue down to the lower end of the channel. I'd bet first touch will result in buying. However, I'd keep a close eye on that area to make sure that this level holds. Second level of support is even lower at the 200 day moving average. If the SPX ultimately breaks out of the channel on the lower side, expect selling all the way down to $1900 or so.

I'm fairly cautious at the moment about taking any new trades. I think we see weakness and maybe indecision for a few weeks. That may lend itself to a market neutral trade. I really think it's too early to call a direction and trying to call the bottom is a bit like trying to catch a falling knife. You're likely to get cut in the process. Conservative traders will likely want wait for a confirmed bottom to develop and confirm.

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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