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
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.
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
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make
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.
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
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.
Purchase Recorded session (MP4)
Recording cost: $12
|Calendar spreads entry
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.
Seats limited to 25 so don't wait to sign up.
Session cost: $18
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.
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.
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.
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
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.
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
- 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.
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
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
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
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.
I have a number of questions related to your trading plan section on the
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.
- How do you define which stocks need to be added to the watch list?
- What are the indicators that you use to setup your entry rules?
- Can you explain to me the correlation between market conditions and the trade?
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.
- 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
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
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.
- 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
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.
- 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
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.
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.
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
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
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 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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
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.
- Understanding the construction and the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
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table of contents