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Success With Options - Monthly Review, Issue #70 -- October 2015 Edition
October 05, 2015

Welcome to the October 2015 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.

Double Bottom? - October Newsletter

Just when you thought it was safe to go back in the water... well, suffice it to say you were probably wondering if there was another shoe to drop. So, is the selling over? Is there still an opportunity to see a Santa Clause rally heading into the end of the year?

In this edition we'll tackle that question, explore an interesting trading strategy for this market and revisit an older question that was submitted by a reader. By the way, I apologize for getting this newsletter out a few days late. It's been a busy month.

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) Answers to your questions

3) Options Outlook

4) Featured Products

Options Strategy Focus: Trading Tools For Options Traders

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials.

I periodically am asked about how my trade tools are set up and how I use them to analyze, enter and manage trades.

Since this is a bit difficult to capture simply in text in a newsletter, I'm going to record a video for this month that I'll reference here and I'll just hit the highlights of my tool setup. For the most part, I really have three dashboards I use.

  1. 5 day/15 minute charts - I like to have the three major futures charts on a short timeframe just to show basic market behavior. I typically use the tos charts in 1x3 (1 column 3 rows) grid mode showing the /ES, /TF and /YM that represent the three big indices. I like to turn off volume, moving averages and anything that keeps me from simply seeing the relationships of one 15 minute period to the next.

    Honestly, I don't really use them for making my trading decisions except to try to eek out a few more pennies or maybe a slightly better position. As an example, the other day I was watching these charts and observed a bias toward selling. I decided to wait and monitor to see if I could get a better position at a more favorable price. On occasion, I've actually decided completely against entering based on what I'm seeing that day.
  2. 1 year daily charts - I also have a grid  mode for these but use the Prophet Charts instead. Why? I'm not sure I have a great reason except that I tend to like using the studies on this tool a little better and I'm more comfortable with setting them up. In this chart, I use 2x2 grid charts and have the $SPX, $RUT, $DJI and $VIX.  usually keep these charts pretty simple. I turn off volume and any other studies except the 20 day, 30 day and 200 day moving averages. I find it handy to use this very basic support/resistance mechanism. Beyond that, it's really just technical analysis such as horizontal support/resistance or up/down trending support/resistance. I'll often draw trend lines in to help with that.

    I tend to use these charts more for my longer term outlook and deciding on a given day whether I want to enter a trade.  These charts give me a more heads-up perspective on the 4-6 week outlook and I review them prior to making any entry decisions. It's often the case that the short term charts are telling me one thing while the longer term charts are telling me another... or they could confirm each other.

    I should note that these aren't the instruments that I trade so I often have another single chart up that I use to verify my support and resistance. For example, if I'm liking the action on the $SPX, I'll have a single chart of the SPY that I use to analyze my trade setup.
  3. Main thinkorswim dashboard - On the main dashboard, I have all my trades in my portfolio that allow me to evaluate my positions. It probably goes without saying, right? However, on my trade tab, I almost always have two columns enabled. One is 'Probability OTM' - the probability that the option will expire out of the money. The other is 'Open Interest'. While most index options have a pretty high open interest, I trade a lot of weekly options and it pays to know if a strike I'm considering has low open interest.

This is probably a pretty basic setup, but it serves the purpose for me to monitor the market at various points during the day. I like to monitor the open to see how the market is leaning and then 30 or so minutes in to see if the opening trend continues or reverses. I also like to monitor the close for the same reason. I often will make trade entries or exits 30-60 minutes after the open and 30 minutes or so prior to the close. It's then that the 15 minute charts really come in handy to see what the bias is.

Everyone has their favorite setup so don't let this influence you if you already have a good working setup. However, if you're looking for suggestions, feel free to leverage anything I've shared.

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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!

Since I didn't receive any questions this month, I'll resurrect a 'blast from the past'.

Q:  I'm trying to find an easy way to back test a strategy that I'm considering. What is the best way to do that?.

First of all, kudos for considering back testing before beginning to trade the strategy live. There are actually a number of different ways to back test. There are some platforms out there that let you write entry and exit rules using a programming language or scripting language. The trouble is that many people don't have that kind of background.

In my opinion, there are at least two ways you can back test using the Thinkorswim platform.
  1. You can use ThinkBack. ThinkBack is a feature that's been available in the platform for quite a while. With ThinkBack, you can take advantage of historical closing prices of stocks, ETFs and the options on them. That means you could select a date for trade entry that's in the past, enter the trade based on your entry rules and quickly spin forward to the point where you find your exit triggered based on your rules to find out how the trade resulted. You can then log that information in a spreadsheet for tracking.

    The one limitation with this approach is that the charts are still based on the current point in time so to get an accurate picture, you'd have to zoom in and adjust the chart to make the right edge reflect the individual days. Another limitation with this approach is you can't set up limit and stop orders to close the trade automatically. The nice thing though is the data goes back quite a ways in time. You can use this feature on either the live platform or the paper money platform.
  2. You could also use OnDemand, which is a cool new feature of the platform that allows you to turn your entire platform into a time machine. What I mean is you can pick a point in history (currently only as far back as 12/6/09) at any time of the day and begin re-playing the data. This gives you a live feel to the trading. When you go into OnDemand mode, it affects nearly every feature of the platform as it will adjust the charts, analysis tab and everything.

    To keep from confusing yourself with your real trades, they disable real trading and you enter a kind of virtual environment much like paper money. Not everything is quite hooked up to this yet. ToS charts are available but Prophet charts aren't. While you can't go back in in time before Dec, 2009, the overall feature set is nice because you can trade tick by tick intra-day just as if you were there. So, you can re-live the 'flash crash' of May 25 and see how you'd handle it. The advantage of this approach is that you can set up closing orders (limit & stops) and test them.

There are probably other ways to do this and lots of variations on that theme. If you know of some other ways to do back testing feel free to contact me and I'll post them in next month's newsletter.

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.

What a month! We saw some wobbling on the beginning and then resumed selling on the end of the month. In the end, we weren't that far from where we started the month.

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

"...So, what next? More of the same? Since this is written after 4 days of September trading, we know there has been a bit of selling from the initial bounce. Will this mean another leg down? It's honestly too hard to tell. We know that the current low is around $1875 but there is a more recent intermediate low around $1925 set on Sept1. If we see that level hold and the SPX head above the high just around $2000, then I'd say we might be cautiously bullish again. If $1925 fails to hold, a lot of things could happen. We could see $1875 tested again.

I mention these points because I consider them lines in the sand so to speak. We can't really know what WILL happen but we can observe what MIGHT happen based on those lines being crossed or not.

Here's how September played out.

As you can see, that intermediate support did fail and we went all the way back down to $1875. There was certainly the chance that even that level could have failed. In that case, it could have been quite a bearish month. However, it does appear that we are seeing a bounce and the appearance of a pattern referred to as the 'double bottom'

We have several things to pay attention to here. First of all, the follow through. The chart shows the beginning of the bottoming pattern. We really need this to continue and to see a move above the 30 day moving average before I'll consider being somewhat bullish again. Beyond that, it would be nice to see the 30 day moving average act as a support as well. That would coincide with a higher high and higher low and would cause me to be fairly bullish heading into the end of the year. Keep in mind that with several days of strong buying there will likely be some sort of pause. There is overhead resistance at the 30 day, 50 day and 200 day moving averages as well as around $2025.

I honestly already took a couple of bullish vertical spread positions when the market was near the lows with the expectation this might (emphasis on might) be the bottom. I was fully prepared to back out of those positions if I was wrong. However, it's looking good so far. I'm also looking for a pause around $2025 or even around $2060 where the 200 day moving average is currently. These would be good points to enter a bearish vertical spread with the appropriate money management and exit strategies of course.

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.

One of the more recent additions to the portfolio of services and products is the Live Web sessions. These sessions are recorded and and available for a very reasonable price of $12 per session. I've created a Newsletter Special. If you add all 4 sessions to your shopping cart, you can get 4 sessions for the price of 3 by using the discount code: WebEx4Pack

Some time back, I released the second for sale video. The title of this video is "Mastering Short Vertical Spreads". I now have a total of two strategy training 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 how 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. 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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