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Success With Options - Monthly Review, Issue #81 -- October 2016 Edition
October 03, 2016
Hello,

Welcome to the October 2016 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.

Breaking the Rut - October Newsletter

What a crazy month we've had. We are full on heading in to the Fall time frame. We've got elections coming up, financial news, all of which are causing some wild fluctuations in the market. Will we break over the current ceiling that's been established, or find some lower lows this month?

In this edition we'll tackle that question, look at possibly breaking out of your trading rut and answer a question that was recently submitted by a reader. Finally, we'll close as usual with a Market outlook for you. For more details, read on...

By the way, I'm going to begin naming the newsletters based on the Options Strategy Focus title so it's easier from now on to locate them in the list. At some point soon I hope to go back and re-name most of the existing newsletters as well - at least for 2016.

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: Breaking out of the Rut

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials and other topics related to options trading.

Are you in a rut? You likely are if you find yourself trading the same trade strategy every month. This is especially true if you are trading with mediocre success. I understand about this because I frequently find myself doing the same thing. I love the short vertical spread. I trade it every month. I talked about it in last month's newsletter. I know a guy who's favorite strategy is the diagonal spread and he pretty much sticks to that month in and month out. But what about all those other great strategies?

First, the truth is that it's not so bad to stick with something that's working. I think everyone will find a strategy they favor and will get really good at it. You tend to continue trading what you're good at and what works. The problem is that in most cases, one strategy won't fit all market climates. That means you are forced to sit on the sidelines when your favorite strategy isn't applicable. Or worse, you force the strategy when it doesn't make sense and it ends up costing you.

A better approach might be to have a few additional strategies you throw in to mix things up. In other words, look for opportunities to toss in a calendar spread in the midst of all those short vertical spreads. Or, learn to trade and use the diagonal spread when all you prefer are calendar spreads. Having a bit of a diverse bag of tools gives you more opportunities to profit from different market climates. Beyond just having the skills or comfort level, make it a goal to include scanning for other strategy opportunities from time to time - maybe once a month.

Beware that adding in these additional strategies is more work. It's like working a set of muscles you don't frequently use. You'll feel the pain initially. However, the more you work them, the stronger you'll get. The result will be that you'll become a more well rounded and flexible options trader and this will show up as having a better yearly return in your trading account.

As a final word of caution, if you are considering a strategy you aren't too familiar with, go back and paper trade it until you are comfortable. I'm not advocating jumping into your real trading with new strategies without paper trading them. I'm just suggesting broadening your range of choices for trading.

Happy trading this month!

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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: Can you talk about weekly options? I'm looking for weekly income

A: I've discussed weekly options a few different times. Some time back I published a topic in the "Options Strategy Focus" section of the April 2015 newsletter. That's probably the best coverage I can provide in a nutshell. At the risk of re-hashing that article, let me explore a few pros & cons here.

The Pros
  • Weekly income - as you pointed out, weekly options mean you can set up and have trades expiring every week. I honestly love this part of weekly options.
  • Easier to find a trade - One thing I've always struggled with was that time when one month's option chain didn't have enough days in it but the following month had more than I wanted. Weekly options make that a lot easier to find the sweet spot in terms of days until expiration. Further, I have a longer time window to put trades on for a given month with 4+ options chains to choose from.
  • $1 and $.50 strike spreads - I love that many of the index options on the weekly charts actually go in $.50 increments. That also allows me to find the sweet spot in terms of the short strike.
  • More rolling opportunities for calendar spreads - With more options cycles in a month, there are generally more opportunities to roll and each roll brings in more credit.
The Cons
  • Low open interest - This is the number one issue with weekly options. It is CRITICAL that you take a little extra time to assess open interest. It sometimes is the case that even though the strike price, time until expiration and probability of success are all good, you may have one or both options that have very low open interest. This results in poor pricing and poor entries and exits.
  • Odd expiration dates - While it is the case that most of the weekly options will expire on a Friday (or the Saturday following the Friday close), usually the last option chain of the month won't expire on Friday. It will be whatever the last day of the month is. This can be a little confusing and actually cause you to miss closing when you should.
  • Unusual strike increments - This was mentioned under the Pros. I like that many weekly options offer $.50 strike increments. I feel like this gives me more control over picking the optimal strike. However, you need to be aware of this as many of the $.50 options are the ones that have the low open interest. Also, you'll find that sometimes there will be $.50 increments and then at some point in the strike sequence, they won't be offered. This can mess up your spreads and can be a real issue with calendar spreads as rolling becomes a bit more of a challenge.
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.
 

Wow! What a month we've had. We went from near all-time highs to selling off and testing the up-trending support.

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

"...Any time you see the market range bound like we have, there is a likelihood that it will break either to the up side or down side outside the prior range. It will likely do this in a forceful way. The longer the sideways action, more violent the breakout could be. This range is now $2150 at the bottom side and $2190 or so at the top side. Given that the dominant trend is still up, I'm leaning toward the next big move being a bullish one. I'm also being watchful of a potential breakdown of the trend. It's always good to be prepared for the worst case scenario as well...."

Here's how September played out.



First, I have to say I was somewhat wrong in my initial guess where I suggested the next move might be bullish. I was surprised as anyone when we saw the selling and it in fact threatened my short puts I had on for the two weeks or so we were down there.

As you can see, the dominant trend is still currently in place. However, I'm less certain that we'll see a test to new highs. We have two key themes to consider. First is that we're heading into election season. It's a good bet that news and debates will cause the markets to swing. On the other hand, we're on the edge of the season that typically kicks off the 'Santa Clause rally'. So, which is it? I'm honestly not sure. At this point things could go either way. Notice we're heading into a triangle trading pattern. Furthermore, we're getting closer to the tip, which will need to resolve up or down.

What's one to do in this situation? You can hold off trading until we see a resolution. You can take a position with a hard exit if you see an indication you're wrong. You can trade cautiously with good money management and be prepared for any changes. One good one that could be fun is a put calendar spread below the triangle point (possibly around $2125 on the SPX or 211-212 on the SPY). This trade does well on an explosion of volatility, which would be the outcome of a break to the downward side. Be prepared to exit this if the break is the other direction.

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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