the October 2011 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
More Turbulence In The Fall - October Newsletter
| Welcome to the October newsletter. Wow! Talk about a turbulent few
months (I know, I said that last month too). It was starting to look like we
were going to see a rebound only to find lots of up and down trading. Will
October be more of the same? Will things get better or worse for the market?
In this newsletter, I'll be reviewing the month in more detail as well as
providing my outlook for October. I'll also review my trades, talk options
strategies and more.
Thanks to those who have provided feedback on the newsletter in the
past. I'm always open to receiving feedback. I do value and take into
consideration feedback on the newsletter content and ways I can make
it more valuable for the readers.
Please feel free to voice your opinion. If you haven't done so already
(or recently), please consider taking a few minutes to visit the
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.
new at Success With Options
|Late this month I added a trade adjustment page as I promised from last
month's newsletter. This is actually the first new page other than trade
tutorials I've added in quite some time. I'd like to add more useful pages to
the site in coming months. Perhaps you have some topics you'd like to see
covered. You can let me know using the
I entered August with one active trade,
which is now closed, and added another trade. Read on for details of
the trades. It's now been three months since I released the 'Introduction
to Options' video. See the end of this newsletter for details on that
As to the trades I opened and closed, see the trade tutorial summary
below for additional details.
Trade Tutorial Summary
|I had a few more trades going this month. The one trade
I closed was a losing trade.
Here's the complete list of trades I was active on this
month in a quick summary.
SPY Put Credit Spread
||More or less
a textbook trade. I put it on, it went as expected and closed for a profit -
just what we like to see.
SPY Diagonal Spread
Win or lose, I find that I learn something from every trade. I want to
include some key thoughts/lessons learned from the past month's trade
tutorials here. Here are the nuggets from last month's closed trades.
SPY Put Credit Spread:
"...As I said when I set this trade up, I went with a credit spread because it does well in a short period of time (assuming the
market goes as expected). Given that there were some pretty wide fluctuations in the market after I put the trade on, it's also a
good thing there is a fair amount of fault tolerance provided!"
For more information on all of the trades I've posted as option trading
tutorials, click here
Back to the
table of contents
Options Strategy Focus: Anatomy of a Credit Spread
I have modified this section a
little bit to focus more deeply on the details of some of the options
strategies I use in the tutorials. In past issues, I've talked about
how to select a strategy and using technical analysis to improve timing
of entries and exits. In recent issues, I've returned to topics more
directly related to the trading systems. I'm going to make a shift in topics and
begin exploring the anatomy of various spread strategies.
I've mentioned many times that the credit spread (or short vertical spread) is one of my favorite
strategies. I expect if you don't already know why that is, you may understand
better following this discussion.
I want to start by reviewing the basic components of the short vertical spread.
Like most spreads, the key components are a long and short position, usually of
the same underlying and of the same option type (puts or calls). In the case of
a short vertical spread, the position is made up of a short put or call somewhat
out of the money and a long put or call a little farther out of the money. The
trade profits in one of two cases. 1) The spread expires worthless ideally for
maximum profit or 2) You buy back the spread for a smaller debit than what you
sold it for.
How is the money made? The trade derives its profit from selling the short
position. The long position exists merely to provide risk protection for the
short position. Consider a naked call or put. What would happen if a major move
against either the call or put happens? Conceivably, the risk would be
unlimited. The long position exists to limit the risk exposure to a defined
amount (the dollar width between the short and long strike). The cost of
purchase for this long position is like an insurance policy and essentially
comes out of the proceeds of the short call or put.
Let's take a look at how the greeks from each side of this position interact.
Let's say we sell a $104 put and purchase a $102 put. The delta from selling a
put would be positive but the delta from buying a put would be negative. The
fact that these are two different strikes means the net delta is positive. The
sold put has positive theta while the purchased put has a negative theta.
Because the sold put is more ITM, the positive theta will be larger than the
negative theta. You begin to get the idea. The short option's greeks will
generally overcome the greeks from the long option. However, the long option
acts as a subduing influence on the short option.
This interaction also affects the profit and loss characteristics both at
expiration and at any point before then. Notice the below chart. On
expiration, the red line indicates a more binary character (either max gain or
max loss). However, notice that as there are 20 days until expiration, the
extrinsic or time premium component of the option's value smoothes out the line.
Notice how we reach break even and even enter into a loss situation at a much
higher underlying price,
weeks before expiration.
As you can also see from the graph, you will need to be very close to expiration
to realize either maximum gain or maximum loss. This is one of the reasons why I
choose to exit the trade when I can lock in 80% of the initial credit or max
I want to conclude this article by bringing all the pieces together.
What makes the credit spread an attractive strategy is the interaction of the greeks that provides some degree of fault tolerance, at least earlier in the
trade. Combine this with the positive theta and you get a trade that can reach
target profitability in a very short time (1-2 weeks) if the market moves in
the desired direction. Bullish credit spreads often perform even better because
you have two greeks plus market movement working in your favor. Notice the above
net vega, which is negative for this hypothetical trade. That means when
volatility drops (a frequent effect of bullish markets), the extrinsic portion
of the spread's price drops even more.
For more information on this strategy, visit the
short vertical spread strategy page. Also, be watching for an exciting new
video expected to be available early next year on this strategy. I'm expecting
to include the above topics in greater detail and much more!
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 comment I received via the newsletter feedback
form. I'm turning it into more of a question for the purpose of this newsletter.
Q: Is there a way to create a login page on your website for newsletter
subscribers so you can get access to content not available to the general
public? It's kind of a hassle to have to use the email newsletters to get the
link to that content.
A: First, thanks for taking time to
provide feedback. This is a really good point, and one I have considered. I have
considered special content for subscribed visitors and even content for monthly
paying subscribers. There are several issues that have kept me from heading that
direction. The first is that at the moment, I don't have plans to maintain
content worthy of a paid monthly subscription. I think if one were to do that,
the paying members deserve a certain quantity and quality of regular updates.
Most account management solutions require an incremental cost that doesn't
really make sense unless I'm doing it for the purpose of the paid subscriber
services. The other reason I haven't pursued this angle is because there is a
responsibility that goes with having login information in regards to protecting
subscriber data. This is a huge responsibility I don't take lightly and so I've
not considered this too seriously at this time.
I do want to provide a low-tech solution though that may address the problem to
some degree. While using bookmarks may seem like the obvious alternative, you
may be interested in having access from your browser running on any system. You
might consider Google Chrome (or the equivalent Firefox plug-in GBookmarks),
which synchronizes your bookmarks with your Google online account. Of course,
this presumes you have a Google account for things like mail, calendar, photos,
While I know it may be easier to access directly from the website, my preference
is to encourage viewers who want to read this content to be subscribers to the
newsletter. I apologize if this causes undue inconvenience to newsletter
subscribers. Thank you for remaining loyal to the site and to the newsletter.
If you would like to submit a question, comment or feedback
on the website, please visit this page.
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. As
such, it may change if the charts indicate something different.
September looked like it was going to be the beginning of a new bullish run.
However, it turned out to be more of the same as concerns from Europe and
economic indicators from the US caused continued volatility in the market. Last month I summarized my
outlook as follows:
" Based on the apparent double bottom and the higher high formed, I'm thinking the odds favor a more neutral to bullish
trend for September. It may be that we will likely see more volatility as indicated by the first few days of this month. Keep in mind
if we see additional selling down to the recent lows, there will likely be more to follow."
Here's how the month played out.
Notice how the last 2 1/2 months have remained in this fairly wide $100 trading
range. This means there is some consolidation that is going on that will
ultimately be resolved one way or the other. When it does, I suspect there will
be a strong $100 move above $1225 or below $1125.
The challenge is in determining which direction this consolidation will resolve
to. If I was to guess, I'd say the next move is up and above the $1225 level.
However, the market doesn't care what my expectations are. We'll have to
ultimately wait and see. The one argument in favor of a bullish bounce is the
fact that this consolidation came at the end of a heavy sell-off. There has been
a prolonged bearish sentiment, which may give rise to a shift. This time, it may
result in a shift to a bullish sentiment.
How does this outlook affect my position? I'm not going to take any action until
the market tips its hand. If we see a clean break of the $1125 level, I'll close
the diagonal spread. I also won't consider adding any new position until a
direction is established. If we see a bounce, I may take a short term bullish
position. Any guesses which one I'd select?
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 sales type information.
For those that aren't aware, I recently released the first 'for sale' video. The
title of this first video is appropriately "An Introduction to Options Spreads".
I say it's appropriate because this will be the first of several videos I'm
working on that really are a labor of love. My goal is to provide a more
in-depth and comprehensive coverage of options spreads.
To that end, this first 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.
Expect more videos to be released in the months to come.
more information or to purchase the video.
Back to the
table of contents