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Success With Options - Monthly Review, Issue #010 -- October Edition
October 03, 2010
Hello,

Welcome to the September 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 and send it to your options trading friends.

To access previous issues of the newsletter, click here.

Against the Odds - October Newsletter

What I expected to happen in August ended up happening in September. In fact almost from the first trading day of the month, the market was straight up with no looking back. In the last newsletter I said that September is historically a negative month (in other words the month ends lower than it started). That was not the case this time.

In this newsletter, I'll cover some of the events from this month, update you on the video and review some trades. In addition, I'll be providing my options outlook for next month. Read on...

Thanks to those that have provided feedback on the newsletter. I will be working on incorporating suggestions over the next few newsletters. I do value and take into consideration feedback on the newsletter content and on ways I can make it more valuable for the readers.

Please feel free to voice your opinion. If you haven't done so already, please consider taking a few minutes to visit the newsletter 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.

 

In This Issue

1) New on the site

2) Trade Tutorial summary

3) Options Trading Tip of the Month

4) Answers to your questions

5) Options Outlook
 

What's new at Success With Options

The big news with the site is the ongoing progress on the video I've been talking about. For more details on the content, check out August's newsletter.

I've made good progress this month on the video. Unfortunately, it was at the expense of other things like staying up to date on trade tutorials. I'm expecting the video project to be complete somewhere around the middle of October.

Let me take a moment to throw out a teaser. Here are some features you can expect from this video.
  • Based on some feedback I received early on, I have extended some of the points with more examples.
  • The expected duration of this video is now pretty close to an hour.
  • I've also tried to make the content more viewer friendly.
  • There will be interactive quizzes at the end of each section to test your understanding.
  • I will be providing an interactive component that will allow you to see the impact of changing volatility, time until expiration and underlying price on the option price.
One thing I'm contemplating is making a preview available on YouTube. Look for an announcement via the RSS feed as well as via this newsletter distribution.

Watch for a few more updates in October...

 

Trade Tutorial Summary

I had a few trades going this month but so far, the results are mixed. Yet... every trade offers an opportunity to learn something.

Here are the trades I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
Closed SPY Iron Condor $124 This trade ultimately benefited from the buying that took place in September. While I might have held on a little longer, I didn't want to get greedy. I'm just happy the trade was profitable!
Open DIA Iron Condor   This trade is still open with the put spread closed and the call spread being threatened. I said I wouldn't adjust this trade so I'm just waiting for an opportunity to close it.
Closed SPY Call Spread -$179 I closed this trade early on a technical exit when the SPY broke through $113. This loss is much smaller than the initial loss I sized the position for.
Open SPY Put Spread   This trade was put on at the same time I closed the call spread. The profit from this trade should more than cover the loss of the previous trade.

While I hate having losing trades, I find that I learn the most from them. I'm going to start including some key thoughts/lessons learned from the past month's trade tutorials here. Here are the nuggets from last month's closed trades.

From the DIA iron condor:
"... On the last update, my profit was $46, not counting any profit I might make on the long call. So now the total gain in this trade is $124. That's not too bad for a trade I had messed around with so much. Could I have stayed in longer hoping for a larger credit? Of course but I could also risk my existing profit. I decided not to get too greedy on this one..."

From the SPY call credit spread:
"...I closed the position last Friday for $.83 debit leaving a net loss of $.29 times 6 contracts or $174. This is obviously much less than the amount I sized the position for. Any time you can get out on a bad trade and lose less then intended, that's a good thing...."

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Trading Tip of the Month

This month I wanted to use this section to talk about an experience I hadwith thinkorswim from TD AMERITRADE. I kind of got a 'poke in the nose' so to speak in the form of an email from thinkorswim. Because I have an account that is held in a company name, which I do for tax purposes, I am considered a professional customer. Consequently, they were now giving me the choice of paying for live quotes or going to delayed quotes.

If you're thinking "What???", you understand my feeling on this. I believe you have the TD AMERITRADE acquisition to thank for that. So, I'm either left with paying a large monthly fee to receive live quotes on the platform or receive quotes that are 15 minutes delayed.

I mention this because there may be many out there who have similarly set up a business entity from which to trade. You may have done this for tax purposes or for other reasons. If you received a similar email, I recommend contacting the good folks at thinkorswim and let them know how you feel. So far, this is the first online brokerage company I've encountered that has enacted this kind of policy.

Is there something that can be done? Possibly. I can't say directly because your mileage may vary. I simply suggest you contact the accounts department at thinkorswim and talk to them. Also, if you are a current thinkorswim customer, stay vigilant. I'm guessing this won't be the last free feature from thinkorswim that you may be asked to now pay for. So far this is the only downside I've seen from the TD AMERITRADE acquisition.

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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!

This past month, I received a question that is probably a direct result of the recent churn in the market.

Q: If you are using probability of expiring in your strike selection, why do you also use technical analysis?

A:
That's actually a great question. If you have been a follower of the thinkorswim classes (live or online), you've probably gotten primarily the perspective of the folks there.

Don't get me wrong, these guys are really sharp and have been really successful using probabilities. In proposing the combination of technical analysis I'm not trying to negate their perspective. I however initially learned to trade using technical analysis. That said, I still feel like I have a lot to learn there.

When I was first exposed to the probability of expiring approach, I found it an intriguing way to select strikes. Fundamentally, it wasn't that different than I'd learned using delta and ROI. Keep in mind that probability is nothing more that an application of standard deviation based on current volatility.

What that means is that I could pick a short put that has an approximate probability of expiring ITM of 30% and I could also pick a short call that has an approximate probability of expiring ITM of 30%. Can both positions be right? Possibly. However consider this. If a there are both a short call and a short put that both have a 30% probability of expiring ITM and the market is currently in a down trend isn't it more likely that the short call will be the better trade?

I say all of that to make the point that probability alone is kind of blind to market direction. That being the case, I've found I need to apply some technical analysis to at least establish an expected direction.

Over time, I've found that technical analysis and probability of expiring can be a powerful combination. Let me give a simple example. Let's say when I select a short strike for a put credit spread, I pick a probability of expiring ITM of 34%. If that strike is below a support level then I feel this adds additional strength to the trade.

I hope this rather long-winded response answers your question.

If you would like to submit  a question, comment or feedback on the website, please visit 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, it may change if the charts indicate something different.
 

Talk about a complete turnaround! Last month I summarized my outlook as follows.

"I believe we may remain within the range of $1040 to $1125 for a while. It's likely we'll see some attempts to reach the $1125 but it may not break through in a single attempt. We are heading into September, which historically has been one of the worst months. That means we should be prepared for the worst but trade what we see. If $1040 support holds and we see a rally from there, I'll be more neutral over the near term. If we see a break of the $1040 support then look out below!"

Last month I expected a rally and it didn't happen. This month I expected sideways to downward trading and the market rallied. However... the key thing is to stay flexible and trade the current trend.



The past month has been straight up, following a bounce from the $1040 support level. After breaking through $1125 and re-testing that area, the SPX is now in a consolidation pattern.

I believe we may see a little consolidation before another round of buying, possibly taking us up to the $1175 or even 1225 level. However, it is also possible to see some selling down to the moving average support levels, which could be as low as $1100. I'd consider these buying opportunities though. We are heading into the fall timeframe with a lot of factors in the mix, including elections, elections and the Christmas buying season. This may add some volatility.

How will that affect my trades? As I mentioned, I'll look for market pullbacks as an opportunity to enter more bullish trades. I will likely look for another put credit spread and maybe another diagonal spread trade as well. As it turned out, my IWM diagonal spread from August would have made a nice profit, but who knew?  I will be prepared for another reversal of trend though if we see a break of $1100. In that case, I'll be prepared with some bearish trades.

Remember to stay nimble and alert. Make a point of doing market analysis at least every week or even every few days.

More on technical analysis.

Options strategies I use

Be sure to take time to provide feedback on the newsletter.

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