the November 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.
Falling into Fall - November Newsletter
|Welcome to fall! That's how I began last month's newsletter.
As we found, that turned out to be a literal statement. What can we
expect heading into the remainder of the year? Will we see a Santa
I recently began a series of live web sessions on a number of topics
suggested by subscribers. I'll have an update on these sessions as well
as providing access to past sessions.
addition, I have answers to your questions and Options Strategy
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 the newsletter
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. However,
they've turned out to be popular with people who couldn't attend the
session as well. See below for more details.
I had a session planned for last month with a scheduled date and
everything. However, since no one signed up, I canceled it. At this
point, I really need to know if this is something that is of interest
and if so when the sessions should be held that enables the most people
to attend. Please use this
survey to help me determine a good time. Until I hear from enough
folks to determine a good time, I'm suspending any further plans to
deliver sessions. I have several proposed topics listed below but as of
now, they are simply proposals.
| Technical Analysis 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
analysis concepts and highlight ones that may be best for
Level: Beginner - Intermediate
| Purchase Recorded session (MP4).
Recording cost: $12
|Short Vertical 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 & management
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.
| Stay tuned
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.
| Stay tuned
|| 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
| Stay tuned
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: Trading Volatility
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials. In
light of recent market conditions, I thought I'd take a little time to
discuss some strategies for trading in volatile times.
The fact of the matter is that it's pretty tough to trade in volatile
times. In reality, there are actually several key phases to a sell-off;
the setup, the middle, the bottom and the recovery. The challenge in
trading is knowing when you are in each of these phases.
identify the phase you're in, the next challenge is knowing what action
Anticipating the event
Knowing when the selling (increasing volatility) is beginning is a
challenge. In fact, this is probably one of the hardest parts of the
whole cycle. How do you know? If you KNEW, you'd already be in it. The
truth is that all you can do is make a best guess based on factors like
a market looking tired, reaching an established resistance level, or
beginning to show signs of weakness.
What can you do about it? In many cases, the best thing to do is...
nothing. Of course, waiting means missing out on any trading
opportunities. If your personal trading style is to be more cautious,
that is the best course of action. If you don't mind taking a few
risks, on strategy you might employ at this
point is buying a put
calendar spread on one of the indices or index ETFs such as the DIA,
IWM or SPY. Why a put calendar spread? Because first, calendar spreads
profit from an increase in volatility (unlike most other spreads).
Buying when volatility is low and selling when volatility is high is
the way to profit with this trade. Second, if you buy a put calendar
spread somewhere below the current trading price, the calendar spread
will increase in value as the price drops to the strike prices of the
An alternative strategy is to sell a call spread above the current
price. The theory behind this is that if the market does indeed sell
off, the call spread will expire worthless. However, if you are wrong
about the market selling off, your spread will be over run and will
likely face a loss. However, there is always that risk when entering a
trade. But, a calendar spread can be more tolerant of the market not
behaving exactly as
you expect in exactly in the timing you expect. A
calendar spread has the advantage of occasionally paying off in a big
way if you happen to get the timing and the price right that the market
sells down to.
In the middle
is also a difficult area to be in. Well, let's face it. They're all
difficult. That toughest part of being in the middle is that if it is
indeed the middle, the action is typically to do nothing. For me,
that's the hardest part of trading. Over time, I've learned to be
patient and wait the market out though. In most cases, being in the
middle or not is proven out by the action over successive trading days.
You'll know if it's the middle or the bottom by whether the selling
continues or reverses.
There isn't really a good strategy in this phase. If you are feeling
an iron condor may make sense with a plan to close each
side as it drops to some percentage of the sold credit price. This
strategy relies on the market selling off more, allowing the calls to
close, followed by a rally allowing the puts to close. The risk is that
one or the other doesn't happen before allowing you to close the
Technical analysis can often help in knowing if you're in
the middle or not. If you are in an area of past support, proceed with
caution until there is confirmation. A hold of support or setup of a
confirmed candlestick reversal pattern (or not) can tell you if you are
in the middle or if this is the bottom.
phase has often been compared to
trying to catch a falling knife. You
can do it but you may get cut in the process. As an observer on the
sidelines, you find yourself watching day by day as the selling
happens, a pause happens, sideways trading followed by more selling,
etc. Each day you ask if this is the time to enter and catch at the
absolute bottom. The reality is that you'll probably never catch the
absolute bottom. You'll be a little early or a little late. Technical
analysis is usually the tool to use at this point.
Technical analysis can give you a bit of insight into what might happen
next. It's not perfect and not 100% reliable but if you have some
tolerance for risk can often get you in fairly close to the bottom. As
you near the bottom, you want to be planning bullish trades so you are
ready to place them as soon as you confirm a bottom. Good initial
trades to take for the bottom include the short put vertical spread as
they are relatively short term in nature.
Since you aren't sure yet the
duration of the bounce, you don't want to commit to a trade that takes
too long to profit.
After the bounce
I say 'after the bounce', I mean once the reversal is in progress. In
many ways, this feels like the middle of a sell-off. You don't know how
long the new trend will last. Is it too late to enter? Is there still
time left in the run? You're not sure. Something that can help again is
technical analysis. Are you currently at an overhead resistance? Are
there any patterns emerging that suggest a pause may be in effect.
There are actually three possibilities from here: 1) The bounce
continues 2) The bounce pauses with sideways action 3) The bounce
reverses with a short or maybe longer term pull back. In the first
case, you would be safe with a bullish entry but how do you know? Maybe
an entry with an early exit planned.
Usually there is a level below the
current position at which point you know you are wrong about the trend
continuing. If the market goes sideways from here, then either scenario
1 or 2 would allow a bullish put spread without issue. If there is
another reversal, then you likely are going to experience stress on
your position so having a planned exit is a good idea.
There will be a time when entering a bullish trade is not as wise. That
is when there has been a prolonged bounce such as we have seen in
recent weeks. In this case, your choice is to sit on your hands (don't
do anything) or possibly take a contrarian bearish position. Of course,
to take a contrarian position is more risky and should not be
undertaken if you don't have the stomach for risk. Again, having good
exit rules that allow you to exit when you are clearly wrong about this
being the top of the bounce.
There is probably more that could be said here but I hope you
from this article that there are ways to play in the trend
regardless of where the market is in the volatility cycle. Having good
technical analysis skills, a good understanding of the strategies and,
most importantly, good money management practices will help you find
opportunities to profit in all conditions. For more on strategies,
check out the Options Trading Strategies page. For more on technical analysis check out the Technical Analysis page. For information on Index tracking options you can trade, check out the Index Options page.
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!
This question is related to the proper handling of a Calendar spread.
Over this week I had a calendar put spread on the IWM. bought nov 109
put sold oct 1 109 put. the direction was correct as the IWM did
tank and the
oct1 109 put was in the money (107.40) 1 day before
expiration before close I bought back the oct1 109 put for much more
than I sold it for to avoid being assigned and left the nov
109. by doing this it cost me all my profit as I sold the nov 109
the next day as the trade price increased. my question 2 parts
1. was there another exit that I could have taken with this trade?
2. if a put vertical both expires in the money does the sold put get assigned?
This is a great question. The important thing to remember is that
you'll usually get the best outcome if you trade the spread as an
entire spread. Trying to manage the short strike and buy it back
independently of the long strike usually won't end well.
I think if you had sold the long strike at the same time, you would
likely have seen some sort of profit instead of loss. The reason is
that while the short strike was losing money (costing more
back), the long strike was also gaining money (worth more to sell). The
fact is that with a short strike in a near month, the long strike is in
a farther out month, which means the long strike will have more time
premium than the short strike. The result is a that your calendar
spread would have likely been worth more than you bought it had you
sold the entire spread.
As to the second question, it's a bit different question than the
first. The answer is that any option in the money at expiration will be
assigned, whether you are long or short the position. The action taken
depends on whether you are long or short calls or puts. This is usually
handled automatically by your broker without you intervening. If this
is NOT what you want, you need to take action before expiration.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at
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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.
clearly saw confirmation of the initial weakness at the end of
September. In fact, we experienced a stomach dropping sell-off in the
first weeks of the month. Next, a gravity defying rise. Starting to
feel like a roller coaster?
In the October newsletter, I summarized my outlook as follows.
For October, it is probably too early to tell how severe 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
Here's how the October played out.
the chart above shows, the selling began almost from the first day of
October driven by a number of factors. In the end, we saw the SPX shed
around 151 points in 2 weeks. That amounted to nearly 10% sell-off from
the highs at $2020 to the lows at $1820. That was followed by a
With the steep recovery after hitting the $1820 low,
I wouldn't be surprised to see some kind of a pause and maybe a
pullback. The question is: where will the SPX pull back to? The nearest
support would be in the vicinity of the bottom of the up trending
channel where the 50 day moving average is as well. That's around
$1975, which is also an area of horizontal support.
this point, I'd be cautious about taking any bullish trades until some
the market has time to absorb the rapid rise. That typically happens
with either the pullback I just talked about or through a period of
sideways movement. Look back at the most recent sets of major
pull-backs and you can see that there is usually some kind of behavior
like that. I MAY consider taking a bearish position if it were very
short term in nature. Look for Monday to indicate whether there's more
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
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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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