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Success With Options - Monthly Review, Issue #59 -- November 2014 Edition
November 03, 2014
Hello,

Welcome to 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 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.

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 Clause rally?

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.

In addition, I have answers to your questions and Options Strategy Focus ...

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) Exciting Announcement

3) Answers to your questions

4) Options Outlook

5) Featured Products


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.

Date/Time Topic Registration
Recorded
8/12/2014
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 technical analysis concepts and highlight ones that may be best for options traders.

Level: Beginner - Intermediate
Purchase Recorded session (MP4).

Recording cost: $12

Add to Cart
More Info
Recorded
9/12/2014
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.

Level: Intermediate
Purchase Recorded session (MP4)

Recording cost: $12

Add to Cart
More Info
TBD 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.

Level: Intermediate
Stay tuned
TBD Portfolio Management
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.

Level: Advanced
Stay tuned
TBD 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 analysis.

Level: Advanced
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.

Stay tuned!!
 


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. Once you identify the phase you're in, the next challenge is knowing what action to take.

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 calendar spread.

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
This 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 adventurous, 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 opposite side.


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.

Apparent bottom
This 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
When 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 gather 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.
 
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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 question is related to the proper handling of a Calendar spread.

Q: 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?
    A: 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 to buy 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 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.
     

    We 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 so ..."

    Here's how the October played out.



    As 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 very sharp

    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.

    At 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 up side.

    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.

    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.

    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 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. 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.

    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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