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Success With Options - Monthly Review, Issue #71 -- November 2015 Edition
November 01, 2015

Welcome to the November 2015 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.

Are We Overbought? - November Newsletter

What an interesting month! After a month of selling and a month of bouncing around, we seem to have a month of buying. What does this mean for November and the remainder of the year?

In this edition we'll tackle that question, explore an interesting trading strategy for this market and revisit an older question that was submitted by a reader. By the way, I apologize for getting this newsletter out a few days late. It's been a busy month.

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) Answers to your questions

3) Options Outlook

4) Featured Products

Options Strategy Focus: Take a Deep Breath

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. This month, I want to talk about a slightly different topic - but still related to options trading.

How often do you take a break? Is it at Christmas time? New Year? Vacation time? If you're like me, you have a hard time stopping - or giving up a trading month. I write this in some free time I have while on a cruise in the Mediterranean. Guess what? Most of the time, I have no internet connectivity. That means no trades.

Can you live without trading for a few weeks? It's a good idea from time to time, for whatever reason, to completely take a break. As the title says, "Take a Deep Breath". You have to do that occasionally to maintain perspective, relax without any distractions or worries. From my perspective, you can do this one of two ways.

  1. Have no trades active
    The best way to take a break worry-free is to have no active trades. Let them expire or close them yourself and don't enter any more trades until you return from your break.
  2. Have a few trades with exits and good money management
    If you feel you must, you can enter trades. However, keep the number small and use good money management. Additionally, have some automated exits so your trades can close per your intentions without you having to intervene. This way, you can ignore your trades for the week or two you are taking a break. If you find this hard to do, go with option # 1.

As I've stressed, there are a variety of reasons to take a break, whether it's vacation, interruption of your network connectivity or for some other reason. Be careful about feeling bound to your trading. Of course it's true what they say that if you don't have trades, you can't make money. However, if you are tired or have lost perspective, you'll likely make more bad trading decisions and that's also not good for your portfolio.

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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!

Since I didn't receive any questions this month, I'll resurrect a 'blast from the past'.

Q: I was reading about rolling diagonal spreads and doing so multiple times in the same month. Is that a strategy you employ or recommend?

First of all, I can't recommend any strategies for anyone to trade. I'm not an authorized broker or dealer. That said, I have heard of a variety of strategies regarding managing diagonal spreads and some do include multiple rolls in a given month. The key thing to remember is that any time you are rolling the short strike, you should be receiving additional credit. The goal of rolling is to reduce the cost basis of the trade, which in turn reduces risk and increases potential profit.

The trick though is timing. Regardless of the rules you employ, timing the rolls can help maximize the profit. Usually, you will look to roll a short strike when there is little premium left in the current month and rolling allows you to sell premium in a later month. When you are farther away from expiration on the short strike, this is more difficult to achieve.

It is also possible to roll the long strike. You might consider doing this any time the delta drops to a certain level. You will be doing this for a debit, but the idea is to position yourself with additional time in the trade as well as for a continued move of the underlying.

I talked about this somewhat in my 3/2/2010 IWM diagonal spread trade tutorial page. Check out the 4/21 update. The key thing is to know and understand your trading strategy well before trading with real money. I'd recommend back testing and paper trading this approach before trying it in a real money trade.

I'd also recommend developing a clear trading plan for your diagonal spread strategy that includes initial strike selection as well as when and how to perform rolls.

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.

Were you surprised to see such strong buying this month? I was. I expected to see a bit of a bounce but also expected to see some re-testing or intermediate pullbacks.

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

"...We have several things to pay attention to here. First of all, the follow through. The chart shows the beginning of the bottoming pattern. We really need this to continue and to see a move above the 30 day moving average before I'll consider being somewhat bullish again. Beyond that, it would be nice to see the 30 day moving average act as a support as well. That would coincide with a higher high and higher low and would cause me to be fairly bullish heading into the end of the year. Keep in mind that with several days of strong buying there will likely be some sort of pause. There is overhead resistance at the 30 day, 50 day and 200 day moving averages as well as around $2025..."

Here's how October played out.

We certainly saw the bounce confirmed from the double bottom. We also saw some extremely strong buying cycles with little to no pauses. And... in a matter of one month, we've nearly erased all the losses seen in the August sell-off. As you can see, the SPX blasted right through the 30 day, 50 day and 200 day moving averages with hardly a pause.

The main thing that jumps out at me is that we are pretty strongly overbought. It's quite unusual to see the price running well over $50 above the 30 day moving average. At the moment, we're closer to $80 above the 30 day moving average. It's hard for me to see any continuation without some sort of regression back to that moving average. We can see a very brief test of the 50 day & 200 day moving averages as support. As a result, we could see a test of any of these. In fact that's what I hope for because they will offer great entry points for bullish trades.

At the moment, I'm included to be slightly bearish to neutral until I see some healthy testing of the 30 day moving average. Once that happens, I'll be more inclined to be bullish and look for good bullish trades.

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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