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Success With Options - Monthly Review, Issue #82 -- October 2016 Edition
November 01, 2016

Welcome to the November 2016 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.

Trading on Gold (GLD) - November Newsletter

This month has proven hard on the broad market in general. As we'll discuss later, the longer term up-trend has been broken. So how will the market shape up as we head into the end of the year?

In this edition we'll tackle that question, look at trading gold and answer a question that was recently submitted by a reader. Finally, we'll close as usual with a Market outlook for you. For more details, read on...

By the way, I've begun naming the newsletters based on the Options Strategy Focus title so it's easier from now on to locate them in the back issues list. I've also updated all the 2016 newsletter titles to reflect the Options Strategy Focus title. At some point soon I hope to go back and re-name remaining newsletters for the prior years.

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: Trading on Gold (GLD)

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials and other topics related to options trading.

This month, we'll be looking at some trade ideas on gold. More specifically, the ETF having the symbol GLD. GLD is an ETF that actually represents gold itself and is backed by actual shares. There are other ETFs that track both gold itself and gold miners. I happen to like trading the GLD. One reason is that it has robust activity on the options, which means I can use all my favorite premium selling strategies. Consider this an example of applying the principles of "breaking out of the rut" from last month's Options Strategy Focus.

Before any further discussion, I must emphasize the following:

The following ideas are for education purposes only. No strategy discussed here should be taken as a recommendation to buy or sell options. Always do your own research and make your own trade plans.

GLD has a tendency to be a somewhat volatile stock (ETF). If you go back and look at a chart, you can see lots of cases where GLD made strong moves either to the up side or the down side. This has made for some great opportunities to trade off that behavior. I want to discuss two of my favorite strategies when trading GLD.

Strategy 1: Diagonal Spread
I tend to not use this strategy a lot because it is a fairly long term strategy. However, I've found it to be a particularly good strategy for trading GLD when the trend is behaving as I expect. Rather than discuss the entire trade here, I want to refer you back to an old trade tutorial I did back in 2010. While the trade itself didn't turn out especially profitable, the discussion around the analysis and setup illustrate both the mechanics and the potential of this strategy. You can find this discussion on the Call Diagonal Spread on GLD page.

Let's talk about some of the considerations of trading the a diagonal spread on GLD.
  • Diagonal spreads are a debit strategy, similar to calendar spreads. That means you need to allocate some capital to buy the spread. In the case of a diagonal on GLD, this can be anywhere from $400-600 per contract. This may stretch your money management and limit the number of contracts you can trade.
  • Strong moves in gold and in the underlying ETF can cause the value of the position to change quite a lot. You need to monitor and take appropriate action. Use good technical analysis and exit strategies to manage the trade.
  • This is a longer term strategy. As such, it can take 4-6 weeks to fully play out. Markets can move lots of different ways over that time and can also wreak havoc on your psyche as you watch things move.
Strategy 2: Short Vertical Spread:
At the risk of introducing a more mundane strategy (i.e. one that I use all the time), the short vertical spread can be a viable choice when you want to take advantage of quick but relatively short moves. I've tended to use this strategy when my longer term outlook is less clear and I just want to capture the short term moves.

Considerations for this strategy include:
  • If you trade the short vertical spread, this will hardly be anything like breaking out of the rut.
  • You may want to be sure of the outlook and duration of the trend. A short vertical spread can waste up side potential if the trend is longer term.
  • With the quick moves often found in GLD, you may want to establish some mechanical exits (stops) to allow you to get out when sudden changes occur.
Strategy 3: Calendar Spread
The last strategy I'd mention is the calendar spread. I usually don't consider this as a possible trade on GLD, but there is one case where I think it can do well. Consider the scenario where volatility is relatively low and GLD has been trending up. What happens if GLD suddenly sells off? A rise in volatility for one thing. Recall that the calendar spread is a 'vega positive'. That means the value of the spread increases with a rise in volatility. So, I tend to consider the calendar spread when I'm anticipating a sell-off.

Here are a few things to keep in mind.
  • You will typically do better with this strategy with put calendar spreads.
  • The challenge is figuring out a reasonable target price. You want to leave enough time and movement for the trade to develop.
  • This is also a longer term trade. Given the nature of calendar spreads, you really want the short strike to be near expiration for best profitability.
We've quickly covered three strategies for trading GLD. If you like to trade precious metals, this is one way to do it while keeping with premium selling strategies. Further, it's a way to push yourself if you find yourself falling into the rut of trading just one strategy all the time like I do.

Happy trading this month!

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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!

Q: Any chance you have a list of the ETF's that you follow on a regular basis?

A: There are a couple of ways I'd like to answer this. For those of you who have been following the website or newsletters for some time probably are aware I typically follow and trade just a few ETFs. These are the DIA, SPY, IWM and occasionally the GLD. These are the index tracking ETFs for the broad market. I tend to prefer to do this given my time availability. However, there are a lot of ETFs out there that can be traded. Many have options so for the options trader, this is great news.

A good starting point from my perspective is to start on the web site with the Index Option Trading page and the ETF Options page. These provide a good foundation of the concepts of trading index options and ETFs in general. Finally, I recorded a YouTube video sometime back called Finding Optional ETFs. This actually demonstrates how to build a watch list from a list of optional ETFs using the thinkorswim Option Hacker tab.

None of this really covers how to build a strategy around ETFs but that's where you need to spend time assessing your own style and trading goals. How active are you in trading? What strategies will you likely employ? What are the historical trends of the candidate ETFs?

I really like ETFs for a lot of reasons so hopefully these pointers will help you get started on the road to successful options trading using ETFs.

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.

After months of holding to the up trend, we finally saw a break of the trend. Things are about to get interesting.

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

"...As you can see, the dominant trend is still currently in place. However, I'm less certain that we'll see a test to new highs. We have two key themes to consider. First is that we're heading into election season. It's a good bet that news and debates will cause the markets to swing. On the other hand, we're on the edge of the season that typically kicks off the 'Santa Clause rally'. So, which is it? I'm honestly not sure. At this point things could go either way. Notice we're heading into a triangle trading pattern. Furthermore, we're getting closer to the tip, which will need to resolve up or down....."

Here's how October played out.

We spent the majority of the month pretty much trending sideways. That's made it good for trading neutral strategies like iron condors. Then, the last week happened. Notice that the up trending line was initially broken simply by running sideways right through. This up trending support has been kind of a line in the sand indicating whether to trade bullishly or bearishly. I can safely say we've turned a corner on the trend.

Now that we've broken that up trending support line, it's time to look for the next level of support. Right now, there is horizontal support pretty much right where we're at (give or take 10-15 points). If that fails, there's always the 200 day moving average. I frankly wouldn't be surprised to see the 200 day moving average tested. Currently there isn't any kind of wide spread panic so the selling may likely just be more election jitters.

Given that we're kind of in the middle of a move, your choices are to wait it out or jump in. Not great choices I know. My plan is to wait things out for now. I have some trades in play I'm waiting to close but I'll be holding on for a week or so before I make any more trade entries.

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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