the November 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.
Two Months In a Row! - November Newsletter
| Welcome to the November newsletter! I'm getting this newsletter out a
little late because I was putting the finishing touches on the video I've been
talking about for several months. It's surprising how much work goes into
getting the video produced and packaged.
Who would have thought we'd see two months in a row of gains? Certainly in more
bullish times this isn't as surprising. However, given current economic
conditions and the uncertainty of upcoming elections, I'd have expected more
selling. I'll be reviewing the month and providing my outlook for November
toward the end of the newsletter.
Also in this newsletter, I'll cover some of the events from this month, update you on
the video and review some trades. Read on...
This month I'll be slightly revamping one of the sections I've produced in the
past. Based on suggestions from readers I'm going to provide a little more of a
an options strategy focus. In fact, I'm going to rename the section 'Options
Strategy Focus'. Clever title, huh? The goal of this section will be to provide
more detail about various aspects of options strategies.
Thanks to those that have provided feedback on the newsletter.
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.
new at Success With Options
The big news with the site is the release of the video I've been talking about
for several months. I'm very excited to have this finished and to be announcing
availability here first in the newsletter.
In summary, here are some quick facts about the video. For more details about
the video and to purchase it, please visit the video
You can also check out the video promotion for this on
If you are newer to options spreads, you'll definitely want to check out this
- The video is just over 30 minutes long and is packed with information on
buying and selling options and how to use the two concepts to construct
- The video has several quizzes to test your understanding of what was
- I've included an interactive tool to allow you to see dynamically the
impact of price, time until expiration and volatility on the option price
- Since this is an initial release that I want to get feedback for, I'm
only releasing 50 copies of the video. Once the feedback has been
incorporated, I'll provide an unlimited release.
- I'm announcing the video here first to newsletter subscribers to give
you first opportunity to purchase the video and take advantage of the special
- The offer is first a low price - only $20. Second, I'll refund 1/2 of
this price for those who provide feedback on the video. Third, for those who
provide feedback, I'll also provide a free copy of the final product with
|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. I only
did a few since I was focused on other things.
bullishness of October, the call side of this spread was overrun. I stated when
I entered, I wasn't going to adjust this trade at all. That's not a bad strategy
in a neutral kind of market but not a great idea in a trending market. I did
this mainly to provide a contrast to the adjusted trades I've done in the past.
In this case, you can see when unsuccessful, the trades lose more.
was put on at the same time I closed the call spread from last month for a small
loss. The profit from this trade more than covered the loss of the previous
trade. This emphasizes the value of being willing to switch sides when the
another bullish trade I entered shortly after switching to a more bullish
stance. At the moment, I'm nearly ready to close this trade for the target
||This is another
bullish trade I entered after wanting to take a more aggressive trade. It turned
out a diagonal spread on the SPY was too expensive so I went with another put
after entering the SPY put spread, I found an opportunity to enter this diagonal
spread. The risk is limited by my plan to close the position.
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.
Does the fact that this trade lost money mean that I should continue adjusting? Certainly some of my prior trades also lost money even with adjusting.
The key point is that one trade isn't enough to evaluate the effectiveness of a management strategy. Before implementing a full scale management strategy,
many trades are required using the same rules in order to evaluate the long term effectiveness..."
call credit spread:
"...I mentioned this as a lesson on the call spread tutorial as well but it's worth repeating. It is important to have clear signals to trigger exits.
Furthermore, it's critical to take action on these because to delay might be costly - both in terms of potential loss in a trade as well as opportunity
For more information on all of the trades I've posted as option trading
tutorials, click here
Back to the
table of contents
Options Strategy Focus
Based on feedback, I have modified this section a little bit to focus more
deeply on the details of some
of the options strategies I use in the tutorials. As you've perhaps followed some of
the tutorials, you might wonder why I chose one strategy vs. another.
This month, I want to talk in a little more detail about selecting the strategy
For newer traders, it may not be quite so obvious how one determines the
strategy to select when entering a new trade. Like many other aspects of
trading, there is no one hard and fast rule about strategy selection. For me, I
believe it comes down to the following.
In a recent trade tutorial
(10/5/2010), I talk briefly about some of the decisions in the strategy selection
section. Some of the characteristics to understand about each trade are
- I have several strategies I understand well and have trading plans for.
- When selecting a strategy, I have an outlook on the market in terms of
trend, strength and duration.
- I have guidelines or expectations on how bullish or bearish I want my
overall portfolio to be.
The objective in selecting a strategy to trade is to match up a strategy with
your expectations and objectives. Here's an example. In many of the trade
tutorials, my objective for selecting a strategy is to adjust my portfolio delta. Let's say my
portfolio has gotten rather positive and I'm not as bullish as I was. What are
- How bullish or bearish is the strategy?
- How fault-tolerant is the strategy?
- What kind of impact is there on my portfolio (greek impact)?
- Can I afford to employ this strategy (margin or outright cost)?
I need a strategy that offers me negative delta, preferably positive
theta, and isn't too long term. What strategies fit these criteria? A short call
vertical spread, a long put vertical spread, a one month put calendar.
What strategy makes sense? How bearish am I? If I were a little more bearish, I
might simply enter a short call vertical spread. If I simply expected some
medium term weakness, I might select a put calendar spread. The calendar spread
might give me a little more tolerance if the market continued with more buying
whereas the vertical spread would potentially force me to act if it were
In many cases there is no one perfect strategy. Selecting a good strategy is
really a matter of understanding the characteristics of the strategy combined
with the trading rules you employ and mapping to your objectives. I believe once
you have a solid understanding of how your strategy behaves, you are better able
to select a strategy that can help achieve the objectives you have for the next trade
Back to the
table of contents
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 is related to an exit strategy I
often employ in my trade tutorials.
Q: Do you have a rule of thumb on the
percentage of maximum profit for trades such as iron condors, butterfly, or
A: Thanks for asking this great question. Many followers of the trade
tutorials may see me mention that I have a percentage that I target to lock in
profit. However, they may not be familiar with why I use that amount.
Additionally, the percentages I use may not be what others want to use so I'll
first talk about what my trading rules are and then I'll briefly talk about the
thinking process behind defining this percentage.
For most of the
vertical spreads I enter, my trading rule for exiting to lock in profit is to
close when I can lock in 80% of the initial profit. Similarly, my exit rule for
iron condors is to exit when I can lock in 60% of the total credit when closing
the entire trade.
Why limit the profit instead of holding out for the maximum?
The main reason has to do with the risk involved in holding out for that last
percentage. I talked about this in a fair amount of detail in last
May's newsletter. The key point is that holding out for the last percentage
of the maximum gain can be rather risky. By risky, I mean potentially risking
the unrealized gain (say 80%) for the last 20%, which usually can only be
realized in the last few days of the option cycle.
The real question then
is what percentage to use? The key principle to keep in mind in choosing a
percentage value to target is that there is an inverse relationship between
profitability and risk. Any time I attempt to lower risk (as in closing early to
make sure I have more successful trades) I trade off the profitability of that
trade. That means I can choose a rule like closing to lock in 70% of the credit
or target profit and I'll be successful in more trades but make less profit than
if I were to hold out for 80% or 90% of the maximum gain. However, more of my
80% or 90% trades are likely to fail since I must often hold them longer to
realize this gain.
What rule will
you use? That has to be up to you. Experiment around, but make sure you try
enough trades at a given target percentage before evaluating the effectiveness.
By "enough", I mean at least 10-20 trades over a period of a year or so. You might decide to back test the exit rule you are considering using a tool
like thinkBack or OnDemand on the
thinkorswim from TD AMERITRADE platform.
Whatever percentage you decide to use, make sure you've tested it and that you
follow that rule on all your trades of that strategy.
If you would like to submit a question, comment or feedback
on the website, please
visit this page.
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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. As
such, it may change if the charts indicate something different.
This month shouldn't have been too much of a surprise if you read the outlook
from last month's newsletter. In it I summarized my outlook as follows:
"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, and the Christmas buying season. This may add some volatility."
I expected a rally up to 1175 and it went even farther before beginning another
period of consolidation. Yet volatility is nearly where it was at the start of
Notice this pattern that has developed over the last couple of months. After a
strong move up there is a week or two of consolidation before continuing. Could
we see that pattern repeat itself this month?
Possibly, however there are some factors to consider for November. First, this
first week is election week and the results of the election may stimulate a move
one way or the other. Also, there is talk of further stimulus programs from the
Fed that could move the market. Finally, we are heading into the final months of the
year, which are often bullish (but not always so).
Here's what I suspect may happen.
We may see some short term selling in the next week or so followed by another
attempt to push to higher highs - maybe up to $1200. In the end though we may see November end up pretty
much where it started.
How will that affect my trades? I currently have on three bullish
trades. The two put spreads will soon close as either more buying takes place or
time passes. The only risk is a strong sell-off. I also have a diagonal spread
that has not moved up as strongly as I'd prefer and any weakness in the EWZ may
force me to close the trade.
As for new trades... I won't be entering any more bullish trades unless there is
a clear break above the consolidation area we currently have. I fact, I may use
further buying as an opportunity to sell some December call spreads or buy a put
Remember to stay nimble and alert. Make a point of doing market analysis at
least every week or even every few days. 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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table of contents