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Success With Options - Monthly Review, Issue #36 --December 2012 Edition
December 01, 2012

Welcome to the December 2012 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.

Where's the Santa Clause Rally? - December Newsletter

Welcome to the December newsletter. 

It seemed like a good theory that the markets might get back on track once the elections were over but so far it isn't looking that way. November has come with its own share of fears like the fiscal cliff and ongoing concerns about bailouts in Europe. What's in store for December?  Read on...

As usual, I'll be reviewing my trade this month, talking options strategies, answering your questions and more.

Thank you to the many readers who have recently provided feedback to the newsletter. If you haven't done so already (or recently), 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.


In This Issue

1) Trade Tutorial summary

2) Options Strategy Focus

3) Answers to your questions

4) Options Outlook

5) Featured Product


Trade Tutorial Summary

I had no trades going when I entered the month. I did have an existing trade from last month that has since been closed. I'm not putting up as many tutorials as I have in the past due to time constraints.

I want to encourage you if you are a fan of the trade tutorials and have a Facebook account to participate in the tutorials by commenting, asking questions, or suggesting alternative strategies. I'd like these to be more interactive than they have been historically.

In the mean time, I will continue to do trade tutorials but probably not as frequently as before. Here's the trade I was active on this month in a quick summary.

New/ Closed Trade Gain/Loss Comments
DIA Iron Condor -$326 This trade is now fully closed at a loss. Some time back, I had added a calendar spread to the put side. However, the adjustment didn't help much.

Win or lose, I find that I learn something from every trade. I want to include some key thoughts/lessons learned from the past month's trade tutorials here.

From the DIA Iron Condor
"While a calendar spread can make a nice adjustment strategy, it does potentially add additional risk in the trade. In this case, the trade was profitable but it just wasn't profitable enough to overcome the loss on the put side of the iron condor trade. "

For more information on all of the trades I've posted as option trading tutorials, click here

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Options Strategy Focus: Vertical Spread Video Coming

This section of the newsletter will focus more deeply on the details of some of the options strategies I use in the tutorials. I wanted to use this last newsletter of 2012 to give you a preview of a vertical spread video I've been working on.

This video is an in-depth follow-up to to the Introduction to Spreads video that was released last year. I expect this video to provide over an hour of information on all aspects of vertical spreads including the following topics.
  • Vertical spread mechanics - how a vertical spread is constructed
  • Strategies for strike selection
  • Entry and exit rules
  • Trade management
  • Overview of back testing
  • Generating a trading system
I'm in the process of finalizing the outline and talking points and starting the recording process. I expect this to be complete by the end of the year and final editing to be complete early next year.

I'm very excited about this video. First of all, the vertical spread is my favorite trading strategy. Second, as I've been planning this video and putting together notes, I've found there are a lot of really great points to add to the video. As a result, I believe this video will be a must have item for anyone wanting to master trading short vertical spreads.

Stay tuned for the next options strategy focus as we return to more strategy related topics. Any suggestions for topics? Send them in via the newsletter feedback 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 month I received a question about protecting trades. I'm going to paraphrase it a little.

Q: Do you have criteria on when you roll one side of the iron condor?

A: This is a really good question. I presume that you are talking about rolling one side or the other of the iron condor up (and away from the risk).

In last month's newsletter I talked a bit about evaluating adjustments. The first step in this process is to determine whether it makes sense to roll or not. It's important to realize that the price of rolling up will reduce some of your profit and, while adding some additional breathing room, it doesn't guarantee that the position won't still get overrun.

Assuming you want to go forward with a roll, the next step is to determine some price point that would signal the need to roll. It's important that this not be an arbitrary decision, but based on a trading strategy and specific rules. For example, you might have a strategy to enter an iron condor by selecting short strikes having a delta of .10. You might then have a rule to roll the spread up if the short strike delta increases to .25. This is a well defined trigger that is easy to quantify and easy to implement.

I'm NOT suggesting that a  good point to trigger a roll is a delta of some value such as .25 but you will want to come up with some similar trigger. This trigger could be a delta value, a spread credit price, etc. Any rule (or rules) you come up with should be tested thoroughly using a back testing system to ensure that your rule results in improved profitability.

If the question was "Do I have a set of criteria"?, the answer is no. In the past I  have employed an iron condor strategy to enter with short strike prices with a low probability of expiring ITM (known as a higher probability position). I did have a rolling rule to roll the trade up. These days I typically enter more aggressive positions that have a lower probability of success but pay out a little better when the trade turns out. As a result, I won't usually roll these positions but I will sometimes adjust with a calendar spread as I did in the most recent trade tutorial. Even then, adjusting doesn't always work out.

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, it may change if the charts indicate something different.

I had anticipated several possible outcomes this month, one of which was more selling. Sure enough, the 38.2% level didn't hold and the selling took us all the way down to the 61.8% level. Unfortunately, this happened quite quickly and caused my remaining iron condor trade to turn into a loss.  Last month, I summarized my outlook as follows.

"... For the next month, I'm expecting two things. I'm looking for a bounce at the current 38.2 fibonacci level and I still anticipate some volatility so we may see a lot of choppiness for the next week until we get past elections. Then, we'll probably be driven mostly by earnings announcements. We're heading into a season that is traditionally called the 'Santa Clause Rally'. We'll see if that holds this year. If on the other hand the fibonacci level fails to hold, I think we'll see some pretty strong selling all the way down to at least the 61.8% level. Be prepared and and have plans in place for all eventualities. "

Here's how the month played out.

It looked initially like the 38% fibonacci level would indeed hold. However, once past the election, the market sold all the way down to the 61% level. From there, we had a fairly strong bounce all the way up to the 50 day moving average. We currently stand right at this level with the 50 day moving average acting as a potential resistance level.

With 8 of the last 10 days being up days, I wouldn't be surprised to see a pause around the $1425 level. A little longer term, it's very possible that we may see a late Santa Clause rally through the end of the month. Following a near term pause, expect a continued run up to test the highs. However, a potential headwind continues to be the march toward the fiscal cliff here in the U.S., and uncertainty as to whether it will be adequately addressed. This can put some downward pressure on the markets and dampen the anticipated Santa Clause rally.

As a result of these two tensions, an iron condor or any other similar neutral strategy might make sense. What is another neutral strategy (or near neutral strategy) I could employ? How about a double calendar spread, a call calendar above the current price and a put calendar below the current price. An alternative approach might be to wait and watch over the next week to see if we reach higher highs and then sell a call spread. If some selling occurs, look for an opportunity to sell a put spread. These are just a few ideas. Does anyone have suggestions? In the meantime, look for a tutorial to show up late next week.

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 Product

I'm adding a new section to the newsletter. Feel free to disregard if you aren't interested in sales type information.

For those that aren't aware, I released the first 'for sale' video about a year ago. The title of this first video is appropriately "An Introduction to Options Spreads". I say it's appropriate because this will be the first of several videos I'm working on that really are a labor of love. My goal is to provide a more in-depth and comprehensive coverage of options spreads.

To that end, this first 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.

New Video Coming
I am also in the final stages of the next video, which I'm very excited about. It features my favorite strategy - the credit spread, or short vertical spread. This video will cover everything from how the spread is constructed to how to create a trading system around it. Be watching for this video in the coming months.

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