the December 2013 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
it to your options trading friends.
To access previous issues of the newsletter, click here.
Finishing Out 2013 - December Newsletter
|November offered an unusually bullish run leading up to the
final month of the year. The question now remains whether we'll see
December finish strongly as well.
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
Also in this newsletter, I have answers to your questions, Options
Strategy Focus and Market outlook for you. For more details on
that, read on...
Trade Tutorial Summary
|As you may have noticed, I have not been posting any trade
tutorials. I have continued to place my own trades that pretty much
follow the guidelines I outline on the website and have been teaching
in the videos
I've recently announced. These have been producing consistent gains
over the last few months despite the ups and downs of the market.
I'd like to recommend this month that you go back and review the trade
tutorials I've entered so far this year and see what you can learn.
Look for a change in this section beginning next year.
Do you have thoughts about the value of the
tutorials or ways to improve them?
Let me know.
For more information on all of the trades I've posted as
tutorials, click here
Back to the
table of contents
Options Strategy Focus: Calling it a Year
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials. This
topic will be slightly different than the typical options topic usually
covered here. I'm going to propose that as you have traded this year,
if your trading year to date has been profitable (or even if it
hasn't), perhaps it would be a good time to take the last month off for
What do I mean by that? I'm suggesting that you use this time of the
year to evaluate your current trading strategies. Which ones have
worked? Which ones pose a challenge to you and may require tuning of
your rules? What new strategy would you like to add in 2014?
There is a saying in the business world that "sometimes we're so busy
chopping wood we don't take time to sharpen the ax". Is that you? Maybe
December would be a good time to do that. Maybe instead of trading a
lot this month, you cut back on trades. Then, use the time not spent
setting up trades or managing trades doing a review.
In the coming year, I'm going to begin using this section to outline
some strategies that I often propose on the website but I'm going to do
it here by focusing on one strategy a month and providing references to
all related material including website pages, trade tutorials, and
Don't wait for me to start providing these in the newsletter though.
Feel free to go out and locate the content for yourself and begin
sharpening your axe for 2014. In addition, do take time to review your
trade logs and trade journals for your trades. You do use these, right?
Of course you do because you are a serious trader who wants to become
better every year.
Stay tuned for the next options strategy focus as we return to more
strategy related topics. I'm always looking for additional topics that
are helpful to readers. Send them in via
the newsletter feedback page or the Contact Me
Back to the table of contents.
Answers to Your Questions
|I frequently receive email from visitors to the site with
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: I was watching the Mastering
Short Vertical Spreads video and in the Strike Selection section,
you had shown the probability of expiring out of the money on both the
thinkorswim platform and OptionsXpress platforms. These numbers were
different for the same strike price. You didn't really explain why they
were different. Can you tell me why they would be different for
A: Thank you for bringing that up. It's true I didn't
really go into much detail on that in the video. I chose not to address
that point for several reasons. First, it was a tangent in the overall
topic of strike selection and second, because the explanation itself
involves a fairly in-depth discussion of how theoretical prices are
derived on options.
An option's price is made up of a combination of intrinsic value and
extrinsic value. Intrinsic value is fairly straightforward - it's just
the amount the option is currently in-the-money (ITM). Extrinsic value
is more complicated and involves considering days until expiration,
volatility, interest rates and more. A number of formulas have actually
been created to allow calculation of a theoretical price plugging the
above factors into the formula.
The most well known formula is known as the Black-Scholes model, named
after the primary contributors to the definition of model. The formula
is often used to calculate a theoretical price, but it can also be used
to solve for one of the other factors such as implied volatility given
a current option's price. With this volatility, it is possible to
calculate the statistical probability of an option expiring ITM or
Here's where we come to the answer to the question of why the values
may be different on various platforms. It turns out there are different
models that can be used to calculate the theoretical option price. One
issue with the Black-Scholes model is that it's based on European style
options, which can only be exercised at expiration.
The thing is that most ETF-based options and stock options are what's
known as American style options. That means they can be exercised at
any time and that affects the model. In addition, many stocks and ETFs
issue dividends, which also affects the model. For that reason,
alternative models were introduced including the Bjerksund-Stensland
model that attempt to deal with these factors.
So, while one platform may use Black-Scholes, another may use the
leading us to arrive at different implied volatility values and
therefore different probabilities. That may initially seem like an
issue. However, these probabilities
shouldn't be taken as guarantees anyway. The best way to think of this
probability is as a relative indicator.
Over time, you will become accustomed to having a range of probability
values that will represent your ideal point for strike selection. I
offer 65-70% as my recommended values but that may be slightly
different on other platforms and indeed may be different for an
I hope that helps answer the question. For more information on
volatility and it's affect on probabilities, visit the option
volatility page on the website. In addition, if you want to learn
about using probability for strike selection, either check out the Vertical
Spread strategy pages on the website or get your copy of the Mastering
Vertical Spreads training video.
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
Back to the
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.
expectations may change if the charts indicate something different
during the month.
Even after the nice run in October, November has shown a nice
additional move. The question is what will happen for the remainder of
Last month I summarized my outlook as follows.
"...At this point, it appears there is some pause that's taking
could turn into selling but I'd only expect that to bring the SPX down
to the $1725 support level or worse case, down to the dominant trend
line currently at $1700. We'll have to see if Santa Clause brings a
rally in December but it wouldn't surprise me to see a pause in the
earlier parts of November. Keep in mind the VIX is in a fairly low area
of the chart, which could indicate a potential for increased volatility
and with it some selling.
Here's how the last month played out.
As the chart above shows, the SPX is still in an up trend with no signs
of slowing down. I put a channel in so it's more clear the range the
SPX has traded in over the last few months. Notice that for the month
of November, the SPX mostly followed the upper side of the range. Last
month I said it was possible that the SPX would trade down to the $1725
level before possibly rallying again. In fact, the selling only went to
the $1750 level before triggering another rally.
This is the kind of setup that makes me a bit nervous. While it's
possible for the SPX to continue to rally through December, it's also
possible that there will be some kind of sell-off at least back town to
the $1750-1775 level before continuing on. For now, I'm going to be
watching for some kind of signal as to what's next. The key thing to
keep in mind is that the dominant trend is still bullish.
In terms of my trading plans, I'm planning to hold off making any
trades of significance for now. In fact, I may take my own advice and
not trade much at all in favor of analyzing past trades and making some
plans for 2014. The end of the year is always a good time to pause and
reflect on your past trading year.
As you look at your past trades, what did you do well? What do you need
to improve on? What strategies worked? What market trends worked?
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.
on technical analysis.
Options strategies I use
Be sure to take time to
feedback on the newsletter.
Back to the
table of contents
|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.
more information or to purchase the video.
Short Vertical Spreads
The focus of the video is on one specific strategy, including all
aspects of of the process. This includes:
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.
- Understanding the construction and the trade progresses
- Selecting the long & short strikes
- Planning entry & exits
- Managing the trade once entered
- Back testing
- Creating a trading system with the strategy
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
Back to the
table of contents