the December 2014 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
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.
Rally or Fizzle? - December Newsletter
|It's been a surprisingly strong month given the meteoric rise
we saw in October. Is this a Santa
Clause rally or are we at the top with selling in store?
I recently began a series of live web sessions on a number of topics
suggested by subscribers. I'll have an update on these sessions as well
as providing access to past sessions.
In addition, I have answers to your questions and Options
Focus and more.
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
feedback page and let your voice be heard. This can be done
anonymously so please consider how you can help make the newsletter
Announcement: Live Web Sessions Schedule
| Recently, we launched a new service in the form of periodic
live Web sessions. These
sessions have been quite successful as we had
a number of attendees join and participate in the discussion. However,
they've turned out to be popular with people who couldn't attend the
session as well. See below for more details.
Based on feedback, I'm going to schedule the next few sessions. Notice
that I've added dates for two more sessions to be held in mid December
and early January. I'll be sending out a reminder notice but don't wait.
Sign up now so you won't forget and then add it to your calendar. I'll
be using these sessions as well as feedback using this
survey to help me determine if there is sufficient interest.
Each session will be recorded and made available to attendees.
If you can't attend a session, don't worry. Once the session has
completed, the recording will be made available for a very reasonable
price. They'll be announced and listed on the Options Trading Videos
page as well as in future newsletters so stay tuned.
We are planning additional sessions so continue to use the feedback
form to make suggestions and requests for future sessions. Use this
survey to have your say.
Options Strategy Focus: Portfolio Management
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials. One
of the more frequently asked questions I get in one form or another is
about managing trades from a portfolio perspective.
One of the harder aspects of trading is keeping a balanced portfolio,
or at least keeping a portfolio that's oriented toward your current
bias. I've covered this topic in a video on YouTube to some extent but
I want to expand on this here.
is Portfolio Management?
First, what do we mean
by portfolio management? When I refer to this
term, I mean having a set of trades that collectively reflect the
current market bias and making trades that take into consideration the
current risk and portfolio greeks.
In your account, you should be able to have a good idea of what the
total risk is, how the portfolio as a whole benefits or is harmed by a
move up or down, how time affects th position and how volatility
increase or decrease affects the portfolio. That in a nutshell is what
I mean by portfolio management. Much of this view comes from
understanding the greeks at the portfolio level.
Ok, so I may have introduced a concept that may not be familiar. If you
have worked with individual option contracts, you should be familiar
with delta, gamma, theta and vega with
respect to those options
contracts. If you understand that option greeks can be additive, you
can begin to see how we arrive at the idea of portfolio greeks.
If you think about it, you can do the same thing with a vertical spread
or any other spread position. If you buy a call and sell a call to
create a vertical spread, you can add the deltas (one will be positive
and one will be negative) to arrive at a position delta. You can do the
same thing with the other greeks as well.
Now, if you think about it, you can take that concept to the next
logical level, which is to add the delta, gamma, theta and vega for
each position to arrive at a portfolio delta, gamma, theta and vega. As
an example, if you had a positive delta, it tells you that the
portfolio will benefit from an overall market increase. If you have a
negative vega, it suggests your portfolio will benefit overall from a
decrease in volatility. Ideally, your portfolio
theta should always be
positive as should each of your positions if you are following the
premium selling strategies promoted on the website.
You use the portfolio greeks to determine your overall exposure to
market factors such as volatility, time passing and market bullishness
or bearishness. You can also use the greeks to help you select a
strategy when considering a new position. First though, you need to
determine your current bias.
Any time you are set to put on a new position, you will always want to
determine bias as you would typically want to determine outlook. The
same is true when managing your portfolio. The way to do this is the
same as when entering a new trade. It's primarily through technical
analysis. My preference is to use simple techniques
such as support and
resistance. You'll want to look at a two week timeframe as well as a 4-6
week timeframe. What you are doing is making a plan to adapt your
portfolio to reflect your outlook. Since most positions are 3-6 weeks in
duration, you'll want to take the time to do this.
Once you arrive at an bias, you'll be comparing bias to portfolio bias.
Your portfolio bias is expressed in the greeks. Delta primarily
indicates directional bias. Positive delta means bullish bias. Negative
means bearish bias. The larger the delta in either direction, the more
bullish or bearish. Vega can give you an idea of volatility bias.
Positive vega means the portfolio benefits with increased volatility and
Once you have both an idea of portfolio bias and an idea of outlook, you
have one of two choices. One, do nothing since the outlook agrees with
the current bias. Two, select a position that
shifts the portfolio from
its current bias more in the direction of your outlook. Of course, this
latter choice could either mean pushing the portfolio further in the
direction of its current bias or changing the bias of the portfolio by
the position(s) you add. For example, if you want to move a mildly
positive delta to a more strong positive delta, you pick a positive
delta trade. If you want to move a negative vega portfolio to a less
negative or positive vega, you select a positive vega trade.
a strategy for the portfolio
To begin, you need to make sure you understand the greeks of each
stragegy. In general, most strategies I propose are positive theta so we
won't spend time on that. Beyond that, you need to know what strategies
are positive delta and negative delta. Generally, any bullish strategy
is positive delta and
any bearish strategy is negative delta. Vertical
spreads and iron condors are negative vega, while calendar spreads and
diagonal spreads are generally positive vega.
So, you now have the building blocks to make your decision. You know
what the current portfolio bias is. You've assessed the market and have
an idea of the market bias. You know what strategies will help you make
the necessary adjustment to your portfolio. You are almost ready to set
up the trade.
If you are using the thinkorswim platform, you have another tool in your
toolbox. You can use the thinkorswim analyze to see what impact your
trade will have. You can see what the greek impact is as well as the P&L
impact. If you use this broker, you'll want to take this additional step
of doing the analysis.
Finally, you will will enter the trade. Once entered, you can now see
the actual impact to your aggregate
greeks. Be careful that you don't
try to accomplish the entire job in one trade. If a fairly large
adjustment in your portfolio is called for, do it in several trades.
This will give you a little more flexibility and a bit more fine grained
control as well.
I know that's a lot of information to digest. There are actually a few more
aspects I couldn't cover in this newsletter given the space. For more on strategies,
check out the Options Trading Strategies page. For more on
technical analysis check out the Technical Analysis page. Also, be sure to check
out the video on portfolio management
on YouTube. Finally, you may want to consider attending the Portfolio Managment
webinar coming up this month. See the schedule in the prior section
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!
This question is related to
the mechanics of a short vertical spread.
Q: If I sell a call option at a 14 day strike price of
10.5 and buy a call option of the same stock at a 14 day strike price
of 11 what will I gain if the commission is $1 per transaction and the
stock price stays the same and is my only risk the $50 difference in
case the stock goes up?
A: I want to take time to address this here because behind
it are the mechanics of a short vertical spread, which I think are
really important to understand.
There are a number of key mechanics of a vertical spread I want to
explore before directly answering the question. First of all, let's
look at the spread. You are selling a $10.5 strike and buying a $11
strike. This creates a vertical spread with a width of $.50. It's
important to understand the risk and reward of this trade. Realizing
that each contract controls 100 shares of the underlying, we are
about a risk of $50 per contract. It's not clear what the
credit is but I could imagine that a typical OTM credit would be
between $.10 and $.15. If we assume it's $.10, that means a reward of
$10 per contract.
The risk in any vertical spread is the width of the spread ($.50) minus
the credit, which means there is $.40 or $40 per contract risk with a
$10 reward. To answer the question then, if there is a $1 per
transaction commission, the actual max gain if you sell the spread and
it expires worthless is $9. If the stock goes nowhere for 14 days, then
your spread expires worthless and you keep $9.
If the stock were to go up but remain below $10.5, then you still keep
$9. However, if the stock moves above the short strike, you get into
interesting territory. If it remains below the long strike, there is a
risk you get assigned on your short call (meaning you must sell 100
shares per contract you originally sold). You then must
take some sort
of action, typically closing the resulting position. Generally, this
will result in a loss but less than the max loss of $40.
Finally, if the stock moves up strongly, there is the chance that both
options will be assigned at expiration. This will be handled
automatically with by the broker after expiration. If, on the other
hand, you are fully ITM on both options and your short option gets
exercised by the buyer, you have the ability to exercise your long
options to close the position for the maximum loss.
I should mention that in many of these scenarios, you will be required
perform closing transactions, which will usually involve additional
commission. The amount of the commission will be dependent the broker
A lot of the mechanics covered here are also covered if a fair amount
of detail in the Mastering Short Vertical Spreads 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.
After the steep rise in October, who would have thought that we'd see
such a strong continuation in November? So far, that's 6 weeks of
strongly bullish action without much of a letup. What can we expect for
In the November newsletter, I summarized my outlook as follows.
With the steep recovery after hitting the $1820 low, I wouldn't be
surprised to see some kind of a pause and maybe a pullback. The
question is: where will the SPX pull back to? The nearest support would
be in the vicinity of the bottom of the up trending channel where the
50 day moving average is as well. That's around $1975, which is also an
area of horizontal support. ..."
Here's how the November played out.
While I really expected some sort of a pause to occur, none
materialized. We saw the SPX move up to the diagonal resistance, pause
and then push through. We are now pretty close to the midline of the
prior up trending channel. Stepping back and looking at the move from
the lows in early October to the end of November, it's breathtaking how
strong this move
There are several things I notice at this point that are worth pointing
out. First, we are very near the midline of the bullish channel the SPX
has been in since the beginning of the year. I see that as the next
level of resistance and would expect a pause and even some selling when
we get there. Second, the SPX has pulled quite a ways away from the 30
day moving average. There is a gap of about 70 points or so between the
two. I'd guess that there has to be some sort of reverting back to that
support level. However, we're also caught in the midst of a 'Santa
Clause rally' that offers opposing tension to this outlook. That said, I
think the odds favor some sort of a pullback before resuming the bullish
At this point, I've been selling against the trend a bit, taking a
contrarian view of things. That may come back to haunt me but as I said,
I expect a pullback to some
extent. However, I'd treat a pullback to the
moving average a buying opportunity. If this happens in the first week
or so of the month, I'm looking for bullish positions that will
allow me to ride the bullish wave into the new year.
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.
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