the December 2015 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.
Wobbly Year End - December Newsletter
|Well, the last 6 months have certainly been a lot more interesting
than the first half of the year.
In this edition we'll tackle that question, explore an interesting
trading strategy for this market and answer a question that was
recently submitted by a reader. By the way, I apologize (again) for getting this
newsletter out a few days late. It's been a another busy month. There will be no
next month (January 1) due to the holidays.
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
Options Strategy Focus: Volatility - Friend or Foe?
| This section of the newsletter will focus more deeply on the details
of some of the options strategies I use in
the tutorials. Given the
large fluctuations in the market and underlying volatility, I wanted to
explore this a little bit.
Let me start by posing a question. Do you prefer high volatility
markets or low volatility markets? For options traders who make their
money from selling premium, I'd hope the answer is that you prefer
higher volatility markets. But... that means markets that are much more
turbulent and prone to strong and sometimes unpredictable selling.
As options traders, we're caught between to seemingly opposing desires.
If we are still firmly entrenched in the traditional market mentality,
we are happy when the market goes up and concerned with it goes down. To
take joy in a market selloff seems, well, a bit unnatural. As option
traders of the premium selling variety, we need to learn to become a bit
more ambivalent to the ups and downs of the market.
I say that because
as a trader who employs many different strategies, I
know that I can make money in any market, regardless of the volatility
or bias. Let me give you a few examples of what I mean by this by
evaluating some different market conditions, both in terms of bias and
One thing I want to point out before jumping in is the use of the terms
'lower volatility' and 'higher volatility'. I use a more relative
comparison because the current volatility at the moment is simply
relative to the volatility that may exist for the prior weeks. In the
bigger picture, higher volatility for a point in time where recent
volatility was low (ex VIX=15) may suggest a short term selloff. Whereas
higher volatility in a time where recent volatility was already high may
be suggestive of a continuation. These two scenarios may call for a
different strategy to be employed.
Long term bullish - lower
Usually when we've had a longer bullish run and volatility is lower,
we'll find that it's really difficult to sell a typical put spread.
Remember, short vertical spreads are vega negative. You benefit when selling
in a high vega and buying in a low vega climate. From here, you have a couple of choices
of trades but the thing to keep in mind is you are wanting to leverage a
trade where volatility is lower (or at least relatively similar) on
entry than when you exit. Here are a few examples of what you could
trade based on your shorter term bias.
Long term bullish - higher volatility
- Short term bullish - Consider a long call spread. The
low vega characteristic means it can often be less expensive to enter,
and that means a better profit if the trade expires fully ITM.
- Short term bearish - Consider a put calendar spread or
long put vertical spread. In both cases, you get the bonus of
benefiting from a move in your selected direction AND a spike in
Some time during a bullish trend, you'll see some selling where
volatility spikes. In this climate, what you do will depend on your
outlook. Consider though that you may be more interested in a vega
negative trade (ex short vertical spreads, iron condors, etc).
Long term bearish - higher volatility
- Short term bullish - Consider a short put spread. If
volatility is still fairly low, a long vertical spread may still be more
- Short term bearish - Consider a short call vertical. This
gets tricky because by the time you find a spike in volatility, it may
be too late for a decent entry.
- Short term neutral - Sometimes you may find a period where
its looking like a sideways trend. In this case, you may be able to
capitalize on spikes in volatility to enter
an iron condor.
This is probably one of the toughest climates to trade in. In a longer
term bearish market, when volatility has spiked even higher, it can be
hard to determine if there will be more of the same or a sharp reversal.
Usually though in higher volatility markets, you will likely focus more
on vega negative trades, which are typically your premium selling
strategies, such as short vertical spreads.
Long term bearish - lower
- Short term bullish - I like these because they are easer to
catch with technical analysis. My favorite in this climate is to sell a
short put vertical.
- Short term bearish - Given that volatility is high, it can be
an opportunity to sell a short call vertical but I usually tend
to stay away unless technical analysis gives me a good entry.
This scenario presents some more interesting possibilities. With higher
volatility, most of the premium selling strategies are possibility
depending on your outlook in the short term.
- Short term bullish - A short put spread can be a great
trade in this circumstance. In this case, 'lower' is still higher than
usual. If you spot a shorter term bullish bounce, you can slip in & out
with this kind of trade.
- Short term bearish - Even with relatively lower
volatility, there's still a decent opportunity for premium selling
strategies like short call vertical. However, if you believe the
volatility will increase, it may be a decent opportunity to buy a put
calendar as well.
These are just a few examples of different market climates. What I
hope you see from this is that we don't have to consider volatility a
friend or a
foe but rather, an indicator that can help us better select
the strategy we should be using in any given climate.
For more information on the VIX and technical analysis, check out the
technical analysis page on the web site.
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!
I'm going to paraphrase a question I recently received by email.
Q: I've been attempting to follow
your trade strategies outlined on your Website. We have some months of
small success only to give it back during big market corrections. We had
been hoping to generate enough of a return to provide a decent monthly
income to live on. Do you
have any suggestions for how to achieve more regular positive returns?
A: First I certainly understand your frustration with getting the hang of things with your trading. One thing I learned the hard way is to not let your need to generate sufficient income be
the thing that drives your trading. I did that early on and got burnt pretty badly.
I see trading sites that offer to help you make 5% per month on your
trading but most have some fairly serious setbacks on a bad month. I
trade fairly conservatively and am happy with steady gains over the
year. However, I too have losing months.
The key to having a longer term positive portfolio growth comes down to
two key points in my opinion.
- Consistent money management
What I mean by this is that you should consistently follow your money
management rules. This amounts to using a consistent risk % for every
trade. For me, that's 2% of my portfolio. Every trade I enter has this
same risk profile - no exceptions!
Related to this is a consistent overall risk/month. By this, I mean
taking maybe 4 trades at 2%/per trade means I'm risking approximately 8%
per month in trades. I
personally find this hard to do without forcing
myself to take trades I'm not comfortable with. However, when I look at
my monthly returns, I can see inconsistencies in my returns that are
directly related to this lack of consistency.
Let me provide a concrete example. Let's say my trades vary from 2-6
every month. Since I never know on a given month which trades will be
successful, it's very possible that my winning months might be the ones
I take just 2-3 trades and my losing month could be that one month I
take 6. With more trades, I also have more at risk in that month. Can
you see how this inconsistency can affect your portfolio over the year?
- Consistent trade setup/management and habits
By this, I mean is that I am consistently reviewing the market (daily
perhaps) to evaluate trade opportunities, changes in market outlook and
potential early exits. I find when I am more
consistent with this part
of my trading, I am also more consistent in my month-to-month trade risk
and therefore, monthly returns.
With my busy schedule, this is the one I personally find hardest to
achieve. It's a struggle to discipline myself to take the time to
evaluate the market, look for good trade setups and make the entries. I
find I'm either too busy and don't do it at all, or I feel compelled to
enter a trade, even when it may not be the best setup, simply because I
happen to be looking and know that I may not have time to re-evaluate at
a later time.
I find that when I make the extra effort to be more consistent in my
disciplines in this area, that my trading outcomes are more consistent
as well. There are some tools I make use of that help me in this area.
One is a trade journal. The trade journal is used to capture details of
a trade, including the circumstances that let me to enter,
the trade and so on. I also capture decisions made later on during the
trade like why I decided to stay in, exit or adjust. This forms a nice
record you can step back and read at the end of the month or year to see
how your decision making is and what can be improved.
I also use a trade log to capture my overall trade information. I like
to capture the trades on a monthly basis so I can see my month over
month returns. This can be used to evaluate your longer term performance
and allow you to set goals for improvement from one month to the next or
one year to the next. As a subscriber to the newsletter, you should have
received a free download that included both of these. I highly encourage
you to make use of them, whether paper trading or trading with real
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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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.
expectations may change if the charts indicate something different
during the month.
Sure enough, we did see some selling in the early part of November as
expected. I didn't necessarily expect selling all the way to the 50 day
In the November newsletter, I summarized my outlook as follows:
"...The main thing that jumps out at me is that we are pretty strongly overbought. It's quite unusual to see the price running
well over $50 above the 30 day moving average. At the moment, we're closer to $80 above the 30 day moving average. It's hard for
me to see
any continuation without some sort of regression back to that moving average.
Looking back recently, we can see a very brief test of the 50
day & 200 day moving averages as support. As a result, we could see a test of any of these. In fact that's what I hope for because
they will offer great entry points for bullish trades. ..."
Here's how November played out.
Sure enough, almost within the first few days of November, we saw a
fairly sharp snap back. I had expected the 30 day or 200 day moving
average to be the support level, but the SPX actually sold off all the
way down to the 50 day moving average before bouncing back to an
equilibrium just short of $2100. A lot of this has been news driven as
the market absorbs news about terrorist attacks and potential for
raising the Federal interest rate.
At this point, the market is likely to swing either way. We have a range
established between recent highs and recent lows that form support and
resistance levels. Given that this is written several days into
December, we already can see that the first move was down with a sharp
rally on Friday. As we head into the last few trading weeks of the year,
the market will likely be more bullishly biased as is typical for this
time of year. However, this year feels a little different, so we may not
see the typical strong finish we've been used to seeing at year end.
I'm definitely more inclined to look for bullish trade opportunities in
the next week. I may look to see if Monday continues the rally we saw on
Friday or whether we'll retrace some of that. Either way, there may be
some good bullish entries to be found. I'm also wanting to keep my trade
cycles short as
the market seems to change bias fairly quickly these
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.
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.
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. Many know this is my go-to
After watching the video, I'm certain you will understand why.
- Understanding the construction and how 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
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