the December 2016 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.
The Calendar Spread - December Newsletter
|Finally!! The newsletter is finally out for December. Chalk
it up to busy schedules and end of year craziness. This will be the
last newsletter until February, essentially skipping the January
newsletter as I usually do.
Are we on one incredible bullish run or what?? Is the a Santa
Clause Rally, a Trump Rally or both? Can this run continue? In this
edition we'll tackle those questions, look at trading gold
answer a question that was recently submitted by a reader.
Finally, we'll close as usual with a Market outlook for you. For more
details, read on...
I'm planning on using some down time
over the coming weeks to work on the "Mastering Calendar Spreads"
videos. The goal would be to have this available early in 2017. Stay
tuned for additional details. In the mean time, feel free to take
advantage of the holiday special to purchase anything from the video
store at 30% discount. Use the code holiday2016
at checkout to receive this discount on anything in your shopping cart. This
code will be good until January 1.
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: Trading the Calendar Spread
| This section of the newsletter will focus more deeply on the
details of some of the options strategies I use in the tutorials and
other topics related to options trading.
This month, I'll introduce (or review) the Calendar Spread strategy. I
mentioned at the beginning of the newsletter that I'm going to working
to complete the next video series, which will be on Calendar Spreads.
This seems like a good time to kick that off by providing a brief
introduction to them.
Quick Calendar Spread
I'd like to quickly discuss the construction of a calendar spread and
talk about how it is different from the Vertical Spread. The big
distinction with a Calendar Spread is that it will be composed of
strikes that have different expiration months but exactly the same
strike price. The short strike will be in a nearer term cycle while the
long strike is in a farther out cycle. This offers some interesting
characteristics in terms of how it behaves and profits. Notice that we
still have a 'defined risk' trade where the long strike is used to cover
or limit the risk from the short strike.
In the ideal case, the short strike will expire with the underlying
right at the strike price. Actually, you want the option to be just
barely out of the money (OTM). As a result, the short strike will be
worthless on expiration but the long strike having some number of weeks
or months until expiration will
still be worth something. In fact,
that's the whole way in which calendar spreads profit. When opening a
position, you sell the short strike for a credit, which offsets the long
strike that you buy for protection. The net result is a debit. As time
passes, the short strike's time premium melts off faster than the long
When you can trade
Calendar Spreads are quite versatile in that they can be traded on their
own or used as a protection or adjustment strategy. Let's look at an
example of each.
Quick Analysis of a trade setup
- Trading on it's own - One strategy I like to use with
Calendar Spreads is setting up a trade following an extended bullish
move. The volatility is typically low at that point, which makes the
options cheaper for strategies that involve a net debit. I'll buy a put
Calendar Spread below the current market. How far below depends on my
outlook for a correction. Often it
will be a support point. I buy the
spread and then wait for the market to pull back. The longer this takes,
often the more profitable this trade will be. because it allows time for
the time premium of my short strike to melt off. This approach offers
several key benefits. With put Calendar Spreads, you are expecting a
selloff typically. With a selloff you usually see an increase in
volatility (Vega). The combination of increasing volatility AND the
market moving down to your short strike can act as a double benefit.
- Trading as an adjustment - Another case where I like to use
Calendar Spreads is as an adjustment in combination with a Short
Vertical Spread or Iron Condor. In this case, I want to use my Calendar
Spread to offset the risk that may occur if the market moves against my
short spread. In this case, the profit from the Calendar Spread helps to
offset the risk or loss that may occur if a
Short Vertical Spread goes
wrong. In the best of all cases, I can win both on the Calendar Spread
and in the Short Vertical Spread but that doesn't happen too often.
There are a few considerations when looking at Calendar Spread setup.
These can all affect entry cost and potential profitability and are
influenced by your objectives for putting the trade on. Let's look at a
few of these considerations.
This is a quick introduction to Calendar Spreads. Be watching for the
release announcement early next year. In the mean time, also have a look
Calendar Spreads page on the website. There, you will also find
links to some older tutorial videos on Calendar Spreads.
- Call vs Put Calendar Spread - This is usually a fairly easy
choice. I typically want my spread to be entered as an OTM spread. As a
result, if I'm considering a bullish trade, I'll put on a Call Calendar
Spread. If I'm considering a bearish trade, I'll put on a Put Calendar
- How far out of the money the strikes are - This is a more
difficult choice and is based on a few factors. Largely, this is based
target price where you expect the market to be around the
expiration date of your short strike. One of the things I like about the
Calendar Spread is that you can be a little bit wrong and still profit.
One of the tougher parts of this though is that it's a lot harder to
calculate profit and in fact, you can't know exactly what it will be
ahead of time.
- How many options cycles between long and short strikes - This
will be based on your objectives for entry. Using Calendar Spreads for
adjustments means I'll usually ensure I have it on for the duration of
the trade I'm protecting. If I'm entering the trade on its own, then the
number of options cycles usually has something to do with my outlook and
the timeframe for that outlook. If I'm expecting a period of movement
within a tight range, I may put more cycles in between because I have
opportunities to roll the short strike from one cycle to the next. This
basically allows me to recoup some of the credit and may increase the
profitability of the overall trade.
- What's a good entry price - Entry price is often linked to
the prior two decisions. How far out of the money and how many cycles
will have a direct affect on the price of both the long and short
strike. Overall, you are looking for around 30-40% target ROI.
Calculating that can be a little tricky but there are tools both on the
thinkorswim platform and at the Options Industry Council (OIC) web site
that can help with this. The allow you to roll time forward and an
analyze the impact of time passing, price changing and volatility
changing to project a potential future price.
Happy trading this month!
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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: On several of my
trades after the first day I got a Regulation - T call notice in my
position statement. What is a Regulation - T call notice and why am I
A: Regulation T is a
series of regulations created by the US Federal Reserve Board and
govern various aspects to how accounts are managed for investing. This
is particularly important to understand when it comes to regulations
relating to margin accounts, which is why you might have received a
Regulation T call notice.
There are several aspects to these regulations that you should be aware
Why might you receive a Regulation T call notice? If any above
activites cause your margin to drop below required amount, you could
receive a Regulation T call notice on your margin. The typical approach
to resolving this is to add more money to your account. There is
actually a regulation that limits how many times you can resolve the
call by simply closing one or more positions.
- Borrowing money to fund a
stock purchase - For example, let's say you had $2500 in your
brokerage account. You wanted to buy
200 shares of SPY at $200.
However, that would cost $4000. You could use a margin account to fund
part of the purchase by borrowing money from the broker at their
standard rate. Regulation T allows you to borrow up to 50% of the
purchase price of the stock.
- Using margin for uncovered
options - This means for nake puts or calls that are not secured
with your own cash, you would need to borrow from your margin. The
amount you borrow is more difficult to determine and may be up to your
broker to define. However you are required to maintain at least $5,000
in your account (as opposed to the $2,000 minimum required for
purchasing or shorting stocks). Generally, this can be pretty risky and
complex and more so when using a margin account.
- Frequent trading -
Options traders can open and close positions frequently without
realizing that it actually takes a few days for the trade to finally
settle. If you perform too many trades in a short period of time, it
might be that more of your margin is required than you realize.
In general, I'd say you are at relatively low risk of encountering this
situation if you follow some basic rules.
I hope that helps you better understand what Regulation T
calls are and why you might receive one. For more information, consult
your broker's margin rules to find out how they manage margin accounts.
- Make sure you have sufficient cash in your account. I'd recommend at least $20,000.
- Use defined risk trades (Vertical spreads, Calendar spreads, etc)
- Limit your risk per trade to
1-2%. That means risking no more than $200-400 per trade.
- Limit the total risk to 10% or less (this will only tie up about $2000 and you won't need margin anyway).
Help me ensure we have an interesting question or two to respond to
next month. Submit your questions at this
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|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.
And... as quickly as that, the selloff is over.
In the November newsletter, I summarized my outlook as follows:
"...Now that we've broken that up trending support line, it's time to look for the next level of support. Right now, there is horizontal support pretty much right where we're at (give or take 10-15 points). If that fails, there's always the 200 day moving average. I frankly wouldn't be surprised to see the 200 day moving average tested. Currently there isn't any kind of wide spread panic so the selling may likely just be more election jitters......"
Here's how November and the first half of December played out.
Sure enough, the SPX sold off right down to the 200 day moving average,
coincidentally was very close to the 50% retracement point from
the prior lows back in July to the highs in August. With the election
over, the market has rebounded hard and fast and at the end of Nov,
actually broke over the prior highs. That makes these all time highs
people. Furthermore, we're now at more than 7 years of bullish behavior
since the lows of 2009.
It's very possible that we could see the projected high from the
Fibonacci chart be tested. There is a school of though in the technical
analysis world that if you break the 100% retracement level, the next
target high is at 161.8%, which would be $2320 or so. That's really only
about $70 more. However, keep in mind that this time of year
traditionally sees a kind of bullish rally often referred to as the
"Santa Clause Rally". What follows in January is often some selling.
With as strong a rally as we've seen it is also quite possible we
see selling at least back down to the support level around $2200.
Do you have trades on right now? If so, watch them carefully. As for me,
I'm trying to close my trades and wait this out. If opportunity offers a
chance, I'll try to sell above the 161.8% fib level. Otherwise, I'm
looking for an opportunity for a bullish entry.
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.
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|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 strategy for
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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