the December 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.
Flat November, Up December? - December Newsletter
| Welcome to the December newsletter! It's been a wild month with the SPX
making highs not seen since 2008 only to give some of those gains back. We've
seen two months of gains in September and October with a pause in November. What
does December hold in store?
In this newsletter, I'll be reviewing the month in more detail and providing my outlook for
Also, I'll update you on
the video, review some trades, talk options strategies and more. Read on...
Thanks to those that have provided feedback on the newsletter.
I do value and take into consideration feedback on the newsletter
content and on ways I can make it more valuable for the readers.
Please feel free to voice your opinion.
If you haven't done so already, 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.
new at Success With Options
The big news with the site is the release of the video I've been talking about
for several months. In last month's newsletter I announced the availability of
the video, which is an early access version. While in in good condition already,
I knew there was opportunity to improve the final product and wanted to provide
a way for viewers to provide feedback.
I have already received some very good feedback and am in the planning stages of
producing the final product with feedback incorporated. It's not too late to get
your feedback in. If you have the video and haven't provided feedback, please do
so in order to receive your 50% rebate.
If you haven't yet purchased the video,
there's still time. Since I still have some copies left I decided to extend the
evaluation period to 12/15 before this version of the video becomes unavailable. For more details about
the video and to purchase it, please visit the video
You can also check out the video promotion for this on
If you are newer to options spreads, you'll definitely want to check out this
- Since this is an initial release that I want to get feedback for, I'm
only releasing 50 copies of the video of which there are still a few copies
available. Once the feedback has been
incorporated, I'll provide an unlimited release.
- The video is just over 30 minutes long and is packed with information on
buying and selling options and how to use the two concepts to construct
- The video has several quizzes to test your understanding of what was
- I've included an interactive tool to allow you to see dynamically the
impact of price, time until expiration and volatility on the option price
- The offer is first a low price - only $20. Second, I'll refund 1/2 of
this price for those who provide feedback on the video. Third, for those who
provide feedback, I'll also provide a free copy of the final product with
- The final release will probably sell for about $25 so this is a good
opportunity to not only get an early access copy but receive the final copy
as well for only $10.
|I had a few trades going this month but so far, the results are mixed. Yet... every trade offers an
opportunity to learn something.
Here are the trades I was active on this month in a quick summary. I only
did a few since I was focused on other things.
||This was a
successful trade that benefited largely from the recent bullishness in early
||This isn't a
mistake. These two trades made exactly the same amount, again benefiting from
have been a nice trade but the overall market was starting to weaken and EWZ seems
a bit more susceptible to weakness than other indices.
GLD diagonal spread
this trade just a few weeks ago. This is a nice inflation trade but more than
that, I'm hoping to demonstrate some longer term management techniques with
SPY vertical spread
help entering another bullish trade to take advantage of what I believe is short
term weakness. Time will tell...
While I hate having losing trades, I find that I learn the most from them. I'm
going to start including some key thoughts/lessons learned from the past month's
trade tutorials here. Here are
the nuggets from last month's closed trades.
put credit spread:
"...While it's often easier to draw lessons from the failed trades, I want to take a moment to look for some lessons learned in the midst of this successful
trade. Every successful trade starts with a good trading plan regarding how and when to enter. However a successful trade is further assisted by having a set
of clearly defined exit rules - both to limit loss and lock in profit. Furthermore, I consider this a successful trade because it was entered based on sound
money management rules that helped ensure that I wouldn't suffer a severe loss if the trade went against me..."
call diagonal spread:
"...The turbulence of the last few days has shaken me out of this diagonal spread position. I'm kind of angry about this because my stop forced me out of the trade before it could turn around. Unfortunately that's the down side of having a stop
loss order on a trade that may well run the gamut. In this case, my portfolio was small enough that the only way to enter even one contract of a diagonal spread was the stop loss..."
For more information on all of the trades I've posted as option trading
tutorials, click here
Back to the
table of contents
Options Strategy Focus
Based on feedback, I have modified this section a little bit to focus more
deeply on the details of some of the options strategies I use in the tutorials.
As you've perhaps followed some of the tutorials, you might wonder why I chose
one strategy vs. another. Last month I began this section by talking about how
to decide what strategy to use when thinking about entering a trade. I talked
about how it's important to understand the characteristics of the different
strategies so that the correct one can be selected based on your objectives.
This month I'll talk in more detail about the
characteristics I talked about last month, including timeframe, bullishness or
bearishness, impact of the greeks, and cost. In the various strategy pages, I've
talked about the resulting greeks. It is worth the time to take a look at the
construction of the various strategies and understand better how the combination
influences the resulting greek values. I've summarized the key ones like delta,
theta and vega below so I won't spend any more time talking about them here.
I want to first talk a little bit about timeframe. As you've probably already
noticed with the various trades I employ, each strategy has a slightly different
timeframe that is required to fully play out. Typically vertical spreads are
the shortest term and can complete in 2-4 weeks, depending on market conditions.
Calendar spreads are usually a little longer term and diagonal spreads even
more so. Iron condor trades are simply a combination of two short vertical
spreads so their timeframe is pretty much the same as the vertical spread.
Because of the way long vertical spreads work, they will often require a little
more time to develop - or they require a very strong bullish or bearish move.
Another factor to consider is degree of bullishness or bearishness of the
vertical spreads tend to be either mildly bullish or mildly bearish. Combining a
short call and short put spread creates an iron condor that is generally neutral
(within a range). Depending on how they are constructed, long vertical spreads
will typically be more bullish or bearish than their short vertical counterparts. The less in the money they are to
begin with, the more bullish or bearish they will be.
Calendar spreads, while longer term in nature, tend to be only mildly bullish or
bearish as the selected strike will be only a few strikes above or below the
current underlying price. A diagonal spread, which is a combination of a vertical spread and a
calendar spread, can be both longer term in trade duration but more bullish or
bearish. They can be more bullish or bearish because there is more flexibility
to roll up or down to create a wider spread.
One final characteristic to consider is cost. Different trades have a different
initial cost or margin requirement that may be a limiting factor in selecting a
strategy. The cheapest trade to enter overall is the iron condor. A $2 wide iron
condor with an approximate probability of success of 50% will cost about $1 in
margin, which is also the risk in the trade. Vertical spreads will cost slightly
more and calendar spreads even more. Usually diagonal spreads are the most
expensive and can cost anywhere from $500 - $800 to enter depending on the width
of the spread and the duration.
As you can see, there are many different factors to consider for each strategy.
To simplify the process of evaluating these characteristics,
I've provided a table that summarizes the characteristics for each strategy.
|Short put vertical
Call diagonal spread
Mildly - strongly bullish
Put diagonal spread
Mildly - strongly bearish
Note: the above table provides some generalizations about the various
strategies. Depending on how they are constructed and how the underlying
moves, the characteristics may change. For example, a typical long vertical
spread will start out having positive vega and negative theta. However when the
spread is fully in the money, it becomes negative vega and positive theta.
You may be realizing that strategy selection can be somewhat complicated. It can
seem that way at first but the more you become familiar with the
characteristics, the more instinctive the selection process becomes. You decide
you want a bearish strategy that offers positive theta, positive vega and a 6
week timeframe and you automatically think of the put calendar spread.
Be sure to check out the detailed descriptions of the various
I employ for an in depth discussion of many of these characteristics. Remember,
practice makes perfect so get out there and try the strategies.
Back to the
table of contents
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 past month, I received a question that relates to a topic I haven't
discussed much on the website.
Q: How much capital is actually required
to trade options effectively?
A: This is a great question, and one that may have crossed many newer
traders' minds as they've considered trading options.
actually various schools of thought on this. Some will argue that you can trade
options with only a few hundred dollars. Others suggest that you shouldn't trade
options unless you have an account of $20,000 - $50,000. Which answer is right?
Both? Neither? Let's take some time to think this question through.
On the surface, I could say that
you can enter a trade like an iron condor on the DIA or SPY for roughly $100 in
margin. In this kind of a trade you might risk roughly $100 to make roughly $100
for a 1 contract $2 iron condor spread. However, you wouldn't want to enter this
kind of trade if your portfolio balance is only $500. Why?
The main reason is
that if the trade is a loser, you lose 20% of your portfolio in one trade.
Another reason is that you may not be allowing enough free capital to make
necessary adjustments if that is part of your strategy. Furthermore, other
trades such as vertical spreads and calendar spreads may actually cost more than
$100 in debit cost or margin. A few losses of this kind would obliterate your
account and you'd be on the sidelines watching all the good opportunities pass
perspective. In my trade tutorials I talk about limiting my trade risk to just
2% of my portfolio. If we take the above trade as an example, that means I need
at least $5,000 to risk $100, which would be 2%. Consider also that in any
portfolio I'm trading, I may want to have the flexibility to trade 5 or more
different trades. Let's say that each trade carries on average $200 of risk (on
a $10,000 portfolio). That's a 2 contract iron condor or a 1 contract vertical
or a 1 contract calendar spread perhaps. If I trade 5 of these different trades
each carrying a risk of $200, I'd be risking $1,000 total. How much of your
portfolio are you willing to risk if every trade went bad?
back and talk about the larger perspective. Knowing that trading options carries
risk, how much of your total investment capital do you want to tie up in this
kind of trading? The answer better not be "all of it." I can tell you from
bitter experience, that this is a bad idea. Remember, you never want to
risk more than you can stand to lose and this includes options trading.
In the larger scheme of things, you want to consider this kind of trading as
maybe 20-30% of your overall investment strategy. Ideally, you might want to
have the majority of your investment capital spread out among other longer term
investments such as stocks, ETFs or even real estate.
Back to your original question then. How much should you have to trade options?
You might want to start with a $10,000 account and only trade single contract
positions until you get comfortable. You can start with a smaller account like
$2,000 - $5,000 but you will be forced to take fewer trades and may also be
limited in types of trades you can enter. In addition, with an account this
small, you will likely be risking more than 2% on each trade. If you can live
with this, fine. However, it runs the risk of blowing up your account in a few
trades if you're not careful.
If you would like to submit a question, comment or feedback
on the website, please
visit this page.
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. As
such, it may change if the charts indicate something different.
November has shown almost no net gain as we end the month nearly where we
started. I hinted that this might be the case in last month's newsletter. In it I summarized my outlook as follows:
"Here's what I suspect may happen. We may see some short term selling in the next week or so followed by another attempt
to push to higher highs - maybe up to $1200. In the end though we may see November end up pretty much where it started (emphasis added)."
While I was correct in my final statement, the way it played out was slightly
different than I expected.
For the last two weeks or so, we've seen just a sideways range. How this will
resolve is still yet to be determined. The market is acting like it's afraid of
its own shadow. There is a fair amount of good news but it's tainted by the
economic situation in Europe. I believe the market wants to rally but needs a
respite from all the bad news.
The thing to watch out for is the support level right at $1173. There have
several attempts to touch that level but each time has resulted in buying. As
we've seen in the past few months, we could see the month begin with another
rally. However, we could also see a failure of this support level and that would
probably lead to a lot more selling.
How will that affect my trades? I
am monitoring the market daily. If we see a break of support at $1173, I'll
probably close all my bullish positions and sell some call spreads right away.
If we see a rally from this level, I will become more bullish (cautiously).
However I will be holding off on adding any bullish positions for the moment
until we clear the overhead congestion area above $1200.
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.
Back to the
table of contents