August was a very interesting month to be trading the markets. With the huge sell-off starting at the end of July and running into August expiration, it was hard to do anything but hedge and protect your portfolio. We did run into some trouble on the way down like everyone else – but I firmly believe that our risk management was much better than other newsletters. Namely our positions were very conservative to begin with, which allowed us to roll/adjust our positions and avoid major losses.

Credit Spread Strategy: 1.29%

To re-cap this month’s income, let’s look at what we made in premium vs. our required investments (in margin). Here are the positions we had with corresponding PROFIT/INVESTMENT and RETURN:

RUT 910/915 CALL SPREAD – $45/$955 = 4.71% Return

SPX 1,110/1,100 PUT SPREAD (Rolled Lower) – ($5)/$940 = 6.38% Return

With regard to TOTAL INCOME and RETURN, the portfolio produced $40 of income after investing just $1,895 in margin. That means we saw a total portfolio return of 1.92% this month based on our model allocation.

Naked Puts/Calls Strategy: -3.37%

To re-cap this month’s income, let’s look at what we made in premium vs. our required investments (in margin). Here are the positions we had with corresponding PROFIT/INVESTMENT and RETURN:

SPY 105 PUT – $25/$1,050 = 2.38% Return

GLD 130 PUT – $25/$1,305 = 1.92% Return

OIH 120 PUT – $25/$1,206 = 2.07% Return

IWM 69 PUT (Closed Early) – ($145)/$689 = -21.04% Return

With regard to TOTAL INCOME and RETURN, the portfolio produced $70 of loss after investing just $4,250 in margin. That means we saw a total portfolio return of -3.37% this month based on our model portfolio allocation.

Iron Condors Strategy: 0.00%

We did not enter any positions for the Iron Condor strategy this month. All funds remained in cash.

Just last week I had offered a fairly strong argument that we were near a short term bottom. And it wasn’t that I had some magic crystal ball or anything, I was just looking at all the technical indicators – as emotion free as I could get.

Now, after putting together a very strong rally over the last couple of days it seems that we are due for some investors to start closing out losing positions. Remember that most people saw their money evaporate during the July-August sell-off nearly 20% and are looking for any reason to “break-even.”

This really gets down to the trading psychology and theory behind support and resistance levels. You have to put yourself in the shoes of the other guy. Per the chart you can see that most people who are holding stocks right now have really been put through the ringer! And as we get closer to their break-even point, they will hit the sell button without any second thoughts.

People and investors especially hate to take a lose. They will virtually do anything to make sure it doesn’t happen. This also means holding a loss much longer than they should in hopes that it will somehow come back. Naturally, as soon as they see their bad investment come back (even a small loss of 5%) they will sell out of the losing position.

Have You Ever Held On Too Long or Exited Too Early?

The trading psychology of losing is the most fundamental reason why old support becomes new resistance. Add your comments and discuss the past situations where you have either held onto a trade that you new wasn’t good way to long, or where you exited with a small loss just to see the stock continue higher.

Believe me, we have all done it – learning from it makes you a better trader.

Unless you’ve been living under a rock for the past 24 hours, I’m sure you know that Steve Jobs resigned as CEO of Apple (still keeping his Chairman role of course). The news really shouldn’t come as any surprise to shareholders and the market – it’s been an inevitable event for the past year now with his unfortunately dwindling health.

Still the “hangover” from the resignation will linger for months and years. Apple will still be a favorite love of Wall Street for the future but this guy gave the company an amazing direction and vision. Really it’s a shinning example of entrepreneurship and capitalism at it’s best. 10 years ago Apple was near bankruptcy and losing money and Jobs single handedly turned the company around.

Well done Mr. Jobs – and we should all take note…

5,371% Return Since 2003

The last 10 years for AAPL stocks has been one of the great stories on Wall Street. A roughly 5,371% return from the 2003 lows and boy do we all wish we had bought up AAPL stock when it was trading at $7/share.

I’m not a crazy Apple follower but after getting my new MacBook last year around this time for my birthday I can definitely say that I will never go back to a PC again. These things are just too damn cool! It actually made it to #14 on my list of 39 life lessons.

Will AAPL Survive Without Steve Jobs?

Here’s the Million Dollar question I want to pose to you all. Add your comments below! I’m sure that we could have some very strong arguments on both sides…

The past three weeks have been some of the most volatile trading in the last three years; all the more reason why keeping a good stack of cash is a great idea in a volatile market. Most options traders incorrectly think that they need to have money invested at all times in the market. They force trades into the market when the risk/reward ratio really isn’t there.

What can we learn from this “mini-crash” we have all just gone through? Well, if you are an options traders you learned 2 valuable lessons on why keeping cash is so important in a rising volatility market.

1) Cash leaves room for margin expansion…

I think there is no question that a lot of new options traders learned that their margin account can actually increase very rapidly on them. And if they were 70-90% invested before the selling started then the term Margin Call become a new vocabulary word.

Having cash ready and low levels of margin usage in a low volatility market leaves room for that margin to expand with increasing volatility. If you did’t over-invest then you have plenty of room in your portfolio to withstand the market swings and come out alive (or at least not with a blown-up portfolio).

2) Cash on hand can be used for ridiculously profitable trading opportunities…

As the VIX above shows, high volatility levels can be easy pickings for options traders. Since they historically don’t last long, those traders who have additional cash on hand can go out and “bottom pick” the market for ridiculously easy profits.

One way I that I like to take advantage of this is with short naked puts. Just this past Friday, you could sell a Put on the S&P 500 at a strike price of 750 and take in a premium of nearly $167 per contract! That’s an easy 2.23% return in 24 days AND the market would have to drop another 35% for you to lose money.

Again these are the kinds of easy trades that you can make if you keep some cash in your portfolio.

Technical Indicators Show We Are Near A Bottom

All the indicators out there are showing that we could be setting up for a very strong and sustained move off these August lows in the coming month. Everything from insider buying to sentiment indicators show buy signals.

Probably on of the biggest signals comes from the NYSE Percentage of Stocks above their 200-Day Moving Average. As of Friday, this indicator is at the same level as previous major stock market bottoms.

I know it came be hard to get back into the market after the huge swings but if you want to be an emotion-free trader who uses technical analysis, now could be a good time to start build up your portfolio again.

Fibonacci analysis is crucial to an options trader and almost all traders generally speaking do use retracements and extensions as part of their strategy. It’s a topic that I’ve covered multiple times before here on this blog as well. Over the years Fibonacci levels have proven to be exceptionally accurate at predicting market movements and this can help traders devise strategies to make more profit.

Trading Breakouts

One of the best ways to make profit while trading is by predicting price breakouts. With Fibonacci retracements and extensions breakouts can be accurately predicated and when a trader uses an additional indicator to provide supplementary evidence they can be certain when a breakout will occur.

Fibonacci retracements and extensions rely on a trader accurately choosing the low and high points of an overall trend. Once this is done the Fibonacci analysis can be applied to a candlestick chart and a number of key Fibonacci ratios will be presented on the candlestick chart as horizontal lines.

Use Fibonacci Levels For Support/Resistance

The lines help project points of resistance and support and they can also be used to suggest when a breakout is likely to occur. The two key ratios are 38% and 62% and often when a security is trading it can rebound back and forth between these two ratios.

If this is happening a lot and the market looks congested between these two points then the retracements are suggesting that a price breakout is imminent.

When a price breakout occurs the price of a security will often move dramatically outside of the 38% and 62% ratios and the market will change significantly. The presence of price congestion in between these two lines created by the Fibonacci retracement suggests the market price will move and this is the point at which a trader should act.

Don’t Use Them Alone!

Fibonacci analysis is best used in conjunction with another indicators to confirm if the breakout is definitely going to happen. Like all technical analysis tools we use, a trader shouldn’t simply rely on the analysis provided by the Fibonacci retracement without checking other indicators.

Using the evidence of two indicators is a much more reliable strategy because if the two suggest a breakout is likely then it will probably happen but if they contradict each other a trader should stay out of the market.

Bollinger bands are excellent at predicting breakouts and when they begin to contract, this is a signal a price breakout will occur. This behavior is known as the Bollinger squeeze and if a trader correctly identifies it whilst also noticing congestion in the Fibonacci retracement, they can be fairly certain the breakout is imminent.

By combining the Fibonacci retracement analysis to the Bollinger band analysis, a trader can confidently enter or exit the market based on the evidence provided. If the correct move is made a trader could make plenty of profit or prevent themselves from losing money during a breakout. Similarly, this strategy can be applied to Fibonacci extensions because the same principles are used to determine the future market movement.

Guest Post by Mark Deaton

Exchange Traded Funds (ETF) such as QQQQ, SPY, IWM and DIA all have a broad representation of the stock market, and so tend to be more stable and less volatile than individual stocks. They tend to settle into a trend, and hold it for longer, whereas stocks tend to bounce around all over the place.

This inherent stability provides an opportunity for options traders, especially for those who are not after the huge gains, but are happy to trade more frequently for smaller bites of the cheese. Selling credit spreads is an excellent strategy for taking advantage of a trend, and making 5% per month on a portfolio.

Another excellent strategy is to use Deep-in-the-money (DITM) options…

Benefits of Trading Deep ITM Options

DITM options have a relatively high Delta, which means that when the stock price moves by $1, the related option price moves by a similar amount. This means that the maximum amount of movement in a stock’s price can be captured using the leverage of an option trade.

The basic strategy for trading an ETF (for example, QQQQ) is similar to that of swing trading. You are aiming for small gains in short times, and most trades will be completed within 1-2 days. The technical analysis requirements for a trade of this strategy are not onerous – in fact it is easy to over analyse, and end up not having the courage to make a trade.

In essence, you need to know how to identify a trend, and to be able to give a measure to the strength of the trend. You also need to be able to pick up the likelihood of an imminent trend reversal, by identifying support and resistance lines. If the trend is upward, you will buy DITM calls; if downward, but DITM puts.

Focus On High Delta Options

The best option to pick is one that has a Delta between 70 and 90. This is so that you are not buying the most expensive options, but you are still going to capture the movement of the stock as much as possible. You also need to pick an option that is about two months from expiry, so that time decay does not have too drastic an effect.

In any case, you will be in and out of the trade so quickly that time decay should not be significant. Set an entry for the trade somewhere near the lower end of the daily trading range, or wait for a one or two day pull back before entering.

Have Some Risk Management In Place

As soon as you have entered the trade, the first and most important step is to set up a stop loss. Only stupid and irresponsible traders work without stop losses, especially when dealing with options. The first rule of options trading is to minimise your losses! Having done that, set up an exit trade of about 12-15% profit. Quite often this will be filled within a day or two, which means that you get to do another trade.

Trading DITM options on ETFs such as the QQQQ is an incredibly good and relatively easy strategy to generate regular profits. The time requirements are not too demanding, and the process can be somewhat automated.

Add your comments below and let me know what you think about trading DITM options? Has it been a worthy investment for you? Did you run into any snags?

Guest Post by Rob Forbes

We all know that the US debt was downgraded at Standard and Poor’s this past weekend. If you didn’t, then apparently you live under a rock. The truth is that it really didn’t come as a surprise. Standard and Poor’s (along with Moody’s and Fitch) put the US on negative watch back in April, but the timing sure didn’t help the already weak markets.

How to still come out alive? Well, first take a deep breath and realize that it was already coming and most of the news is already priced into stocks where they are now. Get back to basics with your trading plan. If you did have any loss protection measures in place last week I bet you learned a good lesson to keep with you from here on out.

Here are some of the major headlines after the downgrade:

How debt has defined human history

Dow theory supports sell signal

S&P bites the hand that feeds it

Cash is king…still

ECB announces bond buying in last ditch effort

Worst start to August ever

QE3 becoming more of a reality?

What Are Your Expectations After The Downgrade?

I’ve gotten more emails over the past weekend than I usually get in a whole week! I want to hear what your thoughts are on where we go from here as we start August trading and the summer slowly ends…add your comments below.

Everyone is always looking for the best place to find real-time stock market quotes and news right? And since companies are changing each their platform for stock market quotes seemingly everyday, it can be hard to find reliable news and quotes that are laid out in an easy to read manner.

This list took me a little over 3 hours to complete but I used mostly the links that I have available for our members. I’d love to hear which sites you use the most for stock market quotes and news via the comments section.

Bloomberg

CNN Money

Reuters

TheStreet

SeekingAlpha

Wall Street Journal

MarketWatch

YahooFinance

NASDAQ

Google Finance

FINVIZ

SmartMoney

CNBC

MacroAxis

ADVFN

DailyFinance

MSN Money

Fox Business

BarChart

Wikinvest

Morningstar