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Good morning and welcome to your latest edition of the Winning Secret. We begin this week with one our subscriber’s questions which is a very good one--certainly worth commenting on in the newsletter. In his email, subscriber, Cristian, writes,


“You talked about closing the EWZ bear call credit spread, because delta reached 0.24, etc. For a couple of days now, DO closed with the 74.25 short call strike at a delta of 0.23, but I have seen no comment in the member area. Are you hanging on, hoping for a bounce back down?”

Here's the answer---From a Winning Secret perspective, when we close out a trade using a Delta buyback, we’ll be closing it out for good and moving on to a new a trade--and DO isn't quite there...

There are a couple of reasons why closing out completely is a good practice. If we followed what the EWZ did last week the Delta increased to a high of 31, hovered in the 28 - 29 range for most of the week before finally settling back down to 24 on Friday. Now, it could continue to fall further but with about 6 weeks before expiration there is too much time to wait with only a 69% - 76% chance of winning.

If at all possible, we need to have a mindset where we’re not trying to predict the future. I know that can be difficult because it’s our natural inclination to have a market bias--but our goal is to get away from the predicting game and instead play a set of odds that mathematically guarantees the deck is always stacked in our favor.

Risk management should always be a key focus when trading anything. An effective trading plan requires that we make every effort to minimize losses and maximize our winning trades. Great question, Cristian, thank you!

Trader’s Tip:

Historically,

• The “Summer Rally” is the weakest rally of the year and usually ends in July.

• Since 1987, August has been the 2nd worst month for both the Dow and the S&P 500; 5th worst month for the NASDAQ.

• In the last 13 years, the S&P 500 was up only twice on the next to the last day.

• The first nine trading days of August, especially the first one, is usually weak.

• Tuesday, August 10th and Thursday, August 12th are bearish trading days.

• Friday, August 13th is a bullish trading day.

From a stock (not options ) trading perspective, August is usually a good month to stay out of the market and go on vacation as it leaves most traders frustrated. The middle of August is usually stronger than the beginning and the end

Key Dates:

• August 19th--options expiration for some indices.

• August 20th--options expiration for all equity and all other index options.

• September 16th--options expiration for some indices.

• September 17th--options expiration for all equity and all other index options.

Volatility:

Last Monday’s open was extremely bullish which is very unusual as this is historically a bearish time of the year. And as shown in the figures below, the market is becoming too complacent once again--so let’s just keep at least one eyebrow raised as we see how this all plays out.

Market Outlook

In the news this week, both stocks and the dollar fell after a weak US employment report Friday. The report had investors dumping stocks and moving into foreign currencies, gold, bonds, etc. With the U.S. recovery weakening, private job growth was only 71,000 for the month of July which is a far cry from the numbers needed to reduce the unemployment rate which remains at an optimistically reported 9.5%.

It takes about 200,000 new jobs for the unemployment rate to hold steady and keep up with the growing work force. And despite $26 billion in federal aid, local, state and federal government levels have had to eliminate 169,000 jobs. Unfortunately, more losses are coming; about 20,000 – 30,000 more jobs being cut per month is estimated for the rest of this year. It will take many years to regain all the lost jobs due to the recession. The economy lost 8.4 million jobs in 2008 - 2009 and this year the private sector has added only 559,000.

Consumer borrowing fell again in June as households kept lowering their credit card use and socking money into savings accounts. This marks the 5th straight month of cutting back and a $1.3 billion drop for the month of June. And this is the 16th drop over the past 17 months as consumer credit has fallen by $163 billion since its July 2008 peak.

Households are continuing to save more and borrow less which is important and a good thing--but it's had a negative effect on consumption and GDP. It the not-too-distant past economists were worried that consumers weren’t saving enough; now they’re worried that they aren’t spending enough!

Consumer spending accounts for 70% of US GDP, so it's THE single most important sector of our economy . Finally, on a brighter note, Europe’s economy is strengthening once several sovereign debt sales were over-subscribed--it appears that crisis has passed--for now.

Dow 14,000 in 2011?

Well Then, Make Mine a Double…and Yes, I’d Like Fries with That!

While scouring the news events of the week, I discovered two articles that shouted for attention. The first was a prediction on how the Dow could reach 14,000 in 2011. It’s an interesting read based on a number of factors including the country's GDP fluctuations since World War II. And after reading it, I thought it would be fun to put it to the test and see what the chances of this pinnacle being hit from a volatility perspective.

But before we sit down and crunch the numbers, how about we crunch on a light snack? Well, have no fear because it’s Krispy Crème Donuts to the rescue. That’s right folks…you too can try their new cheeseburger with a twist.

Twist you say? That’s right.

Not only is it just a cheeseburger but it’s a cheeseburger topped with chocolate covered bacon! And it gets even better. They’ve done away with the bun and instead sandwiched it between a couple of donuts.

What has this got to do with trading? Well, nothing.

But if we really want to play this one, I’m thinking a Bull Put spread for starters. Why? Well, it’s sweeping the nation and everyone has got to try one, right? The stock has got to go up! Then I’m thinking Bear Call spread because either we’re all going to be in the hospital or we’ll all be dropping like flies and there’ll be no traders left. I wonder…can you get fries with that?

Ok, Dow 14,000. Is it possible? Well, if we look at both historical and implied volatility, from both January 2011 to January 2012, sure there is a statistical chance. Not much of one but it is there--in looking at these odds though it looks like a better bet to sell--something we're getting increasingly good at.

What are the Secrets of the Week?

Since it’s not clear if Friday’s close is a sign of more trouble to come or just a temporary setback, the best plan is to continue with our neutral style of play. And since earnings season is winding down, if stocks are going to continue their upward trend they’re going to have to get their news from somewhere--and that’s going to be the economy. But with housing, sales, income, and jobs all down things could get pretty discouraging--unless you’re a Winning Secreteer of course--so let’s get started...

You can get in on this week's trades along with two new high-probability trades per week by clicking here now: http://www.thewinningsecret.com/

Stack the Deck on Every Trade,

Robert

To all our subscribers, God Bless and have an awesome trading week!