Q: What is gap risk? is that when the open price next day is lower than your stop loss price?
A: Yes, correct. And in some cases, substantially lower esp if very bad news is given out after market close. A stop will NOT protect you in that case. A put option will.
Q: Does the Cash secured put strategy imply that if you sell the put, you have to have the cash in your account to pay for it if it is put on to you?
A: Yes, “cash secured” means you put up the cash. It stay in your account but it is held back.
Q: So it is a matter of personal perception as to where the stock is heading?
A: Yes Vicki. Covered calls are best suited for a slightly bullish to neutral markets. CC are not suitable for Bear markets (a market going down).  Cash secured puts are also suitable for Bull Markets.

Q: Do all ETFs go in the opposite direction of the stock they represent?
A: No, most trade in sympathy versus opposite. There are a growing number of inverse and leveraged ETFs. Be sure to order the ETF or read online the prospectus for any ETF you are not familiar with. Over 1100 now…

A:  You can place your sell stop below the entry price in any increment – down to the penny.  Unlike options, which have specified strike prices, the stop order may be placed at any price.  Of course, remember that for a sell stop you want to place the order slightly below the stock’s support.

 
Q:  Can you put more than one type of order on a stock?

A:  You may place more than one type of order for a stock but you should do that as a conditional order.  For example, if you want to place a sell limit above your entry price and a sell stop below your price, then you would enter a conditional bracketed order.  This will cancel the open order that is left when the first order is triggered.

Q:  At what percent would a trailing stop be considered too tight? (Ron)

A:  The chart will have to give you that answer.  What is too tight for one stock may be too loose for another.  Evaluate the volatility of the stock you’re trading and allow for the normal daily fluctuations.  When in doubt, allow for more room but reduce your position size so that you don’t violate The Market Guys’ 1% Rule.
 

Q: When I want to purchase stock on etrade the cost is 5.69 a share, but the ask price is 5.70, what is the ask price?

A: There are three prices that are posted on your trading window that traders look at the most. The Bid Price, the Ask Price and the Last Price. The last price is simply the most recent price that the stock was traded at. The bid price is the highest price the buyers are willing to pay for the stock at that moment in time and the ask price is the lowest price the sellers are willing to sell at. Therefore If you are a buyer who wants to buy a stock at the market, you would have to make a trade with a seller who is willing to sell you their stock at their offering price. If you decided to sell stock, you would in turn make a trade with someone who is willing to buy your stock at their highest bid price. Remember it takes two sides to make a trade and just like real estate there is a price the seller is asking and many times the buyer of a property will submit a lower price than what the seller is asking in hopes that the seller will move to them in order to complete the transaction. The same principle applies to the stock market.

Ronald C. asks:

Q: How solid are the energy stocks in this new market in your opinion?

A: Energy stocks are, in our opinion, a great place to be if you are a trader, especially if you are a swing trader who is looking to capture profits within a 3 week to 3 month window. There is enough volatility there to exploit the technical signals and as a result of this volatility many opportunities open up for the option traders. There is a good book out now entitled, ‘Game Over’ written by Dr. Stephan Leeb. This book may give you a completely different outlook with regard to the energy sector whether you are a trader or investor. According to Dr. Leeb, our world is running out of energy and it’s the perfect time to create great wealth once you understand how to position yourself in the energy stocks.

Link to ‘Game Over” by Stephan Leeb

Susan D. asks:

Q: What factors should you consider when buying a stock: price, history, dividend? Other factors?

A: There are many factors we would consider before buy a stock but price history is the most important factor for sure. The other thing we would have to consider is the length of time we plan on holding on to the stock. If you are a long term investor, than dividends would be something to consider but don’t be fooled by a high dividend paying stock because many stocks have dropped far below what the dividend is paying as a percentage. It all comes back to price. If you are not sure about how to determine what the price trend of the stock is then you are more than welcome to come back to another one of our webinars so you can learn more about technical analysis.

Brad K. asks:

Q: What would you suggest a 25 year old with decent income invest in who is ok with high risk/reward?

A: Just because you have a high risk tolerance doesn’t mean you have to expose yourself to high risk transactions. In fact, some of our most profitable trades have come to us as a result of conservative “lower risk” strategies. I would suggest you take time to learn about our four most profitable option strategies. Our ‘ 5 Points for Trading Success’ book has been a best seller since it was published in January 2008 and it’s a great place to get started.

Click link below to review book:

https://www.themarketguys.com/store/products/The-Market-Guys%27-Five-Points-for-Trading-Success%3A-Identify%2C-Pinpoint%2C-Strike%2C-Protect-and-Act!-(Hardcover).html

John L. asks:

Q: How often are trailing stops moved?…Daily or minute by minute?

A: If you are using the trailing stop feature on the Power Etrade Pro Trading Platform then the stop can be set to automatically track the price or a percentage of price which means the stop price would be dynamically adjusted as the price of the stock moves up. Many times we will manually adjust the price as we see the stock move up as it establishes higher role reversal support levels. This would take more skill to accomplish but with a little practice it becomes much easier to do.

Karen S. asks:

Q: Can one company’s shares be traded on more than one exchange?

A: There are many exchanges and yes, stocks can be traded on multiple exchanges. You may also be referring to the difference between listed shares and shares traded over the counter. Listed companies are generally the large cap stocks identified by a three letter identifier while over the counter stocks are traded on the NASDAQ and usually have a ticker symbol that is four letters. There are also some stocks that are dually listed both on the NYSE and NASDAQ and from time to time you will see stocks move from one exchange to the other as their financial requirements for such listing change over time.

Baleke K. asks:

Q: If this is not a good time for beginners to buy and hold, then what would be the best strategies to consider?

A: Don’t misunderstand what we meant when we say, “this is not a buy and hold market”. This does not mean investors should stay out of the market it just means you should not buy and hold and hope that your stock is going to go up in price. Buy and protect would be a more optimistic way of describing the type of market we are in right now. There are many opportunities for investors and traders alike, but the conventional buy/hold strategy is not the best strategy to put your money into now. The “Golden Buy/Write is a great strategy to learn right now and it wouldn’t take more than an hour to learn. If you would like more information about our modified version of a covered call which we have labeled the Golden Buywrite then just send an email to info@themarketguys.com and we will get you’re the information you need to get started.

Q&A from The Market Guys Webinar dated 021209

Joanne B. asks:

Q: Do I always want to issue a stop order when i purchase a stock?

A: The Market Guys philosophy for trading is to protect, protect and then potect again. The decision to get out of a bad position should be made even before the trade is entered into the market. We strongly suggest that traders use sell stops for any equity position held, especially in today’s highly volatile conditions.

Debie M. asks

Q: How do you make “trading” work including commissions and taxes, i.e., always having short-term transactions?

A: We make money in the market by putting our money in the direction of the money flow. In other words, money moving into a stock generally pushes the price of that stock up. We can easily see this in a price chart, so when we put our money in a stock that is going up in price there is a greater chance for us to profit in such a stock. After the stock has gone up in price we then look for signs of money moving out of the stock. This would be displayed on a price chart that displays a “pivot point” to the downside. Once we see weakness in the price we sell out of our positions and move to cash. Of course there is more to it than what I have just explained but the basics are simple. Buy when others are buying then sell when the sellers begin to push the price down.

David W. asks:

Q: What does a new trader do to analyze stocks and what does he need to know to figure out what it all means.

A: This question comes together with the question Debbie just asked. Our primary tools for analyzing stocks are price charts. Think of them as weather vanes of the financial markets that give us the direction of the money flow. The biggest mistake people make is when they try to buy low and sell high. The better way to look at the market is to look for stocks that are strong and buy them as they are going up with the intention of selling them higher. The “buy low sell high” can get you into real trouble in a bear market because when you buy in a falling market you increase your chance of losing on your trade or investment. Learn what support and resistance means to a trader and use these concepts to increase your odds for profiting. This is what The Market Guys talk about most in our seminars, webinars and radio programs. It’s essential that you learn these concepts before getting into the market otherwise you could be putting yourself at risk while trying to profit in the market.

Melissa N. asks:

Q: what are options?

A: Equity Options are contracts that are traded on most exchanges allowing the buyers of the option contracts to control a stock at a certain price. There are two types of option contracts, which are calls and puts. Buyers of call options lock in a buy price for a limited amount of time for a particular stock and buyers of puts lock in a sell price for a limited time. If you were to buy a call or a put you would have to pay what’s called a “Premium” to the person selling the call or put to you. It would be best to approach the world of options the same way you would approach learning a new language. Learn a word or a phase at a time and as you digest these concepts you will become more fluent in the” language” and over time you will understand many of the strategies used to trade options. We have produced a video for you through E*Trade Financial entitled Options for Beginners. Click on the link below and you will have a better idea of how options work.

https://us.etrade.com/e/t/jumppage/viewjumppage?PageName=trading_education_videos&SC=JGTMWEB

Q: In your opinion, which technical tool/parameter is the best forecaster of short term price movement? – Tom

A:  we always say that price is the forgotten leading indicator.  We start with price and volume.  Look for the story – what patterns are forming, how strong is volume, how long are the candles, etc.  Beyond that, use the simple indicators such as simple moving average (SMA) and trends lines.  Always keep in mind that technical analysis is first and foremost a risk management tool, not a forecasting tool.

 Q: Does fundamental screening play a larger role when screening on a longer price movement forecasting? – Sanjay

A:  Yes, fundamental analysis becomes more important as your time horizon gets longer.  Technical analysis is always important – even for the investor.  A long-term investor can use monthly and weekly charts to manage positions very effectively.  However, a short-term trader may not use any fundamental analysis.  Swing traders through investors should employ a mix of the two.

Q: How much can you really pay attention to Fundamentals when they can be manipulated by people… whereas Technical’s cannot? – Deb

A:  That’s a good point that you can’t ignore.  People can make up stories for the financial reports but they’ll always tell the truth withtheir wallets.  Fundamental analysis is what people are saying; technical analysis is what people are doing.  Furthermore, financial reports are a month to a quarter old by the time you see them.  Technical data is real-time – you get to see the trades as they happen without delay.

A:  We often trade in the last 15 min of the day. So if we see the pivot point holding, we will trade *that* day rather than waiting for the next trading session.  This assumes that the signal is one that doesn’t require confirmation.  An example would be a bullish engulfing pattern.  A doji is an example of a candle that does require confirmation from the next trading session.

Q:  In today’s climate and with so many stocks well below there 50 and 200 day moving averages, what can you take from the charts to give you confidence in future picks?  – Lee

A:  Well, for starters, you could include bear trading strategies such as put buying and short selling to profit from market downturns.  Then you would actually be searching for stocks that are below the 50 SMA and 200 SMA.  Beyond that, you can find short term buying opportunities and use the moving averages as profit targets as opposed to support levels.  Further, the candle patterns and role reversals that we identify are just as valid in downtrending stocks as they are in uptrending stocks. 

Q: Can you short sell and trade options in an IRA account?  – Ed

A:  Short sell – no.  But you have many options strategies available to you, including some that have similar profit scenarios as short selling.  All you need to do is submit an IRA Options Upgrade request to your E*Trade rep and you can begin trading options in your retirement account.

Q: So many 401K and retirement IRA’s do not permit individuals to invest directly into stocks other than the stock of the company which offers the plan. Most of these investments are limited to funds within certain selected mutual fund families. How do you advise clients on how to appropriately manage risk when limited to these investments?  – Brenda

A:  First, consider your overall portfolio.  In addition to your company plan, be sure to balance across your other savings.  Having done that, you need to do the best you can with the limited investments in your company plan.  Consider having a core of index funds and money market funds.  Index funds will follow the market and give you diversification with low expense.  In these volatile times, money market funds are good to temper the falling and volatile markets.  Don’t get carried away with many funds and switching too often – that usually results overall under-performance.  Finally, be sure your other investments balance the limitations of your company plan.  If you have a high balance in retirement index funds, don’t add more in your other accounts.

A:  You can choose to sell your option at any time prior to expiration.  When you sell that option, though, it isn’t necessarily matched back up with the original seller.  In other words, you don’t have to trade with the same person as the original trade.  The buys and sells are pooled and matched through the exchange.  As long as there is ANY buyer out there, you can sell your option.

Q: Explain again the relation of the stock price, strike price and the intrinsic value. – Bruce

A:  For the call option, the stock price minus the strike price is the intrinsic value.  For the put option, the strike price minus the stock price is the intrinsic value.

Q: What are your personal opinions on the down side to call options? Any? – Avi

A:  It depends on how you use it.  If you’re buying a call in place of buying the stock, one down side is that you have an expiration on the call option.  As such, there is time decay – or a drop in the value – as you get closer to the expiration date.  Also, just like buying a stock, you have the risk associated with a drop in the stock price.  If the stock price falls, the value of the call option falls.  However, there are benefits that can’t be forgotten.  These include more leverage and greater choices in managing the trade.

Q: If you sell the option before the expiration, do you sell at the stock price or the option price? – Geoff

A:  You don’t sell at the stock price – you sell for the current option premium.  Remember, you paid a premium to buy the option.  That premium is based on the intrinsic value and the time value.  When you sell the option later, there will likely be a new premium based on current intrinsic + time value.  If you bought a call option and the stock price goes up, you would have more intrinsic value.

Q: Is the premium price per contract or share? – Don

A:  Options chains list the price per share for an option.  Therefore, a quote of $3.55 for a particular option would cost you $355 for each contract you buy (plus commission).

Q: Why would you sell a call at a loss, rather than letting it just expire? – Jill

A:  If you let an option expire worthless, you lose the entire premium.  If the trade starts to move against you, it is better to sell the option at a loss since you still have some value in the premium.  That’s the objective of risk management – don’t give up the entire trade, but rather salvage your capital when you realize you’re wrong.

Q: I’ve heard that the potential for gain is greater with options trading than with just trading stocks. Is there truth to that and what makes options gains more lucrative, compared to trading common stock? – Ben

A:  There are two reasons why options can be more profitable than stocks.  The first is leverage. You can control the same stock for much less capital.  For example, you may be able to trade a $100 stock for a $40 option premium and still get almost the same profit.  An eighty cent profit on $40 is better than a $1 profit on $100.  Second, options give you more flexibility.  You can make money if the stock moves sideways – something you can’t do with the stock.  We teach these strategies through The Options Oracle every week!

Q: I just took your Options for Beginners webinar today. I wanted to say thank you, it was a good presentation. I also took your intro to trading webinar on Tuesday. Exciting!!! If you had a short position that wasn’t doing very well, could you buy an option with a strike price below your entry level for the short and then immediately turn around and exercise it to cover the short? (And thus make a profit…)? – Tim

A:  Think about the two parts of the trade. First, you have a short trade that is losing money because the stock price rose. Second, you buy a low strike call but you pay a premium for both intrinsic value and time value. If you exercise, you would realize intrinsic value but you would immediately lose time value. So the answer is “No” – you would actually lose more money in the scenario you described!

A:  It is always a good time for short trades.  We don’t consider a market – or parts of the market – to be good or bad.  There are uptrends and downtrends.  A down market is not bad if you know how to short or use other bear strategies.  With the current market weakness, we are certainly finding more short sale opportunities so consider adding this strategy if you’ve never used it before.

Q: What does P/E mean? How is it calculated and how can I use it to make decisions when buying stocks?    – Aprajita J.

A:  P/E is a fundamental measure that stands for Price to Earnings.  It is a ratio of the current stock price to the stock’s earnings.  P/E is best used as a comparative measure rather than an absolute measure.  Different industries have different levels of “high” or “low” P/E’s.  Most investors use P/E as one of the fundamental considerations while most short-term traders tend to ignore it.  A basic approach considers a low P/E relative to industry peers as a bullish signal.

Q: What is a good way to practice without risking my cash? – Tim L.

A:  The old method of paper trading is still a good start.  You could literally paper trade which means you follow the market and write down your buys and sells in a notebook and evaluate your results.  Some programs allow for simulator trading – it looks like the real thing until you shut down.  Then you get to start fresh the next time.  But there is no substitute for having real money in the market.  So consider real trading but with very small positions -  1 option contract or 50 shares.  Then you get the real trades with all of the emotional attachment but less capital at risk.

A: Thanks for the great comments Kent! That’s the great part of our partnership with E*Trade, CBOE, ISE, CME and others. We have many resources available including our podcasts, webinars, live events and the Oracle advisory service.

Q: Sometimes I fixed a stop price and my order was executed, but after that the price moved up. Are there rules to avoid this? -Cinthia T.

A: The key to avoiding this is to build your skills in identifying support and resistance properly. The more you learn about role reversals, moving average support and candlestick high/low pivots, the less you will see this occur. Having said that, there are times when it will still happen – you can’t avoid it altogether but you can minimize the frequency.

Q: How do we use the search function to find stocks? -Lynda L.

A: We use both the stock scanner on www.etrade.com as well as the Power E*Trade Pro Strategy Scanner. Please join us for our Stock Selection webinar to see these tools in action!

Q: Did you say earlier that you can do these types of orders in options as well? -Mike L.

A: Yes! Power E*Trade Pro allows for conditional and contingent orders for stocks, options and indices. For example, you can place the condition on the underlying stock and then set up the conditional order to execute the option. It’s a great way to enter and manage positions! For readers of The Options Oracle, this is a very powerful tool to open and close the Oracle trades.