The latest trade alert has been sent out. Please check your email box for details.

Thanks,
AJ Monte CMT
Chief Market Strategist
The Market Guys, Inc.

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:  The quick answer is that the rule applies to both trades as well as investments. However, there are some investments that will outperform the market but may take longer to do so. A stock that returns 5% for the first 3 years and then doubles in the 4th year may underperform the market on the short term but ultimately outperform the market. Your goal is to determine the lifespan of your investment as best as possible. All the while, make sure your expectations are realistic and not based on “hope”. Holding a dog because there is a remote chance that your company may hit the 9th inning home run is not a solid investment strategy.

Thanks for your question!

AJ Monte

The Market Guys

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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.
 

If you have any questions pertaining to the alert that went out on March 7th, 2009, please post them to this section so I will be able to help you.

Thanks,

AJ Monte CMT

Chief Market Strategist

The Market Guys, Inc.

On February 13, 2009, Oregon Rep. Peter DeFazio introduced HR 1068 into the 1st session of the 111th Congress. He is calling his bill the “Let Wall Street Pay for Wall Street’s Bailout Act of 2009 .” Following are two key provisions included in this bill:
(5) The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor.
(6) This transfer tax would be on the sale and purchase of financial instruments such as stock, options, and futures. A quarter percent (0.25) tax on financial transactions would raise approximately $150 billion a year.

As an example, if you buy and sell 100 shares of AAPL, you would pay approximately $50 on top of your trade commissions. Rep. DeFazio says that it is appropriate that Wall Street should pay for Wall Street’s bailout. His comments reflect a profound ignorance regarding our marketplace. Average traders and investors from all walks of life participate in the stock market through 401(k)s, mutual funds and college savings accounts. Furthermore, many investors have seen their account values plummet and need to make strategic buy and sell decisions to protect their assets. If HR 1068 becomes law, these Main Street investors – you and your family – will bear the brunt of the new tax. You will be taxed to sell your investments which have already lost value and you will then be taxed to reinvest your money.

The Market Guys have always been passionate advocates for participating and prospering in the markets. You know that we have always strived to help you manage risk and grow your wealth. The markets have been under extreme pressure and now is not the time to add to that pressure. Do not be deceived; this is not a tax on Wall Street – it is a tax on Main Street. Teachers, engineers, students, retirees – everyone – will fall under this proposed tax.

We urge you to contact Rep. De Fazio as well as your own representative and let them know you oppose HR 1068.

Sincerely,
AJ Monte
The Market Guys

I believe today’s strategy will be the best play for these current market conditions and I am targeting a 20 to 25% ROI for 2009 and beyond.

Q: Does a Put enable a stop-loss order?

A: A stop loss order is something you would use to protect against a drop in the market, but it does not offer you 100% protection. If a stock gaps down overnight and opens at a price below your stop price you can lose money. A put gives you pure protection and acts like an insurance policy for your stock. The put allows you to sell your stock at a predetermined price for a limited amount of time. For this insurance you would pay a premium. If you are using a put for protection you would not expect to make a profit from the investment you have made in the premium. Look at it as a way for you to exchange a small amount of money for the ability to sell your stock at a certain price should the stock drop below your strike price.

Lona C. asks

Q: So with a put option, do you own the stock?

A: If you are using the put as a protective strategy to mitigate the risk associated with owning a stock position then you would own the stock and buy a put. However, you don’t have to own the stock to buy a put. Many investors purchase puts as a speculative play when they believe the price of the stock is going to drop. The value of the put rises when the price of the stock drops. You can buy a put and later sell it for a profit after the stock has moved lower.

James P. asks

Q: Is there a minimum amount of money to try out an option? I’d feel more comfortable trying this to learn it with $100 than $10,000, for example.

A: Option premiums vary from pennies to hundreds of dollars for each option contract. The opportunity comes in finding the right stock to trade along with finding the right price for your trading account. You have to check with your broker to see what the minimum account balance would have to be and you will need to submit an option application that would allow you to trade options. Most brokers have your best interest in mind which is why I would recommend you speak with your broker to see what their minimums would be for your type of account.

George K. asks

Q: So options all expire on the third Friday of the month?

A: For most options, the last trading day for the option is the third Friday in the expiration month. However, the option doesn’t actually expire until 12 noon EST the Saturday after expiration Friday. If you are the buyer of the option you would still have until this time to call your broker should you decide to change your exercise instructions.

Paul Z. asks:

Q: When you say the option is auto’ly executed, that means (for a Call) that you would buy the stock. Is that the end, or can you set it up so that you buy than auto’ly sell?

A: If an option is in the money by a penny or more your option will automatically be exercised on the Saturday that follows expiration Friday. If you own an in the money call this will result in a stock purchase. If you own an in the money put, this will result in a stock sale. Should you decide to trade out of that stock position you will have to wait until the following Monday to trade out of it.

Steve R. asks

Q: Who gets the premiums?

A: The option buyer pays a premium to the option seller. This is the case for both calls and puts.

Ketan S. asks

Q: In your example of buying a $45 put and going long $50/share, if the price does fall to $45/share, would you sell both to break even.

A: If you buy stock at $50 a share and simultaneously buy a protective put with a strike price of $45, then the most you can lose is $5 (50-45) plus the premium you paid for the put. Yes, you could sell both the stock and the put should the stock drop but you can also hold on to the stock position right up until the expiration of the option. Unlike a stop loss order that would immediately sell out of your stock on a downturn there is always the chance a stock could rally back up. Owning a put gives you the protection to limit your loss but it also gives you time to stick with the stock should it bounce back up.

Dave P. asks

Q: What are the advantages of puts versus a stop loss?

A: The biggest advantage is gap protection. Have you ever seen a stock gap down on bad news? The downside to a stop loss order is that it doesn’t protect you during a gap down move in the stock. Put options give you insurance that guarantees you a sale price even if the stock gaps down to zero. The other advantage is what I just mentioned to Ketan, The stock can gap down but you don’t have to exercise the put right away. You can hold on to the position right up until options expiration at which time the stock could have already rallied back up to a higher price than where you bought it.

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