4 Q&A from Today’s Webinar – 12/05/08
Kate C. – 12:30 pm
Q: At level 1 options trading, there isn’t any way to protect an entire covered call with stops, if you want to get out based on too big a drop in the stock price. You can write a contingent stop order to buy to close the contract …
A: A covered call or a buy/write position leaves you open to downside risk. In order to protect yourself you would have to set a contingent order to buy back your call to close that call when the stock breaks down below support. At the same time you would sell your stock to close that position and move to cash. You must first buy back your open call position before you could sell the stock and move to cash.
Kate C. – 12:30 pm
Q: … but you can’t set a stop on the stock position. I’ve applied for level 2 so I can protect the stock position with a put.
A: You don’t want to complicate the exit strategy too much the best thing to do is learn how to use your contingent order entry window on power ET Pro. If you have questions about the functionality in the software you can always call one of the ET reps to help you.
Deb H. – 12:33 pm
Q: When we had the two weeks where we couldn’t go short, wasn’t it ETFs that could still be shorted? And if so why was that?
A: The SEC put out a restriction on any new short selling in many financial stocks but not all. What they forgot to mention is that you could still buy put options which would still allow you to profit on the way down. The only thing you had to make sure of is that you didn’t exercise your puts. This would place you in a short position therefore triggering a red flag and put you in a violation. The reason the restriction on short selling came out was to cut down on some of the speculation that was causing the prices to drop. As you can see it didn’t really do any good to hold up the market.
Erick G – 12:34 pm
Q: back to the stop loss order. Can’t it work against you in the way that your broker would rather fill you stop loss that your “profit order’?
A: If you are referring to a market maker who “runs the stops” for profit then I wouldn’t worry about it. There seems to be an idea that has been going around for a few years now that the market makers are out to get you. The reason most people see stocks reverse after they have been stopped out is because most people place their stops on or above support levels. Once the stop is triggered the stock will most likely bounce off of support not because the market maker pushed up the price of the stock but simply because stocks bounce off of key support levels most of the time. Besides, the market makers are too busy managing large positions; they are not going to go out of their way unless it’s a very large position in place.
William M – 12:42 pm
Q: I have been closing positions a lot at end of day to avoid risk due to news, global markets etc huge gap downs ….is this being to skittish?
A: If you are day trading then this is not being skittish, it’s being smart. If your plan is to day trade then you would start your day in cash, make some trades, and then end your day in cash. If you decide to hold on to a position overnight then you have moved away from day trading and you are now a speculator. We don’t promote day trading but would rather see our students swing trade which allows for a position to be held longer with fewer shares for more of a profit swing. With that said we are careful to use our 1% rule when trading equities.
Erick G – 12:45 pm
Q: you can answer in the blog page but I mean I have 2 exits. One with a loss and one with a gain but for some reason I just rather put the order for either the gain or loss when the stock is leaning to one or the other. Is that a bad idea?
A: If you are referring to a strategy we refer to as an “OCO” or “One cancels Other, then you can use the Power Etrade Pro platform to do this. What I think you are talking about is that you put a stop loss order below a support level to limit your loss should you be wrong. Then you put a second order in to sell the stock higher in order to take a profit. If either order is filled then the system automatically cancels the remaining order so you don’t fill both. If this is what you are referring to then I think this is a good idea.
Stan R – 12:48 pm
Q: If the trend is still up, isn’t stopping too soon a weak strategy?
A: If the trend is up and you have bought a stock then you would place what’s called a trailing stop. This is a stop loss order that gives you protection should the stock drop but the trailing feature automatically moves the sell stop order up as the stock moves higher. What this does is protect your profits as the stock moves higher. We have a presentation we do called Conditional Orders and it is archived on the www.etrade.com/seminars link.
Thomas M – 12:49 pm
Q: In your example you would buy at $45 and sell at $41–a $4 loss, which is 10%…how, does that fit with the 1% rule
A: We are not calculating the 1% based on the share price of the stock. We are calculating the 1% from the balance in our account. If I have $50,000 in my trading account 1% of that account would equal $500. If I bought 100 shares of a stock at $45 and lost $4 on that trade I would only be down $400 which is less than my $500 or 1% of my trading account. This is an important rule that we highlight in our book. BTW…This book would make a great gift for someone in the family who wants to learn the 1% rule. Yes…I know…shameless plug for the book right? Can’t help it…It’s a good book.
Jim H – 12:50 pm
Q: How do you draw that support line?
A: You would look at a stock as though it was a bouncing ball. The points at which the ball or in this case stock bounces is what we would call support. The technical term we use as a sign for this bounce is called a pivot point. Please be sure to listen to our On Demand Radio program with The Market Guys because we talk a lot about pivot points. You can access this show through our website by clicking on the Podcast tab at the top of the page.
4 Responses to “Q&A from Today’s Webinar – 12/05/08”
The contingent order entry is easy enough. It’s the unstopped stock position (especially in a market that’s seeing 700 point drops in the Dow) that I’m not so keen on. I can’t count on reacting in time manually.
Another subject: taking profits. When I’ve messed up a trade in the last couple of years, that’s usually been the problem. I’d have positions that were up, and then they’d swing back down and I’d get stopped out for a loss. I’ve started using trailing stops, and I got out of most of my last trades at a profit, either when the stop triggered, or when I saw that I was up and the stock was nearing S/R and decided to get out.
I shorted WR on 11/25/08. It’s bouncing slowly down below its 20-day moving average. I find myself tempted to get out because I’m up, but I’m having a hard time figuring out how much of this is a reasonable reaction to an extremely volatile market and how much is overcorrecting fear, based on a desire not to repeat the sort of mistake I most often made over the last couple of years. I need a more systematic idea of how to decide when to get out when I’m up.
Er, correction: its 50-day moving average.
Merry Christmas, all!
Interesting information provided. You have given this post a lot of thought and care, which is so rare these days. Many people just throw stuff together, just to get something onto the internet, so it is good to see that some people still care. Thanks.
Barry
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