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 trade for a living but you must be prepared to treat it like a real business.  You can’t just step in and start pulling cash out of the market.  You’ll have a period of learning where you will likely lose money. You also must have enough funds to keep you from trading scared – that is, feeling like you cannot lose any money.  When that happens, you will be much more prone to avoiding losses by letting them ride.  The best bet is to start trading on the side, while you have another income source.  Then you can make the switch when you’re confident in your ability to continue full-time.

Q: : Can you buy a put if you don’t own the stock and pocket difference if option is in the money at expiration? - J.H.

A:  You sure can!  You don’t need to own the underlying stock to trade options.  What you’re referring to is a long put trade which is similar to shorting the stock.  In both trades, you profit when the stock price drops.  You have to be careful about losing time value, though.  Consider subscribing to The Options Oracle to help you decide which option is the right one for your trade.

Q: If you sell to OPEN a PUT and you don’t want it to be a naked put, would you first buy the underlying stock or would you first short the underlying stock?  – D.D.

A:  Selling a put obligates you to buy the stock.  Therefore, in order to not be uncovered or naked, you would need to have the full amount of cash required to make the purchase in your account.  This is known as a cash secured put.  Shorting the stock does not hedge a short put position.  If the stock price rises, the short put will expire worthless but you continue to lose from the short stock position.

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!

Q:  I only have about $5000 to invest.  What is your recommendation for investing and trading?

A:  First of all, don’t swing for the fence.  You have to be patient and grow the $5000 the same as if it were $500,000.  You can’t try to double your money every month.  That said, you should start with a core selection of investments for the long term – index funds and bonds included.  This will give you a base.  You really should have around $20,000 or so before you begin to trade actively.  Wihtout sufficient funds, you cannot trade enough shares to make the transactions worthwhile.

Q:  If you buy an option that is in the money (ITM) by $1 and the stock price doesn’t move, is the option always worth at least $1 on expiration day?

A:  Yes – an option will always be worth at least intrinsic value at expiration.  But remember, you paid more than $1 for that option because you also paid for the time value.  So you would lose money in the scenario you described.

Q:  How can I buy puts without owning the shares?

A:  You can always buy puts and calls without owning the stock.  You would buy puts without buying the stock if you think the stcok price will fall.  This is very similar to shorting the stock.  In both cases, you profit when the stock price drops.  A put option increases in value when the stock price decreases in value.