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…

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.

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:  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:  Great question!  Yes – the market gives you fresh information every day – don’t ignore it.  You originally set your stop based on the information you had at that time.  With new information (a candlestick reversal, news event, etc.) you may want to close a position even before it hits your stop.

Q: Does The Equity Oracle cover small cap penny stocks?   – Mark

A:  The Equity Oracle and Options Oracle generally do not consider penny stocks as trade candidates.  Occasionally, The Equity Oracle may address penny stocks from an educational standpoint to illustrate how they vary from higher-priced stocks.

Q: How much should my trading account be to make the Oracle worth the subscription?   – Bill

A:  You can certainly benefit from the Oracle education regardless of your account size.  If you’re thinking in terms of trading your account and paying for your subscription, we recommend at least US$5000 in your trading account.

Q: I have spoken to some “experienced” traders which have completely pulled out of the market and moved in cash as they said its a bear market. In your opinion are we in a bear market? If not would what are the indicators of a bear market?   – Mark

A:  Are we in a bear market?  Yes!  Are we in a bull market?  Yes!  The answer is, there are both bear and bull markets right now.  For a while, oil and gold were raging bulls.  Recently, we have seen the clear bear prints in the financials.  By definition, a bear market is a 20% pullback from the highs.  The main point is this – the market is not homogenous.  You can always find stocks to buy and stocks to sell; regardless of the direction of the major indices.  Therein lies your opportunity.  Happy hunting!

Q: Hey, Rick! I just watched one of your webinars through E*TRADE FINANCIAL and really enjoyed it! I took notes on it and everything. It was very informative. However, I have a question for you: once I finished watching your live webinar on price, I watched an archived one on conditional orders. I would like to know what the difference is between ‘sell stop’ orders and ‘stop limit’ orders. I was a little bit confused when someone asked a question on stop limit orders and just needed some clearification. Thanks!   – Connor

A:  A sell stop order is a stop order that becomes a market order upon triggering.  A stop limit order is a stop order that becomes a limit order upon triggering.  A great resource to learn more about stop orders and risk management is the 2007 Webinar Library.  The 10-DVD set includes sessions on conditional orders and much more!

Q: I’m trying to settle on a decision-making strategy for stock-picking. Suppose I run the Strategy Screener in Power E*Trade Pro and I come up with some individual stocks that look like good buys or good shorts. Do I pass the trade if: 1. The market is trending in the wrong direction. 2. The industry is trending in the wrong direction. 3. The market or industry has no clear direction, and is quiet. 4. The market or industry has no clear direction and is whipsawing violently? Or, basically: when does ‘the general conditions don’t favor the trade’ override ‘this individual stock looks good’?   – Kate

A:  The overall market and sector/industry trends should be taken into consideration but the go/no-go decision will be based on the stock itself.  For example, when oil prices were shooting up, we saw many days when the indices were weak but OIH, for example, was strong.  A strong move in the market will tend to influence trader/investor sentiment, of course.  Buying an uptrending stock in an uptrending sector will tend to be a better trade than buying an uptrending stock when the rest of the sector is falling.  Whatever your choice, be sure to follow The Market Guys’ 1% Rule and you’ll know what to do if your pick is wrong!

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.

A:  The 1% Rule is Point #4 in the The Market Guys’ Five Points for Trading Success.  Specifically, refer to Chapter 12 which deals with applying the 1% Rule to your risk management plan.

Q:  With The Options Oracle, will it be suitable for a trader that only have level 2 option level approved on his or her account?

A:  With an E*Trade Level 2 account, you will be able to execute some of the trades, but it is recommended that you apply for Level 3 for full participation.

Q:  Is your radio show available online?

A:  You bet!  Just click on the Podcast tab above!

Q:  What’s wrong with taking a bit more risk by allocating more than 20 percent to stocks?

A:  We suggest allocating no more than about 20% of your portfolio to active trading.  You may allocate more than 20% to stocks overall.  There are a number of factors that will affect your overall portfolio allocation including risk tolerance, goals, how long before you need the money and current income.  Remember the point we made in the webinar:  every reward comes with its own attendant risks.  Your responsibility is to manage the risks as best as possible.

Q:  If you’re only trading 20% of your money, where do you have the other 80%?

A:  That will be unique for each individual but it may include index funds, real estate (both direct and securitized, such as REITs), cash or cash equivalents, fixed income and commodities or precious metals.  You should consult a financial planner to assist you in your overall allocation for your specific needs.