FAQ

Q. What is the best online broker to use?

A. We like optionshouse.com and optionsexpress.com. Both allow you to have a virtual account. This is a great learning tool because you can enter your trades and watch the relationship between the stock’s price and the option’s price over the course of a week and see how the trade work out. They both have easy order entry as well and allow you to enter both sides of your credit spreads all on 1 ticket.

Q. When do you enter the trade?

A. You can enter it anytime from Friday to the following Friday’s close. I have found that if you wait until Tuesday, you will take less risk because you are in the market fewer days and there has been enough time for the options market to develop. You can even wait until Wednesday in some cases. I prefer not to be in any trades like this over the weekend.  This is just my feeling on the matter. There is no right or wrong day to enter your trades.

I highly recommend you watch the weekly options quotes through your online broker or at www.cboe.com. You will notice that when the weekly options “age” a little, you will get better liquidity.

I also recommend you try a virtual account at optionsexpress or optionshouse. You can trade virtually at first, like paper trading only better because you can see in real time what happens to options prices over 7 days and their relationship to the underlying stock.  Especially with credit spreads, which are now very easy to do.

Q. Do you recommend letting the credit spread options trades expire worthless?

A. Yes.  You can get out before expiration and make less than your original profit. Sometimes that might work for you. Some people take a little more risk going in for a higher profit, knowing that they will get out before expiration.

Q. Do you “defend” the trade and if so how?

A. No. I don’t know who made this term up but I hear about it all the time.  Defending a trade means you have to buy an additional Call or Put, or in the case of regular options, you would roll it out to the next month. The bottom line here is that you are investing more money in a losing trade and more than likely will take an even bigger loss adjusting or defending because the underlying stock is already going against you when you place the defending trade or adjust the trade. This is throwing good money after bad. It is the exact opposite of what I teach. I want a stock that is moving up when I place a Bull Put spread, this way the stock is moving away from me and my probability of success is high.

It’s also critical that you understand that in any trade, you can get out at any time. You don’t have to lose all the money required to do the trade if the stock starts going against you. You can unwind the trade at any time.

Q. What to do if the stock goes against you.

A. Sometimes, during the week, the underlying stock may go against you. At this point, you have to decide if you think the trend is broken and the stock will trade through your strike prices by Friday, or if the stock is only temporarily moving against you. The best way to learn more about this is to read the report in the Trader Training Section titled Case Study CMG: When to Get Out and watch the video in the Trader Training section called Video: Diary Of A Volatile Trade.

Q. Do you ever make adjustments?

A. No. The only time I adjust anything is when I’m losing then I am getting out.

Q. Do you put in any conditional orders to close out your spread, tied to the underlying or to the option price?

A. No. But I suggest you try it in a virtual account and set it up so you “unwind” the trade if the underlying stock hits a certain price.

Q. Do we have to own the underlying stock to trade the options?

A. No. Only with covered calls.

Q. Do you use the “greeks”?

A. No. The greeks were originally developed for institutions that hold stocks to analyze options prices relative to the stocks they own.

The secret to making money with options is learning to analyze the underlying stock. Not the options.

Options were originally designed for the institutional and professional investors. They bought options as a hedge against their stock positions.  When buying these options, they planned on losing every penny they spend on the options because they bought the options for insurance. Not to make a trading profit. They insured themselves against losses in their stock positions.   The “greeks” helped them analyze what they were buying when they bought the puts or calls.

Q. Can I practice with a demo account?

A. Yes, I highly recommend it.

Q. I have a Sep IRA account and can’t buy on margin.  Can I still use your strategies?

Yes, you can use the covered call strategy with weekly calls.

Q. Do you use a market or limit order, especially on credit spread trades?

A. This is a very important question, glad you asked.

With credit spreads, we are putting a limit on the net credit and not the individual options.

For example, when you do credit spreads at optionsexpress.com or optionshouse.com, they have an “all-in-1-ticket” where you enter the ticker symbols for the options you want to buy and sell and simply select what your net credit limit is. This is great because when we do credit spreads, it does not matter what the individual options were bought and sold at, the only thing that matters is your net credit. So this way, we skip having to figure out what limits to set on each option and just focus on a limit for the net credit. You can also trade in a virtual account at both these firms and I highly recommend you do that first before you put real money on the line. This way you will see the relationship of the options prices and how they move relative to the movement of the underlying stock.

  Also, when you select your net credit, it’s important to realize that you can get filled between the bid and ask on each option.  There is a video in the member’s area on the Trader Training page if you scroll down almost to the bottom you’ll see the video titled: Entering On A Limit, that video explains this better than I can in an email. Please watch that and if you need more help please let me know. It’s usually easier to discuss this after someone watches that video if they still have questions.

 When buying or selling Calls and Puts for other strategies like the covered call strategy or in cases where I want to simply buy a Call or a Put, I will most likely use a market order.