17 Jul Answers to member questions

I love getting questions from our members. First of all, this tells me that when a question comes up over and over again, I need to add a new video to the member’s area which explains, in detail, the subject in question. Improvement is always key in trading and the course keeps getting better and better with these improvements.

Here are a few questions I’ve received recently regarding general roadblocks in the learning process when first learning how to trade options

Q#1: Do I have this this correct – If an option price is bid way up and fear takes over, people want to protect and buy puts, we should sell volatility, in other words, should we sell puts to them ?

Answer: Yes, that is correct. We definitely want to be sellers of premium when it is appropriate. As a beginner though, I would be very careful selling naked puts at this stage – that’s why I use bull put spreads as an example of what to sell in the course. It still leaves you with a lot of risk to the downside, so you have to always actively keep an eye on them, but they have a little more protection than just naked puts.

Q#2: If I sell puts on stock I do not own and the trade goes against me and becomes worthless, must I purchase the stock to exit the trade ?

Answer: No, you do not have the stock “put” to you unless the price of the stock is below the strike price of the put you sold. If you sell a put and the price closes above the strike price of the put, then you get to keep the money (the premium) you sold the put for. It’s actually very common for hedge funds and others with alot of margin to sell puts on stocks they want to own – and if the price goes up above the strike price at expiration, then they keep the premium they sold and do it again and again. Again though, you have to always monitor these type of trades and be ready to “roll down” the puts you sold if the stock falls too much too fast. Lemme know if you want me to describe how to “roll down” a position.

Q#3: If option price is bid way down we want to be buyers of volatility, do we buy calls, or what do I do ?

Answer: Generally yes. If you are bullish on a stock and the implied volatility is low compared to historical volatility (or if the VIX is low) then buying calls and/or puts is a viable strategy. Just always know where you will get out of a trade, before you place it, and if it goes against you and never violate this rule!

Keep those questions coming! In the next few posts, I want to elaborate more on the different ways we can roll out/down to stay out of trouble when a trade goes against us, as well as finish up on my discussion on how to construct and manage strangles.

Happy Trading!!