For today’s Mailbag Friday, I included a few questions that I think cross traders’ minds from time to time.
My team and I read through all your feedback, and enjoy answering your thought-provoking questions – questions that could possibly help out other traders who are wondering the same thing.
So, let’s see what’s in today’s mailbag…
I love trading, but sadly trading options means you need to be watching the market. Seems I’m very busy with my business, so I can’t stay glued to the market. What’s your suggestion? Can I still trade options while not watching the market all time?
– Frederick
Hi Frederick, thanks for taking the time to write in. As long as you understand your limitations, and you focus your attention on trades that fit within those limitations, then YES, you can trade options.
Let me explain…
I sit in front of my quote screen all day long. So, I see everything that’s happening, and I make multiple trades every day that are designed to play out within a few minutes or a few hours.
People with real jobs can’t do that. And, if they try, they end up losing a bunch of money because they’re making trades they can’t manage.
But what if you focused on “bigger picture” ideas? Look for trades that might play out over several weeks or several months. In those situations, the intraday noise of the market doesn’t matter so much. And, even if you can only look at the market once each day (at close or opening), you can still take advantage of the moves.
For example, a few months ago I turned bullish on the financial sector. I told subscribers, “The short-term action stinks. But, if you can buy now, and then close your eyes for a couple of months, I’m confident that buying the banks today will prove profitable.”
I wrote the same thing about the energy stocks in October.
Both of those sectors enjoyed HUGE rallies in November. It didn’t matter if you couldn’t pay super-close attention to the market. The conditions were such that you had plenty of time to get into the trades – and the rally was large enough that you had plenty of time to get out of the trades with solid profits.
In your situation, Frederick, you should ignore the flirtations of quick, intraday trades. They’ll leave you frustrated. Instead, focus on bigger picture trades that might take a little longer to play out. If you do that, I think you’ll enjoy, and be profitable, trading options.
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Good morning Jeff, I’m a recent subscriber and I’ve read or viewed almost everything you’ve provided. I’m very impressed and really enjoying my experience of trading options, as I’m learning a lot and, “in the money” (touch wood). I had an interesting situation unfold and I’m wondering if you, or one of your colleagues, could answer my question.
About a month ago, I sold a covered call for a $150 premium on a stock at a strike price of $15 with an expiration of December 18th. I originally bought the stock for about $9. Not too long after selling the call, the stock shot up as high as $34 in about 3 weeks, before falling back down to the $25 range yesterday. In the meantime, I lost the stock, but made some decent money.
My question is, after selling the call and watching the stock climb above $15, should I have bought the call or stock back prior to losing it? Your thoughts would be appreciated. Thanks.
– Jerome
Hi Jerome – good question and thanks for writing in. The trade you described is a “covered call” strategy – where you collect money by agreeing to sell your stock at a specific price by a specific expiration date. It’s a strategy that serves to generate income on stocks you’d want to sell at the agreed upon price anyway.
So, your question is best answered by knowing why you bought the stock in the first place. If you bought the stock at $9, thinking you’d be happy to sell it at $15 if it got there, then making a few extra bucks by selling a covered call option is a smart move. You should be happy with your profit and move on.
But, if you bought the stock at $9, thinking it could run to $20, $30, or even higher, then it doesn’t make any sense to sell a covered call on the position and agree to sell it for $15. That’s a trade you shouldn’t have made in the first place.
As a general rule, traders should always have an exit plan for their positions before they enter a trade. That’s when you’re least emotional and can make a rational, logical decision on when to exit – whether at a profit or a loss. Then… just stick to your plan.
My guess is that when you sold the covered call on the stock, you were happy to collect money for agreeing to sell your shares at a 67% profit. That’s a good trade.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, Jeff Clark Trader member Randi opposes Jeff’s analysis on Monday’s natural gas essay…
I’m not sure your explanation for natural gas prices falling, as we approach winter, is correct. As someone who has used natural gas for heat for the last 15 years, the cheapest way to buy it is to contract for X number of gallons for the upcoming year – usually in late spring or summer. That’s a fairly hefty cash layout.
So, those who are somewhat closer to the edge financially may hold off until, for the most part, the natural gas is mostly contracted out. Then, as winter comes in, there’s less demand because the delivery companies have filled out their contracts. Of course, this is for individuals, and there is a commercial demand too. But they’re going to get the cheapest they can, as well.
– Randi
… We also asked readers if there were any other economic ideas considered “college economic textbook” for the average person, but don’t pan out the same in the real world… So Roy, a Jeff Clark Trader member, wrote in with his thoughts…
Globalization seemed to show that the theory of comparative advantage was correct. However, in the real world, ethical considerations have started to shine a light on the working conditions in many countries.
Consequently, the lowest price is no longer the prime factor for many buyers/consumers. The problem that remains is: What will happen
to the workers who were dependent on the work for survival – irrespective of the working conditions?– Roy
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].