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Thursday, October 15, 2009

Stocks FAQ'S

1. It has been said that naked option selling is extremely risky due to the fact that it has the potential for unlimited losses. How do you address this issue? The potential for "unlimited losses" in naked option selling is a myth! If you want a short answer read on. if you want a more detailed explanation there is an article about this on Click the button to the right and you will be taken directly to the featured article.

Driving an automobile is risky and extremely dangerous for someone who doesn’t know how to drive. If we were to consider the great risks involved in driving there would be very few drivers around. Yet we see millions taking this so-called risk. Why? Because for the experienced and safe driver, the risk of an accident is almost totally eliminated. Of course there is the risk of another driver being careless and causing an accident. In this respect, the option writer is in a safer game than the driver in that there is no second party that can create a dangerous situation for him. The experienced and knowledgeable option writer is in full control of his trading system and knows how to organize his trades so that the “unlimited loss” factor is kept to bare minimum and may be totally eliminated. If a situation arises where it can’t be eliminated the risk factor is so reduced that its ill effects are minimal. My e-book explains the three strategies employed in dealing with risky conditions and teaches the reader the trading methods required to prevent potentially damaging situations. The greatest benefit offered by my system is its ability to resist the negative forces of a declining market – the main enemy of stocks, mutual funds, bonds and such other related investments. If you have an investment program that grows steadily during good times and resists decline during bad times wouldn’t you call that a safe and low risk investment?

  1. So if the risk can be controlled and minimized why aren’t more people involved in selling options?

The answer to this is found in the analogies of prominent option authors presented in the main page of this site. For many, options trading has become synonymous with making big profits from small investments. Option sellers on the other hand, do not have the potential for outrageous profits from any single trade, and by not being a get-rich-quick proposition it is less popular to traders who are looking for big returns on their small investments. Needless to say, option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions.

  1. What exactly do you mean by outperforming the market consistently? What if the market and the economy dropped by say, 10% or more in one year?

If the market declined by 10% or more in one year, my system will definitely do better than the market’s negative performance. It may not deliver 30-60% return that year but it will certainly outperform the market’s negative performance and will in all likelihood produce a fairly decent positive return.

Your past performance page shows a negative return for 2008. Don’t options traders always achieve positive returns regardless of market conditions? In the kind of chaotic market such as that in late 2008 where prices dropped so swiftly and deeply as has not been seen in a hundred years, there are no winners. It becomes a game of who loses the least and my trading system certainly did a good job of tempering losses under such severe conditions.

  1. Who should be using your options investment system?

Definitely not those looking to make short term profits in the stock and options market. The program is intended for those who seek a safe, low risk investment vehicle to grow their capital steadily over a period of time.

  1. How much capital do I need to get started in writing options?

Only you can answer that question, but keep in mind that brokers would normally require a much higher starting capital for selling options than if you were just a normal option buyer. If your experience and skill in option trading is somewhat limited it would certainly be advisable to start at the barest minimum allowed by your broker and work yourself up as you sharpen your skills.

  1. How much knowledge and experience is required to be a successful option writer?

For starters you definitely need a good grasp of the essentials of options and you need to be very familiar with the basics of how options operate. As to experience, it’s certainly helpful if you are currently doing some trading in options. If you are totally new to options and have not done any options trading at all, it’s not a good idea to start your option trading exposure using the strategy of selling options.

  1. What type of options do you trade and recommend? Indexes, stocks, ETFs?

I trade mostly ETFs, some indexes and, occasionally but rarely, stocks. This is just my preference. I don’t recommend any specific listed issues since this is not what my e-book intends to do. But the e-book gives guidelines on how to select listed options that would make good candidates for my option selling system.

  1. How often do you trade? Do I need to be at my computer every minute the exchanges are open?

The number of trades depends a great deal on the amount of money you have invested in the system. On reading my e-book you will see there are not too many trades done to achieve the profitability claimed. The illustrations in the e-book cover a period of six months and there are a total of only 18 trades done over this period. This is an average of 3 trades per month. The trade examples are based on a capital investment of $20,000. No, you don't have to be at your computer at all during the trading day because you can place your orders in advance the night before. I even use contingent orders long in advance of the occurrence of an event.

  1. How will I know when to trade? Does your e-book give guidance on this?

As has been mentioned in many parts of this site, I trade in reaction to the market and not in anticipation of its future direction. Generally, I make a trade when the market has moved some distance from its position either up or down. Following this principle and the information given in the book together with the illustrations you will know when to effect a trade.

  1. Does your system guarantee profits or capital appreciation? How about when the economy goes into recession and the markets are depressed?

Nothing is guaranteed in this world except death and taxes. Even real estate, which is regarded by many as the ultimate sure thing when it comes to appreciation values, has its downturns as demonstrated by the state of today’s depressed real estate market. I will be honest and say that in a situation where the stock market goes in a swift and deep decline such as that of September–November 2008 my system may suffer a similar outcome. I will hasten to add though, that the negative impact of a deep market decline will be much less for the option seller than if he were in any other investment, including safe harbor mutual funds. Visit the past performance page on this site and see how the option selling portfolio has outperformed all indices by wide margins.

  1. Does your system apply to options on commodities and index futures?

I don’t see why not. The mechanics of how options work are the same for stocks, commodities and futures. I personally trade only ETF, index and stock options so I can’t say how successful it will be for the others. If one is an option trader on commodities and futures and would like to see if my system can be used successfully, the cost of the e-book is a very small price to pay for the potential rewards it offers.

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