Mike’s note: If you’re interested in learning to trade, there couldn’t be a better time to start.
Volatility is back… there’s more geopolitical uncertainty than we’ve seen in years… and the market seems to be on the cusp of a major downturn.
It seems scary… But these conditions are ripe for trading.
That’s why today we’re answering some of the most frequently asked questions we’ve seen about trading options and technical analysis. The answers will give you an edge over the majority of investors who never even touch this sector of the market. And set you on a path to making more money in one day than some do all year…
To start, here’s one from Arthur on chart timeframes…
Can you explain the significance between the daily, hourly, and five-minute chart? I’m trying to understand what the different timeframes are telling me about future market behavior. Thanks.
– Arthur
Mike’s answer: Hey Arthur, thanks so much for your question – and for being a subscriber.
The different timeframes on a chart reflect the times that price data is recorded.
A simple line chart with a daily timeframe, for example, records just the closing price of the day. An hourly chart records the closing price of the hour throughout the trading session. And five-minute charts record the closing price at the end of a five-minute period. Those points are then connected to form the line.
So, these various timeframes show you different pictures of a chart – how investors think of a security on a short, intermediate, and long-term basis.
But, much more importantly… they can tell you when patterns on the chart are likely to play out…
For example, a pattern on a daily chart is likely to play out over the next several weeks or months. Meanwhile, a pattern on a more short-term chart, like the 5-minute chart, is more likely to play out in just a matter of hours.
When you’re searching for trading opportunities, always be sure to check multiple timeframes and plan your trades accordingly. So, if you spot a bullish pattern on a daily chart and want to buy a call option, you should choose a later expiration date to give the pattern time to play out. Likewise, on a five-minute chart, you should expect the trade to be much shorter-term.
Now, on to a couple questions on put options – and answers from Jeff Clark…
Please explain the difference between buying and selling a put?
– Paul
I’m wondering what the difference is between puts and uncovered puts? Thanks.
– Johanne
Jeff’s answer: Hi Paul and Johanne, thanks for your questions.
When buying a speculative put option, you’re betting on the stock falling. You’re putting up money to buy the option in anticipation of selling it later at a higher price.
When selling uncovered put options, you’re taking the other side of that trade. In other words, you’re bullish or at least neutral on the stock. You profit if the stock goes up or stays the same. You collect money up front when selling the put. And, you hope to buy the option back later at a lower price.
And to answer your question, Johanne… When a put option is uncovered, that means the option writer does not hold the underlying position in their account. A covered put means the option writer holds the underlying position.
Last up, a question about options account levels…
Selling uncovered options requires the highest level of options account at Fidelity. I have been there for many years, with $300k+ in accounts and do not qualify for this level.
Why is Jeff doing this for his lowest level of service? I do plan to upgrade when I can, but this is really disappointing… At least offer two options – either one uncovered sell or one regular option play. Thank you for your time.
– Anthony
Jeff’s answer: I’ve never understood the reluctance some brokerage firms have for allowing customers to sell uncovered put options. The strategy, when implemented correctly, is less risky than buying the underlying stock.
Most of the time, you can usually just call the brokerage firm and explain that you are planning to sell uncovered puts on just two or three stocks at a time, and in the quantity with which you usually trade the underlying stock (for example, if you typically buy 500 shares you’ll be selling five puts). That should be enough to get approval for selling uncovered puts.
The other alternative is to open an account with another brokerage firm that understands the reduced risk feature of this strategy (Interactive Brokers and TD Ameritrade are two such firms. But, there are many more).
Most of the time in Jeff Clark Trader, we’ll be buying options rather than selling uncovered puts. However, there are times when selling uncovered puts is a much more favorable strategy. For example, during periods when the stock market is highly volatile and option premiums are inflated, you’ll stand a far better chance to profit by selling uncovered puts than by buying call options.
Also, if we already hold a speculative call option position in our portfolio and I want to increase our exposure to that trade, I prefer to do so by selling an uncovered put rather than adding another speculative call option.
Mike’s note: We hope today’s Market Minute helped clear things up for the new traders out there. But, these questions really just scratch the surface…
With options, there are a lot of moving parts. The learning curve can seem steep, at first. That’s why most investors stay away… and miss out on the big money-making opportunities they present.
So, Jeff created an option trading advisory that’s designed to be a simple, easy-to-follow guidebook for new traders – while still providing winning options trades every month. Learn how to get a subscription for just $19 right here.