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Ask the Trader Guy: Why Market Direction Might Not Matter

January 1, 2012
Fredrik Broden

Q: Hey Trader! When will stocks go up again?

A: Dang, I just traded my crystal ball for a pair of Bulls’ tickets, since they both stink for picking market direction. Listen, nobody knows which way a stock or the market is going to go. But by your question, it sounds like you're long some stocks, and they're losing you money. You might want to consider selling some calls against your stock positions. Typically, when volatility is high, it tends to push up the value of out-of-the-money options. You can collect some income and reduce the cost basis of your positions by selling covered calls. Just remember: Your stock can get called away anytime if it takes off, and rob you of all that extra potential. In some cases, particularly if volatility keeps rising, it could force you to buy the option back for a higher price than you sold it for.

Q: Hey Trader! Will a stop order protect my long stock position in a crash?

A: Well, define “protect.” A stop order turns into a market order when the stock hits the stop price. And a market order offers no guarantee of execution at a certain price. You have no control over the price when you enter a market order or, by extension, a stop order. When a stock or the market is dropping rapidly, it can become much harder to get an order filled at a particular price as traders become more cautious and widen out their bid/ask spreads. If the stock gaps lower, it can blow right through a stop price, triggering a market order when the stock is far lower. You could potentially get filled at a price much lower than your stop price, creating a loss that's greater than what you might have calculated at your stop price.

Q: Hey Trader! My astrological forecast indicates I'll have seven years of good fortune! Gimme some trades!

A: When the moon is in the seventh house and Jupiter ... You know, it doesn't matter when you start trading. How about a call calendar for a Capricorn? A put spread for a Pisces? Maybe after your seven years are up, you could start using yourself as a counter indicator. More than one trader has humorously concluded good money can be made betting against yourself.

Q: Hey Trader! I'm thinking about getting a pet to keep me company when I trade. The local rescue has some really cute cats. Any thoughts?

A: Sitting in front of a trading screen all day, you think you'll crave interaction, and a nice cat will give you something to play with while you wait for the next opportunity. Stop—pets and trading don't mix. Cats? They step on keyboards and mouse buttons. Dogs aren't much better. Their dopey eyes and plaintive whines take away the mental edge you need when trading. Calculate four-legged spread prices in your head. That will make you forget you're lonely.

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