Ask the Crew:
Crew members tackle questions
submitted by readers each month

Q. I am new to options trading; can you recommend a good broker?

A. TradeMonster is excellent for option trading and the type of spread trades that we focus on. OptionsXpress is also very good. I would take a look at these two services first.

Q. The Couch Slouch is an awesome strategy. What are some guidelines for choosing the strike prices for the Put spread?

A. There aren’t really any defined guidelines for choosing the strike prices. We typically want to go as far out of the money as we can while still bringing in a reasonable credit.

Q. Where do you get the intrinsic value and the time value of a stock?

A. Intrinsic value is the amount that a strike price is in the money. If you buy a 250 call and the stock is valued at 255, then the difference between 255 and 250 is $5 dollars of intrinsic value. The option may cost $6.00, in which case the extrinsic value (time value) is the $6.00 minus the $5.00 intrinsic value which equals $1.00 of time value.

Q. Very new to Options and their language: short leg, long leg, short put and protective Put. Which ones mean buy short leg or long leg? Short put or protective put?

A. Short leg is to sell the equity in question to gain a premium at strike price. It is called a short because a trader is in essence selling something he does not own. Long leg is a trader actually buying the equity. Short put in the context of the above would mean to sell a put. Long put would mean to buy the put. The protective put is to buy put options (going long) as insurance against a drop in the price of shares of the equities purchased. “Equities” is a term used to indicate “Put” and “Call” trades.

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