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

Q: Just signed up for Weekly Options Windfall. Trying to find the math for selecting the long protective put in the calendar spread. Some positions are a month out, some are at the end of the year, some are a couple of strikes OTM and some are further. There must be some math to it; any insight you can provide would be very helpful?

A: There isn’t an exact calculation to how we pick the puts. A very general guideline is we are usually spending about 2 times the weekly premium on the 1 to 2 month-out OTM put. However, Preston has been going a bit further out in time on a few of these and you want to pick protection that isn’t too close to the money, yet still provides protection. Usually that is a strike or two out of the money.

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 them 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: What are the risks involved when you do an iron condor? Also, what do you need to be watching for in order to exit the trade before expiration date so that you don’t wind up buying any stock?

A: The risk in an iron condor would be the difference between the strikes minus the premium you received. So if you took in a $1 credit for both sides and there was a $5 spread in your strike prices, you would have a $4 risk on the trade. To avoid buying any stock or having stock put to you, keep an eye on the time value of your sold options. If the time value is less than 0.10, keep a close watch on your position and consider closing it. I’ve only been exercised early a couple of times. One time it was on a Thursday after a dividend had been paid out and I woke up being short several hundred shares of stock—the call was exercised. The other time the stock had a dramatic drop and the time value was at 0 and I didn’t buy back the option and ended up with stock when the put was exercised.

Q: I am new to Pirate strategies on weeklies. When you get into a credit spread on a Friday and it goes against you is there a stop loss point or do you hold and let the spread be you stop loss?

A: The spread is your stop loss, but if things are just not going our way we will get out long before it gets to that point.

Q: Can you define what “things are just not going our way” is?

A: When we get into a trade we expect the stock to behave a certain way. For example, if we get into a position expecting it to pin to a strike price and it doesn’t, then we would just get out. Every trade we get into we should have a solid idea what we are anticipating; if the stock is acting weird then we just bag it.

Our goal is to cover ground that will benefit the entire community…so get busy sending in those questions…

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