Hello, traders. One of my new year’s resolutions is to get better about sharing the excellent Q&A I engage in regularly with readers who send me questions one-on-one. I’m dubbing it the Options Grab Bag, a quick dig into the postal pile to see what you folks are most curious about lately.

 

(Incidentally, if you want to know my other new year’s resolutions, check out last week’s post, 2009 Resolutions for Options Traders. Plus, you know, eating healthy and flossing and most of the resolutions list from January 2008. ;-)

 

Zuluguy writes: “Do you recommend credit spreads as a low-risk strategy?”

 

Zuluguy, if you’re approved to trade credit spreads, they can definitely be useful, and their risk is known and limited to a defined amount. To brush up on what credit spreads are, check out my blog series on long spreads. If you’re a TradeKing brokerage client, you can login and check out Short Call Spreads (Play #14) and Short Put Spreads (Play #16) in the TK Options Playbook, too.

 

That said, in the option world it’s hard to call anything purely “low-risk”. Choose your strategy carefully, plan the trade (including having a Plan B if things don’t go your way), but also stay mindful of your trade size.

 

The amount of risk involved in the trade depends on not just on the strategy, but on the size of the account. If you have $100,000 in the account and you do 1x1 credit spread and only risk $500 total, then I would call that a relatively low-risk trade relative to the account size. But if your account has only $5,000 then the same move starts to look pretty risky.

 

Snoopyjc asks: “Any good collar strategies to minimize risk in this bear market? The cost of the puts is so much higher than the income you can get on the calls….I'm interested in using a collar instead of a (trailing) stop loss. Comments?”

I have written a couple of posts on the topic, Snoopyjc. When interest rates go to zero (like they almost are now), calls will be close in price to puts. There’s a carry cost that gets added into the call, too, which is why collars are not looking as attractive nowadays. When we move away from near-zero interest rates, that picture will start to improve – but who could say when that will happen?

 

I’ve written several posts offering alternative ways to hedge in these unusual, tough market conditions. You might want to try index options or ETFs as hedges.

 

Thanks to both of you for stirring up some good discussion!

 

As interesting questions roll in, I’ll make sure to share the goods with all of you. Meanwhile, enjoy your week! 

 

Regards,

Brian Overby

TradeKing's Options Guy

www.tradeking.com

[image: mail by sporkist on flickr]

 

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.

 

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. 

 

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Hello Bryan,
Thank you for your great blogs on options.
Do you have good guidelines on protecting your portfolios incase of the option positions goes against as a rule of thumb ? Like going long and short at the same time.

Thanks, ATHMAN.

Hi Brian, thanks again for the great blog entry. 

Question, What guidelines would you give to one for legging into a option position such as a condor or Iron Butterfly?

Hi Brian

I'm interested in receiving monthly retirement income by selling covered calls. I need to withdraw 3% of my current portfolio balance to fund my retirement. I'd rather be more conservative than greedy. What are my changes and what should I look for in "Implied Volatility" and "delta".