America’s #1 Trader Answers Your Biggest Questions

The holidays are right around the corner.

And this time of year can be a little bit hectic.

People are racing around madly trying to finish their last-minute shopping and prepare for the New Year.

So I’m going to wind things down a little bit.

A lot of what I write is technical.

This could make it a bit more challenging for newer traders to follow along at times.

So today, let’s back up and review some of your biggest questions…

Here we go…

Q: I am new to your help. I don’t know what a “loophole is.” Any help?

A: Certainly! A loophole trade is a debit spread that traders use to essentially avoid the volatility in the price of options that’s caused by market volatility. It can be either a call credit or a put debit trade.

Volatility is important because it measures the rate and amount of upward or downward change in an underlying investment (such as a stock, EF, future, etc.). If the volatility of an underlying investment is high, then the option is probably going to cost more than expected. Conversely, if the volatility of an underlying investment is low, then the option is probably going to cost less than expected.

You’d want to consider a loophole trade:

  1. If the options you’re looking to buy have too much implied volatility and are deemed expensive, AND/OR
  2. To hedge a straight call or put option. By creating a loophole trade, you’re reducing the cost of a straight option purchase, which reduces your risk in the trade.

Here’s a great starting place for understanding loophole trades and how you can profit from them:

https://powerprofittrades.com/2015/07/power-profit-trades-the-power-of-the-loophole-trade

Q: So I’m a discretionary, directional swing trader. What strategy/strategies do I focus on?

A: At the beginning point of a trading career, everyone is a discretionary trader. In my opinion, you want to get out of this phase because trading decisions are often made based on intuition, greed, and fear…and these aren’t necessarily the best things to base trading decisions on, and they’re also not good for trading longevity. In fact, most professional traders will tell you that their trading patterns are based on objective methods.

So let’s talk about being a directional trader. This means that, as an options trader you’re directional in nature and primarily use calls, puts, or vertical spreads as option strategies.

Now the next thing to ask yourself is: what is your time frame? Is it long-term (more than 3 months), intermediate (1-3 months), or short-term (less than 30 days)?

Another thing to ask yourself is: are you swinging for the fences or are you looking for a lot of smaller winners? Meaning, do you want to make a profit off of one big trade, or do you want to make money. Knowing this answer will help you determine your option strike placement?

As you can see, there’s more than one thing to consider when trying to figure out the strategy/strategies you should use. There’s no one-size-fits-all answer. These things take time and are based on your lifestyle as well. So you’ll want to trade around your lifestyle, not through it.

The key is learning who you are as a trader, which is a journey. I’ve been at it for over half of my life, and I still learn new things every day. I’m here to share with you everything I’ve learned and continue to learn as you grow into the trader you want to be.

Best of luck to you!

Q: What’s the formula for risk v. reward?

A: Reward can be really tough to calculate for a stock, but it CAN be calculated for an option or a spread. It’s the percentage of your maximum risk to your maximum reward. The risk is the amount that you paid for the option or spread. The reward, of course, is the amount of the return you expect to make from the option or spread. There’s something else called a 2:1 risk/reward ratio. Simply put, this ratio allows you to double your money.

You should always determine the amount of time you have to keep your money invested and the amount of money you can stand to lose when evaluating the level of risk you’re comfortable taking.

Q: Tom, this is great information! Could you please address your thinking when choosing a strike price for your option?

A: Before I answer your question, let me first define a few things for those who may not know:

In-the-money (ITM): For a CALL option, this is when the option’s strike price is below the market price of the underlying asset. For a PUT option, this is when the option’s strike price is above the market price of the underlying asset. Being ITM doesn’t necessarily mean that you will profit, but it does mean that the option is worth exercising since it costs money to buy options.

Out-of-the-money (OTM): For a CALL option, this is when the option’s strike price is above the market price of the underlying asset. For a PUT option, this is when the option’s strike price is below the market price of the underlying asset. An OTM option only possesses time value. If the option is still OTM at expiration, it will expire worthless.

At-of-the-money (ATM): For a CALL option and a PUT option, this is when the option’s strike price is the same as the market price of the underlying asset. An ATM option may still have time value, and options trading tends to be high when an option is ATM.

Time Value (TV): This is also known as extrinsic value (EV) or instrumental value (IV) and is the premium that an investor or trader would pay over the current exercise price based on the probability that it will increase in value before expiration.

Price Risk: This is the risk an investor faces of a decline in the value or a security. This is the biggest risk all traders face.

Time Risk: This is the risk an investor or trader faces when trying to buy or sell stock based on future price predictions. This is why timing is so important when trading.

Now to answer your question, I tend to go in-the-money (ITM) when volatility is low and I’m looking at strike prices. Some people say there’s more risk here, and there is, but this is all price risk. By going ITM, I try to eliminate the biggest risk of options, which is time risk. There’s nothing I hate more than being right and still losing money. By going ITM, you’re allowing the option to act more like a stock instead.

Q: You have explained the practical use of ‘greek’ letters remarkably BETTER than several books I have read. Look forward to your future postings. Any specific insights on risk management associated with selling out-of-the-money puts?

A: Actually, I do-they involve selling out-of-the-money credit spreads. I know…at first it may sound silly to create a two-legged trade, but this is a great alternative actually owning the stock (selling puts). Furthermore, it will hedge against the downside risk that an open put position has. I’ll get into much more details in an upcoming article.

Q: Great article! Do you spend time giving monthly stock suggestions?

A: Thank you! My primary goal here is education, so typically 95% of the content on Power Profit Trades is for educational purposes only. About 5% of the content on Power Profit Trades is recommendations I choose every so often from my premium service. To answer your question, I don’t currently have a monthly trade alert service but have considered getting one started. I’ll be sure to give you more information when and if that becomes a reality.

Q: I’ve heard that some folks trade against the LEAPS by selling calls or selling puts. By doing this, they generate a weekly income. How does this work? Is this something that we should even be thinking about?

A: Before I answer, let me explain what LEAPS are for those who may not know.

Long-Term Equity Anticipation Securities or LEAPS, are publicly traded options contracts with expiration dates of longer than one year. This offers traders the opportunity to gain exposure to prolonged price changes without needing to use shorter-term option contracts. LEAPS cost more because of the longer expiration dates, which can lead to a healthy profit.

Now getting back to your question, what you are referring to is similar to a covered call, but in which the LEAP is substituted in place of the stock-almost like a synthetic covered call. A trader like this would buy the LEAP and sell 30-day call options against it. The goal is to take more theta-also known as time decay- in on the short-term call than you pay out on the long-term call. As long as the underlying stock stays sideways or goes up, the strategy actually works quite well for single-digit monthly gains. The risk is much like a covered call

Q: Can you identify (not recommend) any options trading platforms or brokers that provide such a platform for home traders so that I can submit the trade myself without having to call a broker? I find your system, very, very interesting (and at this time, still rewarding), but definitely need the full options trading account. Thanks for all your help – you are an excellent teacher.

A: Now this is NOT a recommendation-I am NOT remunerated by brokerage referrals, and I would ask that you consult as many brokers as possible before deciding on the one that’s right for you.

That being said, after teaching hundreds of thousands of students over several years, there are three brokers that seem to be mentioned more than others. They are: OptionsXpress, Think or Swim (offered by TD Ameritrade), and Interactive Brokers.

Q: Would you ever consider a bull call and bear put spread instead of a straddle to lower the cost of entry? The sold call and put would be placed above/below the range of the expected move. I know there are more commissions but I think that would be more than made up by the lower entry cost.

A: Absolutely! You can do this but not just to get in and out ahead of earnings. What you’re referring to is called a “short butterfly,” which is typically a move to maturity.

To back up a little, a butterfly spread is a neutral options strategy with limited risk as well as limited profit. Traders use this strategy when they expect the volatility of the underlying asset to be lower than what’s already implied. Butterfly spreads also have three strike prices.

A short butterfly spread is the same as above, but with this strategy, traders expect the volatility of the underlying asset to be higher than what’s already implied.

Q: I’m starting out as an options trader. Do you have any advice on things I should know before I start trading?

A: In my years of trading, I’ve discovered (and often the hard way) that you need three things before you make a trade:

  1. KNOWLEDGE: Jumping into anything without thoroughly understanding it is a mistake, especially when it comes to money.
  2. PLANNING: Every house starts with a set of blueprints… trades should, too. My specific trades all start with entries AND exits. Typically, I have limit orders on both sides. Regardless, I don’t enter a trade with the idea that I think it will go up, and I don’t wait for the market to do something first before I exit.
  3. EXPERIENCE: This is one thing that does get better with age. Whether you win or lose on a trade, take time to study what you did right or wrong so that it eventually comes as natural to you as, say breathing.

I’ll even go as far as saying that many profits traders see are results of knowledge, planning, and experience.


Here’s Your Trading Lesson Summary :

It’s easy to focus more on the strategies to use to find that winning trade and bank that huge profit. But sometimes, we forget about the basics. Here are the three things all traders need before making that first trade:

  1. KNOWLEDGE: Jumping into anything without thoroughly understanding it is a mistake, especially when it comes to money.
  2. PLANNING: Every house starts with a set of blueprints… trades should, too. My specific trades all start with entries AND exits. Typically, I have limit orders on both sides. Regardless, I don’t enter a trade with the idea that I think it will go up, and I don’t wait for the market to do something first before I exit.
  3. EXPERIENCE: This is one thing that does get better with age. Whether you win or lose on a trade, take time to study what you did right or wrong so that it eventually comes as natural to you as, say breathing.


Keep your questions coming, and I’ll make sure to do another Q&A article in the upcoming weeks.

Until then,

Happy Holidays!

Tom Gentile

2 Responses to “America’s #1 Trader Answers Your Biggest Questions”

  1. Say Tom on the spreads I like to use OCO , but I have a reservation regarding the low end of the oco I use 30 % of the price I paid for it 32but sometimes 30% is not good enough . Do you think 50% is best? thank you CV

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