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Frequently Asked Questions

What is the difference between closing a contract and exercising a contract? Would it ever be beneficial to let an option expire?

Dec 15, 2017

You can either sell an option for a profit or loss (closing a contract on the open market) or you can exercise the option and carry out the terms of the contract. When exercising a call option, the owner purchases the underlying shares at the strike price; when exercising a put option, the owner sells the underlying shares at the strike price to the option seller. In both cases, the position is no longer open.

Letting one expire occurs when the option is held into expiration. Here in Profit Multiplier, we will generally always close out our option trades before expiration. In my opinion, letting an option expire is the same as throwing money away. It’s better to sell for a small something that nothing at all.

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I know lithium is a great way to play the growth of electric vehicles. Are there any other materials we should be aware of?

Nov 30, 2017

That’s a great question. You’re correct that the primary power behind electric vehicle (EV) batteries comes from lithium, and this material has become a hot commodity as it is also used in iPhones and computers. In fact, we’ve already made some money on this growth theme in my services.

But what is often not talked about on Wall Street are the other materials that make up these batteries. Cobalt, which is typically a byproduct of copper and nickel mining, is essential for high-end rechargeable batteries, and the demand for this blueish-grey metal is about to explode.

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I am new to options trading and confused by some of the terms I’m seeing. What are some key options terminology I should know before diving further into this kind of trading?

Nov 20, 2017

That’s a great question, and it’s completely understandable considering some of the terms and phrases used in options trading aren’t used in regular stock trading. Here are some that every trader should be familiar with, starting with the two types of options you can buy or sell.

Call: An options contract that gives the buyer the right to buy a stock at a set price within a certain period of time. Calls are generally bought when you have a bullish outlook on either the market or a particular stock’s potential.

Put: An options contract that gives the buyer the right to sell a stock at a set price within a certain period of time. In contrast to calls, puts are a more bearish play on the market or a specific stock that aim to profit from a downside move.

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What’s the best way to handle earnings season regarding ETFs? Are they as impacted by the results?

Nov 10, 2017

Earnings can be a volatile time for stocks as investors weigh their buy and sell options both leading up to and after the announcement. It’s also a time that highlights one of the greatest benefits ETFs have to offer – they almost entirely remove company-specific risk, including that surrounding quarterly results.

Of course, an ETF can still experience heightened volatility during the season, especially as a large move in one of its top holdings could affect near-term trading. At the same time, poor results from an industry leader could send an entire sector – and therefore, the ETF – lower.

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I’ve noticed that you talk about the RSI a lot in your analysis. What exactly does it show?

Oct 12, 2017

You’re absolutely right. The relative strength index – more commonly referred to as the RSI – is one of my favorite indicators on a stock chart. It’s an overbought/oversold oscillator that measures a stock or index against itself.

Don’t confuse it with relative strength, which is very different as it measures one chart against another to determine the stronger. The RSI is a formula that helps determine if a stock has run too much to the upside or fallen too far to the downside. There are a few different time settings you can use with RSI. My preference is the 9-day period setting, which takes the last nine trading days into consideration to determine the RSI number. While I could talk for hours on how I use the RSI in my research, it really excels in identifying buy signals.

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Are moving averages something you look at in your stock analysis?

Sep 22, 2017

Yes! I love moving averages because they can tell us a lot about historical trading and give us a good idea of where the stock is (or at least should be) headed in both the near and long term. The 50-day moving average is one of the most widely-used indicators in the world of technical analysis, and yet many investors aren’t familiar with how it works or its importance in trading.

A simple moving average – the type that I use in my analysis – is the average closing price over a certain number of previous trading days. So the 50-day adds up a stock’s closing prices over the last 50 days and divides by 50. The end result is the level of the moving average on any given day. There are a few ways I use this data in my analysis.

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Let’s say you recommend an option in a certain stock, but aren’t actually recommending the underlying stock. What makes you want to trade the option rather than the movement in the stock?

Sep 12, 2017

That’s a really good question, and typically it comes down to timing. In NexGen Profit Mulitplier, we will generally hold an option for anywhere from a few days to a few weeks and stocks for about one to three months. That’s a big difference in holding periods, so it puts importance on how imminent a move ahead is.

If the payoff looks like it will take some time to play out, we will more likely target a trade on the underlying stock. However, if a stock is likely to take a near-term pop, we can maximize that upside potential through a call option. For example, a 2% bounce wouldn’t be worth trading in a conventional stock trade. But that 2% can quickly translate into a double-digit winner through the profit-multiplying power of an option.

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I’ve been a subscriber for a couple of months, and I love your strategy and what you’ve been doing. However, I have a question regarding risk management. Why are there times that you deviate from our plan and stay in a trade even when it closes below support?

Sep 07, 2017

Thanks for your kind words! Your question is a good one. Critical support levels are one tool I use to judge the health of a stock’s chart, but they are not the final word on a trade. As you’ve seen, there are situations where other factors that move individual stocks and the overall market need to be taken into consideration.

Once the support level is broken, I need to see a strong likelihood that it will bounce for us to stay with it. I reexamine all of the factors that led to the support break to determine if we need to make any adjustments. This is when I get in touch with my thoughts so you are kept updated on my latest outlook.

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I understand that you have to weather the storms when it comes to longer-term investing, but how do we make sure we’re not catching a falling knife? I don’t want to be stuck in a name that’s never going to bounce.

Sep 01, 2017

That’s a great question, and the key is implementing a risk management strategy. Many think that risk management is all about managing downside, and that’s true. But it’s not all stop-losses and support levels. It actually starts with the timing of our entry.

When it comes to stock analysis, there are two sides to the coin: fundamental and technical. Fundamental analysis looks at the company itself and takes macroeconomic factors into consideration.

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I trade based for valuations. Does NexGen include valuation analysis?

Aug 25, 2017

That’s a great question, and my stock selection strategy is something we’ll talk about often. One of the first things I look at when analyzing potential investment opportunities (whether for the long or short term) is the company’s fundamentals. Within those fundamentals, I analyze growth of earnings and revenue as well as the PEG (price-to-earnings-to-growth) ratio, which gives us valuation. So it does come into play in my research.

I will say that the fundamentals are not as important when you’re looking for a short-term stock to trade. However, we will still look at them because they help us stack as many factors in our favor as possible. Just because a chart is pointing higher doesn’t mean that the stock is strong on its own. The company could be falling apart at the seams, and that’s exactly what the fundamentals help to tell us.

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