In this edition of the Morning Mailbag, I answer some of the questions I’ve received from tackle trading Team members.  If you want to be featured in an upcoming post, send your questions to team@tackletrading.com with the subject line Morning Mailbag or tweet me @timjusticeutah or @tackletrading.

Q: I had a stop loss placed on a trade.  When the Market opened today, it gapped and opened below my stop loss.  However, it quickly recovered and moved back above my purchase price.  THe stop did not trigger.  Does it only trigger if it is on the way down?  I understand it not being triggered due to the gap, but I am just wondering if it does not trigger if the price is moving up through that stop.  From Vickie,

To Vickie: Thanks for the question and its great to see you using stop losses.  The most likely scenario from above is that you’re trading in a virtual trader and it didn’t trigger because virtual trading doesn’t always work like live trading does.  There is another possibility though: the trigger type you used for your stop loss order may not have been triggered.  If your stock dropped down on your chart below your stop loss point – and you had your stop set to trigger on a last price – but the actual chart reflected the bid/ask or mark price – it may not have triggered you out.  This isn’t the likely scenario for your example, but it can happen.

Q: From Matthew: On closing diagonal spreads, there were 3 options for closing the trade.  Scenario.  Bot 30c Nov expiration.  Sold 40c Oct expiration.  1) if stock hits higher than 40, close position and take profit.  This makes sense.  2) If stock drops to where we have the predetermined willing loss, close entire position.  This makes sense.  3) If stock has not hit 40 on day before expiration of the near term strike (sold 40c OCT), then close the entire position on the last day of the near short call.

The last option is where I am confused.  If we sold the 40 call, and the price is at 39.99 or less, why would we not simply take the premium from selling the 40 call?  We would be left holding a 30 call with a month until expiration and no obligation.  We could even sell another premium after the expiration of the Oct call, turning it into a regular Bull Call for November?  I rewound it 4 times and wrote down what it said for closing.  Been mulling it over, and it doesn’t make sense to me why you would close it out in its entirety, for it is still profitable.

A: Matthew, great question.  Diagonal spreads involve using options in different expiration cycles.

Q: From Micheele – I wanted to follow-up on your comment about preferring that students learn how to sell volatility first because you think selling volatility is easier than buying volatility. Could you expand on why you think buying volatility is harder? The reason I was asking about buying volatility is because that book I read said it was lower risk.  You also talked about gamma scalping being necessary for buying volatility. I would be interested in learning more details around gamma scalping in one of our labs.  I also went and downloaded all of the Trading Justice podcast so I can start listening to them.

A: Michelle – thanks for the questions.  Selling volatility means you’re falling in the theta family of trades.  For most beginners – its nice to have time on your side.  When you use strategies like naked puts, bull put spreads, bear call spreads, Iron Condors and Calendar spreads you are building what are called time positive trades.  Having time passing help your trade is a big benefit and can be the difference between winning and losing for some traders.  Buying volatility may in fact be lower theoretical risk – but it may not be lower actual risk.  It all comes down to execution.  In trading – there are many different ways to define risk.  The 1st is to define it from the risk graph.  This is the theoretical risk in a trade.  Its factual and defined to the penny.  But its not all there is to look at.  Because you have to consider actual risk.  Consider an example from one of our podcast guests – Jake Pelley.  Jake sells naked puts that have limited reward and very high theoretical risk.  But yet, he’s not lost a trade in over 10,000 trades.  Because his execution is sharp and his management style is dialed in.  Examining theoretical risk and reward is important for a trader to understand – but you need to build experience on how these different strategies work in the real market to get a better idea on how you want to trade.

Gamma scalping is something I can do some videos or blogs on in the future.  It’s a broad topic – but one that can help traders play short term volatility plays.  For now, one of the simplest gamma scalps that you can start practicing on would be to buy a straddle or strangle on weekly options for quick moves.  Do this when you expect the underlying stock or market to make some kind of strong move up or down based on the news of that day or that week.  Don’t spend more than you’re willing to risk on the total position though as these are quick trades that will either win or lose in a short period of time.

Thanks for listening to the podcast!  That’s very nice to hear that you and others are enjoying them.  We’ll continue to put them out as long as the team is listening.

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That’s all for today Team.  Keep an eye out for a new podcast today after the Fed announcement.

Coach Tim

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