| We've heard your burning questions...  Dear Chart Of The Day Reader,
Hi there! Chuck Hughes here. You may recall that in the past, I've encouraged readers to send in questions, concerns, difficulties, or anything else that isn't sitting right. Well, we've been listening… And we've got some answers! Just remember, we cannot give personalized investment advice. We can answer general trading questions, and are more than happy to. Let's get started! Question 1 from Barry B.: When an option is rolled over, you show the reduced cost basis and the current profit based on the value of the current option. But you seem to calculate the profit percentage based on the reduced cost basis. That seems to be double dipping. Shouldn't the profit percentage be based on the cost of the original option? Answer: When we roll over our profitable trades, it does reduce the cost basis. This is the benefit of rolling over a profitable trade. We do use the reduced cost basis to calculate our returns because this is our cost for holding the open trade. By using the adjusted, reduced cost basis after rollovers, this is the actual cost. So it would be the correct number to use for calculating returns. After enough successful trades and rollovers the cost basis will reach zero. Once this happens, our process is to double the number of contracts that we have open and then cut the profit from the most recent trade in half. This will allow us to have our cost basis positive again, and continue to allow us to compound our returns. Question 2 from Pete M.: I would like to know if you have ever had a problem with the IRS figuring that a rollover is actually just a sale and another buy creating a taxable event instead of a rollover. I don't know if it really makes a difference since almost all of your trades would be considered a short term investment incurring the higher 20% tax on profits. Answer: A rollover does involve a sale and then the purchase of another option. If you sold the option with a profit, then yes, this profit is taxable. But you do not pay your tax on that gain the instant that you sell the call to take your profits. When you pay your capital gains tax come April, or even if you pay quarterly, you would just pay the taxes owed on your net capital gains at this time. With most of our options, since they are considered short term investments for tax purposes, you would have to pay the short term capital gains rate. Question 3 from James W.: I am not sure what your criteria is for when to sell. Do you use a trailing stop to signal a sell-to-close order? How do you decide? Answer: There are a variety of times when I want to sell a position. As part of my trade management guidelines, I don't want to sell a position with a small profit. Instead, I want to let the profits run. Typically once a position reaches 25% profit or more, I'll look to use some of the contracts to leg into a spread trade. Spread trades allow us to protect profits. (More on that in the near future…) We implement the roll over strategy when the underlying stock is still on a PowerTrend 'buy' signal and we are confident that the bull trend will continue. As long as the trade is profitable, we will roll over the call option to capture as much of the bull trend as possible. If there is a loss on a trade when we go to roll over the position, we will exit the trade. The only time we exit a profitable trade is once a month when we look to take profits. Then, we'll exit a partial position in order to take some of the profits off of the table. According to my trade management guidelines, if one of my option trades heads south and reaches a 30% loss then I will use what I call a 'mental stop-loss' and exit the trade. Now, this level of a 30% loss is based upon my personal risk tolerance so your own personal 'mental stop-loss' could be different. If a losing option contract does not hit the 30% loss, I'll typically hold on to the contract until expiration to see if the option can turn it around. Question 4 from Robert S.: I am up 78% on a trade with 23 days to go, should I take my profits? If not now then when? What is your criteria for taking profits on existing open trades? Answer: Of course you can take profits whenever you choose to as that is ultimately up to you, the trader. However, I like to hold on to options contracts if they are profiting to allow them to turn into big winners. Now, this is not to minimize a 78% return as that is a fantastic return. But if I think that a stock still has legs and more room to run, I am likely to hold on and continue to roll over successful trades. One thing that may be helpful is a partial close out of your trade. If you have multiple contracts open, you could close some of the contracts, and leave others open. This allows you to take profits and take some of your money off the table while also leaving some contracts open to that you can continue to profit from the winning trade moving forward. Question 5 from Lee L.: How long does he wait after the 1-month price crosses above the 10-month SMA before deciding a trade should be made? Is it immediately after the crossover occurs? Or does he wait a period of time to make sure the price doesn't cross back below. Answer: If the 1-Month price is above the 10-Month SMA on the last trading day of the month, then the trend is considered intact and the stock is signaling a PowerTrend 'buy'. Once this trend is confirmed, there is no waiting period. As long as the 1-month price stays above the 10-month SMA, the PowerTrend 'buy' signal is still active. Only if the 1-month price crosses below the 10-month SMA on the last trading day of the month is the PowerTrend 'buy' signal no longer valid. Phew! That was quite a lot of question answering. Luckily, I love to do it. Thank you so much to everyone who reached out because they were confused! PowerTrend Options and Thunderbird Options Course are for people of all experience levels, so it's important to me that you feel comfortable no matter what trading we're doing. Please remember, if you ever have a question, or you just want to let me know how I'm doing, shoot me an email at askchuck@lfb.org. And since we won't talk again before the New Year… I'd like to wish you and your family a wealthy and healthy 2020! Best Regards, 
Chuck Hughes
Editor, Chart Of The Day P.S. — Big News! Chuck's Thunderbirds Trading Contest is coming soon! If you recall, this is an open competition to see who can book the biggest total profits using Chuck's options strategies. You get $50,000 in virtual money to work with. But the prizes are very real! Third place gets $2,500... Second place gets $5,000… And first place gets an all-expenses paid trip to my home in Maui! The contest begins on January 6, 2020. But you'll need to register first. Look for an email to hit your inbox soon that will include instructions to sign up. | 
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