Think Skeptically

Several hundred folks watched me give a presentation this week in Las Vegas…

I opened up my “Think Skeptically” speech with a magic trick (that fooled no one)… And I told the audience that I hoped they would be skeptical of me as well.

That’s the same I want for you… my Retirement Millionaire Daily readers.

My team and I spend every day researching the topics we write about. I have researchers with financial expertise and researchers with medical expertise. I’m constantly traveling the globe in search of new information and experts in various fields.

But you should always be skeptical. Even if someone is an “expert” on a topic, don’t be afraid to question him.

Any time you read something here that you don’t understand or you don’t think is true, tell us about it.

If it’s a mistake, we’ll fix it. If we need to explain something further, we will. And so we’re doing a bit of that in today’s Q&A…

Q: Since when did ‘vega’ become a Greek letter? It’s a grape variety, and a fairly bright star, and several other things… but a Greek letter?

It’s all Greek to me, perhaps? No wonder financial stuff is confusing! – B.H.

A: You make an excellent point… Vega isn’t a Greek letter. But the symbol used to represent it is the Greek letter “nu,” or “v.” We assume someone along the line got confused.

Nonetheless, it is one of the primary “option Greeks.”

Vega is delta for volatility.

When a stock price changes, we can use delta to help figure out how the option will move…

When the volatility changes, we use vega to figure out how the option will move.

Q: Appreciated your article on hospitals. Remember that under Obamacare, our choice of hospitals is many times limited. Also, “Center of Excellence” like Mayo, Cleveland Clinic, M.D. Anderson & others are many times totally out of network. Meaning 100% pay by the patient. – G.M.

A: You’re right, we can’t always choose whatever hospital we want… especially if we’re hoping insurance will pay for it. (This is especially true in emergency situations. First responders often have protocols that limit your ability to choose a hospital.)

But you bring up another point… Your health insurance may not cover the hospital that’s best for your care. So, can you put a price on your health?

That’s not a question we can answer. What we can do is provide you with the resources and information you need to make these kinds of decisions.

Q: Doc, I’m selling cash covered puts in my retirement accounts. I read your stop-loss breakdown for selling calls, but I wondered, does it work any differently when you don’t own the underlying, as with covered puts? – J.M.

A: Calculating stop losses for puts is a bit different.

Let’s look at the put side of last week’s example…

Say you sell December $25 puts on stock XYZ and you collect a premium of $1. Selling a put option for $1 with a $25 strike means your capital at risk is $2,400 (recall each option contract represents 100 shares). Capital at risk is the amount of money we’d owe if we had to buy shares of XYZ.

Here’s where things change from covered calls… Let’s say we use a 25% stop loss. This time, we want to look at the maximum we’d be willing to lose per option. In this case, that would be $6 ($2,400 x 25% divided by 100).

But remember, when you first sold the put, you received $1 per option. That’s your money to keep, and it raises your stop to $7.

To ensure you incur a net loss of no more than $6 per option, you would buy back the puts if the option price increases to $7.

What health or wealth nonsense have you read lately? Tell us about it by writing us at [email protected].

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Retirement Millionaire Daily Research Team
September 23, 2016