Welcome to our "Invest Like a Pro" Q&A Center!

Here you'll find our top pros, analysts, and advisors answering questions that have been submitted by you and other individual investors like you.

We welcome any and all investment-related election questions, questions about trades you hear about in our "Invest Like a Pro" series, and questions about our Motley Fool PRO service, in general, that you may have.

Please submit your questions to AskThePros@fool.com – and be sure to check back often for our latest replies.

July 12, 2012 | Your Question:

No matter who wins in Nov., after the election what do you think will happen to the transportation industry with such companies like Westport Innovations (WPRT) and Clean Energy (CLNE)?

Richard

Our Pro's Answer:

Fortunately, the power of the marketplace often overwhelms government constructs, and this is likely to remain true with transportation and energy. Cheap natural gas prices and a large, stable supply are driving increased demand from power plants and transport vehicles – namely truck and bus fleets that can all refuel in set places. This is a long-term trend that will surely continue whoever wins in November. In fact, Citigroup predicts that the U.S. will be energy self-sufficient and even export oil by 2020. That forecast sounds aggressive, but even if it proves partly true, the energy industry should create a few million new jobs this decade as natural gas usage grows.

Westport's products allow fuel-driven engines to convert to natural gas. It's a promising company but not expected to be profitable in earnest until 2015, so it remains speculative. Clean Energy builds fueling stations and sells liquefied natural gas. Again, it's a promising long-term investment, but meaningful profits again aren't expected until 2015. Both companies are well worth knowing and following, but keep in mind that both are still speculative.

– Jeff Fischer 

July 11, 2012 | Your Question:

I have an IRA with about $500,000 in it. Over the past few years I have converted about 20% of it to a Roth. I would like to convert the rest but have some questions, some of which relate to the election:

1. If Obama is elected and allows the Bush tax cuts to go away, what will this do to the marginal tax rates?

2. If Romney is elected, is it safe to assume that he will continue the Bush cuts? Is it likely that he would cut marginal rates even further for taxpayers in brackets between $100,000 and $500,000?

3. Since the winner will be determined in November, It seems like I can just wait until then to decide what to do. For example, if Obama is elected, and that results in higher marginal tax rates in 2013 and later years, I might be better off to do a big conversion in 2012 while the Bush rates are in effect. If Romney is elected, and the Bush cuts are retained, I might want to phase my conversion more gradually to avoid jumping brackets, or even wait to see if he will lower marginal rates. Does this approach make sense?

Bob D.

Our Pro's Answers:

Robert Brokamp, Advisor, Motley Fool Rule Your Retirement:

It can be argued that tax rates are more likely to go up quicker and higher if Barack Obama is re-elected, but remember that a president doesn't pass tax laws, Congress does, and these laws have to pass both the House (controlled by Republicans) and the Senate (barely controlled by Democrats). Regardless of who gets elected, tax rates must go up eventually to cover the debt and the rising entitlement spending. Thus, converting some traditional IRA assets to Roth assets can make a lot of sense. To the extent that you want to wait to see who's elected in November, you'll have plenty of time to act after the election. You have until Dec. 31 to convert traditional assets to Roth assets, and I wouldn't expect major changes to the tax laws until the re-arranging of the deck chairs in January.

Jeff Fischer

1. The current marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%, with 15% capital gains taxes. The income levels at which these marginal tax rates kick in differ whether you're married or single, so you can visit irs.gov for tax tables to get income levels that are relevant to you. If the Bush tax cuts expire, and no new tax laws are written, the marginal rates will revert back to 15%, 28%, 31%, 36% and 39.6%, with 20% to 28% capital gains taxes.

2. Romney's proposed tax plan is to lower marginal tax rates at all income levels even from current Bush levels, typically by a handful of percentage points each, including for top income earners; and he would want to keep the capital gains tax rate at 15%. These are his wishes, but it's probably not safe to assume that it happens until it does. Given deficit issues, any big fiscal changes like lower taxes are likely to be contentious among lawmakers.

3. We will certainly have one big uncertainty cleared up by Nov. 4 – the next President. But whomever wins, there's no telling what happens to tax rates in early 2013. It will partly depend on who wins in Congress, too, as that will help determine what the President can accomplish. But it's a reasonable assumption that if Obama wins you might want to take actions in 2012 that will incur current tax rates rather than risk higher rates in 2013. And if Romney wins, there's at least a better chance that tax rates won't go up and may even go down, so you can move more gradually and see – but again, there will be tax uncertainty for a while whomever wins (unless the Bush tax rates are extended prior to the election). Thanks for writing, and good luck on your conversion! And even more important, on your future investments.

July 10, 2012 | Your Question:

Right now, I have a selected set of funds, some of which I have had for years in a 403b a few IRA's and one overseas fund. I also own three of the stocks that you or The Motley Fool have recommended which have done fair, but not extremely well. However, my real concern is come January, it really will not matter what most of us have since excessive spending cuts will occur across the board if Congress does not compromise.

What should we be doing to prepare for that? Bonds are commonly recommended but it is doubtful whether treasuries, municipal or commercial offerings will do any better than equity. What are your thoughts, please?

Dan

Our Pro's Answer:

At current rates, bonds will not provide an attractive return over the next several years. The main purpose of bonds is to protect money you need in the next few years (and only choose short-term bonds for this purpose), and to have some portion of your portfolio hold up the next time the stock market significantly declines (though there are PRO strategies that will accomplish this as well). If you're concerned that reduced government spending will hamper the economy – which is a valid concern in the short term – then focus your portfolio on consumer staples, companies that provide goods and services that regular people need, regardless of what's happening in the economy. The extra bonus is that many of these companies also pay dividends, which historically have grown at a rate that exceeds inflation and hold up much better than stock prices during a downturn.

– Robert Brokamp, Advisor, Motley Fool Rule Your Retirement

July 7, 2012 | Your Question:

I read the booklet describing options strategies for Intel and American Express – both strategies made sense and seem to be a powerful way to enhance returns.

My question is how to identify other stocks where these strategies may be employed. As an example,

1. Is there a minimum level of options interest in the stock for it to be reasonable to use for puts or strangles? If there is a low level of options activity, are options trades still wise?

2. When identifying a stock that you would like to purchase, but at a lower price, how do you determine the strike price for the put that you should sell? Should the strike price be a certain percent lower than the current market price? Or should the strike price be calculated to give you a specified minimum level of return for the length of option?

3. How do you determine how far into the future to sell the put option? The longer term option – say 90 days in the future seems to carry a larger premium – I assume because there is more time for the stock price to move to the strike price. However, would you sometimes be better to take a shorter strike date and lower premium, and if the option expires with the shares un-assigned, you can sell another shorter term put option. Does the need to pay option fees to your broker factor into the decision?

4. Similar to question no. 2 above, how do you identify the strike price and strike date for the call option portion of a strangle. Should the covered call be set at a certain percentage level above current market price, or set to achieve a minimum level of return over the period of option, or annualized return?

5. Thanks for any guidance you can provide or links you can provide where I could learn more.

Doug V.

Our Pro's Answer:

1. We usually target companies that have significant interest in their options, otherwise the bid/ask spread on the options may be very large, and it can be more difficult to get in and out of the options at prices you like. There's no set minimum level of open interest necessary in the options, though (open interest tells you how many contracts have been opened but not yet closed). We've successfully made trades on options that had zero open interest before we recommended it. The more telling sign is how much volume the stock itself trades each day. Eventually that volume usually affects options volume. We most often write options on companies worth more than $1 billion and that see meaningful trading volume each day.

2. We start with a valuation estimate. If we think a stock is a good buy at a certain price, we'll target writing puts at that corresponding strike price or a bit lower. But there's more. You also want to be paid enough for writing a put option, so we seek a premium payment from the option that equates to at least a 12% annualized return. So, if we're writing $10 puts that expire in six months, we'd want to be paid at least a 6% yield on our potential $10 purchase price, or $0.60. And we do usually target strike prices a certain amount below the current share price – ranging from 5% to more than 10% lower – because otherwise you could just buy the stock today. We provide guidelines to all of this in PRO options guides given to members.

3. You're getting the hang of this! We usually write puts that expire in six months or less, sometimes even just a few months, because the income per day is higher the less time until expiration on your options. And then you can repeat the trade sooner. But we also need to make sure the absolute income we receive is worthwhile each time, including after commissions. Writing options that expire in four months or so, on average, is usually a sweet spot. You're paid well enough and you can repeat the trade three times a year when possible. But we'll also write puts that expire in three months or less if the yield is good; and six to seven months out to be really defensive, using a low strike price with a handsome yield.

4. This relates to fair value, too. You don't want to sell a stock too cheaply, even if you're primarily using it for income. So, we aim to use strike prices that are reasonable sell prices for the stock. At the same time, you want to be paid attractively enough by the covered calls, since you are capping your upside on the shares. We provide guidelines in our educational guides on covered calls given to members, and again, we generally aim for at least a 12% annualized return on any income position we take. In the case of covered calls, that can include stock appreciation, dividend yield, and option income. But the option income should be a big enough piece of that mix to make writing them worthwhile. As with put writing, most covered calls we write expire in six months or less. It partly depends on how volatile the market is (as measured by the VIX) because that'll partly determine how much the calls pay us, along with how volatile the stock itself is. We'll write calls that expire as soon as is reasonable; three or four months is often the ideal sweet spot, but five or six months may be necessary to receive larger payments at higher strike prices. Finally, for strict income positions, you can write calls expiring the next month or two and keep rolling them.

5. Our pleasure. Thank you for your interest, Doug, and for your great questions! We hope to help you become a great income producer, as well as stock investor.

– Jeff Fischer

July 5, 2012 | Your Question:

If President Obama wins the election and continues his policy of keeping interest rates low and printing money which tends to devalue the dollar, would an Asian bond ETF such as FAX which pays approximately 5% be a good investment?

Bryan C.

Our Pro's Answer:

Hi Bryan. Keep in mind that the Federal Reserve has targeted an especially low interest rate through at least 2014, so low rates are very likely to continue. As for increasing the money supply, that has mostly been done to recapitalize banks and buy government debt, which helps keep interest rates low. At banks, the stimulus money was largely replacing value that was destroyed, so that doesn't portend inflation the way it otherwise might. That's especially true because banks are still very slow to lend money out today, and profligate lending is what often leads to price inflation – just look at what it did to home prices in the last easy lending cycle. Meanwhile, rather than lose value, the dollar has gained value against its largest currency rival, the Euro, since 2007 (for various reasons, of course).

All of which is to say, why buy an Asian bond ETF? Except for retirees who need certain income, we're not big fans of bonds in any stripe right now because interest rates are so low in the United States – and to your question – at a low cycle in much of Asia, too. When rates start to rise in coming years, most bond prices will decline. Instead, we prefer to buy stock in American multinational companies that pay a healthy yield and trade at an attractive valuation. Stocks are a good defense against inflation historically, and at today's valuations, many leading large-caps are very likely to outperform bonds by a wide measure in the coming years while also paying a growing yield. We do consider bond ETFs in PRO, but right now, stocks look more attractive. Thank you for writing!

– Jeff Fischer

July 2, 2012 | Your Question:

I am following your recent download describing how to buy puts on INTC. My question is: What is the downside? On my Schwab trade platform it states that for each Oct. PUT to open Oct. 25 contract for INTC the downside is $24.14 and the upside is $86.00 and break even price is $24.14.

I am very interested in doing this kind of investing but need to really understand it. Could you please elaborate especially on the downside.

Thank You,
Grigg D.

Our Pro's Answer:

Thank you for your question, Grigg. First, realize that we're suggesting that you write – or sell – the Intel put options, not buy them. By selling puts, you're paid the premium as income. You are then on the hook to buy the stock if it declines below the strike price by expiration (puts usually won't be assigned before expiration). So, your downside on this position becomes the same as stock ownership below $24.14. That is your break-even price on the trade. Any price below on Intel's stock becomes your risk, 100 shares of Intel for every put you write.

The upside of the put writing trade is what it pays you on day one. That's your income. But, to repeat, the downside is you're obligated to buy the stock if it declines below your strike price (and you don't buy to close your puts before expiration). That said, the potential obligation to buy shares can become upside, too. Warren Buffett bought some of his famous Coca-Cola (NYSE - KO) position by writing puts, and it has earned him enormous profits over the years. We would be happy to buy Intel at a net $24.14 and wait for price appreciation. So, as long as you're ready to buy a stock before you write puts on it, you should be happy to get the stock if it declines to your price. If it doesn't fall that much, though, you're happy with the income you made instead, you won't get shares, and you can write puts again. So, these trades should be a win-win either way if you set them up on good companies.

But with any put you write, the downside risk is the same as stock ownership from your strike price, minus what the options paid you. So, in this case, $25 – 0.84 = a $24.14 break-even price on 100 shares of Intel for every put you write (since each option represents 100 shares of stock). Thanks for the question!

– Jeff Fischer

July 1, 2012 | Your Question:

I have been thinking of joining the PRO service but have some questions. I am a small time investor who only has around $19,000 a year to invest. I am seven years away from retirement. Right now, that money is going into my 403b plan at work. I am a member of Rule Your Retirement and follow their strategies. My company matches 6% so I know it is smart to keep that in the 403b plan. So, what to do with the rest? With only around $15,000 to invest with, does becoming a PRO member make sense? Will the profit I make following your recommendations be more than what I could have made in index funds once I subtract the cost of the PRO service?

Also, I have read some of your information on options and find I really don't get it enough to feel I know what I am doing. Does the service put the information out for dummies? Like step 1 do this, step 2 do this? I am excited about the possibilities but concerned about the cost and making mistakes that could hurt my retirement

Thanks,
Kevin

Our Pro's Answer:

Hi Kevin, congratulations on saving in your company retirement plan that matches. That's always smart. As for understanding options, PRO does provide easy-to-follow guidance. Many of our members – perhaps most – are new to options when they join, and soon most of them are well on their way. Our trade recommendations spell the trades out, we offer guides to the strategies we use, and we have a whole Options U. in our Motley Fool Options service that comes complimentary with your PRO subscription. The Fool, through PRO and Motley Fool Options, has probably taught sensible, profitable options strategies to more people since 2008 than any other service out there.

But if you're investing $15,000, I think the PRO service cost would take away too much of your capital. You should try to spend less than 2% a year of your capital on investment expenses. True, you often need to spend money to make money, and many members use PRO for educational purposes with plans to invest with that knowledge later. But I think you're near enough to retirement that you want to keep and compound as much money as you can, and PRO would cost you a disproportionate amount of what you have to invest. So, I suggest returning to PRO when you have more capital in the years ahead. For now, keep doing what you're doing – saving and investing in stocks. Thank you for your interest!

– Jeff Fischer

June 30, 2012 | Your Question:

Does the call and put strategy work if the authors of Aftershock are right and the market drops by 90% and unemployment is at 50% and inflation is at 100% as they predict. What effective strategy do the pros recommend to protect our investments against a worst case scenario like they think will happen? What do the Pros think the probability of this worst case scenario happening is!

Thanks,
Ben

Our Pro's Answer:

Thanks for your question, Ben. Doomsday scenarios sell well, and although governments and currencies do rise and fall, the odds of the scenario you described playing out in our lifetimes is very low to nil.

The stimulus money created by the government since 2008 has mostly filled in for capital that was destroyed, so without strong consumer demand, it's unlikely that extreme inflation is around the corner. More likely is an outcome similar to Japan's Lost Decade: Low inflation for years, because interest rates are likely to remain relatively low and economic activity soft.

Also, keep in mind that stocks have historically provided good protection against inflation, because prices and earnings rise with inflation, so stock prices follow suit.

This said, PRO this year has been invested about 65% net long (bullish), and the rest short (bearish) and cash. So, PRO has defenses in place. We will continue to hedge whenever we feel it's necessary as we seek to make money for PRO members even in challenging markets.

– Jeff Fischer

June 30, 2012 | Your Question:

I was wondering about whether you can be called away from your option purchases or are they good till expiration. In other words if I had a call in the intel example and the price rose to 30 during the time I held the option, but fell back down to 24 before expiration, would I still own the stock and get to keep the premium for the call? Also can I close the call option myself by forfeiting the premium at any time before expiration?

Thanks,
Eric

Our Pro's Answer:

Most options, typically at least 90% of them, are not exercised until expiration. They're usually not exercised before then because an option carries "time value." This is the extra value that you're collecting as the option writer, and that the option buyer is paying – it's the extra premium you get paid to "sell to open" or write an option. As long as an option still carries some time value (and it usually will all the way to expiration week), the option holder won't want to exercise it early, because if they did, they'd be giving up that time value.

The option is exercised at the exercise price, of course, and the time value that it had simply disappears when exercised. The option owners don't want to give up that value, they don't want to give it to you, so they don't often exercise early.

Now, there are a few cases where options are more often exercised before expiration. One is when the stock has moved very dramatically.

If you wrote a $24 covered call on Intel and the stock increased to $30, the option may have so little time value left that the owner will exercise it (because the further a stock gets from an option's strike price, the less time value that option will have). Time value is easy to watch. A $24 call when a stock is $30 has $6 in intrinsic value. Any value in the option above $6 is its time value. So, it might be worth $6.10, which is a small enough premium that the option might get exercised early.

Second, if Intel goes ex-dividend, the call will likely get exercised early if the quarterly dividend payment is larger than the time value remaining in the option. In this example, the call would be exercised by someone who wants to capture the dividend payment. But a realistic expectation is that 90% of options are not exercised before expiration.

Just watch for dividend dates when a call you've written is "in-the-money," and watch time value on your options. We of course do this for PRO members. But it's not difficult once you see how it works.

– Jeff Fischer

June 29, 2012 | Your Question:

I have been reading about your Pro Program for many months. My concern is that I may not be able to do the more advanced investment moves without your assistance. I am 62 years old and plan to retire within the year.

If I do join the Pro Program in July, will there be someone that will be able to coach and guide me through the program.

Sincere regards,
Susan

Our Pro's Answer:

Hi Susan. Since 2008, PRO has been doing exactly that for our members.

We realize that many members arrive without much or any options or shorting experience, so we have tutorials and we spell out the "How To" specifics, our objectives, and the possible outcomes in each recommendation we issue.

We're then available to answer questions from members on the boards, too, all week. And, we have a great PRO community of members who are very helpful to everyone asking questions. So, we work to make every strategy, every PRO recommendation, and our whole portfolio, very clear and easy to follow.

That's why we're there.

– Jeff Fischer

June 29, 2012 | Your Question:

I've recently signed up for MF service and have put together my initial portfolio based on Supernova recommendations. I'm interested in the Options path as a next step in my learning but have a question on what types of stocks are relevant to use for these 'safer' options strategies.

The introduction sent on options strategies spoke more to using these on more established large cap stocks which have lower beta's or volatility. Do these strategies apply (or are they less lucrative/more risky) on more growth type stocks?

Best Regards,
Matt R.

Our Pro's Answer:

Thank you for being a Fool member! Options can be used on most any type of stock, but different option strategies are recommended in different situations, of course. When we're looking to make reliable income, we like to target Blue Chip stocks as we did in our first free income report for you: Intel and American Express. We want to avoid surprises when we're setting up income trades that we hope to repeat again and again. So, we focus on giants with attractive valuations and stable results.

When it comes to high-growth stocks, an investor is usually agreeing to take on more risk in return for potentially greater rewards. Options don't always make sense in those cases. For instance, you rarely want to write covered calls on a growth stock since a covered call caps your upside on the stock for a relatively small income payment, and you still keep all the downside risk.

Nor do you really want to write puts on many growth stocks, because your upside (unless you get to buy shares) is only the put premium, rather than all of the upside the stock may offer. Imagine if you just wrote puts on Apple years ago and didn't buy the stock. So, you usually want to just own growth stocks outright for the long-term upside.

However, you could also consider buying long-term (2 1/2 year) call options on some growth stocks. You can risk much less money buying a call option rather than investing a big slug of cash into the stock itself.

And finally, if you really want to own a growth stock, but only want to buy it more cheaply, you can write put options on it, despite what I said above. The put premiums are usually very attractive – you'll make good income until you might eventually get shares. Just realize you may never get shares if they don't decline, so you may miss the upside and just be left with option income.

No matter what, when you write puts be ready to own the stock for the longer haul, because you'll want to if it falls below your put strike price by expiration, giving you shares.

– Jeff Fischer