Rank #1: #350 - The Ultimate "Quick" Guide To Option Trading Strategies
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to go through my ultimate quick guide to options trading strategies. Options trading strategies are nothing more than a combination of calls and puts, either short or long that allow you then to create a custom payoff scenario for various market conditions or expectations. Now, unlike stock which is a one-dimensional trading vehicle, you can only buy stock or sell stock, options have the beautiful advantage of being able to be crafted to your exact specifications. This is why I love options trading in general, is that whatever market expectation or whatever stock expectation you have, you can generally build an option strategy around that and that means that you don't always have to take directional bets. You don't always have to be long an underlying stock or be bullish on an underlying stock. You can be bearish. You can be bullish. You can even be neutral within a range. You can have the expectation that volatility will generally contract or expand. There's a lot of different ways that you can profit with option strategies as opposed to just trading regular stock.
Now, like I said, there’s probably a couple of main categories of option strategies. There's two types that I classify them as. There’s simple strategies and then complex strategies. Simple strategies would be things like long calls and long puts, short calls and short puts, covered calls and covered puts. Complex strategies would be things like credit spreads, debit spreads, calendar spreads, diagonal spreads, iron butterflies, iron condors, straddles and strangles and the reason that they’re a little bit more complex is because they require multiple option contracts in many cases to create the specific payoff diagram that you’re looking for. Now, option strategies are also further divided into two broad categories of risk, risk defined strategies and undefined risk strategies. Again, one of the great things about options trading is that you have the ability (if you choose) to define your risk on a particular trade. If you want to make a trade on a particular stock and you want to know for sure how much money you could make or lose, you can create a defined risk spread trade and control your position size. Likewise, you can also create undefined risk strategies that allow you the opportunity to potentially generate higher levels of income on a more consistent basis, but you will take on a little bit more risk. These strategies would include things like straddles and strangles or short calls and short puts.
Now, as always, we suggest that you back-test all of your option strategies to make sure that whatever strategy you ultimately end up choosing generates enough income for your account or performs the way you want it to. You can do this right through our software here at Option Alpha. If you just search the back-testing software on our toolbox, we can give you the ability to back-test any option strategy that you want out there and again, test out the strategy before you actually put your hard-earned money at risk. As always, if you guys have any questions, let me know and until next time, happy trading.
Sep 07 2018
Rank #2: #512 - Scratch Profit, Keep Holding, Or Roll For A Credit?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer a question which is basically – “Scratch profit, keep holding or roll a position for a credit?” Now, this question came out of the Option Alpha community on Facebook which if you're not part of the Option Alpha community on Facebook, I don't know what you’ve been doing on Facebook just scrolling around aimlessly, but you should definitely join and take a look. But I asked everyone in there and I said, “Look. Give me a list of questions for the daily call podcast.” This is one of the questions that ended up coming up and they said, “As expiration week approaches, if a trade has not reached our say 25% profit target, but is still positive, say where we have a 5% profit, is it better to roll the position for a credit if that's possible or close out the trade as a scratch?” Again, the question is, “Scratch profit, keep holding potentially or even roll the trade for a credit?”
My opinion on this is to close the trade as a scratch profit. If you have held the trade all the way to the week of expiration and it still has not reached your profit target, but you have a profit on the table, I say you take the profit and reset the position in the next month manually with a brand-new trade. Now, can you roll the position to the next month for a credit? For sure, you can do that and you should take in a substantial credit on the roll. I would not roll a position that is a little bit of a profit for say a $5 extra credit in the next expiration month. The reason is that if you get into a situation like that and you can't roll for a substantial credit, it's probably because the position is not centered or is not neutral to the new stock price. The position might be on the edge of a breakeven. My opinion there is again, take the scratch trade, the scratch profit, remove the position and re-center the new option strategy over wherever the new stock price is in the next expiration period.
That's always been my position on trades like this that are kind of marginal at best. Sometimes we even close trades that are scratch losses. We’re not of the opinion that everything should be rolled. If it's a $10, $20, $100 losing trade and it’s kind of just a scratch loss, it’s right on the edge, right around the breakevens, sometimes we’ll just close the position, start over fresh, kind of reset the strike prices in the next expiration month. Hopefully this helps out. As always, if you guys have any questions you want me to get added or queued up here to the daily call podcast, please head on over to optionalpha.com/ask. That is where we take these questions from. We get a list of those, we add those to the podcast and all the Facebook Lives that we do and we get them queued up for you guys and hopefully, start answering a lot of these questions. Until next time, happy trading.
Feb 16 2019
Rank #3: #410 - Does Using Multiple Technical Analysis Indicators Help Or Hurt?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, “Does using multiple technical analysis indicators help or hurt?” Now, this is a question that we get often here at Option Alpha, especially since we did the long, long research, about 20 years of data on multiple technical analysis indicators, settings, parameters. You can find that all in our research report called Signals. But my assumption here is that it has to work in both cases and what I mean by both cases for technical indicators is that technical indicators should work like wheels on a bike or like wheels on a car. If you have a car that has four wheels, each of those wheels has to be strong enough to hold the car. You can't have a tire that's flat or else, the car really doesn't move down the road as well as it should or as effectively as it should. But when you have let’s say four wheels on this car and each of those wheels worked independently and then are put on the car and worked together as a team, you can get the whole car down the road. When I think about technical analysis indicators, I think about them in two dimensions. One, they have to work by themselves. If somebody tells me, “I want to use this indicator.” there’s going to be research and data and back-testing case studies that prove that that indicator is actually effective. Now, not even looking at the other indicators, not confirming signals, not other moving averages or RSIs or MACDs, if you’re going to use one indicator and even use that indicator in conjunction with some other indicators, it's got to work independently by itself first just like a wheel on a car. That wheel on the car has to be able to get down the road. If that wheel is flat, I don't care what car you put it on, it’s still not going to work.
It's got to work independently by itself. Then once we have a series of technical indicators that work independently, now, we can start to figure out what kind of cross indications can we get by using multiple indicators at the same time. Now, I'm a fan of limiting this to like three or four. Probably four at the most is what you might have to use on some of your charting. You start getting over four indicators on one chart and it becomes chart overload and technical overload, analysis paralysis, whatever term you want to use. It's just less and less effective the more indicators you are looking at. In our research, what we found is that there's probably about three… In most cases, depending on if you’re going long or short different stocks, there’s probably about three indicators that end up working out pretty well independently by themselves, but then together, they give us a better picture of what might be happening. Now, the way that I use technicals is that in my case, all three of my technical indicators have to line up for me to make a strong judgment call on a direction. If I don't get all three of these indicators to lineup at the same time or very, very close to one another, then I’m probably not going to make a strong judgment call. I’ll probably just make a neutral trade. But we have used this before over the last couple of years since we did the Signals research, especially when we get assigned stock. We’ve been really kind of leaning on these indicators as a means for helping us determine if we should hold the stock long or short, depending on how we’re assigned the contracts. I think multiple indicators can help as long as you use them the right way. They’ve got to work independently by themselves and I think you should limit them to three to four and they can definitely hurt if you use too many of them or just flat out using the wrong technicals. For example, like simple moving average. Not a great technical indicator based on our research, so using that in any form or shape would not really be productive to your trading. Hopefully this helps out. As always, if you guys want to learn more information about the technical analysis that we did, head on over to optionalpha.com/signals. Again, that’s optionalpha.com/signals.
Nov 06 2018
Rank #4: #352 - Trading During Pre-Market & After Hours Sessions
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about trading during premarket and afterhours sessions. Premarket and afterhours sessions are the times (directly like it suggests) right before the market opens regularly around 9:30 Eastern Time in New York and then directly after the market closes which is usually 4:00 PM Eastern Time in New York. Those are those premarket or afterhours sessions. Now, we typically see and hear about these premarket and afterhours sessions because of stock earnings or announcements and we hear one stock is trading higher afterhours or trading lower afterhours. This is why we typically see these environments happen. And so, what a lot of brokers are doing is now allowing many people to start trading the underlying stocks during these time periods. And so, we’re specifically talking about the actual stocks themselves, not the options contracts. During these time periods, it's a good opportunity to quickly adjust a position or get in or out of a position when the regular market hours are not in session. Now, the caveat to this is that because it is premarket and afterhours, the liquidity is much lower, the spreads are much wider and it's much harder to get filled in these times. Not that you can’t do it, but it's a little bit harder to do it.
Now, TD Ameritrade is the first one to really open this up and they open this up with what they call 24/7 contracts that can be traded all the time or stocks that can be traded all the time and this usually runs from Sunday at 8:00 PM Eastern Time to Friday at 8:00 PM Eastern Time. During this time period throughout the week, you have the ability to trade a lot of these highly liquid big-name securities, things like FXI, SPY, EEM, GLD, SLV, DIA, UNG, TLT, IWM, QQQ and USO. I think those are the ones that were initially rolled out. And so, with those tickers in particular, you have the ability to trade pretty much the entire time that there are available sessions for that during the week. Now, Robinhood on the other hand also opened this up for most tickers as well and extended this across a lot of other securities and individual stock names and with extended hours trading with Robinhood, what they allow you to do is trade basically the 30 minutes before the market opens and then the 120 minutes after the market closes, so about two hours after the market closes until 6:00 PM Eastern Time. Again, a very similar type of framework. It’s a little bit different for each, whether you’re at Robinhood or TD Ameritrade or other brokers might start rolling this out in the future, but I think this is good. I think that ultimately, more access to the markets for traders and investors like me and you is a really good thing in this market. I think it shows that we’re starting to level the playing field and we’re starting to open up the gates if you will to regular people. And so, we don't want just institutions and just major banks having the ability to move the market without some sort of influence from potential retail traders or the masses. I like the idea of doing. Hopefully it starts rolling out to other securities as well and definitely rolling out to options contracts in the future. As always, if you guys enjoy this, let me know and until next time, happy trading.
Sep 09 2018
Rank #5: #226 - Basic Understanding Of A Deep In The Money Call Option Strategy
Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to be talking about getting a basic understanding of a deep in the money call option strategy. There's a lot of jargon in there and so, we want to break this down for you guys if you're getting started with options or if you’re new to options trading. The term “deep in the money” basically refers generally to option contracts which are more than $10 in many cases in the money, meaning they have intrinsic value or a lot of baked in intrinsic value right now. For call options, this would be strike prices that are at least $10 lower than where the stock is trading right now. For put options, that would be strike prices that are at least $10 higher than where the stock is trading right now. In either case, the idea here is that options that are far in the money have this deep intrinsic or high intrinsic value because they're so far in the money that if they were to be exercised right now, they do have value to exercise and get rid of the stock or buy the stock and dump it in the market.
Now, the call option strategy side of this is this idea that you are much better off to buy deep in the money call options than you are to outright, buy long stock in an underlying security. Now, on the general premise, I agree with the general analysis in most cases that it is much better for you to synthetically go long a stock using options than it is to go long the underlying stock itself. I feel like in most cases, stock can be insanely inefficient and can cost a lot of capital and can tie up a lot of capital in your account. And so, I want to use an example here today just to prove this point. Now, again, there's a lot of moving pieces here. There's no one way to do it. There's many contract months, there's how deep in the money do you go, how far out do you go in expiration, etcetera. I want to try to touch on as many of these as we can in the daily call and just to kind of again, get the discussion going and the dialogue going on this. But generally, I agree with the premise that you are much better off to synthetically go long a stock than you are to buy the actual underlying shares.
Let's take an example of Netflix. Netflix is a popular one. Right now, it’s trading around 340. And so, to buy stock in Netflix, if you were to buy 100 shares of Netflix, it will cost you $34,000. Now, for most people, that would tie up all of their account and then some. They probably don't even have enough money to do that. But if you have enough money to actually buy Netflix which is a big hurdle in and of itself, it would tie up $34,000 to buy 100 shares. And so, one of the ways that you can trade Netflix and go long Netflix synthetically using options is to potentially buy a deep in the money call option. Now, here's where you start to have some analysis and you have to do this. It's nothing that we've done before, so it’s up to you to determine how far out you want to go in expiration time. But you can buy deep in the money calls for 30 days out, 60, 90, 120 and in some cases, you can buy them very far out. With Netflix, we’re looking at the January 2019 contracts which are over 250 days out from expiration.
Let's say you’re really bullish on Netflix for whatever reason and you want to get a long position, long exposure and you're willing to hold that position for a long time. January 2019 contracts, so many, many, many months of holding these contracts. If you were to buy the 270 strike call options, again, which are more than $10 in the money, so they’re very deep in the money as it’s commonly referred to, the 270 strike call options when the stock is trading at around 340 would cost you $8,800. You could replicate a position in Netflix for about $8,800. Now, this is obviously significantly lower than the $34,000 it would cost to actually buy the stock. That's why options become so efficient because you can leverage option contracts and replicate a stock-like position without having to outlay all the money.
Now, here’s where you’ll also have to make decisions on how deep do you go in the money. In this case, you want to use Delta as your approximate for how many shares that option contract will replicate or will basically mimic. In this case, the 270 call options have a Delta of 80 and so, what that means is that that call option is going to replicate about the profit and loss of 80 contracts as the stock is moving. If Netflix goes up by $1, you should assume that you’re going to make about 80% of that move, really. You’re only going to participate in 80% of that move versus if you had say 100 shares, you’d participate in a $100 move. With a Delta of 80, if Netflix goes up by $1, you’re only going to get $80. You want to use Delta to be your approximate representation of how many shares that deep in the money contract is really trying to mimic.
Just to give you guys another opinion on this or another look at this, the 225 call options which are now even further in the money cost about $12,000, so still significantly lower than buying Netflix outright. But those call options now have a Delta of 90, so they’re going to replicate a 90 share type position in Netflix. It’s going to mimic Netflix like you will have 90 shares in your account or like you’re trading 90 shares of stock. As you can see, the further you go in the money, it costs more money, obviously. As you go in the money, it cost more money, but you also start to replicate more and more of the stock position. Ultimately, like I said, it’s up to you to decide how you want to do this if you're super bullish on Netflix and if you want to use this type of strategy.
For full disclosure, I don't use this ever. I do not ever go into a position where I'm super bullish on anything. I prefer to just trade options the way that we teach at Option Alpha and how we trade around the market in a 30 to 60-day time period. I think it's much more effective to do that. But again, if you have some underlying major bullish assumption and you don't want to buy the stock or you can’t afford to buy the stock, I think some sort of deep in the money call option strategy is a good alternative. I don’t think it’s the best strategy to use compared to other things, but if you're dead set on doing this, if you have it set in your mind that you want to go long a stock, then this is a good way to do it using options synthetically. It's much cheaper and offers a little bit more pinpoint accuracy as to how far you think it might go and how long you want to hold the contracts, etcetera. Hopefully this helps out. I know it’s a little bit longer than our usual daily calls. But as always, if you guys have any questions, let me know and until next time, happy trading.
May 06 2018
Rank #6: #550 - What Pre-Market Analysis Should You Be Doing?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What premarket analysis should you be doing?” This is often a question I get many, many times during the week. People are always wondering – “Kirk. What are you doing before the markets open? Do you have a ritual, a routine? What are you checking? What are you not checking? What type of premarket analysis and thought processes should we be going through?” And the reality is I don't do that much and that should come hopefully as a breath of fresh air because I think oftentimes, people can get down a rabbit hole of new stories and market-breaking coverage, all these things that [Unintelligible] talk about on TV. And so, I try to keep my morning routine very, very small, focused and minimal at best. Usually, what I do in the morning is simply track premarket futures. There’s an easy way to do that. You can do it through your brokerage account. You can do it through Bloomberg or Wall Street Journal, Market Watch. I mean, any of these major sites will show you where the futures are trading. And so, the futures contracts give us potentially a little bit of an indication of where at least stocks are going to open. It doesn’t mean that stocks are going to end the day there. But if the premarket futures are down, I know that potentially, there's going to be some selling, so I just mentally prepare for that. If the premarket futures are up, I know that there's going to be generally buying in the market at the open, so I mentally prepare for that. It's not necessarily where the futures are. It’s just – Are they generally in an acceptable regular range? Are they down half a percent or are they down 5%? If they’re down 5% in premarket trading, something major has happened and maybe something major overnight overseas that I missed and now, I’m waking up and I should figure out what's going on. Again, it's not to say that if they’re down, we should do anything different or if they’re up. It’s just really the extremes that we’re looking for.
The second thing I usually do is I just glance through headlines and I'm telling you right now, I never read any of the stories. I glance through headlines. Headlines can tell you everything you need to know about what's going on, on a surface level. “Did so and so do this? Google got fined.” Okay. I don't need to read the whole story. I just know that Google got fined. “Okay. That's interesting.” But what I'm looking for is just the major headlines that again, could move the market. If somebody starts a war with somebody else, that's a major headline. If the FED does something or somebody gets elected president, those are major headlines. Those are the things that I'm really looking for. I’m looking for market-moving dramatic events in both directions, good or bad. “Trump and China signed a tariff deal.” Major things that can move the market, that's what I'm looking for. And it’s not that these will then create a situation where I’m going to re-shift my portfolio. I just need to be prepared for a big move in advance. I don't want to come into the market with the market open and then see this big move and say, “Well, what happened? What was the cause of this?” Rather, know generally what the headline is that drove the market in either direction. And from there, I really then turn myself off from it. I usually check all these things in the morning when I get up. Have some coffee, go through Option Alpha emails, but after that, I disconnect from the markets in general. I don't watch any news, I don’t read any newspapers, I don't do any of that stuff and I simply just wait until the market opens, come in maybe 15, 20 minutes after that and start monitoring positions and going through my daily routine when the markets are open. As far as premarket analysis stuff, it’s actually pretty simple. I think if you're building out a systematic portfolio that’s based on odds and probabilities, then you realize that a lot of that market stuff is just to understand more so than to be reactionary. And so, I feel like a lot of people, they read a lot of these headlines and then they get reactionary and they immediately do something on the market open and then stocks reverse and a new, new story comes out and they end up digging themselves deeper into a hole. My thought process is I just want to understand generally what's going on and just be aware of big moves if big moves are coming, so that I can prepare myself appropriately. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.
Mar 26 2019
Rank #7: #340 - Why BROKERS Platforms Suck! (And What I'm Doing About It)
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I’m going to talk about why broker’s platforms suck and what we are going to do about it. This honestly has become to me, a really nagging thing and that is that I have to explain to people all the time why one broker or another broker can't do something. This happens with Thinkorswim, this happens with Tastyworks, with Trade Station, with Schwab, with Robinhood, everything and I feel like I have to always explain why their broker platform to some degree and in some areas, sucks what they do really well, but what they really suck at. And it's hard because a lot of these broker platforms are not built for the full-time options trader or for the person who’s focused on full-time options trading.
One of the things that we’ve been doing and we’ll be releasing very soon in the next month, month and a half here has been our own platform for auto-trading. Now, it’s not going to be just auto-trading. It’s going to have all of the capacity to scan, monitor and more importantly, auto-trade and analyze your positions moving forward. Now, we’ll have more details on this coming out, but that's literally what we’re trying to do, is we’re trying to build the platform that I know I want, that I know you guys want because I hear it all the time. I hear all the complaints about reporting. They don't know. Many platforms especially Thinkorswim right now, we don't understand if we’re really making money or not. If we are, what positions are making money and which are not? Are we doing good trading credit spreads or not? How do we know? And many of these broker platforms just kind of shrug this off and that really ticks me off now because they’re making a lot of money off of commissions and off of fees and everything and they just shrug off a lot of the stats that really could be important and could lead people to making smarter decisions and smarter trades and basically allocating their money with better information. We’re trying to build that. I think that's a big push for me lately. Now that we've got a really amazing team of developers and people leading this and helping me out with this, we’re really going to push the forefront here and build something that’s revolutionary, I mean, something that’s intuitive, easy to use and more importantly, super, super powerful, data-driven, I mean, all the things that we’ve been wanting in this industry for a long time.
I would say that the point of me doing this show is not only just to tell you guys what we’ve been working on, but I think that right now, where we’re at in this industry is that a lot of people have been settling for subpar technology and that has ticked me off for the last couple of years. And so, I've been investing a lot of my own personal money. A lot of the money that we generate from Option Alpha goes right back into investing in this type of technology for you guys, so that we have something that we can catch up to a lot of other markets and industries. The brokerage industry and the investment industry is very old-school. It takes a long time to move this ship in many respects. And you look at the Thinkorswim platform which hasn't had a major update since it was basically purchased by TD Ameritrade, I mean, think about it. It has not really had a major update to that platform since it was purchased from TD Ameritrade. That's crazy. And a lot of these platforms now are just recreations of the same thing. And so, we’re doing something completely different, way more intuitive, much easier to use and of course, naturally integrates all of our auto-trading and AI technology that we’ve already built out. It’s going to be amazing. I can't wait for you guys to see it because a lot of the other platforms out there suck right now and we’re hoping to change that big time. Hopefully this helps out. If you guys have any questions or want to learn more about it, obviously just stay tuned. We’ll be doing some more shows and some more podcast as we get much closer to the launch here. But it is coming. It's very much well worth the wait and hopefully you guys are really excited about it. Until next time, happy trading.
Aug 28 2018
Rank #8: #235 - Hidden Mutual Fund Fees Are Killing Your Portfolio Growth Curve
Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about hidden mutual fund fees that are killing your portfolio growth curve. I assume actually, most people who are listening to this podcast probably don't have mutual funds just yet. But if you are listening or if you’re new to Option Alpha and you do have mutual funds, hopefully this will help out because undoubtedly, at least a couple of times a week, probably at least like five times a week, I get an email from somebody wanting me to review their mutual fund positions or their portfolio which I don't do. I don't do that generally unless you’re a coaching client of mine. I just don't have time to review everyone's portfolio, nor do I want to. But I get people who are always saying to me, “What about this mutual fund and what about that expense ratio?” And so, I wanted to do at least a quick chat about it because I think there are things that people don't really consider when it comes to mutual funds that might help out.
First things first, I don't think that I'm actually totally shocked that people still invest in mutual funds because we know most mutual funds have higher expense ratios than say an ETF or an index fund. I think the average expense ratio is at least over 1% still for most mutual funds. At least that’s according to Morningstar right now. And that expense ratio can actually trim a lot of your nest egg. If you think about how money compounds and how just even a 1% difference, even though it doesn't sound like a lot, actually can really dramatically trim how much money you have after 30 years of investing. In many cases, it could trim hundreds of thousands of dollars and you don't even really realize it. But there's another kicker that's really not seen. Most people can see what the expense ratio is. That’s easy. But there are some things that are not seen or kind of subsurface fees that we don't even think about. One is the cost of owning a mutual fund and having money sit in cash. Actually, a lot of mutual funds have some sort of cash balance or they’ll probably always have cash because of redemptions and rollovers and what they invest in. And so, that cash balance actually sits in cash in the mutual fund, but you still pay an expense ratio because it applies to the whole fund. That's really again, trimming some of the fees. It's really bloating some of the fees that you see inside of your account. You don't really feel that necessarily, but you don't get paid for money sitting there. You get paid for money that's actually at risk in the market. In this case with many mutual funds, you’re actually paying money in an expense ratio for money that’s sitting there.
The big one for me though is transactions. Transactions are not something that's typically in an expense ratio. In fact, it takes a lot of work to go back through a mutual fund’s history and the prospectus and see how many transactions or how frequently they rebalance. But let's take one of those target date funds because that's always fun and interesting. People always look to invest in a target date fund. If you’re going to retire at 50, invest in this. If you’re going to retire at 60, invest in this and we’ll automatically allocate your portfolio as you get closer. Well, all of those transactions cost money. There was a study done by Edelyn Evans and Cadillac(?) which found that the average transaction cost for mutual fund, just the buy and sell of everything was on average, 1.44% per year. Now, that’s not included in the expense ratio. You have your regular expense ratio for just basically running the fund in the expense of getting into the mutual fund, then you have these transaction cost and depending on how frequently they “rebalance” your portfolio, then you have all of these expenses that basically start adding up. The more often they rebalance, the more expenses that you see and then on top of that, if you rebalance within the same year, now you start throwing in taxable gains, short-term capital gains versus long-term capital gains. It really becomes something that… It's no wonder why actually a lot of people are still financially unsecure and are not retired even at older ages now. Even at 50s and 60s and 70 years old, people are still working because some of these things are just not seen and not really felt in your account necessarily.
I think most mutual funds now really, if you add up all the expenses and the transaction cost and money sitting in cash which is unutilized, money at work right now, I think you could easily make a case to say that most mutual funds are probably in the 3% plus total cost, everything rolled in and that's insane. I think that's crazy. You’re already at such a disadvantage by just having that right there that it's really, really hard to make money because you have to make that much more money on top of just the total cost, plus inflation. It really, really becomes difficult. I actually am just shocked why people still invest in mutual funds. I don't know if this industry will last. I think it's basically dying, but it seems like it's taking a while to completely go away. Anyways, hopefully this helps out. If you thought this was helpful, please send it to somebody else that you think invest in mutual funds and would love to hear this. I think it’s just worth a conversation at least with yourself or your financial advisor or whoever else manages your money in your account to really take a hard look at these and see what you're paying and what it all adds up to. As always, hopefully this helps and until next time, happy trading.
May 15 2018
Rank #9: #191 - The Only Two Things You Can Control In The Stock Market
Hey everyone, Kirk here again and welcome back to the daily call. Today, we’re going to be talking about the only two things that you can control in the stock market. I will come out right away and tell you exactly what those two things are. The only two things you can control in the stock market is the underlying in which you trade or the security and the strategy or the technique in which you trade it. That's it. Now, this might come as actually a shock to some of you guys because many people still think that they can control the market. You either try to do it… I don’t know, like Jedi mind tricks or move the market with your mind. You stare at the screen so much until your eyes bleed because you want the stock to go up or down. But I have learned a long time ago that we have no control on price and direction. The only things that we can control are the underlyings in which we trade, the tickers in which we trade and the strategy in which we trade them. That’s it. Everything else is out of your control. The political environment, what this country does or what that company does or what Amazon versus Tesla does. None of that stuff you guys can control. Unless you're leading those companies, you have absolutely no control over where the market goes, where the economy goes, where the stocks go, where bonds go. We have no control over that. And the sooner that you realize and accept that, the better off you're going to be because you’re not going to worry about it and because you’re going to focus, re-shift your attention onto the things that you can control.
If you can control the underlying, great, what underlyings are you trading? Are you trading a diversified basket of tickers or are you focusing all of your attention on just one ticker which is a bad idea? And then on a strategy, what type of strategy are you using? Are you buying options which doesn't work? Are you selling options which does? Are you properly position sizing? Are you keeping your position small and increasing your frequency? Do the things that you can control and don't worry about everything else you can’t control because not having control for direction or the economy or bonds does not matter when it comes to options trading. It doesn't matter because we frequently will reset strategies every 30 days. If the market starts to go down or if the market starts to go up, we’re constantly resetting strategies and improving frequency. That's why direction is meaningless when you trade options and you do an option selling strategy the way that we do. Direction becomes meaningless. It doesn’t mean that direction can’t hurt your position. Of course if you have a huge down or a huge up move and it’s unexpected, of course, you’re going to have a little bit of a setback, but it’s not going to change the outcome of the strategy, it’s not going to derail you from being successful trading. Control the things you can control. Don't worry about everything else. Hopefully this helps out as always. Until next time, happy trading!
Apr 01 2018
Rank #10: #342 - Does Unsystematic Risk Matter Anymore?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “Does unsystematic risk matter anymore?” First, let's read a description of unsystematic risk. Unsystematic risk is a unique specific risk to a company or industry. That’s also known as nonsystematic risk or specific, diversifiable or residual risk in the context of an investment portfolio. Unsystematic risk can be reduced through diversification. The idea around this is that if you have two different companies, say McDonald's and Apple, you can pretty much diversify most of the risk away from owning those companies by investing in other companies that are non-correlated to Apple and McDonald's, maybe a utility company, maybe an oil and gas company, a financial services company. There’s a lot of ways that you can diversify around it. The question that everyone is asking though is, “With the advent of indexes and a lot of these ETFs, should it matter what unsystematic risk is still present in the market?”
I think the answer to this question is of course, we should because even though we can diversify away from most of the unsystematic risk in the market through a portfolio or a basket of ticker symbols whether you’re trading stocks or options, it’s still really important to position size accordingly because of the recent big moves that we've seen in even some of the bigger ETFs that cover entire countries and their markets. Recently, we saw EWZ, RSX, EWY… A lot of these ETFs have made major overnight moves, in some cases, 15%, 20% down which represents an entire market or an entire industry moving down and having a massive systematic risk impact on the rest of the portfolio or in many cases, the global economy. I think that unsystematic risk is being put to the back table because many people think it's easily diversified out of with a lot of these ETFs and investment indexes, but the underlying truth is that most of these ETFs and indexes are still made up of real companies. And so, if that basket of ticker symbols or companies that the ETF is tracking or investing in is still made up of something that carries a lot of unsystematic risk, then that's not necessarily a good thing.
I think it’s something that we have to keep an eye out always with what we do here at Option Alpha as far as options trading. I always like to keep a diversified basket of tickers. In fact, just the other night as I was going through the weekly strategy call with elite members, we talked about adding some tickers to our portfolio that had lower implied volatility than other things that we had on our watch list, but the reality is that adding those tickers would add a little bit more diversity to our portfolio. And so, we weren’t going to keep cramming in a bunch of high IV tickers into our positions if we already had five or six different positions already and similar or related ETFs. Instead, we’re going to try to diversify things out. Even though it might mean trading something with a slightly lower implied volatility rating, I think the diversification benefit of doing that is far greater than trying to pigeonhole ourselves into one industry. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.
Aug 30 2018
Rank #11: #480 - Trading Big Stock Moves With Options (The Right Way)
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about trading big stock moves with options the right way. This really comes down to what we've seen just in the last couple of months. It could be individual ticker symbols like SLV or GDX or TLT. They’ve had really big moves in the last couple of months.
And what people tend to default to do when they expect a big move in a stock is they tend to want to buy options and they think that buying options leads to potentially the biggest payout because they have limited risk and all this upside potential. What they fail to remember is that in all cases long-term, the buying power that options provides prices in the expected move that should happen in the stock. And so, what we see is that when stocks are about to make a big move or have already made a big move, all of that stuff is priced in and long-term, stocks underperform their expectation. Now, this doesn't mean that you couldn’t find yourself in a situation where you buy an option and you make money because the stock moves more than expected. That happens all the time. But the long-term whole outcome of option buying is already pricing in the expected move. It’s already pricing in the expectation that the stock is either going to make a big move or has had a big move and it usually never moves more than the expected outcome long-term.
The right way to trade big moves with options is to trade them by selling options around those big moves. Typically, we see this around earnings trades. We saw this just last year in 2018 when we actually sold a ton of naked options in UNG after a massive move in natural gas. We posted all those videos. They’re all public and live on YouTube, so you can see all of our positions that we got into, but this was counterintuitive. Most people would’ve thought, “Why are you selling options? UNG just had this huge move. It's potentially going to make an even bigger move.” But we knew that option pricing was way too expensive, had priced in a massive move that we expected not to happen long-term and we ended up trading around that situation and making some pretty good money. And so, that's the right way to trade some of these big moves, is not actually to buy strategies, but to use option selling strategies. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.
Jan 15 2019
Rank #12: #664 - Simple AAPL Call Option Example
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to actually look at another simple Apple call option example. We actually did this a couple of podcast back. I thought it was good, we could look at another one again here today and look at call options in Apple. Apple is a really popular stock. Everyone loves call options. We’ll look at it in two different cases. We’ll look at a simple selling of a call option and then we’ll look at option buying examples. And again, the idea behind doing this is just so you get at least some frame of reference for how this might work in the real world. We talk a lot in theory here about how option pricing works and how option contracts work, but sometimes it’s really important just to kind of get a real world example of what’s going on and what we could potentially do with an option contract. Remember that options are meant to be there to let you choose how you want your risk payoff diagram to ultimately look like. Option contracts and the entire option pricing chain is there and open at your discretion to choose how much risk you’re willing to take, how much or how high of a probability of success you want and how much premium you want to collect or how much you want to pay out in order to exchange that risk in the market. It’s really cool. As we go through this, you’ll kind of see how that works out with different strike prices and different option premiums.
Right now that I’m doing this, Apple is still trading let’s call it around $200 because it makes it pretty simple. It’s actually trading a little bit lower than that, but let’s call it around $200 that Apple is currently trading at today. With Apple trading at $200, again, if we’re looking at call options and we’ll first look at option buying, so if we were just super, super bullish on Apple, we loved everything about Apple and we thought it was going to go up to the moon and we want to buy some call options, let’s say we buy options that are about 40 days out from expiration and we want to buy something that is cheap because that’s what people usually like to do with option buying. They like to buy something cheap, but they don’t want to buy something like a lottery ticket. Something really, really far out that’s only a couple of dollars, well, they realize that it’s probably not going to hit that strike price, so it’s probably like wasting money on a lottery ticket. Maybe we go out and we buy something around $220. Seems realistic, seems potentially… I’m just like obviously being very subjective here, but this is what people do. They say, “Oh, $220. That probably seems about realistic. Apple could go up another $20 easily in the next month and a half because it’s a $200 stock and it’s a good company and I like all the products, so of course, Apple could go up $200 in the next two months.”
If we buy the 220 call options, those are around a 15 Delta. It’s actually about a 12.5 Delta, but let’s call it about a 15 Delta. You have about a 15% chance on the better end of actually making money on this option contract, but that’s only to get the stock to that strike price of 220. You still had to pay money to get into this contract and in this case right now, that option contract is trading for about $.95. $95 would allow you to get into this contract which again, this is really in all honesty, this is where people I think a lot fail with initial options trading, is they see that it’s $95 and they don’t think that’s a lot of money, like they think, “Oh, it’s a drop in the bucket. It’s about $100, good trade. Apple could go up. I could make so much money.” And that’s like this quickest sand trap basically for new traders. But they see that it’s $95 in this case, so our blended breakeven is right about 221, so really, Apple has to get not only to 220 which there’s about a 15% chance that that happens, but it’s got to get to 221 before we start breaking even. Maybe 12%, 13% chance that it actually gets to 221, somewhere in that range by the time of expiration. Now, the tradeoff here is you don’t risk a lot of money. If Apple never gets up there, you didn’t risk anything more than say $100 with commissions potentially to get into this. It wasn’t a lot of money out of your pocket, but you have an insanely low probability of success, right? You have an extremely low probability of success. It’s more likely than not long-term that this thing is going to bankrupt you slowly with a thousand cuts, right? Like this is a death by a thousand cuts for option buyers. Yeah, you might hit one or two here and there, but over time, it’s just going to erode the value of your account.
Let’s say you want to do something different on the option buying side. You want to go a little bit further out because you just want a really crazy lottery ticket and so, you go out to the 235s. You think to yourself, “Okay, look. At this point, I just want something insanely cheap because I’m willing to risk and gamble some money.” And some people are, right? I’m not that person, but some people are gamblers and they just don’t call themselves gamblers as traders, but they are. And so, they go out to the 235s. Now, the 235s are only $20, so $20, pretty much anyone can spend $20 and not blink an eye at it. But this is what I talk about all the time about watching kind of your dollars and watching your cents, so that they grow and start to mature, kind of babysitting these $20 bills and $100 bills. If you just blow this $20 bill on this, sure, it might work out here and there, but long-term, it’s a negative expected return as an option buyer. If they go out to the 235s, they spend $20, this has a Delta of .02 which means that there’s a 98% chance that you lose your entire $20. You could pretty much attribute this to mostly a lottery ticket. Now, if you want to do this, do it. That’s fine. Just call a spade a spade. You know you’re gambling. You know this is a huge potential risk and it’s not likely to make money.
This is two different ways that you could trade those call options if you were on the long side. Now, obviously if you’re on the short side, the same thing would work just in reverse. In the case of selling the 220 options, if you sell the 220 options as a call option writer, then you collect a nice $100 paycheck, but you have risk in case the stock does go above 220 which there’s a 15% chance that that happens. You don’t have a 100% chance of success, but you’re compensated for the fact that you have a pretty good probability of success and you’re going to get some money in case you’re right. If you went out even further as a call option seller, yeah, you can probably pick up some really cheap and easy money, but in that case, you better have a lot of cash still left in the bank because what if that 2% scenario happened where Apple just exploded higher and you lost way more than the $20 you’re collecting in premium? I think you have to understand that it’s all relative. Risk and pricing and reward here is all relative and it’s pretty fairly distributed. It’s almost perfectly priced for what the expectation is for the market. Now, the expectation of reality might not match up once we get to options expiration, but right now, the market is pricing in pretty fair in expected growth for each of these different contracts respectively.
The end result is what do you do? You can choose to do whatever you want. There’s no saying that you have to do one versus the other. You got to be an option seller versus buyer. We put out all the research that we do here on Option Alpha. We talk about where the edge is. You can look up other resources, but in our opinion, it’s obviously more profitable and the research shows and the data shows it’s more profitable to be an option seller, but you can ultimately choose to do what you want to do. Today, I just want to walk through an example, so you have some more realistic numbers to kind of work with than basically just some theory and charts of just general option pricing. Hopefully this helped out. As always, if you have any questions, let us know and until next time, happy trading.
Jul 17 2019
Rank #13: #174 - How Do Corporate Earnings & Dividends Impact Options Trading Decisions?
Hey everyone, Kirk here at Option Alpha and welcome back to the daily call. Today, we are going to answer a question from one of our members which is basically, “How do corporate earnings and dividends impact our options trading decisions?” The real question here was that somebody sent in… Again, thanks for submitting questions because it helps out on this podcast in topics and things that we cover. But the question that was submitted was, “Can you talk more about how these corporate actions like corporate earnings and dividends affect trading decisions? For instance, if you’re trading in a security that has a dividend being announced before a contract expiration or is going through an earnings event, do you wait until after that announcement or that dividend to pull the trigger?” I think this is a really good topic. It’s one that we've covered before, but it's worth covering again. When we start looking at trades, we do look into the future for any trades that we’re doing in individual stocks and we want to have a frame of reference for where dividends and earnings come up. Now, in most brokerage platforms, you can actually see into the future a little bit by just adjusting your chart settings and actually showing dividends and corporate earnings. On the Option Alpha website, what we have with our watch list and our software is we have little tags that show you if earnings or dividends are coming up in the future, so that helps out with the watch list. But you just want to be aware that those things are in the future because they could impact your trading decision.
For example: I think earnings are probably the biggest one that impacts our trading decision to either get into a trade or not. We generally know that heading into earnings, though it doesn't happen all the time. But generally, heading into earnings, we start to see implied volatility start to slowly tick up. The stock might be a little bit more volatile than usual because it's coming into this earnings event. It could have great earnings. It could have bad earnings. There could be something missing in there, great revenue, bad revenue, the whole deal. And so, the stock is likely to make a big move after earnings, so we start to see implied volatility start to tick up as we head into that event. How that would impact us was that we would not then start trading a short premium trade heading into that earnings event because if we’re going to start selling options, we want implied volatility to either stay low or go lower and that's the total opposite of what would typically happen in that environment. We would rather just wait for the actual earnings announcement itself and trade that one time IV crush that happens or IV collapse that happens around earnings versus trying to get it right heading into the earnings event and taking a lot of risk in the meantime. That's really how it impacts us for trades. That's why you typically see if you’re a pro or elite member that we do a lot of trading and a lot of auto-trading on some of the ETFs and some of the larger indexes because they don't have that corporate action coming up every 30 or 60 or 90 days, depending on what industry you're in.
The other thing that we look at is dividends. Dividends for us are not a huge decision-maker. We recognize that dividends are on the horizon for something. That doesn't mean that we won't do the right strategy at that time because by the time we get to the dividend announcement, it does not mean necessarily that we’ll always be assigned by the dividend or we’ll have any assignment risk. If we get to that dividend event and we are in a position where we could be assigned, then we can adjust or close or roll the position. I've never really found it to be this detrimental thing to trading. Again, I'm aware of the dividends, I know when they're coming up. They’re scheduled out and I can see them in the future and as they come closer, we get announcements for them and updates for them, but it doesn't really impact my trading decision because the trade I make today if dividends are 45 days out, I might be out of in 30 days, so it might have no impact at all. I think for me, it's more of the corporate earnings that impact things versus dividends. But hopefully this helps out. As always, if you guys have any questions or want to hear different topics, please submit a question like this person did. You can submit it on email or at optionalpha.com/ask and leave me a private voicemail. You can also just send us a tweet or a message on Facebook, Twitter, YouTube, Instagram, any of the social networks out there. We’ll definitely respond to it and get it queued up for the daily call. Until next time, happy trading!
Mar 15 2018
Rank #14: #295 - Short Selling Basics: How Can You Sell Stock That You Don't Even Own?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question that has to do with short selling basics and how you can sell stock that you don't even own. When people start trading options and start trading stocks, they undoubtedly run across the concept of going short or short selling. And so, it’s really confusing at first because the idea is, “Well, how do I sell something that I don't even own?” And that’d be like selling a car without even having a car. How do you do this? Well, the concept is actually really easy and I'll try to explain it very simply for you guys here today on the show because I want you to understand just the basics of it. We’re not going to get into the nitty-gritty and the actual behind the scenes of who's doing what, but just the basic concept of how short selling works is actually really easy.
If you think about option buying or stock buying just to use the other side of it here real quickly, you would buy shares in the open market and then to complete your trade, to close the trading loop, you have to sell those shares at some point. If you buy shares and then you outlay money, you have to then sell those shares in the open market to get back the money that you had invested or money you invested with profits. There's no other way to do it. To complete the entire trading loop and close the position, you’ve got to sell what you bought originally. Well, in short selling, it works in the total inverse. When you sell something short, you’re basically borrowing shares from the broker or the market and selling them in the open market to somebody else. The idea is that when you sell those shares, you’re hoping that they go down in value, so that when you close the trading loop and you buy back those shares, you buy them back for a lower price than what you sold them to somebody else. It's the same concept. It’s just taken from the other side. Now, the difficulty in selling stock short is just having the availability of shares to borrow from the brokerage or from the company to be able to sell short stock because you have to borrow shares and sell them to somebody else, hopefully closing the trading loop by buying back the actual stock at a later date for a cheaper price. This is a way that you can actually speculate or hedge against a potential stock going down. That's what some people do a lot. In fact, you hear a lot of these terms called short squeezes and short interest on the stock and we’ll talk about all of those in future shows. But just this idea is actually very easy, is that you don't own the stock, you’re kind of borrowing it and you do have to complete the trading loop. You have to at some point, buy back the stock, hopefully at a lower price, but it could potentially be at a higher price.
Here's a really good analogy that I've used before in coaching and some of our trading which I think might help even drive home this point even more and that's the idea of a homebuilder. See, a homebuilder is actually somebody who is selling the home short. That's really what they’re doing. They’re a short seller of housing. When a homebuilder comes up to you and you contract with them to build a home for say $100,000, well, that homebuilder has now sold you something that they don't even own yet or they don't even have to give you. You’ve written an agreement and you say, “You know what, Mr. Homebuilder? I will pay you $100,000 to build my home.” Well, the homebuilder hasn't done anything. They haven’t built a home. They haven't laid the foundation or built the walls yet. They’re selling short. They’re borrowing, basically future time in your agreement in money hoping that they can actually build the home for less than $100,000 because then, that’s how they make their money. They are contracted to only get $100,000. If it cost them $110,000, he's got to go hire his own people, he's got to spend time and gas and buy wood and roofing and everything. If it cost him $110,000, well, he loses $10,000 on that. Now, that doesn’t make him a bad guy for being a short seller of homes. It’s just a really kind of life example of how this works in the regular market. This happens all the time all over the place. It's not that short selling happens just in the stock or the options market. Again, a homebuilder is a short seller of housing. They’re selling you a house for $100,000 and if he can build it for $90,000 and you’re happy with it, then he makes his $10,000 profit. He's hoping he can build it for less than the cost that he sold it to you for.
Hopefully it helps out. As always, if you guys have questions even as simple as the ones that we got here today from one of our members in an email, please let me know. Shoot me an email, send us a tweet. Post it on Facebook, whatever you have to do to get your question in here to the daily call. Until next time, happy trading.
Jul 14 2018
Rank #15: #183 - Buying Stocks For Free Via Robinhood.com - Easy Or Hard?
Hey everyone, Kirk here again at optionalpha.com. Welcome back to the daily call. Today, we're going to answer a user question that was basically submitted which is “Are buying stocks for free via Robinhood easy or hard?” I do have a Robinhood account. I’m very familiar with the platform. We actually interviewed their cofounder, Baiju just a couple of weeks ago depending on when you’re listening to this podcast. You can listen to that over on our weekly show where we talked about the history of Robinhood and where they're going with their new free options trading that they’re going to be releasing. I still have not gotten the free options trading on my end, so I'm signed up on the wait list because I want to see what it looks like and how it functions. I still have not got any up, but maybe I will here in the future.
But I think that buying stocks on Robinhood for free is actually very, very easy. I think they've nailed the stock side of what they do. It's incredibly easy, incredibly intuitive. There's not too much open for interpretation on how you would buy securities. And for most I guess regular investors who just want to buy a couple of stocks or hold some stocks, I think it’s totally an option to do because of the commission cost. You can basically have no commission cost in it. You maybe lose a little bit to margin and slippage I think which is really not talked about that often because you can't set a price. Basically, everything is market orders for what they do. I can’t go in and say, “Okay. I just want to buy Apple stock at 92.” I might buy it at 92.15. If I buy it at 92.15 or whatever price is now times 100 shares, that could be the difference in commissions right there. I don't think that that's talked about a lot, but as far as like true commissions, no, they don't charge it. There's probably a lot of slippage in there because of market orders that people just don't expect. You can probably shave some pennies off of the prices all the time by just being a little bit patient and placing limit orders versus market orders. But it is what it is. The platform is not meant to be a huge advanced trading platform. I think the charting is very basic. It’s all line graphs. You can’t really decipher anything from it.
I will say that the one dispute I have with their platform (and I brought this up many times to their developers) is that most of the data in there is actually not accurate at the time that the markets opened. We oftentimes see dividend stocks… I check a lot of REITs in there that my wife owns in her account. I checked those in there and the dividend information is not correct and sometimes very, very far off. That means that PEs are wrong, it means that sometimes I see the highs and lows being wrong or the volume being wrong or delayed. There are some things in there that when you dig through it, I think maybe it's not the best platform for the sake of analysis or looking into a security and determining a position, but as far as actually buying the stock or selling securities and getting into it, they have made that very, very intuitive and easy.
I look forward to seeing what they can do with options trading. I've done a couple of reviews on that after our podcast and interview with Baiju that you can go back and take a look at. We’ll talk about it more here in the future as we get access to Robinhood’s free options trading. I think it’s going to be very, very simple and very straightforward which I do think is not necessarily that good for regular investors. I worry that they’re going to be releasing options trading out to the marketplace without any of the education and opening people up to do options trading and I think initially, it’s just long calls, long puts, covered calls, etcetera which ultimately, we know from our research is not the best way to generate money. I hope that they release advanced strategies very soon because that is going to be one of the keys for people to control their risk and actually generate some money, is some of these spread strategies which I don't believe they’re releasing at the moment. We’ll see where it goes in the future. But as always, if you guys have any questions or comments, let me know. If you thought this was helpful, if you thought any of our daily podcast are helpful, again, please let us know on Facebook, Twitter, Instagram, YouTube, wherever you follow us at and give us a rating and a review. Until next time, happy trading!
Mar 24 2018
Rank #16: #190 - When Trading Options Patience Pays 5X More Overtime
Hey everyone, Kirk here again and welcome back to the daily call from Option Alpha. Today, we are going to be talking about why when you trade options, patience pays five times more over time. Now, I think the easy and simple way to describe this is to use the analogy of reaping what you sow. Basically, the concept here is when you plant or when you’re a farmer and you start to plant seeds or crops, it takes a long time for those crops to mature. You have to patiently wait for them. You plant, you water, you’re watering, you’re watering, you’re waiting, you're waiting and then boom! It’s like overnight, they pop. And then after they pop, then they just go bananas. We see this in our area where we live. There's a lot of cornfields. It’s truly like I didn't think I'd ever live in an area like this because I grew up in Northern Virginia and DC and lived in New York, so that was totally different to me. But now, there's a lot of cornfields and man, when you see the corn pop out of the ground, it literally feels like the next day, it's like four feet tall. It goes bananas once it actually starts to mature and hit and gain some traction.
I think this concept is very, very similar in options trading. Options traders I think… Let’s say the default options trader who is new to trading thinks that when they place a trade, immediately like snap of a fingers that it’s going to be profitable two days or three days later. That's why people actually are very, very attracted to weekly options in most case because they feel like they could get quick profits. They want quick money. They want to get rich overnight. The reality is that patience in options trading pays way more to just wait for profits to come to you. Our whole framework is built upon selling options and then sitting back generally and waiting for time decay and IV’s over-expectation to play out, to basically mature over time. We know that option pricing and most pricing is generally fair and efficient at the time of trade entry. At the time of trade entry, there's no real edge that can be gained in the market, there's no arbitrage opportunity that you can gain. Where the opportunity comes is by sitting back and waiting for pricing to mature.
I talk about pricing maturing all the time because that's what happens. Volatility is not as high as people expected on trade entry, you also have time decay, the market doesn’t move as far as people expected. All of this stuff works out in favor of the option seller long-term, so that's why we just have to be patient. You just have to sit back a little bit more and wait for the corn to grow. That's really how I think about it. Hopefully that helps out. Again, just be more patient. Try to be more patient with your strategies. Realize that it's not an overnight get rich quick type of thing. It’s a long-term wealth building process and that takes time. That's why it's called a long-term wealth building process because it takes time. Sit back and wait for the corn to grow. Until next time, happy trading!
Mar 31 2018
Rank #17: #718 - What Is A Low Put Call Ratio?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What is a low put to call ratio?” A put to call ratio basically tells you exactly what it sounds like it’s going to tell you. It tells you how much put volume there is relative to how much call option volume there is. And so, when you generally see a low put to call ratio, that means that there are fewer put options being purchased for every call option that’s purchased. Now, this is generally a gauge that market sentiment is seemed to be relatively bullish. People are almost excessively bullish in some cases because they’re not buying enough protection or they don’t feel like there’s a need to go out and buy put protection, so therefore, they decide that they don’t want to do it and they buy more call options and they have lower put option volume relative to call options.
The inverse would be true when you see a put to call ratio that is really, really high. That means that people are potentially becoming excessively bearish or basically that we’re reaching an extreme and bearish sentiment. People are buying put options at an increasing or ever-increasing rate relative to call options. They believe that the market’s going to go down, so they buy more put options, they forego buying call options and this causes the ratio to go higher. Again, the low put to call ratio basically means that people are potentially in a mode where they could be a little bit too optimistic or too bullish on the sentiment of the market. The actual ratio itself and kind of the rank of ratios or the moving average of the ratio could vary depending on the security, what’s normal and what’s not, so you just have to look at a relative range. One stock might trade on average, a 1.2 put to call ratio. Another stock on average might trade a 1.6 put to call ratio. I would look at relative ranges to judge what really is low or not. It’s not just one figure. It’s probably just a relative range for that particular security.
As always, hopefully this helps out. If you guys have any other questions, please let us know and as always, never forget, your life should have options because options give you freedom. Until next time, happy trading.
Sep 09 2019
Rank #18: #317 - The "9 To 5" Collective Social Agreement Is Completely Ridiculous
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I’m going to go on a little bit of a rant and tell you why I think this 9:00 to 5:00 collective social agreement is completely ridiculous. What am I talking about? I’m talking about this idea that everyone in the entire world, all the people in the world somehow should get their work done between 9:00 and 5:00 and that seems to be the collective social agreement that work starts at 9:00 and it ends at 5:00. And while I understand the need to separate church and state, meaning the need to separate work from family and life, there's no possible way that everybody in the entire world gets all of their work done in the exact same time block every day, week after week, year after year. It's not possible. I do not believe that this is going to be how many companies are run in the future and I think we’re already starting to see that this transition is starting to pick up a lot of steam and the transition is really away from this 9:00 to 5:00 working schedule to just basically getting stuff done however long it takes to get done.
So, of all the people that work now at Option Alpha and we have 12 people who work at Option Alpha now, contractors, developers, people who help out with support now, back-testing team. We have 12 people on the staff right now, basically and of all the people that now work at Option Alpha, nobody is on a regimented 9:00 to 5:00 schedule. In fact, it's one of the things that I really talk about and preach as I'm getting people onboard and showing them the systems and tools that we use to kind of run Option Alpha and help you guys and I tell everyone, “Look. This is not a typical 9:00 to 5:00 job.” And that could be good for some people or maybe who’s not used to for other people, but all I really care about is making sure that what we need to get done in a given day gets done. If it gets done in three hours, great. If it gets done in five hours, great. If maybe one or two days, you need to work longer into the evening and take the afternoon off to recharge, great, that's fine.
It is not possible for us to totally focus immediately every single day on the most important work just between 9:00 and 5:00 and in fact, me, myself, like I wake up many days very early. As you guys know, my routine is to wake up very early, do all of my emails and all of my most important stuff early in the morning and then for the later part of the morning, I spend with my wife and kids. We go to the gym, we go to the pool or hang out and then I come back in the afternoon and kind of finish up tidying up things that I need to do in the afternoon. For me, that works out really well and I can't just say to all the people that we have here working on our team, “You have to do the same thing as me.” or “You have to be here at 9:00 to 5:00.” I really don't care. I think that in many respects, as long as work is getting done, if it can be done in 20 minutes or an hour and they can take the rest of the day off, fine, I'm good with that and I think that that mentality is a lot more attractive to people and leads to I think more productivity because what you end up finding is that the people who are most productive, most efficient and most eager to grow and learn and develop rise to the top naturally. It's kind of this self-selection process that you put everybody through.
I think it’s just fascinating because where I live in Pennsylvania now with my wife, this area as a whole is really still stuck on this 9:00 to 5:00 I would guess like workers assembly line mode. In fact, many places here because of unions and contracts around working prohibit people from leaving the building one minute before 5:00 o'clock. I mean, they literally have to just sit there locked in a cage, in my opinion until 5:00 o'clock and then they are allowed to leave because God forbid, they would leave one minute before, they could get written up, they could have their contract canceled with the employer. I mean, it's really just a bad… It just feels like it's such a David and Goliath type of situation all the time and that's not what it should be. It should be everyone collectively working together, people choosing to be at that job or not be at that job and employers understanding that it doesn't require just 9:00 to 5:00 to get things done. Sometimes it may require less, sometimes it may require more, but ultimately, I think this whole social agreement on 9:00 to 5:00 is ridiculous and I think it's totally outdated. Feel free to send this to any of your employers or bosses if you want to and I would be happy to argue on your behalf as to why people are actually more productive if you don't give them strict boundaries. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.
Aug 05 2018
Rank #19: #393 - The Basic Business Model Behind Options Trading As A Professional
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the basic business model behind options trading as a professional. Here's the thing. Every business has a definable profit or edge that they are going after and all it comes down to is effectively spread. You can think about every single business, every single possible business out there and what they’re all going after is some conceivable spread between cost and revenue, so somewhere where they can make money as a profit. In case of trading, specifically as options traders and option sellers, what we are going after, our primary advantage is implied volatility and the edge that is derived between the expectation and the actual volatility of underlying prices. We have no discernible edge in market direction, so that’s something that people oftentimes don't understand, is that we’re not trying to go after a directional edge in the market, we’re trying to go after an implied volatility edge in option pricing. Now, fundamental stock investors are trying to go after an edge that is different between market price and the fundamental value of the company. It's no different. They’re just going after it potentially a different way and they're not necessarily going after it all in a directional fashion of like only the stock could go up. Sometimes they might sell stock that is overpriced compared to its fundamental value which could be much lower. That's where most trading happens, is within this edge.
Now, I just want to give you some other examples, so that you understand that it's all the same thing. It's all just trying to go after the spread or this edge in many businesses. Now, a service-based business like a painter or homebuilder is trying to go after an edge between the cost of labor and tools and supplies and how much somebody would pay to have their house built or their house painted. It's all the same thing. They’re just trying to go after that spread. In e-commerce, if you're selling towels or chairs or jeans or something online, you’re trying to capture a spread between how much you have to manufacture or buy or build a product and how much you can sell it for in the market. In restaurants, the food and the service and the experience allows you to charge a premium or a spread above and beyond the actual cost or raw ingredients of the food and the actual entertainment or whatever is associated with the restaurant, like the napkins and the silverware. Restaurants are just trying to charge a premium compared to what it actually cost to prepare the meal. In insurance, we see the same thing with policy pricing. Insurance companies will price an insurance policy at a likelihood that you're going to get in a car accident or your house is going to burn down and you’re going to die sooner than it might actually end up happening. That edge in pricing comes from the expectation that you have an event happen sooner than what they know might actually happen in the long run. Casinos do the same thing where they have an odds edge in the game. They have some sort of mechanism in all of the games that gives the casino a slight edge in pricing or a slight edge in the win rate or the payout, something that allows them to create a spread between you and them and allows them to generate a profit long-term.
Now, what you can see in all of these things if you really look at all of these disciplines, every type of business out there, is that no business is based on one transaction, no business is based on one particular person making a transaction and then causing a huge profit. It's all based on repetition, selling a lot of homes, selling a lot of chairs or towels if you're in e-commerce, feeding a lot of people if you’re in the restaurant business, writing a lot of insurance policies if you’re in insurance, getting a lot of people to play games if you're in the casino business. It's all based on probabilities and numbers, the expected outcome of what you're trying to go after. And so, please don't think that options trading is any different. It's the same basic business fundamentals and the same basic business model applied to just a different area and all we’re trying to do is go after again, the implied volatility spread and the option pricing differential. Hopefully this helps out in kind of understanding it. Maybe you might even try to explain it to somebody else, maybe a colleague or a family member. It always is a good idea to try to explain some of these topics to them and hopefully reinforce the learning in your own mind. As always, if you guys have any questions, let me know and until next time, happy trading.
Oct 20 2018
Rank #20: #498 - Here's A Better Alternative To Swing Trading Stocks
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to give you a better alternative to swing trading stocks. We often get people who come to Option Alpha who are recovering swing traders. And I say recovering because they tried swing trading or day trading before and ultimately determined that it didn't work for them or that they basically just didn't generate enough money doing it. And so, the alternative to truly swing trading a stock where you are physically buying the stock and selling the stock using technical or swing trading indicators is to just use options whenever you get into a swing trade instead of the underlying stock. Now, we know that stock is incredibly inefficient on the outside already, but when you actually use stock for the purposes of swing trading, it can be really hard to make money because you basically buy the stock at a certain point and anything above that level, you make money, anything below that level, you lose money. It's really hard to do that line in the sand type trading.
What I suggest to people is if you are going to swing trades that you use options instead and you give yourself a margin of error by selling options outside of where the stock is trading, but in the direction that you want to see the stock go. For example, if a stock is moving lower and gives you a technical buy or swing trading buy signal, instead of buying the actual stock, why not sell a put credit spread below where the stock is trading and give yourself a margin of error should the stock actually fail or should the indicator that you’re using fail and the stock continue to move lower. Let’s say a stock is trading at $100 and gives us a technical buy signal. Instead of buying the stock at $100 hoping it goes above $100 by any penny to make money, why not sell the 90, 85 credit put spread? And so, now, you give yourself an opportunity should the stock actually fall between $100 and $90, so your indicator or your signal was wrong by $10, but you still have an opportunity to make money because you're using out of the money option selling spreads as a means to give yourself a bigger margin of error. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.
Feb 02 2019