The "Daily Call" From Option Alpha

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#700 - Your Life Should Have Options Aug 22, 2019

Show notes

Hey everyone. It's Kirk here again from Option Alpha and I wanted to jump on… And this is going to be a long Facebook Live today because what I think I'm going to be sharing right now is actually… It's a little bit scary to actually share some of this stuff and kind of tell you my thought process. And I do have a bunch of notes on here, so I'm going to show you I have so many notes that I'm going to go through, so if I don't look directly at you, it's because I'm reading from this stuff and I'm trying to figure out my thought processes and what I want to get across. But there's a lot that I want to share on this and this is going to be the show for the daily podcast which is really where the seeds of this whole journey started. When I started the daily podcast almost 700 episodes ago now, one of the things that I wanted to do is I wanted to offer a little bit more than just options trading. I wanted to kind of let you guys behind-the-scenes a little bit, talk a little bit about psychology and mentality and emotional stability. And so, that was one of the things on the daily podcast that we wanted to do and actually, in Show 12 when we talked about confidence versus arrogance, is when this whole thing started to come up. And so, to me, it's only fitting that this conversation kind of dovetails and now starts to pivot from that podcast and stays basically on the daily call podcast. Even though I'm doing this live in Facebook Live, it's going to be part of the daily call podcast. It will definitely be the longest daily call podcast I've ever done because most of them are usually anywhere between three or four minutes and so, who knows how long this one's going to be. The point of doing today's kind of discussion here is really, it's a turning point for me because one, my daughter started kindergarten today and it was a tough morning and still is pretty tough. I mean, her birth back in 2013 was very much a catalyst for where I am now and who the person I am now is. And when my wife and I got pregnant for Molly, our first daughter, we knew we wanted kids, but she was a total surprise. We did not expect to have kids. We were on a five-year plan and then three years into the five-year plan, we had found out that we were pregnant. But she was very much a catalyst that propelled me to this point. I mean, when I knew she was coming, I had to make a lot of decisions about who I wanted to be and what kind of man I wanted to be, what kind of father I wanted to be and ultimately, that led me down the path of deciding if I wanted to really do something with Option Alpha. And so, if you go back even five or six years now, Option Alpha really wasn't much before then. It was very the blog state that it was and I had to make this decision, this quantum leap of faith to do something much bigger with Option Alpha and to really push kind of the envelope on what we were doing. And so, now that she's off to school, I feel like it's the perfect catalyst for me and I feel very much the same emotional state like I was then that I feel like there's something just really kind of pulling at me to do something a little bit different, kind of get outside of my comfort zone and to grow not only as a person, but also as a trader, as an investor, as a father. And so, now that she's off to school, this is the new crossroads. Perfect time to be a catalyst for me because she's doing her own thing. I feel like I can shift and do more of my own thing. I'll start off by saying this and again, none of this stuff is in perfect working order, so you have to bear with me on it. But one thing I've learned over the past couple of weeks is that we're not our thoughts. We all have so many thoughts that go through our head and to me, sometimes I feel like there's so much going through my mind at any one time. I know my wife will probably agree to this that I'm an emotional rollercoaster at some points. But we're not our thoughts and so, what we ultimately are is what we actually do. And so, I don't feel like doing this conversation right now today. This is not how I feel. I actually was going to do it yesterday and then I kind of pushed it off and I know I can't push it off anymore. But I don't think any more, you have to feel like it's your day to do something especially in trading or investing, as being a parent, as a father, a brother, a sister, a mother, whoever you are. You just have to almost act like you want to do it. And I very much want to do this, but I've been nervous about actually getting on and having this conversation, kind of detailing my story a little bit more and talking about where things are going to go with me. And so, for me, I feel like I have to work independent of my thoughts. I feel like I can't wait around for this magical mood to strike because today is definitely not the day where I feel super energized, nor is it the day where I feel like everything is working perfectly because Molly went off to school today, like a big piece of me was ripped out. I've often heard that it's been said and I think this is Brene Brown who said this, but I love this quote. He said, "Vulnerability is just the courage to show up regardless of the outcome." And to me, that's what I feel like this is. I feel like I have enough courage, enough conviction of where I'm going to be taking things and where things are going to be moving and shifting at Option Alpha. I have enough courage and conviction that I can feel vulnerable enough to show up and kind of share this story. I want to go back and kind of take you guys through the back story if you will on a lot of this. For a couple of years now, I feel like there's been something kind of deep inside of me that's been trying to break free, this idea that I just know something is there, it's pulling on me, it's tugging at me, I can't quite put my finger on it, I don't really understand what it is, but it's this feeling of trying to grow and do more as a person and I'm just naturally this way. I love to learn, I love to do all the self-help stuff, but everything I was doing just kind of didn't really fit of jive and so, as a result, it's just been kind of a muddled period honestly really where things have been going well and I don't understand why they're not going totally well, why I'm not totally super, super happy with it and I'd hit one milestone or have one success a little bit and then all of a sudden, I feel like, "Man, I'm right back in the same place. I don't feel like I'm really making progress." And so, what I ultimately ended up figuring out and this is over the course of the last couple of months, so literally the last three to four months, the pieces have really been kind of falling together and I've been doing a lot of digging, soul searching, trying to understand, asking questions like, "Where does my story come from?" And I don't know who actually asked it, but I was on a podcast or something or talking to somebody and they said, "Why do you trade options?" And I could've said the very easy answer which is, "Well, I trade options because of X, Y and Z and I love it." But I thought to myself like there's got to be a deeper understanding. There's got to be a deeper story here for why to me, options are so amazing, like why was it options trading that I ultimately ended up gravitating towards or why did options trading pick me versus anything else? And so, I want to kind of share a little bit of the back story. My deep stories is really rooted in lots of volatility. To take nothing away from my parents because they were amazing people, I couldn't be the person I am now if it wasn't for my parents getting me here, pushing me and doing all of the things that they did. They're amazing people. The problem was, is that through our entire childhood and even through now, we went through volatility financially and it was not their fault. I mean, it was their fault to a certain degree that they were stuck in the place that they were stuck in, but they were both in the same industry, they had two incomes coming from the same place, no outside sources of income basically coming in and so, as a result, our childhood and my childhood was very much a volatility rollercoaster on finances. I remember times where it was really good and we would travel and we would have vacations and then I remember times as a kid where we didn't have any of that stuff and it was like the total opposite where Christmases were not what Christmases I thought they would be. And so, for whatever reason, that struck me. And so, fast-forward, I go through this whole childhood of understanding just now, I realize it now that my entire childhood was basically just a lot of volatility on that side. It would only make sense now that most of what I do now is focused on avoiding volatility and trying to figure out how do you harness volatility to some degree, how do you profit from volatility and somehow it just makes total sense when I do this. But then even fast-forward into my years in school and in college and then ultimately working for investment banks and for retail banks. I was REITs and M&A and I felt the same thing. I went and worked in New York for an investment bank and a lot of what was there was out of my control. It's just totally out of my control. You either made money in investment banking because the year was really, really good or you lost money because the bank didn't close any deals and it wasn't anything that you did necessarily. It's just the function of the market. And so, I was up there right before the market crashed. The deal were falling apart left and right, 2006, 2007, this is when deals were falling apart before things really fell apart, right? And I realized once again, holy crap, here I am, doing everything I can do possibly to get myself out of this viscious cycle of volatility and yet, I find myself in investment banking which is probably the most volatile job in the world. You basically go there and you could make a ton of money and have amazing bonuses and then the next year, you can't, right? And so, I found myself there. And same thing happened generally with REITs and I won't go down that story, but the same thing generally happened. It's just you get into a series of decisions and I just found myself continuously going back to the same idea that like, "How do I remove the volatility from my life? How do I get onto an even state that I can feel comfortable with?" And so, as a result, when I married Emily which was obviously the best decision that I made, I realized that she was such a strong person at her core, that she wasn't overly-emotional and she wasn't highly volatile which was good for me. I needed a person like that which is probably why I'm so attracted to her. But she was so great because she allowed me to kind of grow and start doing other things, like start actually trading at home and supporting what I was doing and start investing in real estate and start investing in other things and start building this business and all the long, trying to basically create a life that has as little volatility financially and stability wise as possible, right? Now, fast forward to now, there's still something that was kind of missing from this whole picture for me. And so, what I finally figured out and this just literally happened in the last two to three weeks even at that. What I finally figured out about why even still to this point, fast forwarding 10 years from all that stuff and building Option Alpha and doing what we've done as a family and as a couple and as a community hopefully and as a leader in this community, there was still something kind of like… I mean, why can't I get over this hurdle internally of really putting myself out there and really kind of leading this charge or moving in the direction I ultimately want to move? And I found out there was three saboteurs as Gary John Bishop would call them and I love the book because it totally changed my life and he basically said, "Look. There's three things that you say to yourself that self-sabotage your belief about everything. And there are these core fundamental principles that you've always believed. You just didn't really know how to put your finger on them." And now, I've had a really good realization and understanding of what these belief, these thought processes are. And so, my three beliefs about people or the three saboteur beliefs that you have is first, about yourself. You have this self-sabotaging belief about yourself. It's the thing that you subconsciously say to yourself over and over again and you don't actually directly say it, it's just in your actions. But what it ends up doing is it ends up dragging you back to that comfort zone, that home base, that good feeling of like – If I ever get a little bit too far out in left field and ever do something a little bit crazy, then ultimately, it brings you back in, okay? The first sabotaging belief is about yourself. And so, for me, my self-sabotaging belief is that I'm not good enough. And so, this has been prevalent in my entire life. I've always had this self-sabotaging belief that I'm not good enough for anything that I do and this is why I overcompensate. It's why I'm a self-proclaimed perfectionist, right? I want to do things perfect. I want to get something out and have it so perfect that there's no gray area on if it's good or not. And if I don't put myself in situations where I can excel to be good enough, I don't feel like I'm actually being challenged. But what's weird about this is that as a result of this, I find myself and I subconsciously put myself in situations that allow me to express enough of a movement to prove to myself that I'm good enough. I grow just enough to prove that I'm good enough and then I somehow seem to either stay still or not grow. And so, this is actually one of my attempts of actually doing that and then kind of overcoming that. That was my self-sabotaging belief and I still have that. That's something I'm always going to grapple with, is I'm not good enough. And to me, it stems from a lot of things. I was a good student in school, but I wasn't good enough. I didn't have enough grades coming out of high school to get into the universities that I wanted to and I ultimately ended up playing football, thought I would actually do a better job in playing football, never grew, but just wasn't good enough and I didn't actually ended up playing, so to me, it was like, "Okay. Well, there we go." I got here and made it to college football which is successful enough, but I didn't actually make it to the next step. And then I wanted to do banking and I wanted to do all these other things. And so, I got just enough to say yes, I was successful doing it, but just not good enough for myself and so, I continuously have this thought process of bumps up top of my head of like – I'm not good enough to do it, but I recognize that now which is so freeing and so cool because I feel like I can overcome that now because I've pinpointed it. I called it out. I basically put a name and a label on it. And so, the next self-sabotaging belief is this idea about people. You have this idea and this is so cool. You have this idea about how you interact with people and because of your idea of people, it then starts to create this idea of how you…

Full show notes at the publisher

#699 - Where Can I Trade Options? Aug 21, 2019

Show notes

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, "Where can I trade options?" Now, I think the simple answer to this question is you can obviously trade options at pretty much any brokerage, but the more important question is what's really happening in the market and where is the new shift in where you're going to be trading happening because I think there's a shift in brokerages and there's going to be a major shift in business models in the brokerage and investing space in the next five to 10 years. In fact, we're already starting to really see the beginning seeds of this shift start to occur with things like Robinhood. Even platforms like Option Alpha when we roll out our new auto-trading platform, you'll start to see this shift start to split the entire industry into what I think are going to be two major fields.

The first field or the first paradigm shift that we're going to go into I think in the brokerage industry is just simply the ability to fill and manage transactions. In my opinion, I think Robinhood has already started this trajectory. Robinhood has broken into the space in a big way, made a big splash, but when you really look at what Robinhood does really, really well, it's not a super fancy website, it's not super fancy indicators, there's not a lot of inside into what to do and how to do it, tools and technicals. Really, what Robinhood does well is order execution. They're willing to invest in a platform that allows them to scale by offering free trading and some margin to basically cover the expenses. And so, that's one side that I think many brokers are going to go towards. They're going to start shifting more and more towards this free model of trading which is really focused on high execution, high frequency, lots of contracts, barebones platform, really just a mechanism by which you are to place a trade. But the other shift that we're going to start to see and we're going to start to see people branch off into these two categories is if they don't go the Robinhood-ish side which is really focused on order execution, they're going to start branching into technology.

Now, like I've said before, the entire industry is going to be flat in five to 10 years. This idea that we're not going to get more trading platforms like Robinhood that offer free trades is crazy. Everyone's going to offer free trades in the future. It will be a standard operating procedure that it will cost you no money, no commissions to enter trades, option contracts, stocks, whatever. And so, when that happens, then you're going to start to see the real platform start to develop that are solely focused on better technology to help you find, analyze, assess, make trades, automate trades and that technology and that side of it is going to become more crowd-sourced. You're going to have this split I think in brokerages in the entire industry. One side focused purely on order execution, on just managing the regulatory side of the contracts and the other side is going to be tech-focused. And the tech-focused side based on new AI and new crowd-sourcing and crowd development and social networks around trading, that side is going to be what actually drives ideas. And then you can just filter your trade and make your trade anywhere, right?

To me, it's like going to the grocery store. Like if I want some milk, I can go anywhere to get milk. It doesn't really matter. It's going to be generally the same milk. But what brokerages are going to start doing is just become a very simple grocery store. They're just going to be there to take your order, execute your trade and really not have anything else to give you because they have to keep all the cost low, so that they can offer free trades and free commissions. I think it'll be interesting. I don't know how it's going to work out, but that's how I see it. I think that there's the split and it's already starting to happen. I mean, we're literally in the beginning stages just in the last two years of really starting to see this kind of dovetail into two directions. As always, I would love to hear your guys' comments, your thoughts on this. If you want to hit us up, we're everywhere at Option Alpha and until next time, happy trading.

#698 - Why Do Options Exist? Aug 20, 2019

Show notes

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, "Why do options exist?" I think this is an important question to ask and one that I think not many people actually truly ask themselves or ask really even about the market. If options contracts exist in the market, then why do they exist? They don't exist, so that we can just throw money back and forth between each other. They exist for an underlying fundamental purpose. And the reason that option contracts exist is simply for the transfer of risk from one person to another. It's the same reason why insurance contracts exist because someone is willing to transfer their risk to another party in exchange for some sort of fee or compensation, however you think about it. But that's really the fundamental reason why option contracts exist.

If someone's going to buy an option contract, say a put option contract that protects them in case the stock goes down, they are willing to pay money in order to transfer the risk of the stock going lower to another party. And then that option seller (me in this case or somebody who sells options) is willing to accept that risk in exchange for some sort of compensation on the other end. And so, this is why the whole options market exist because some future unknown event is still out there and will always be out there until we can accurately predict the future. But because there will always be a future and it will always be unknowable, then people are willing to transfer risk of some future event happening. This is a really important question. Again, I beg you to ask the question today not only to yourself, but to ask somebody else. Somebody else who you know that trades potentially, ask them. "Why do option contracts exist?" See what their answer is, let us know everywhere at Option Alpha and until next time, happy trading.

#697 - A Birthday Reflection About The Longevity Of Life Aug 19, 2019

Show notes

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 a birthday reflection about the longevity of life. As I cross yet another birthday and not necessarily a milestone birthday, but it seems like now, the numbers are starting to look to me, a little bit older than they were previously. For whatever reason now, my new age starts to look even older and older and older as I go and that's I guess because the age is actually creeping up. But as I cross another birthday milestone, I've just been seriously reflecting a lot in the past couple of months about not only life and what I want to do and who I am and really digging deep on a lot of stuff which you guys have probably even seen and starting to hear and you'll definitely hear more about for sure. But what I've realized about life in just conversations this summer with not only my father-in-law, my father and my friends and family and brother-in-laws, is that life is a weird two-headed dragon. I mean, it really is. We still have so much more time to go and especially like I'm just talking about myself at this point. You know, I've got so many more years ahead of me hopefully, so many more good years ahead of me. But at the same time, it feels like the small decisions that I make now obviously have a compounding effect in the future. It's this duality of life that I think is sometimes really challenging. I know it is for me, is this idea that I have to get a lot done now because I know what I do now is going to affect my life in 20 or 30 or 40 years. But at the same time, I sit back and I think sometimes. I have so much time ahead of me. Why should I be so worried about what I do now? And I need to have more patience. I need to be a little bit more calm with what I'm doing right now. I don't need to rush and frantically go through things and worry and stress so much. I need to take my time because I have so much time ahead of me.

And I think this whole idea about life being this two-headed dragon (or that's what I just call it and refer to it as) is really tough. I think because patience is tough right now, but I know it's going to pay off. I think right now, what I'm trying to figure out is what is this happy medium or balance. It's probably a never-ending process for sure, but what is this happy balance and medium between doing too much right now and burning out or just worrying too much and doing too little, so that I don't have the ability to do what I want to do in 20 years or 30 years or 40 years. It's a really interesting concept. For me, I think looking back just even the last couple of months during the summer which was great to spend a lot of time with family and friends this summer, what I've realized is that we do have so much time and we should be probably more patient than more frantic and worried and stressed. That's tough because in many cases, we're forced into a situation by an outside force. And so, it takes a lot of work to peel back and to push back against all the pressures of everything that you should be doing. And just even take some time just to breathe and calm down and worry a little bit less and spend more time actually in the present moment. Okay, so these are my birthday thoughts for today about the longevity of life. I know that we have so many more years ahead of me which is great and hopefully great years ahead of me. And so, I'm just going to take my time, be patient, be more diligent about what I'm working on, what I'm focusing on because I want to make sure I'm doing the things right now that are going to be the things I need to compound in the future. Hopefully this helps out. As always, if you have any thoughts, comments, questions, we're everywhere at Option Alpha and until next time, happy trading.

#696 - Savings vs. Returns: What's More Important? Aug 18, 2019

Show notes

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 savings versus return and asking the question, "What's more important?" And I think this is important to actually ask yourself. Right now, just really quickly, before you do anything else, what is more important over the course of 20 or even 40 years? Is savings more important or are investment returns more important? And I think the results here actually are not that surprising, though I think they might shock some people in the sense that when you look over a 40-year period and you compare let's say a 10% savings rate and 6% return to a 6% savings rate and 10% return, when you actually go to about your 24, 25, the difference is mostly on the end of savings. And so, what I mean by this is that when you have 10% savings and a 6% return, that far exceeds the performance of saving 6% and earning 10% and that's all the way out to the first 24, 25 years of your investment horizon.

What can we learn from this? Well, if you're trading on a much shorter time horizon or if you're just trading in an environment where you're looking at performance over the last two years, three years, five years, even 20, 25 years, what matters more so necessarily than your investment returns though, obviously hopefully they're positive, is the amount of money that you're contributing and saving in your account. And once you actually get past that 24, 25-year period, then and only then do investment returns matter more. That's where the payoff of 6% savings and 10% returns start to really compound on top of itself. And so, from say 25 years until 40 years out in the future, that's where the 10% return type of model portfolio starts to really pull ahead of 10% savings and 6% returns. Again, later in the cycle is where compounding starts to really take form. Hopefully you do both of these. Hopefully you have 10% savings and 10% returns. You'd crush both of these, but the idea here is that in the first few years of what you're doing, savings matter more so than anything else and it's because it allows you to get that steady base of cash flow coming in and then you can start focusing more on higher returns in the future once you have a nice cushion in place to kind of withstand the blow if you will. Hopefully this helps out. As always, if you have any questions, let us know and until next time, happy trading.

#695 - How Does A Limit Order Work For Buying? Aug 17, 2019

Show notes

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, "How does a limit order work for buying?" It doesn't matter what you're actually buying. Whether you're buying stock or options, commodities, Forex, futures, bitcoin, it really doesn't matter. A limit order simply limits the price in which you are willing to pay to enter that security or to buy that security. To use an options trading example, let's say we want to buy a call option in Apple and we're willing to pay $200 for that call option contract. We would enter a limit order that says we limit the price we are willing to pay to $200 or less. That means that if the price of the call option contract in Apple is more than $200, that order will not execute by the broker. The broker has a fiduciary responsibility not to execute that order, not to send that through at $201 or $202. It could only send it through if it is guaranteed to fill at $200 or less. Now, sometimes this means that you can get filled at a lower price. Many times, it means you're going to get filled at the limit price that you're willing to pay, the most that you're willing to pay to enter that contract.

The reason I like these orders and the only reason I use them for all of our trading when we get into contracts is because I know exactly what I'm getting. I know that if the market price is $205 or $206 or $210 or it just starts to continue to go to the moon and starts to go to $250 and $270, that my order will not execute unless the price goes back down to $200 or less. And I use limit orders on pretty much everything I do for options trading, especially if we're getting into contracts and out of contracts. Sometimes that means I have to change the limit orders multiple times and I have to kind of adjust and move and ebb and flow with the market, but I want to be in control of when my order gets filled. I do not want to use for example, let's say a market order which is just going to fill at the next available price and that next available price could be wildly different than where the market is trading right now if there's not a lot of liquidity and the bid ask spreads are really wide. Again, a limit order just basically tells the brokerages and the exchanges, "Look. I am willing to pay this amount and nothing more than this amount and I will only fill this contract if I pay $200 or less." whatever your limit price is. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#694 - Can I Avoid Paying Capital Gains Tax? Aug 16, 2019

Show notes

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, "Can I avoid paying capital gains tax?" The simple answer to this is yes, there's a lot of ways that you can avoid paying capital gains tax depending on the type of investment vehicle you're using, whether it's a ROTH account or a 401K account or a SEP account. You could avoid paying capital gains tax for marital residences when you sell your primary residence and you have a capital gain on real estate. There's a lot of ways to do it.

In the world of trading, one of the ways that you can avoid paying capital gains tax obviously is just to never sell, to never sell your positions. This is actually one of the default positions I think for Warren Buffett, is he avoids a lot of taxation because he just doesn't sell a lot of his positions. Now, the flipside to this is you have to be in it for the long haul, so long of a haul that you have to be a much bigger believer in passive investing than I am. I think that many people… And I can have the data to show that this is probably the case, that many people, if you take a more active approach even just on a very small scale on activity and moving positions in and out of stocks during different trending and momentum triggers, that you could wildly outperform the markets with the addition of having to pay capital gains tax.

I think when people try to avoid capital gains tax, I know it comes from a place of trying to keep as much money as possible and trying to let the government keep as little as possible, but if you deploy a more active strategy versus just never selling any of your positions and holding it forever and you deploy more active strategy where you might have to pay some capital gains tax short-term or long-term, the profits from that type of environment or the limited losses that you would go through in that type of environment would more than make up for the capital gains tax that you pay. Again, it's difference of opinion. Love to hear what you guys think on this. You can always hit us up everywhere at Option Alpha and until next time, happy trading.

#693 - Unrealistic Returns Expectations Lead To Unfathomable Drawdowns Aug 15, 2019

Show notes

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 why unrealistic return expectations lead to unfathomable drawdowns in your account. And this is a really important concept because as a lot of new people continue to join Option Alpha, continue to get started in this world of trading outside of the traditional stock investing that most people are used to, the natural tendency is to have these unsane, unrealistic expectations, these expectations that you can do 50%, 70%, 80% returns in a given year or in some cases, people are saying that they want to do 30% per month. And while that is not necessarily something that is unachievable, the probability of getting to those levels is so, so, so slim that if you were to start working towards a 30%, 50% annualized return, you could go through some unfathomable drawdowns. And I don't mean that lightly. I mean, some of the back test that we've seen where people are shooting for super high allocations, really aggressive strategies, go through 80%, 90%, 95% drawdowns, literally losing all of your life savings and then the question becomes, "Could you really do that?"

I love when people send me tests and results or screenshots of what other people are doing and they say, "Look. This person is doing 30% a year or this person is doing 50% per year." and they show me one little screenshot and one little sliver of their performance. But at the end of the day, that person ultimately is taking on so much risk that there's a really high likelihood they might go through a 60%, 70%, 80% or 90% drawdown at some point in the future. Now, they haven't gone through it yet and maybe they're lucky enough that they could just cut bait and stop before they actually get to that point, but the reality is most of these people are going to go through that. And so, when you have these unrealistic return expectations that force you then to do things that are nontraditional, nonstandard risk management protocols, things like too big of a position size, too much allocation into one ticker, not diversifying and not balancing your portfolio, what you end up doing by default is you end up leading yourself into a situation where you go through a massive drawdown and that massive drawdown could be just big enough that it forces you to quit and abandon everything, so that you don't lose everything you've saved your life for.

My plea to people on today's podcast is please have realistic expectations of what you're going to get out of this because if you have unrealistic expectations, you are going to go through a massive drawdown, one that you don't even know is possible in such a short period of time, it's impossible to stop its bleeding and it will ultimately kill you and lead you to never trade again and I hope that a lot of people stay alive in this business much more so than people get killed by these unrealistic expectations. Hopefully this helps out. As always, if you have any questions, let us know and until next time, happy trading.

#692 - What If 18 Seconds Was Worth $245,356? Aug 14, 2019

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to rhetorically ask the question, "What if 18 seconds was worth $245,356?" Now, I say rhetorically ask this question because the answer to the question is if it was worth that much money, if just 18 seconds of your time was worth a little over $245,000, you would basically rhetorically ask the question, "Well, what do I have to do in order for that amount of time to be worth so much money in the future?" And the answer is you have to run a back test. I am shamelessly plugging our back testing software or frankly, anybody's back testing software, this idea that you can basically look at tons and tons of research that's already been done and is published out there by numerous different places, not only just the research we do here at Option Alpha, but CBOE and AQR and all these other places. They publish so much research on back testing strategies and portfolios and models you can use to improve the performance of what you're doing right now. In one particular scenario which is where the title of this came from, we looked at just literally one tweak in a aback test that we ran using our toolbox software and the result after 20 years for the two different back test was a difference, a Delta of $245,000. One tweak, changing one little parameter in a back test, doing everything else the same except for one small thing created a massive difference at the end of 20 years for your portfolio.

Again, I ask the question, "If 18 seconds was worth $245,000, why are you not using more of your time on the front end of your trading to determine what strategies you should use, what parameters you should be looking at, what triggers you should use for entry, the Deltas, the days to expiration?" Because not taking the time to focus on those things could be costing you a small fortune at the end of 15, 20, 25, 30 years if you're really in this for the long haul. This is why I'm such a big, big student of the game. I geek out on all the research and all the data and everything that everyone has out there because most of it kind of jives together. There's very much a consistent thread and theme through most of the research that you'll read out there about trading and investing and savings and building wealth and you just have to do the little things. But if you don't take the time now and in our case, 18 seconds to run just two different back tests very quickly, it could cost you a small fortune later on in life. If you're not doing that, you can do it with us, you can do it with anybody else. It's up to you, but I'm saying right now, you're losing money if you're not tweaking and optimizing the way that you trade because there's additional value, profit margin to be captured by just changing very small things in how you trade right now. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#691 - Can We Sell Stock Before Buying? Aug 13, 2019

Show notes

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, "Can we sell stock before buying?" And the short answer to this is yes, you can and this is what's called short trading the stock or short selling the stock. What happens is in the background, when you want to start doing this, is you actually have to borrow shares from the brokerage or from somebody else who have shares available to borrow. And so, what you're doing is you're borrowing those shares from someone else and selling them in the open market (say you had $100 a share) with the understanding that in order to complete the trading loop, you've got to return those shares to the person you borrowed them from at some point in the future. Now, you hope as a short seller in this case or someone who's shorting the stock that you can repurchase the shares in the future at a lower price, deliver the shares back to the person you borrowed it from, likely the broker and complete the trading loop all for a profit.

I often use the analogy of homebuilders. Homebuilders are a great example of somebody who generally is a short seller when they build homes. They write a contract and they sell a home that has yet to be completed. They're basically taking money in from the buyer or from the purchaser and they're using those funds to build the home and deliver the home back to the buyer. Now, they hope that they can take in all of this money from the buyer and build the house for less than they took in and that leaves them with a potential profit. The same thing happens in short trading or short selling in the open market for stocks and options. You're hoping that you can deliver those shares back to the person you borrowed them from originally for a lower value. In our example, if we were to short stock at $100 a share, we borrowed it from our broker, sold it to somebody for $100 a share, we hope that in the future, the stock price goes down, we can repurchase shares at say $90 a share, deliver the shares to the broker and that fulfills our obligation to give them back their shares and make them whole again and we captured a $10 potential premium. We sold stock at $100, we repurchase the shares at $90, so we captured a $10 profit per share. Hopefully this helps out. As always, if you guys enjoyed this, let us know and until next time, happy trading.

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