The "Daily Call" From Option Alpha

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#680 - The "DNA" Options Trader Aug 02, 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 the DNA of an options trader. And so, to me, the DNA of an options trader is really two things. This kind of stands for two things. There's the first type of trader which is the "do nothing" approach trader which literally just sit on the sideline and they don't actually engage in the market or when they do engage in the market, it's very sporadic. They might make a couple of trades here and there, but they're really looking for that perfect opportunity, that perfect window to make a position or to enter a trade and we know that that's not always going to come. By default, their "do nothing" approach or mostly "do nothing" approach leads them down a path where they make fewer and fewer trades and the problem with this is that as they make fewer and fewer trades, each and every one of those trades becomes more and more important. I've often used the analogy before, but it's worked so well that if I gave you just 10 years of an opportunity window to invest all of your life savings, but I told you that you had to invest all of that money on one particular day in one trade, how important is that one particular day and that one particular trade become? It becomes everything. Yes, you have this 10-year window to find that perfect spot, but you might just randomly pick the worst possible day to invest or the worst possible security or position. Now, if I gave you that same 10-year period and said, "Look. You can spread your entire life savings out over any time period in this 10 years." you just can't do it all in one day. In fact, you can't even do any of it all in the same year. You have to spread it out over different times and different securities and how important is each one of those days? It becomes less and less important. The "do nothing" trader approach for the first round is somebody who just sits on the sidelines and they just choose to not even engage in the market on a high level.

The second type of DNA for an options trader is the "do nothing" approach which is more advantageous once we actually get into a position. To me, really, the Chinese wall here, the wall that you have to jump over is the actual entry mechanics of entering a position. After that, it's actually okay to generally be a DNA trader, "do nothing" approach. The stock position goes against you, we know from research countless studies have shown this that using stop loss orders reduces your profitability, so do nothing. The stock goes against you, don't sweat it. The stock continues to move in your favor and you can take profits, fine, take profits. If you want to let it go all the way to expiration and completely do nothing, the lazy trader approach, fine, that works too. There's really this kind of split here in DNA and it all centers around trade execution. You have to do something up to trade execution and then generally after that, you're better off just letting the probabilities and the mechanics of the trade work themselves out over time. All of your energy and focus should be on trade entry, not as much energy and focus on managing the backend of the position. Hopefully this helps. As always, if you have any questions, let me know and until next time, happy trading.

#679 - Options Traders Are Addicted To Prediction Aug 01, 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 options traders are addicted to prediction. And it's not necessarily just prediction in and of itself. It's really surrounding this whole idea of seeking certainty and trying to avoid things that are uncertain, so everyone and especially traders and investors are addicts for prediction. And we're trying to figure out where things are going to go and where they're not going to go and what possibly it could be. Things like the weather, right? We try to forecast out the weather, but we all know that forecasting the weather even just a couple of days in advance is really almost impossible to get it totally accurate. But we try to do that. We try to forecast stocks or who will win the Super Bowl, what President is going to win the election, what's for dinner this week. We forecast everything and we're trying to create a level of prediction that gives us certainty and helps us avoid things that are uncertain, but the reality is that the only thing certain about markets is that they are uncertain.

And this to me is an incredibly freeing concept. In fact, if you actually just take a second and take a breath and then say it with me that – "I don't know where the markets are going." and that's okay. That's an incredibly freeing mentality to have, this idea that we don't have to understand where things are going to go or where they might not go or where they could go in the future or how far they might move and that's all still okay. And so, if you start to subscribe to that type of methodology that you can build systems around expected outcomes and not predicted outcomes, then I think you're going to find yourself in a much better position to make money in the market, but also to do it in a way that's less stressful moving forward. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#678 - Why Procrastinators Are Incredible Winners Jul 31, 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 procrastinators are incredible winners. Yeah, I actually said it. Procrastinators are highly successful people and incredible winners and they're winners because as being a procrastinator, they continue to put things off until the point at which they have no time which by default, is exactly what they wanted to do. Their brain is so hardwired to be a procrastinator that they literally are doing exactly what they want to do which is put things off until there's no time left because they're a procrastinator. And that doesn't mean that they're bad people. It just means that they're literally hardwired to do this. They're actually winning at the thing that they want to do on a subconscious level. Now, we all know people who are like this, right? Your brother, your sister, your in-law, maybe a spouse where they just seem to put things off until the last moment, but the reality is that's exactly what they're hardwired to do. Their brain is telling them that this is how the world works, that the world works in a fashion where you put things off until the end and then you have this time crunch because maybe they work better in that environment, maybe they do better work when they're pressured and they have no time left, maybe they just don't want to do it to begin with. But in either case, they're doing exactly what they want to do on a subconscious level. They're winning at being a procrastinator.

This is a really interesting concept because if you think about it, many of us are probably procrastinators in a lot of different areas. Maybe it's with your health and your food or maybe it's with trading or your spouse or your kids. You just continue to put things off. The reality is that you're continuing to feed your brain these positive vibrations really, these positive cycles and flows that say, "Yes, this is exactly what I want to do. I want to continue to be a procrastinator." because we know it's not just in one silo. If you procrastinate on trading or on doing your schoolwork or getting something done at work, it's going to filter in and leak into other areas of your life. My suggestion today is if you are going to win and you're going to hardwire your brain to be a winner in this area of your life, you have to start moving away from procrastination and start moving towards – be more efficient, be more actionable because that will then lead to everything else and it doesn't actually have to start on all fronts. You can just not be a procrastinator about going to the gym or eating the right food or waking up on time. That will naturally allow you to start rewiring your brain to not be a procrastinator in other areas of your life. This a really interesting concept that I read about on a book on psychology and kind of brain flow and habit loops and so, I thought I present it here. Again, I'm not calling anyone out because I'm calling myself out on this too. I do this a lot with waking up or meditating or doing things around the house that I know should get done and I just continue to put them off. But if I let those things continue to solidify, that creates this very positive habit loop that my brain recognizes as – "This is easy. Just continue to put it off." It's much harder to actually do something and jump right to it. Hopefully that helps out. As always, if you have any questions, let me know and until next time, happy trading.

#677 - Late Expiration Reversals Are More Common Than You Think Jul 30, 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 late expiration reversals and why they are more common than you think. I think a big misconception in this industry is this idea of getting out of a position quickly or too quickly before you actually reach expiration, but the reality is that the probabilities are calculated all the way to expiration. Now, I tell people this often in email when they email in say three weeks or two weeks before expiration and the position's going sideways or it's not profitable. They ask, "Should we get out of the position? Should we adjust the position?" Many times, you shouldn't do anything because the probabilities did not say it was a 70% chance of winning three weeks before expiration. The probabilities suggest that it's a 70% chance of winning at expiration and that's a really important distinction because many people think that if a position is losing and it's two weeks before expiration that they should just dump the position and move on, but it's not the case. In fact, it's really hard for me too still to do this, but I know that this is the case that when you hold positions ever so close to expiration, you start to see these late expiration moves, usually the last week or so of expiration. When many people have already dumped the position, oftentimes positions come all the way back around and full circle.

I want to give you guys a couple of examples to look at. These are four different tickers that you can look at right now. I'll explain them really quickly on the podcast. But I really encourage you, seriously. Go do your homework on this and start looking up different ticker symbols. You can look up any ticker symbol you want and there's bound to be a number of times where it's had a very late expiration move. The first one that we're going to look at here real quick is XLV. XLV had a number of late expiration moves. In March of 2019, it moved full circle all the way back up to 93. It was basically trading at 93, dropped middle of the cycle two weeks before or a week before expiration, dropped down to 89 and in the last four days until expiration, moved all the way back up to 92.5, basically 93. I mean, complete reversal in the last four days of expiration. It has done this actually a number of times before in the past. Another one that you can look up is XLU. XLU has had some massive moves before expiration. Back in September of 2018, massive drop right before expiration. Back in December of 2018, massive drop and then huge rebound right before expiration. Again, we see this time and time again that these massive moves in either direction can happen at or near expiration, so don't use the last five days and say, "Oh, well, it isn't in my strike zone yet." You got to really let it go as close to expiration as possible.

XBI is another great example in April of 2019. It was basically trading up around $90, $91 and the last day before expiration, it dropped back down to $95. Literally the last day before expiration, it had a $5 move lower. If you have a position setup at 95 or at 85, you basically went the entire expiration month underwater on your position until the last day and that's why the probabilities at expiration are so important because it's not the probability of winning three weeks before expiration, it's the probability of winning at expiration. Last one that you can check out is gold and GDX. GDX is a great example of this. Again, we have a number of times before in the past where GDX has had a massive move right before expiration, most notably was the recent move in July of 2019. As you approach July expiration, gold basically or GDX went from 26 to 28 in about three days right before expiration. The three days preceding expiration, massive move up in GDX. Again, if you had positions where you were centered at 28, you might have gone the entire month underwater on it until the last three days. Again, I really encourage you to take some time, heed this advice, look at this stuff, so that it gives you confidence to hold some of these positions a little bit longer. Give the probabilities enough time to work out and everything should work in your favor. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#676 - Gold's Massive Rally Stalled Jul 29, 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 gold's massive rally lately and why it has stalled. And not necessarily why it has stalled, but just the interesting concepts around stalled moves like this that we typically see as options traders and what it might mean to you going through some of the examples that we've seen in the last month and a half or so in trading. The time I'm recording this podcast, it's the end of July. We're coming up on the FED announcement. Everyone's expecting that the FED is going to cut rates by some margin and it's just now what's going to be the guidance moving forward. And so, obviously, that could move the markets, but what we've seen generally in the gold market over the last say two and a half months or so is we've seen a lot of sideways action in trading. And so, that two-ish months that we've seen in gold of sideways trading is followed by this massive rally that gold has had. Gold was originally trading in the May, April time period around 12.80 or so on the futures and then rallied all the way up to about 14.20, 14.25 literally in the span of about two and a half weeks.

Now, why this is interesting, the fact that it's had this huge rally and then stalled, is because many people who were trading gold alongside of us because I was trading gold at this time as well, basically were left with positions that got pulled to the extreme. We saw gold have this massive rally, two, three standard deviation move. Many of our positions were pulled to the extreme. Not all, but we laddered into contracts in gold and so, we had some that went full loss. But what a lot of people did is at that point, they stopped trading and I even mentioned this on videos where we started trading gold after it started peeking out. We said, "Look. This is going to be a great opportunity to continue to trade something that has high implied volatility." Option pricing is insanely high and also looks like it could set itself up for just a lot of sideways neutral action. But what a lot of people look at is they look at a rally and they think to themselves, "Oh. Well, if this thing has had a rally from here, it's going to continue." But it's actually often never the case. More so than a rally maybe continuing its exponential and parabolic move is a rally that actually ends up stalling and move sideways. And so, as an options trader, we don't know when these rallies are going to happen and we definitely don't know when they're going to move sideways, but statistically, they happen more often than another continued leg up. We saw this not only in gold, but we've seen this before and we've traded through other ones like the natural gas pop that happened last year where natural gas had a huge pop. We traded it sideways and then it moved after that. I think the same thing is going to happen with gold and we see this oftentimes with many things that have massive rallies. They end up stalling and moving sideways for a period of time before they continue or before they reverse course.

The idea here is don't let a rally prohibit you from making more trades. In our case, the moves that gold made first, that first exponential parabolic move that created some of our positions to hit max loss have all been paid back because we continued to trade gold and have had massive profits come in, in the two-ish months where gold has traded sideways. The people who just threw in the towel and stopped trading actually ended up with bigger losses because they didn't continue the process. Again, the idea here is continue to trade in all environments. You know that things are going to move against you. It shouldn't be a foregone conclusion that you're going to have trades that go two and three standard deviations against your position, but the worst thing you can do is stop trading because you could just miss that next opportunity which allows you to pay back everything else and then some. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#675 - The 2 Best Times To Start Trading Options Jul 28, 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 the two best times to start trading. And this actually comes from an old proverb, but you probably heard this before, but the best time to plant a tree is not only today, but also 100 years ago. The idea around trading is there's only two best times to start trading. The best time was probably 20, 30 years ago. You could actually start the process of trading, even 10 years ago or five years ago, sometime before in the past. But the second best time to start trading is today because as soon as you start trading today, you start setting yourself up for success in the sense that you start building out your trade count and your allocation that works in your favor once you start to apply the law of large numbers. Now, you can only get to 100, 200, 300, 400, 500 trades if you start making trades today.

The best time to start trading was 10 years ago or five years ago or sometime before in the past, but the second best time to start trading is literally right now. And you can start with small positions because that's what we advocate anyway. We don't even advocate that you start with these massive large positions. Start with a very small spread and start trading today, so that the law of large numbers starts to work in your favor because every single day that you keep trading and you stay alive increases the probability of not only success, but it also solidifies your expected outcome in the future. Start trading today if you haven't already. You need a kick in the butt. Hopefully this is it. Start making progress towards that long-term goal that you have for your income, your trading, your family, etcetera. Hopefully this helps out. As always , if you have any questions, let me know and until next time, happy trading.

#674 - Great Starter, Poor Finisher Jul 27, 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 those people who are great starters, but poor finishers. And look, I admittedly put myself into this camp as well because we all have been down this path where we try to start something and we are super, super motivated, we do all the right things, we set ourselves up for success and then for whatever reason, we just fall off the man wagon, right? And so, I've done this before a number of times with definitely meditation in the morning. I do really good for a couple of weeks and then I start to fall and then I have to get back on the horse if you will and regroup and start building new habits again. That's a continuous one for me. I know a lot of people who have the same thing with eating and going to the gym or physical fitness and especially in the world of options trading, it's very easy to get very excited and then quickly just fizzle out.

And so, when I talk about this, it's mainly for the options trading, but again, you can apply it to anything and so have I. This idea though is that when we get started with something, our energy level and motivation is insanely high. That's what allows us to actually make the conscious shift from what we're doing currently to something new. We have to have so much energy and so much motivation for our brain to be willing to start doing something new which creates a lot of stress and it creates anxiety and that's not what the brain wants. We have to have enough energy just to make the switch. The problem is that we have an unwillingness to maintain that high level of energy and fortitude that you need to get you to the point at which it creates a habit and that's really the struggle point. Some people say 30 days to create a habit. I think it's probably longer, more like 60 or 90 days and you got to really, really work at this thing before it becomes a subconscious habit that you just routinely do, that your brain puts on autopilot. In the world of options trading, this really means that you've got to pay extra attention and force yourself in some cases. Whether you feel like doing it or not, you got to force yourself to come in every single day for 60, 90 days and start analyzing and making trades and if you don't do that, it's just going to quickly fizzle out.

We have a lot of people at Option Alpha who will email me and say, "Kirk, I just went through all the tracks in five days. They're amazing. I just placed two trades." And I email right back and say, "Look, there's no way you absorbed everything anyway." And placing a lot of trades right upfront is just a very quick way to burn out because what many people do is they just frontload everything. They do all the training, all the education, place all the trades right upfront and then they have no fortitude to actually continue with it moving forward. I would much rather see someone take one small step every day. That's why I say 30 minutes a day literally keeps the black swans away. One small step every day allows you to take consistent action and gives you enough motivation to keep you going. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#673 - You Have The Pain You Are Willing To Deal With Jul 26, 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 an interesting concept that I think was presented to me in a book that I was reading. I literally can't even say the title of the book because it would use curse language and I know that this podcast is always one that doesn't have explicit language. But the author is Gary John Bishop, so if you want to go look up the book, you can. It's a really, really cool book actually. Both of these books have been really amazing to listen to in here. But one of the things that he said in the book which really resonated with me was this idea of – You have the pain you are willing to deal with. And I don't know why it was just like that particular way he said it, but if you think about it, the idea of choosing what type of pain you're in is really empowering because if you don't choose anything, that becomes a choice. Not choosing is a choice. If you're in pain right now because you feel unhealthy, that's a choice, right? You can choose to be that way or you can choose to do something different.

If you're in "pain…" And I used "pain" in this. If you're in pain because you feel like you're stuck in a job and you need some extra income and you want some more optionality in your life, then that's a choice. You're choosing to be that way versus choosing to let go of something else and choose a different path. I don't know. Just maybe think about this on your work or drive or if you're at the gym or whatever. Think about what kind of pain you're in and what you're willing to deal with. Because it's funny, we're humans, we tolerate so much pain until really, it just breaks us. Now, that old analogy of throwing a frog into a pot of boiling water, it'll jump right out, but if you slowly heat up the water, then it sits there and it basically cooks to death. And we are just like that as humans. We have a little bit of pain and that's okay and then we tolerate a little bit more and then we get into a rut and we start figuring out, "Well, I know I tolerated this much. It's only so much longer. I can tolerate so much more." But ultimately, that's bad mentality. It just leads you down a deeper and deeper rut that it's harder and harder to get out of. Again, today, just kind of think about this. If you have any comments or questions or if you thought this was great, let me know everywhere at Option Alpha and until next time, happy trading.

#672 - Avoid Trading ETFs With Dividend Assignment Risk? Jul 25, 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, "Should you avoid trading ETFs with dividend assignment risk?" We recently went through… In fact, we always go through this every three months or so for most of the ETFs that we trade. We go through this period where they go through dividend assignment. And so, as a result of that one or two or three-day period where it gets really, really active with positions, we have to analyze whether our positions are at risk of assignment or not. In some cases, they are and in some cases, they're not. This means that in some cases, it might be more beneficial to close the position and move on and just continue trading it the next month. The question always pops up which is why I'm doing this podcast, "Should we just avoid ETFs with dividend assignment risk?" And the simple answer to this is absolutely not. Dividend assignment risk is but one small, small component of things that we should be worried about strategically when we're building out a system and a portfolio for trading options. What I'm more so concerned about for example (and this is just one component of it) is I'm more concerned with trading tickers that are as uncorrelated to one another as humanly possible.

Just to use an extreme example, let's say that of all the universe of ETFs that are out there, the only ones that ever had no dividend assignment risk were all ETFs in oil and gas. And I know this is not the case. I'm just using this as an example. But let's say that the only ETFs with no dividends, therefore no dividend assignment risk, was all oil ETFs like oil and gas. Would I be better served by trading those products highly diversified in oil and gas at the exchange or at the sake of not having to deal with the hassle of dividend assignment? Absolutely not. It's a no-brainer question for me that it's not worth the hassle of doing the dividend calculations and maybe closing a couple of positions for the monstrous risk I'm going to take by focusing all of my attention on just those ETFs without dividends that happen to be in oil and gas. But a lot of people do this. A lot of people think to themselves… And this is where the question comes up, like "Kirk, why are we trading these things if we have to go through dividend assignment and we have to deal with the calculation and determining whether to close them or not?" And it's because it's more important than that, because that's just one microscopic area that we can focus on, but the bigger picture gets lost when you only focus on that one little area. Bigger picture things like "How important is uncorrelated ticker symbols? How important is liquidity?" Those things are probably more important than the random dividend assignment risk that we go through.

More so than that, we often see time and time again that when you look at things like TLT over the last couple of years, TLT has actually been one of our better performing ticker symbols and this is actually kind of counterintuitive to what most people would think because TLT as opposed to a lot of other ETFs actually goes through a monthly dividend. Because they pay a monthly dividend at the end of every month, we know every single month, we're going to have to calculate and determine if we are at risk of assignment because of a dividend. And so, a lot of people just avoid trading TLT, but if you avoided trading it in the last two years, you really missed out on a wonderful opportunity because it was one of our best-performing tickers the last two years. Again, this is why I say we shouldn't avoid trading ETFs with dividend assignment risk. It's part of the process. It's part of the game. You have to do it. It's like changing diapers on kids. You don't want to do it, but you have to do it. If you want to have kids, you got to go through the process of changing diapers. It's just a very small component of what trading and parenting I guess should be, to use the diaper analogy. Anyways, hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#671 - You're Building Wealth Every Day, But For Whom? Jul 24, 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 you're building wealth every day, but for whom? And I thought this was a very thought-provoking question, one that I read in a book recently and I thought I would bring it on here to the podcast because I think it could allow you to maybe step outside of your shell for just a moment, look at the bigger picture of what you're doing and really make sure that in totality, all of the activities that you do create a net opportunity for you to build wealth for yourself and your family and the people you care about more so than other people. Now, does this mean that it's bad to help other people and to work for a company where the company is making money and you're getting paid as an employee? No, it doesn't. But it means that you should be looking at all of the activities that you do on a daily or yearly basis and ask yourself the question, "Am I generally building wealth for myself and my family and the people that I care about or am I building it for somebody else? Because if I don't do the activities that are going to build wealth for me first, then how can I ever expect to get where I want to go? How could I ever expect to reach the goals that I've set for myself?" If you are constantly working at a regular day job which is fine, but you also have a lot of debt and you never save any money and you never invest and you never do all the personal-finance stuff that would allow you to get out of that job, then who are you building wealth for? Most of your activities are lined up to build wealth for somebody else.

This is why I'm so passionate about options trading in general, because I like the idea that when you take control of your finances, in particular, your investments, you give yourself at least the opportunity to build wealth for yourself because you don't need anybody else to do it. You need me as an advisor. You don't need anybody as an advisor. All the information we need to know about trading and how to do it successfully and what generally the strategies to use, it's all known and out there. You just need to actually do the activities. You need to spend most of your time building wealth for yourself versus building it for somebody else. This means even simple things like paying off as much non-secured, non-favorable debt as possible, right? If you have debt, but it's on real estate or a business and it's feeling growth, okay, great. But if you have non-secured credit card debt, auto loans, things like that, you can make the case that that is building wealth for somebody else because every time that you pay those interest payments, you're just putting that money that could easily be redirected someplace else for you into the pocket of somebody else. Again, ask yourself that question. Sit down with your significant other, your spouse, your friend, a family member and ask yourself, "Am I building wealth, net in totality? At the end of every day or at the end of every year, is more of my activity going towards building my own wealth or somebody else?" Because you're building wealth every day, but the question is for whom. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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