The "Daily Call" From Option Alpha

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#640 - Well Researched Unimportant Trades Jun 23, 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 well-researched unimportant trades. And I like this terminology because I thought about this the other day when I got an email from somebody that all of this research that somebody sent me and it was like a book report that I got through email which by the way, I do not read all of those and this one, I was able to very quickly discern the problem in the first couple of paragraphs because basically, what this person emailed me is they said, "Kirk, I'm looking at this trade and it's got low liquidity, but…" And then a book report kind of followed after that. And what I know to be true and two truisms that I've talked about here on the podcast before, is that doing something unimportant well does not make it then magically important. The fact that they did all of this research on this company and why it was going to go the direction it was going to go and why the option trade was so perfect and it worked out so well was because it was almost no liquidity. And I looked up the ticker symbol and there was maybe 10 or so contracts in the entire option chain that were being traded just because that liquidity was almost nonexistent, made all of the other stuff that they did unimportant. The fact that they did such a good job analyzing it doesn't necessarily mean that it was the right thing to do because they were analyzing something that was not a good trade or an unimportant trade.

Again, the two truisms are – Doing something unimportant well does not make it important and requiring a lot of time does not make a task more important. The fact that they emailed in and I felt bad and I replied back and had a nice reply to them about why it's probably not going to work because of liquidity, is that they emailed in this book report to me and I know that it took them a lot of time and I know that they wanted to send this and get my opinion on it and I know they definitely wanted me to read the entire thing which I did not. But because they spent so much time analyzing it and reading through all the different quarterly filings and 10Ks and 10Qs, again, does not negate the fact that it had almost no liquidity. I would say no liquidity because 10 or so contracts is basically no liquidity. That totally kills the entire thing. The fact that they spent potentially hours writing up this research and this email to me does not necessarily make it more important. The key here today is if you do a lot of research, but you do them on unimportant trades or unimportant trading vehicles, it really means nothing. You could research everything under the sun, but if it's still an unimportant or a non-possible trading vehicle that doesn't have liquidity, it not has good open interest across different strike prices, it's not an uncorrelated ticker that fits your portfolio, then you're wasting your time and you're spinning your wheels and ultimately, you could be doing something more productive for your account. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#639 - The Productivity of Squeezing Oranges Jun 22, 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 productivity of squeezing oranges. Yes. How in the world does squeezing oranges relate to options trading? But I can promise you that it does if you pay attention and listen to this podcast. When we think about squeezing an orange, what actually happens when we squeeze the orange and we're trying to get juice out of it? What we realize is that when we squeeze the orange, we get the most juice out of it from the initial squeeze. Say 50%, 60%, 70%, 80% of the squeeze generates all of the potential juice from that orange. But then after we've squeezed it and we're trying to squeeze it harder and harder and harder, the output from the orange becomes less and less and less. If you've ever tried to squeeze an orange and if you haven't, do it today and just send me a screenshot or send me a picture or post it on social media. I'd love to see you guys squeezing oranges and posting it back to us. But if you've ever squeezed an orange, what you realize is that at the end, nothing comes out. You can squeeze as hard as possible. You can try to basically break your hand by squeezing as hard as possible and you get less and less juice from the orange.

What is the analogy? What is the lesson we can learn? It's that when it comes to options trading, there's probably a couple of things that we can do that make all the difference in our trading and the more that we try to squeeze and fix or hedge or adjust all these little positions, it's not going to help as much as doing the first steps, those big rocks, that initial squeeze of our portfolio. Our portfolio, if it's an orange and we're trying to squeeze as much income and return out of it, we really can generate the most juice by doing just a couple of very key basic things and when you get to the end of that, then everything else that you do, all the little mechanics of doing… Exiting the position at 20 days or 21 days or 50% or 52%, it's not really going to make a big difference, but what I find is that people focus on just the last squeeze of the orange when it comes to options trading. They email in or they make a comment and they say, "Kirk, I need to know exactly when we should exit every position and exactly when we should take profits on this thing. And is it 51% or is it 50%? Is it 28.5%?" But they're missing, in many cases, the initial squeeze of the portfolio orange.

In my book, the things that you can do to really improve the yield of your portfolio are very basic things. Keep your position size small, trade high probability, sell option premium, diversify out over tickers and different industries that are uncorrelated, do it on a laddering basis, so you spread your trade entry out over time and then adjust where necessary. You do those things, you're generally going to get a pretty good yielding portfolio. You don't have to be perfect in all of them, but just the act of actually performing many of these basic functions generates the most yield from your portfolio. It's like squeezing that orange initially. It's going to get the most juice right out of the gate. Now, can you improve things in the future? Can you tweak how you adjust positions? Of course. But is that going to be the difference between making 1% or 2%? Probably. You could make an extra 1%, maybe an extra 2% by adjusting and manipulating how you adjust positions or when you hedge or how you hedge them, but is it going to be the big, big return that your portfolio generates? Probably not. It's probably just that last squeeze of the orange that you get when you do all the later stage stuff.

My encouragement to you today is focus on the big rocks. Focus on the things that really move the needle first, that squeeze as much juice out of your portfolio as possible and then worry about all the little minute details later on. If you get the big rocks in place first, you have a solid foundation from which to grow and you can make adjustments along the way. Hopefully this helps out. If you liked this analogy, let me know, shoot me an email. Send me a message on social media. We're everywhere at Option Alpha. Until next time, happy trading.

#638 - Moving Accounts From Ameriprise Is A Nightmare Jun 21, 2019

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I just want to talk about what a nightmare our account moving process has been from Ameriprise. I'm just going to say like I don't know how many of these brokerages are still in business and in particular, the process of moving my wife's 403B account from Ameriprise has literally been a complete and utter nightmare. In fact, at the time I'm recording this podcast, it has now gone on about three and a half weeks that we have been actively trying to move this account from Ameriprise over to TD Ameritrade and the process has been a complete nightmare. And I don't understand how it's that case. I don't understand why there are so many loopholes we have to jump through and different people we apparently have to get approval from because they were the original advisor to the school's plan when she was a teacher before, but I just don't understand how an entire industry can be built around this right now and still function with so much capital under management or assets under management.

Anyways, I'm just publicly saying this because I think it needs to be said that Ameriprise has literally been a nightmare for this. They have not been very helpful on this. They continue to push us down, rabbit hole after rabbit hole of communication and they just really are not helping and it's very frustrating. And so, anyways, if anybody's out there and has issues with it, I'm not surprised. I hope in the future that a lot of these other companies do a better job of moving and transitioning accounts. We've had this account in Ameriprise since she left and now, it's at a point now where we just don't think that it's probably right to be there with the fees that are in some of the new funds that they've rolled out and they're kind of forcing us into and so, we're moving it someplace else where we can reduce fees, reduce cost, get into low cost index because we can't really trade a lot of it in that and so, that's what we're trying to do and just the whole process has been completely crazy and a complete nightmare. Anyways, this is a public declaration just to say that Ameriprise, you guys are not doing a good job with helping us out and I hope it improves in the future.

#637 - Don't Avoid Trading Options In Low Volatility Markets Jun 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 talking about why you shouldn't avoid trading options in low volatility markets. It's a big misconception that's out there, something that we have dispelled previously in our profit matrix research. There's a number of other companies and hedge funds out there that have also put out research on this that dispel the same common myth and this myth is that in low implied volatility markets, we should avoid options trading, in particular, option selling that now, in low implied volatility markets, the odds and the edge switch to option buyers, but it's just not the case. The reality is that in all implied volatility levels, the edge is still going to the option seller or the premium seller for the potential risk in the trade long-term. Does this mean that in low implied volatility markets, you could lose money as an option seller? Yup, for sure. You could definitely lose money in low implied volatility, middle of the range, high implied volatility markets. There's no one particular volatility environment that's going to be necessarily a bigger winner or loser for options trading. The edge is still present in low implied volatility for the option seller and that means that option buyers are still net losers in low implied volatility markets. Again, the misconception here is that when implied volatility is low, now option premium is "cheap" and we should be able to buy options and create a strategy that generates a positive expected outcome, but it's just not the case.

We've shown this in our profit matrix research which we released a number of years ago. There's other hedge funds and companies that have released their own research on this and tested it in various markets. All of it is really kind of jiving in the same direction that implied volatility, even low, does not create an edge for option buyers. In fact, the edge still remains for option sellers. The point here today is – Don't be afraid of trading options in low implied volatility markets. You should continue to trade options and sell premium in low implied volatility markets, but you need to scale back your position size. Our position at Option Alpha is that when there's low implied volatility and therefore, a risk of a large move in implied volatility which is one of the things that can hurt option sellers, is that we should scale back our position size during those times. We should be a little bit more conservative. Do we stop trading? Absolutely not. Should we scale back and not be insanely aggressive? 100%. We should definitely scale back, not be as aggressive, reduce our position sizes, reduce the amount of capital that we have at risk, the number of ticker symbols we trade, so that if in a random string of events, we have a large spike in volatility, it will sting, but it won't kill us and that ultimately is the goal, is to keep ourselves alive and to keep the system running for high probability number of occurrences. As always, if you have any questions, let me know and until next time, happy trading.

#636 - Knowing Is Not Enough, We Must Act Jun 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 why knowing is not enough and why we must act. This is going to be an interesting one because I often feel like people who actually put their positions on and don't just have broad opinions are the people who I respect a lot more. And I think I try to do this with my positions because I open myself up every single day to criticism and people looking at the positions or the trades that we make because we publicly make them available after 20 or 30 days and post them on YouTube and put them on our website, all over the place. And so, it's sometimes hard because you get a lot of criticism like – "Why did you do that?" and "Why did you do that?" and "Didn't you know that the market was going to go down or sideways or up?" And the reality is that if you know something is going to happen, but you don't actually act on it, then it's not necessarily something I want to follow or something I want to be a part of. I respect people a lot more who say, "Kirk, I think the market's going to rally and I'm putting on this big position to take advantage of the rally." And I may not agree with them at that particular point in time, but man, I respect the fact that they actually acted on their assumption or their prediction.

And so, oftentimes, you'll hear people say, "The market's going to crash." But they don't actually go short the market, so why should we listen to what they're saying or why should we believe what they're saying? Oftentimes, I think that the market's going to crash and it looks like the market is really toppy or heavy on the top, but that doesn't necessarily mean that I'm going to put a big position on and be short. And I talk about that openly and I say, "Look. I think the market looks really, really toppy or I think the market looks like it's going to go through a bottoming process, but I'm still going to trade neutral or I'm still going to do this." Sometimes if we have a strong enough conviction, we will make a directional trade. We traded directionally during the last month in SMH and XLY and SPY and IWM. We thought that they had an opportunity to go down a little bit and we made a bet on that move. Now, does that make us predicting all moves? Of course not. But in my case, I think it's better to have a prediction of where things are going to go and then acting on it and placing a bet. I like people who do that and that's kind of hopefully what you get out of this podcast today. Look. If you have an opinion on something, act on it and don't be afraid to then defend it and say, "Look. This was my opinion at the time." And we're never going to be 100% right in all of our opinions, nobody is. No investor has even been 100% right or even close to it. And be willing to just defend it and put yourself out there and that's okay and I'll support you on that 100%. Hopefully that helps out. If you have any questions, let me know and until next time, happy trading.

#635 - It's Okay To Have Bad Days, Just Don't Have Back Weeks Jun 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 why it's okay to have bad days, just don't have bad weeks. I thought this was actually a really interesting quote and I've heard this before and it's part of my daily affirmations list that I read that it's okay to have a bad day here and there, but it's just not okay to have a consistent rhythm of bad weeks. Oftentimes, we'll have a bad day trading where the market just doesn't go our way or a position that we were trying to get adjusted, we couldn't get adjusted in time and it goes completely opposite of what we were trying to do. And that's fine. That's going to happen. We know that these events are not going to work out perfectly every single time.

The reality is though, is that we can't have a consistent rhythm of bad days and bad weeks. We need to make sure that we keep ourselves positive, we keep ourselves moving in the right direction and focused on our goals and our outline for our portfolio because if we let one bad day spill into the next and the next and the next, it creates a bad habit and rhythm and process for our trading. The key from today's show (hopefully if you take away anything) is that it's okay to have a fat finger trade. It's okay to mess up on a position or an order size or a risk size for a particular day. Just don't let it start to spill over and become a reoccurring habit. Try to figure out what you did that day that you could've done better the next day and start learning and working towards improving yourself as an investor and a trader. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#634 - Don't Lose Sight Of Macro-Economic Trends Jun 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 talking about why you shouldn't lose sight of macro-economic trends. Now, by the time that this podcast goes out, very soon or even if you're listening to it back in the historical archives, the podcast would've been out, but we interviewed a great set of guys that run a hedge fund over at Crescat Capital and what I loved about this podcast interview that we did with them was that we focused really on macro-economic timing and models. And I thought this was really interesting because what I often tell people is that you don't need to know everything about every macro-economic indicator out there, but you should have a good understanding and have your head above water (if you will) of what's generally going on in the economy and the global markets. And so, when you lose sight of these macro-economic trends, that's when I think potential black swans hit your account that you didn't see coming that maybe other people did see coming or at least had an awareness of. Now, black swans are notorious because we can't necessarily predict their timing or their magnitude. But let's say that we are trading and we see a bunch of macro-economic indicator start to get really exaggerated and overstretched to the point at which they start reading in the 95th or 99th percentile historically. Now, does that mean necessarily that things are going to turn over or reverse? No, it doesn't. But does that mean that you should start to prepare and be aware of things that could be a catalyst, that could change and redirect the market very quickly? Absolutely. And this is where keeping your head above water, looking downfield as they used to say when I played football in college… Keeping your eyes downfield is really important because although something could come on the horizon that could really hurt your portfolio, the only thing that you can do is be aware of it before it happens. You may not necessarily be able to avoid it completely, but awareness is probably about the best thing that we can do to be able to counteract some of these black swan type of events. Things like macro-economic trends, not something I check every day. 100% don't check them every day, don't check them every week, but I do have a good understanding of what's generally and broadly happening in the market and I think the interview that we did with the Crescat guys was really, really cool because the way that they put it together, it ends up being one single indicator or factor that you can look at that kind of brings a lot of these different elements together. If you haven't already, check out that podcast when it comes out or if it's already come out because you're listening to this historically and then please check out the podcast as well, let us know what you guys think and as always, if you have any questions, let me know. Until next time, happy trading.

#633 - What Is A Private Investment? Jun 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 answer the question – "What is a private investment?" A private investment is actually just the complete opposite of a public investment. As options traders and as stock investors, we generally trade in the public markets. This means that all the options and all the stock of all of these underlying companies and ETFs and indexes are publicly available. Anybody with a brokerage account can come into the public pool and make an investment or purchase stock, purchase options, sell stock short, sell option contracts in the public environment. When you switch over now to private investments, private investments are done on a one-by-one basis and this is many times where real estate transactions happen, this is where many business transactions happens on a person-to-person or business-to-business basis where people are dealing with each other individually.

You can still make private investments. There's actually a lot of new companies that have kind of come out of the tech space in the last couple of years, companies like AngelList and other real estate companies that do private placements for real estate or for equity stakes and all of these different Angel investing platforms. That's where you deal in the private market where not necessarily everybody can go in and make an investment and it's usually done on a case-by-case basis one particular person to the other and many times, actually has a lot of fees involved in that because it is more of a private transaction versus a public institution or a public market where you can trade between different individuals. Hopefully this helps out, again, just to give you guys a little bit of clarity. This is a big question we actually get often on here at Option Alpha, so I wanted to do a podcast on this and help clarify. As always, if you have any questions, let me know and until next time, happy trading.

#632 - You Cannot Exercise An Option Without The Money To Hold Stock Jun 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 you cannot exercise an option without the money to actually hold stock. This is actually really kind of a two-part question today because I think what people often have as a misconception is that when they get assigned stock or when they trade an option contract, they have to have the money in place to hold the stock and that's not necessarily the case. The reality is that if you trade option contracts and you don't have the underlying capital to hold the stock, that doesn't mean that you can't trade the contracts. It only means that if you are assigned or if you exercise the contracts, you've got to be able to have the capital in your account to continue the trade. Now, brokers know that in many cases, a lot of people sign up for a brokerage account with $3,000, $5,000, $10,000 and that's not enough to hold stock in all of these different option contracts. This is why brokers will allow you to reverse positions the day of assignment or the day of exercise of those contracts, so that you can get your capital requirement back under your account threshold.

The answer to the question today though is that you cannot exercise an option. If you are a long option buyer, say buying a long put or buying a long call, you can't go out and exercise that option contract unless you actually have the money in place to hold that stock. The broker in many cases, is going to block that transaction and is going to not allow you to go through with that. Now, if you're the option seller on the other end and let's say you sold an option contract and now, you get assigned that contract and you don't have the money to hold the stock, that's okay. The broker knows that this is going to happen and they just want to make sure that you quickly reverse and sell back or buy back the stock the same day to bring down your capital requirement. Even if you don't have enough money in your account to "buy back" that option stock or that stock that you were assigned, the broker will actually allow you to reverse the trade to get your capital threshold back in line. They allow you to do it that first day. That's where margin calls come in. They say basically, "Look. You either reverse the trade or you deposit more money if you want to keep the position." This is really cool. Again, it's not that complicated. It's actually pretty simplistic when you think about it and pretty standard and logical. As always, if you have any questions on it, please let us know. Head on over to optionalpha.com/ask and leave a voicemail there. That's where I answer all these questions and get them queued up for the next daily podcast. Until next time, happy trading.

#631 - How To Fix A Losing Short Call Option Trade Jun 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 answer the question – "How to fix a losing short call option trade?" As we've talked about yesterday where we've talked about fixing a losing short put option trade, today's discussion is exactly the same, except it's in reverse. And again, as a disclaimer, we're assuming here that you did all of the right things before you actually entered the short call option, things like properly adjusting your position size that you're not taking on too much risk, selling options probably close to the money, but not necessarily at the money or far, far out of the money, so somewhere around a 15, 20-ish Delta potentially, you're selling options out of the money and you're using the right risk metrics.

Now, assuming you've done all of these things right, there's again, two ways you can fix a short call option trade or hedge the short call option trade. The first way is to create a spread. Creating a spread would entail buying a call option at a higher price than the short call option you sold. For example, if a stock is trading at $100 and you sell a 105 call option, you could then go out and buy the 110 call option and create a 105, 110 credit call spread. Now, this is going to cost some money because you're going to have to use some of the premium that you collected on the short call option to purchase and protect using the long 110 call option and this will reduce your potential profit, but it will help curb any additional risk should the stock continue to move against you to the upside. Creating a spread is a good way to quickly adjust the position and cut down on the potential risk or margin if it's starting to get too high.

The other way that you can hedge this position is by selling the opposing put option and creating either a straddle or a strangle with your position. If you sold the 105 call option and now, the stock is starting to rally, you could sell the 100 strike put option. Again, what you see here is that the additional premium from selling the 100 strike put option say $175 now moves out your breakeven point by $1.75 on the call side. By using the opposing contract and creating a straddle or a strangle, you can collect that premium and use that premium to help move your breakeven point further from the stock as it moves against you.

This is two great ways you can potentially again, fix a losing short call option trade. As always, we want to make sure that we have proper position sizing and the right strategy in place before the trade actually is executed or all of this stuff really doesn't work if you have too big of a position size. You should obviously reduce your position size quickly first if you haven't already. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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