The "Daily Call" From Option Alpha

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#630 - How To Fix A Losing Short Put Option Trade Jun 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 answer the question – "How to fix a losing short put option trade?" This first, is assuming that you've done everything right up into the point of actually entering the short put option trade. Things like properly adjusting your position size, not incurring too much margin relative to your account, so that you don't over-allocate it. This means selling a put option probably fairly far out of the money, not necessarily a 10 Delta, but maybe a 15 or a 20 Delta, so not right at the money, but fairly far out of the money. And assuming all of these things are in place and the stock starts to go against you, there's potentially a couple of things you can do to fix or adjust/hedge your put option trade.

The first thing you could potentially do to hedge the position is simply to buy a put option at a lower strike price than the put option that you sold. This will in effect, create a credit spread trade and that hopefully will reduce the additional downside exposure beyond that long put option strike. For example, if you sold a put option at $95 when the stock was trading at $100, you could then go out and buy a 90 strike put option to add protection and create a 95, 90 vertical credit spread. Now, again, this is going to cost an additional premium and if the stock is already starting to go against you, it might cost an additional premium that's very close to the original premium you sold for the original short contract. This is more of a hedge type position that can help reduce any additional downside exposure. It still does leave you vulnerable to losing on the trade obviously. You can still lose on the position, but it reduces the additional margin that's required.

The other way that you can hedge or adjust the position is to sell the opposing call to your short put option. What we like to do is convert short put options into short strangles or short straddles. If the stock is starting to move against your put option, you can go out and you can sell a call option above the market or a call option at the market price and collect some additional premium from selling that call option. That additional premium then moves your breakeven point by that amount lower. If you sell a call option and collect that $1.50 in premium, your breakeven point on your put option now just moved effectively $1.50 lower. It helps move the breakeven point on the option contract to a lower state.

Hopefully these two little adjustment techniques could help out. Again, this is all assuming that you did the right stuff to begin the trade and you didn't over-allocate. Obviously, if you over-allocated or you have too much capital at risk, that's probably the first adjustment you can make, is just to remove a lot of your allocation or a lot of your trade to get it back into a reasonable range. As always, if you have any questions, let us know and until next time, happy trading.

#629 - Why Did My Call Options Decline on Positive Earnings? Jun 12, 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 did my call options decline on positive earnings?" This is a very common thing to happen for new traders who are playing a potential big move after an earnings event. And so, many times, people will buy call options heading into an earnings event, expecting a very big move in the underlying stock and in many cases, they might actually get the very big move in the underlying stock. Maybe the stock gaps up 5% or gaps up 3% or has a big rally during the day because of a positive earnings announcement. But the problem that they see is they see that their actual call option that they purchased declined in value. And so, the question now is – "Well, why did that happen?" When you pick the direction right and you have a call option kind of ready to go, waiting for a big move in the underlying security and you get that big move, why do you then potentially lose money because of the option price going down? And the answer to this question is that once we are through the earnings event, we actually see what's referred to as an implied volatility crush that happens. Earnings events are really unique in that they are very, very quick unknown to known transitions. The market goes from an unknown state. We don't know what the earnings of a company is going to be and quickly transitions to a known state of information which is now, we know exactly what the earnings of the company are and they re-price all of the options and all of the stock immediately.

During this event, we see implied volatility or the expectation of a big move collapse because now, known information is out in the market, it's publicly available and so, now, the stock is re-priced to whatever the price investors feel the stock is worth based on earnings or expectations and future volatility has now collapsed because we're now past these unknown or kind of like random event and now, we're into more of a steady state potentially. This is why we see call options decline in value, is because of this crush in implied volatility. As an option buyer, if you buy a call option before earnings, you're paying for this expected volatility and what we see is that more often than not, the stock does not move as far as people are paying for the expected premium. The stock tends to move less than expected. And so, what you need is you need a stock that moves not only just as much as the market expects it to move, but potentially two or three times that amount for you to counteract the decline in value due to implied volatility. This is exactly why call options decline on positive earnings because you can get the direction right, but if you miss the volatility aspect of it, you are dead in the water. Hopefully that helps out. As always, if you have any questions, let me know and until next time, happy trading.

#628 - StockTwits Launches Commission-Free Trading Platform Jun 11, 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 StockTwits launches their first commission-free trading platform. This is actually no surprise to me and in fact, I talked about this a number of months ago. My prediction is coming true that I thought that at some point in the future, all brokers are going to start gravitating towards this commission-free trading model and StockTwits being another new brokerage that's now coming out is going to be offering commission-free trading. Now, at the time that I'm actually doing this video and this recording, there's actually no platform that I can see. The only thing I see on their website is that the new trade app is coming and I just have to be informed of updates. I don't know what it looks like. I don't know exactly how it works or what the actual underlying background is, but they definitely tout it as being commission-free trading experience for stocks and potentially maybe options in the future. I don't know exactly. But I think again, this is going to be the new trend in the market. This is what I've said for a number of months and even a couple of years now I think when I started actually talking about the fact that most brokerages are going to start going towards commission-free trading. This is going to be a race to the bottom in the entire brokerage industry.

Do I think that Robinhood was the catalyst for this? 100%. Robinhood definitely made a big splash in the market by offering commission-free trading not only for stocks and for options and now, all brokers are going to start gravitating towards that. The problem is that they're going to miss a huge opportunity and this is why we're doing the things that we're doing at Option Alpha because I know that brokers are all going to be focusing on how they can cut cost and reduce everything to get commission-free trading, but what they're going to miss in that whole entire race to the bottom is adding better technology, better trading tools, better resources like auto-trading and AI technology. They're going to miss that because they're so focused just on getting commission-free trading and at some point in the future, what's ultimately going to happen is you're going to have 52 different brokers with commission-free trading and how do you determine which one you go with? Well, you can't determine it based on the commission because they're all free, so you use whatever brokerage has the best technology and this is why again, we're trying to build the tools and trying to integrate with all these brokers at Option Alpha, so that we have the best technology for options traders and then you can go out and use whatever broker you want in the future for trading purposes. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#627 - "Daily Expiration" Option Contracts Are Coming Jun 10, 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 daily expiration option contracts are coming. We've all heard about the big trend in weekly options contracts that have really been kind of growing in popularity, but the reality is that the next iteration from weekly contracts is going to be daily expiration contracts. Yes, contracts that open and/or expire on the exact same day. Now, this I think will be a big trading vehicle for a lot of people in the market and I'm interested to see how this plays out in the future because I think the market for options is going to continue to grow and I think that daily contracts actually do serve a very unique purpose which I'll talk about here in a second. The reality is though, is that it's already happening in the Euronext AEX index options. They did actually release a couple… I think it was a couple of months ago or even a couple of years ago. They released some daily index products that actually expire on different days. What they do is they filter out all of these daily option contracts that expire Monday, Tuesday, Wednesday, Thursday, Friday, etcetera, etcetera, so you can really pinpoint the expiration date that you want to target.

Now, the reason I think this is actually pretty cool is because for most investors, buying a monthly contract to hedge some specific risk on today or tomorrow or Thursday's market event, say the FED is speaking or the president is making an announcement, that doesn't necessarily make sense, it doesn't kind of align with the need to buy insurance for that particular event. Where I think that daily options expirations are going to come into play is in very specific, very focused hedging and speculation, so hedging on a FED announcement or speculating on the FED's decision on Thursday or some economic report that's coming out, GDP or earnings for a potential stock. I think that's where a lot of the growth and a lot of the drive to trade daily expirations is going to come. As an option seller, I'm really interested to see how this actually plays out in reality once more exchanges and more markets actually get daily contracts. I don't know if it's going to take a year, two years, three years, five years for this actually to hit kind of a mainstream stride, but I do think it's coming. I think it's already started. The wheels are probably in motion at a lot of these exchanges with a lot of the electronic trading to get many of these contracts back on the books and I think it'll be interesting to see how it plays out. Will I jump into it right way? Probably not, but I think it will be a potential source of income for the future. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#626 - Can I Be Assigned An Option Contract Even If It's OTM? Jun 09, 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 – "Can I be assigned on an option contract even if it's out of the money?" This is a common question that a lot of people have and I think the root of this question is just the fear of assignment. Most people actually fear that when the option contract goes in the money, that immediately, the option contract is going to be assigned. Now, we know that's not the case and we've talked about this a number of times before, not only on this podcast, but also through our training and courses on the website. But now, the question is – "Even if an option contract is out of the money, do we still have risk of assignment?"

Now, technically, yes, it could be assigned. You could get a random assignment from the option buyer. But is this likely to be the case? In all circumstances, probably not. I would say the actual reality of this happening is probably very, very small, maybe under 1/10th of a percent if I were to just guess how many times this has been randomly assigned. And the reason is because if the option buyer were to assign an option contract that's out of the money, not only will they lose the option premium that they paid, but they would effectively be getting themselves into a position that loses money on the stock assignment immediately. Any rational person or even semi-rational person would not want to assign an option contract that's out of the money because they would be better off just actually buying or selling the actual stock at the market price. They would get a much better pricing if they were to assign the option contract.

Technically, somebody could just randomly hit a weird button on their computer or on their phone and accidentally assign a contract. Is that always the case? Probably not. Have I ever been part of an option contract that has been assigned, that was out of the money? Never in the last 10 plus years. I've never had an option contract that was out of the money get randomly assigned to me. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#625 - Real Estate Prices Will Go Down In The Near Future Jun 08, 2019

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, I'm going to talk about why I think that real estate prices will go down in the near future. I briefly touched on this actually in the podcast yesterday, but I think I want to spend a little bit more time on this because I think it is important and maybe we're probably at the top of a business cycle or a market cycle, especially in real estate prices and I think there's a couple of catalyst that could lead real estate prices lower. Not necessarily in all areas. I think there are some areas obviously that will not see as big of an impact or potentially no impact, but a lot of areas that have been built up or there's been a lot of hype around I think will probably be the new real estate market kind of mini crash areas, maybe markets that were similar to Las Vegas or to Florida in 2008. Those markets were really built up. There was a lot of oversupply, a lot of things that really kind of led those markets lower. We're starting to see similar types of trends in my opinion in a lot of different markets. Now, like I said, my wife and I invest in real estate and most of the investment that we have in real estate are in kind of rural suburban areas where the prices are really low, so like $75,000 to $100,000 for a property. I still think these properties could go down in value for sure, but if I lose 10% on a $100,000 house, that's not necessarily going to kill the deal. It would be much worse to lose 10% say on a $1 million property in New York than it would be to lose $10,000 potentially in value on a small property in rural Pennsylvania.

But the reason I think that real estate prices will probably go down the near future are a couple of things. One, I think interest rates being insanely low for as long as they've been is probably going to lead to higher rates at some point in the future. Do I think the FED might actually cut rates before they get into the process of raising them to fight inflation in the future? I do. I think that maybe the next rate cut is in the books. In fact, the futures market right now is actually pricing in a rate cut for the second half of 2019. But once they finish rate cuts and all this other stuff, they're going to have to eventually raise rates and when they raise rates and mortgage rates rise and adjustable rate mortgages rise, then that means that real estate prices will counteract that and have to go down, so that payments stay low. And so, this is probably one of the biggest reasons why I think real estate won't be as good of an investment in the future or at least cyclically won't be as good of an investment in the future, is because it's going to have a big correction in prices just due to interest rates. Interest rates and borrowing for the real estate market is everything. If there's no borrowers or if interest rates are high and people can't qualify for higher prices, then that means that prices have to come down to adjust. The second thing is I think that unemployment being so low and incomes being so high right now, it's probably not the best time. Could employment be better and could incomes continue to rise? Of course. But do we want to purchase at the furthest end of the spectrum and the extremes? Probably not. When unemployment is really low and incomes are really high, it probably suggests we're more closer to the end of a cyclical market or business cycle top than we are at the beginning of a bottom. Again, this could be a good reason or catalyst why real estate prices might continue to go down in the future. As people start to lose their jobs or as unemployment rises and incomes drop or stabilize, people can't borrow or take on leverage to buy bigger and bigger and bigger and bigger houses. And so, that I think is going to be a huge factor as well.

The other thing I think that's going to be a huge factor is just that right now, we have a lot of people who are living paycheck to paycheck. I know there's a recent study out there and please don't quote me on this, but it was basically roughly 50% of Americans can't afford a $400 or $500 emergency event, like couldn't pull together $400 to $500. That's a staggering number. And so, what that tells me is that any little blip that we have in the real estate, the job, the economy, anything could really dramatically affect the ability of people to not only borrow money, but to also pay their debts. And so, when you get into a situation where you go 30 days late on a mortgage or 30 or 60 days late on a mortgage or a car payment and your credit score starts to get affected immediately from that type of event, that's a devastating financial event and that could really set you back a number of months or years to the point at which you work your credit back up to being able to afford or qualify for a mortgage. I think that there's too many things to me like looking from the outside and I don't have a huge pulse on the market, but I look at kind of the broad strokes of the economy and things like real estate. I think there's probably too much to see a huge increase in real estate prices in the future. I could be wrong totally and if I am, that's fine, but that's just the way I look at it right now and I want to share my thoughts. As always, if you have any questions, let me know and until next time, happy trading.

#624 - We're Selling Our Real Estate Investments Jun 07, 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 we're selling some of our real estate investments. At the time that we're recording this, in June of 2019, my wife and I have already started the process of selling a bunch of our real estate investments. Now, it should come as no surprise because we've talked about it many years ago that my wife and I invested in real estate and we continue to snowball that same little investment that we've had into real estate multiple times now into multiple properties. This is something that she kind of manages. She runs this on her end. She's really good at it. She's actually learned the entire business from scratch. And being a teacher, she had no background in finance and does really well with real estate investing.

But what we've learned over the past couple of years is that many of our properties have gone up a decent amount in value and by no means are we making a killing on a lot of these because we usually invest in areas where we can get into the property for say $75,000 or $100,000. But they've gone up a decent amount in value and what we've realized is that we have not been able to demand the higher rents that would necessarily support the higher value. And to me, as a real estate or a former real estate investing trust analyst, I know that one of the major factors or let's say a couple of the major factors in real estate prices are going to be things like job growth, population growth and then income growth. And what we found in some of the markets that we invest in property is that we just are not seeing the income growth or the population growth to really support the increase in prices. And so, maybe the increase in prices is due to the fact that interest rates have been insanely low and generally, there's low unemployment right now. We might be at the cyclical top of a market cycle or a business cycle. And so, for us, what we're doing is divesting from a lot of these potential properties. Now, do we know that a market crash or correction is going to come? Absolutely not. But my opinion on all investing is we should take profits when we have profits on the table, no different than options trading and not try to squeeze every little thing out of it because we have no idea where it's going. Are we selling all of our properties? No. Are we selling the properties that have gone up in value where we can't really justify the increase in rent or we can't demand a higher increase in rent, just don't find anybody that's willing to pay that much in rent? Then yes, we're starting to divest from those properties.

Again, full disclosure, I'm talking about this because I want to get it out there. I think we're probably close to maybe a little bit of a mini top in real estate, definitely in some areas in markets and so, we're trying to do something about it and would love to get your feedback if you are in the real estate industry. You can always shoot me over an email. Love talking about real estate as well as any other investing generally. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#623 - Liquidity Is Still Critically Important As An Options Trader Jun 06, 2019

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be talking about why liquidity is still critically important as an options trader. I think we've talked about this a number of times even on the daily podcast here, but it still comes up a lot which is why I'm doing the show today, that liquidity is a real major, important factor in how you should be choosing your ticker symbols and the underlyings that you're trading. A lot of times, I'll see people send over comments or I'll even see comments inside the forum or the Facebook group or just online, of people trading pretty large position sizes and what I would call fairly illiquid markets or even just new markets. Recently, there's been a huge slew of new IPOs coming onto the market, companies like Lift and Zoom and now that those options contracts are being traded in those highflying tech companies, a lot of people are starting to pile into those. The problem with that is that because they are so new and because they can move so fast in particular, liquidity may or may not be there in the future when you need to exit your position.

And so, what oftentimes happens is that when you get into something that isn't illiquid trade and yeah, you might be able to actually fill the order, it might be very hard to exit the position at favorable pricing. Oftentimes, if you get into something that has liquidity challenges, it means that you're going to have to either reduce your price or increase your price, depending on what side of the trade you're on, in order to entice somebody to come into the pool and swim with you and that means that you're going to reduce the margin or the profit potential that you have in that position just based on the slippage in liquidity. I don't think it's necessarily worth it to go for these trades that necessarily are really good deals because on the back end of what looks like a really good trade, there might be a lot of struggle and hard work to get the position off and that to me is not worth it. If I can get into a good trade, I still need to make sure that I can get out of it and there's good liquidity in the market.

Again, keep this in the back of your mind as you keep going forward today and even this week or whenever you're listening to this podcast, that liquidity is still a really important aspect of being an options trader. That's why we focus mostly on very liquid ETFs, even the highest liquidity stocks when we trade stock options as well because we want to make sure that there's minimal slippage and that we can get in and out without any issues. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#622 - What College Degree Should I Get To Work At An Investment Bank? Jun 05, 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 college degree should I get to work at an investment bank?" This is kind of a piggyback off of yesterday's podcast where we talked about the fact that you don't need a degree to trade or to be in the investment space. The natural progression then is – "Well, if I don't need necessarily a degree, what degree do I need if I need any to work in an investment bank?" And I talked about it yesterday, but I'll reiterate it today. I don't think necessarily, you always have to have a finance degree. Now, this could be totally different and I'm not connected to this space like I was 10 plus years ago when I was working in it, but even then, when a lot of people went to work at an investment bank, they didn't necessarily have a finance degree or a degree in economics. There were a lot of people who had history degrees or psychology or physics or some other science degree and I think again, the key is that you have to be able to think critically and solve problems because ultimately, whatever job you're going to go into, they're going to scrap all of your knowledge and teach you the way that they want you to do it.

For example and I remember doing this when I went to work for Deutsche Bank, is they basically said... Everybody who's coming in, in a room for… It was two and a half or three weeks and the guy came up the instructor and said, "You're going to forget everything you learned in college and you're going to do it this way." And so, the next two and a half or three weeks, whatever it was, we basically learned to do financial modeling the way that they wanted us to do it. We learned on the programs that they wanted, we understood the research and the quarterlies and the 10Ks and the 10Qs the way that they wanted us to interpret them. And so, they basically said, "Look. You got to wipe your hard drive clean and you're going to learn it the way we want you to learn it." Was this probably a little bit more difficult for people who don't have a finance degree or a finance background? Of course. That's probably self-explanatory. But does that mean that you can absolutely not get a job at an investment bank or work in investments if you don't have a finance degree? Then definitely not, right? You can definitely do it even if you don't have a finance degree.

Hopefully this helps out. Again, I don't want to discourage people from doing it because I think it's really cool. I think it's a good industry to get into if you want to do that thing. Do your homework, do your research. Figure out where you want to be. Talk to some people in the industry and make sure you want to get there. But again, don't let any sort of degree necessarily hold you back. Hopefully this helps out and as always, if you have any questions, let us know and until next time, happy trading.

#621 - You Don't Need A Finance Degree To Trade Professionally Jun 04, 2019

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be talking about why you don't need a finance degree to trade professionally. A big misconception I think in this industry and I get why people have this misconception, is that you need a finance degree specifically to be able to either work on Wall Street or to be able to trade professionally. But the reality is (and even more so today than it was even say 10 years ago or 15 years ago) is that you don't need a finance degree to trade or work on Wall Street or work in investments, any of the above. In fact, I'll even use a quick example of that like really proves this point and was really kind of actually shocking to me at the time because I didn't know any better kind of working from school and going to work on Wall Street for Deutsche Bank. A lot of the people that worked in our M&A department with us actually did not have finance degrees. Now, were there a decent amount? Of course. There was probably the most prevalent degree, but there's actually people in our like pod that we were in specifically that had degrees in history or psychology or physics.

I mean, it doesn't matter necessarily that you have to have a finance degree. Do you have to understand finance? Should you probably have a little bit of like a financial background to do something, trading or investing professionally? Of course, that's definitely going to help, right? That's like a mechanic in an auto shop not having any idea of what a car is or what the engine is versus the transmission. You should have an understanding of what those components are, but do you need to have a finance degree to do this? Absolutely not. I think one of the things I learned for sure being in New York and kind of seeing other people is that most banks and most institutions are looking for people who can think critically and solve problems. And so, that's not limited to just people with a finance degree. It's really anybody. In fact, you don't necessarily have to have a degree if you have experience and you've taught yourself and you can prove that you can think critically and solve problems. Hopefully this helps out. Hopefully it kind of gets you over that hurdle. If you've been searching or you just have this question and this kind of popped up online, we'd definitely like to help out. As always, if you have any questions, let me know and until next time, happy trading.

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