The "Daily Call" From Option Alpha

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#610 - If You're In College, You Should Already Be Trading May 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 if you're in college, you should already be trading. One of the passions that I have that I will probably explore at some point later in my life is a passion to actually teach very young kids, high school, college-age kids about finance and personal finance, investing, trading. I don't feel like it's something really being taught in the universities. Now, I went to a university and got a degree in finance and I learned about options pricing. I manually calculated options pricing, but we really didn't do any serious trading. We really didn't do any portfolio modeling or back-testing in that program and that's really sad that actually, I went through that entire program and we really didn't learn that much about actual active trading.

Now, if you're in college right now or if you have a kid in college, my general opinion is you should be trading or teaching those children how to trade. That doesn't mean that you should have these massive accounts and all of this risk. I think everything should be done on a very risk defined level, so everything is done with credit spreads, iron butterflies, iron condors, so you can control the risk and teach the mechanics. But the sooner that you start or the sooner your child starts trading, the longer time period they have to accumulate the required amount of trades and numbers to see this thing work out. One of the things that is really tough for me when people come into Option Alpha is that if somebody comes to Option Alpha and they're at the later stage of their life, maybe they retired and really, they're only going to be trading for another 10 or 15 years, that's really tough because now, we're starting much later in the game and you've got to get enough trade count up to see some success, it may not happen as soon as they expect.

My thought process on this is of course, like compounding of interest over time, the sooner that you start, the better off you're going to be in the long-term and in many cases, many of these college kids that are coming out these days are just riddled with debt and student loans and so, that's going to be a drag on them regardless. It would be great if they didn't have to go through massive drawdowns in whatever money they save or invest on the process of paying off this debt and kind of stabilizing their lives. I think in many cases, it's really tough these days to come out of college, have a lot of debt and then God forbid, we get hit with another black swan or market decline and what little money they've saved up and kind of put away now gets hit by 50% or 60% or 70% and they're left stuck in an even deeper hole. Again, my thought process on this is kids or college students should absolutely be trading already. Don't go crazy with it. They shouldn't be doing these large trades, undefined risk, super risky trades. Do the very basics, the credit spreads, the iron condors, the iron butterflies. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#609 - When Does A Stock Stop Falling And Hit Bottom? May 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 answer the question – "When does a stock stop falling and hit bottom?" And so, the answer to this question is actually very simple. A stock will stop falling and hit a relative bottom when there is equilibrium between the amount of sellers and the amount of buyers and the per share price that they agree on. For example, if a stock is continuing to fall and say is at $100 and then falls to $90, well, that shows that there's still not an equilibrium in price. Market participants, the buyers who are willing to buy and the sellers who are willing to sell have yet to agree on a price at which both parties are now in balance.

And so, when we start to see a stock fall and continue to push through multiple levels of support or start to crash through levels of old resistance, what that's basically telling you is that we have still not found a price at which it would be attractive enough for enough buyers to come in and buy up all the shares that all of the sellers are selling. And so, until that equilibrium is reached, the stock will continue to fall until it hits a point at which there's enough buyers attracted enough by the low stock price to offset the amount of sellers who are willing to sell at that price and at that point, that's where the stock could potentially hit bottom and then start to go the opposite direction.

Now, again, this is very hard to judge. We have a very hard time as regular retail traders. Even using a bunch of technicals and charting indicators and all of these different things we have to our advantage, it's still really hard to pinpoint these tops and bottoms of where markets are going to be because we just don't know when buyers are going to come in and feel like it's an attractive deal. Try not to pin it. Try not to look for the actual bottom. Try to trade these relative ranges around selloffs and around rallies in stocks. Ultimately, you'll be more successful doing it that way. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#608 - Why Do Stocks Reverse Split? May 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 answer the question – "Why do stocks reverse split?" Unlike a regular stock split where you see the share price of the company go down as the company issues more outstanding shares, usually in say a two for one or a three or a five for one stock split, in a reverse stock split, the stock share price goes the opposite direction and actually goes up. And so, what happens is that the company actually takes outstanding shares out from the float or the market open interest of those shares and actually exchanges say two shares in exchange for one share. And so, they actually try to remove outstanding shares in the open market and therefore, push the per share price of the company higher. The real question is again, "Why would companies do a reverse stock split?" Well, first of all, if the company is in a downward spiral of stock price, there is a risk that the potential of the company could be delisted from the exchanges if the price gets too low. Sometimes when company prices go public or they do their IPO and their price is $25 or $30 a share, well, if the company's having a tough time, the per share price of the company might go down to $1 or $2 or even start trading in the penny range and if that happens, then there's a real risk that they get delisted from the exchanges. What companies will often do is they'll go through a reverse stock split and they'll try to push the stock price back up by removing outstanding shares in the market and this will again, not change the value of the company, but just the per share value of the stock. And so, it's an effort to maybe hopefully stabilize the stock, maybe gain some perceived value in the market because now, a $1 stock could be trading for $5 if they do a five for one reverse stock split. There's a lot of reasons why they might go through that.

There's a lot of ETFs that actually go through a reverse stock split as well. Some of the more notable ones are some of the bearish or leveraged bearish ETFs. Things like VXX or UVXY, some of these other bearish type ETFs actually end up going through a reverse stock split just because their core pricing structure is such that the stock price will continue to go down and start to approach zero over time. What these ETF and ETN providers do is they reverse stock split many times over to push up the share price again, so that it has a lot more liquidity, it has a lot ease of trading and actually can have some more room to fall before they reverse stock split it again. Many of these ones like VXX have actually gone through numerous reverse stock splits over the course of their history. It's a really interesting thing. Again, it doesn't really impact what the company is doing or what the ETF is doing at an underlying basis. It's just an accounting metric change, again, reducing the number of open shares or contracts available in the market and therefore, pushing up the per share price of the underlying security. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#607 - Why Do Stocks Split? May 21, 2019

Show notes

The real question is again, "Why would companies do a reverse stock split?" Well, first of all, if the company is in a downward spiral of stock price, there is a risk that the potential of the company could be delisted from the exchanges if the price gets too low. Sometimes when company prices go public or they do their IPO and their price is $25 or $30 a share, well, if the company is having a tough time, the per share price of the company might go down to $1 or $2 or even start trading in the penny range and if that happens, then there's a real risk that they get delisted from the exchanges. What companies will often do is they'll go through a reverse stock split and they'll try to push the stock price back up by removing outstanding shares in the market and this will again, not change the value of the company, but just the per share value of the stock. And so, it's an effort to maybe hopefully stabilize the stock, maybe gain some perceived value in the market because now, a $1 stock could be trading for $5 if they do a five for one reverse stock split. There's a lot of reasons why they might go through that.

There's a lot of ETFs that actually go through a reverse stock split as well. Some of the more notable ones are some of the bearish or leveraged bearish ETFs. Things like VXX or UVXY, some of these other bearish type ETFs actually end up going through a reverse stock split just because their core pricing structure is such that the stock price will continue to go down and start to approach zero over time. What these ETF and ETN providers do is they reverse stock split many times over to push up the share price again, so that it has a lot more liquidity, it has a lot of ease of trading and actually can have some more room to fall before they reverse stock split it again. Many of these ones like VXX have actually gone through numerous reverse stock splits over the course of their history. It's a really interesting thing. Again, it doesn't really impact what the company is doing or what the ETF is doing at an underlying basis. It's just an accounting metric change, again, reducing the number of open shares or contracts available in the market and therefore, pushing up the per share price of the underlying security. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#606 - What Is A Stock Split? May 20, 2019

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question – "What is a stock split?" A stock split is exactly what it sounds like. For whatever reason, the company decides to split their stock and effectively cut the share price in half or by a third or by a fifth and issue a lot more shares in exchange. A very simple example of this would be if a company's stock is trading at $100, they might decide to go through a two for one stock split, in which case, every investor that owns one share now owns two shares of the company at half the price or $50 per share. Now, no value was basically erased or created from going through a stock split. It's just an accounting measure to change the per share value of the company based on the float or the number of shares outstanding that are issued. Again, if you have one share that's worth $100 and now, after the two for one stock split, you have two shares, each worth $50, you're still effectively in the same position, valued at the same company level for the stock.

Why do companies do this? In many cases, companies do this to push down the perceived value of the company and they will issue new shares and split the stock sometimes two for one, three for one, five for one stock splits, so that they push down the value of the company on a per share basis, potentially making it more attractable for people to come in and buy up the company. In fact, I often hear this a lot and it's really interesting and fascinating for people to tell me this. Usually, it's friends or family or local people I talk to about what I do and I'll tell them what I do and they'll say, "Oh. I bought X, Y, Z company at $5 a share and now, it's trading for $10 a share." Well, that's a great investment and great trade for them, but buying it at $5 a share is really negligible compared to buying something else at $50 a share if the stock at $50 a share has 10 times less contracts available. You can't base the value of a company just purely on the stock price. You have to use so many different factors. But still, companies will split their stock and reduce the ownership interest per share and push down the price for many different reasons. Again, one of those reasons is potentially to attract new people with a lower price.

Now, you do see in the opposite happen where companies don't split their stock. Sometimes they never split their stock. Berkshire Hathaway is a great example of this. Stocks never been split, trades for hundreds of thousands of dollars per share because they've never gone through a stock split. This is a good example. You can look up more information on stock splits obviously online, but just keep it in the back of your mind. Again, it doesn't change the value of the company. It's just an accounting metric to change the per share or contract price. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#605 - IPO Basics: What Is An Initial Public Offering (IPO)? May 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 discussing IPO basics. In particular, we're going to be answering the question – "What is an initial public offering or an IPO?" You've probably heard this terminology thrown around all over the place and we do go through cycles in the market where we see more or less IPOs. We've recently gone through a cycle in the last year or so where we've started to see more tech companies start to IPO. And the idea behind an IPO is simply what it sounds like and that is an initial public offering of the company stock for people to purchase. This is the big transition that companies make from being private enterprises owned by individuals and a lot of investment companies and now transitioning to a publicly traded company. And this initial public offering is just the very first day that the stock actually starts trading in the open market and this is the opportunity for people like me and you, retail investors, to actually get into shares of this company on let's call it the ground floor or day one of their trading. Now, this doesn't, of course, necessarily mean that you're going to always get the best price. We've seen with a lot of tech companies recently that their IPO price actually ended up being higher than where the stock closed just even a couple of days later. Although we have seen before historically in the past, some companies IPO at a low price just continue to shoot up higher and basically never trade lower than their IPO.

I think it ultimately is determined by the company that you're investing in. Many people still have to remember that IPOs are not a surefire way to make money and you should still underwrite and value the company that you're choosing to buy shares in or not. For our purposes at Option Alpha, we don't care about any IPOs because options trading doesn't even start on day one and in many cases, starts weeks or months later. We would never trade an actual IPO security, neither the day, nor the days following an IPO offering. What we usually like to do is trade things that have a long history of liquidity and activity in the market. We feel much more comfortable doing that as opposed to actually trading IPOs. But again, the idea here is that IPOs are the very first stage of the initial capital from private companies starting to now raise capital in the public markets by issuing more shares, hopefully fueling more growth in the future. That's always the dream, that's always the pitch and some people do it, some people don't, so we'll see what happens. As always, if you guys have any questions, let me know and until next time, happy trading.

#604 - Trend Line Stock Charting Basics May 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 trend line stock charting basics and just helping you get an idea of how to look at potentially, trend lines on a stock chart or how to draw trend lines on a stock chart. Ultimately, a lot of what we're going to be talking about today though is highly subjective. That's my biggest rub really with trend lines and with charting or classical chart pattern readers if you want to call them that, is that it's highly subjective. Now, this doesn't mean that obviously, there aren't great people who can do it. I think they are the exception rather than the rule. Guys like Peter Brandt have obviously proven a track record of being really great readers of charts, but I don't think that's everybody. I think a lot of people leave chart reading up to interpretation and subjectivity and that can create a lot of different chart styles and trend lines even comparing among your friends and peers.

When we talk about trend line chart basics though, a trend line is just simply what it sounds like. It's either an increasing or a decreasing line that the stock will generally follow or seems to have a history of following and usually, they're drawn on a much longer time period. Although they can be drawn on an intraday or even daily basis, many times, they're drawn on a couple of years or even a decade or two decades of potential charting view. And usually, what you want to look for when building out a trend line or when drawing a trend line is you want to look for relative highs and relative lows that create peaks or apexes on the chart. A huge rally up that the stock had, followed by a huge decline would create a peak or an apex at the top of that move that then could be used to draw a potential trend line and the idea is that if you can connect a couple of these peaks going back historically, that the stock may or may not follow and trade around these peaks, maybe rally up to or fall away from some of these trend lines and that could give you a good potential guide as to maybe where the stock might go in the future or where it might be drawn to just based on historical charting.

Again, the problem that I see with trend lines and I definitely see this with people who draw them, is that I could give the exact same stock chart to 15 different people and potentially see hundreds of different trend lines start to emerge and evolve because everybody sees it differently. And so, this is why in my opinion, I don't really use these for any of our trading. It's cool to see other people share ideas and trend lines and stock charts online and on Twitter, but that doesn't really change how we trade options. Again, this is supposed to be a little bit of a basic video and podcast just to kind of get your feet wet on this. If you're new to stock trading or investing, you can definitely look at trend lines and it's interesting, it's an engagement tool, but I don't think necessarily, it's the end-all be-all for potential signals. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#603 - What Should You Start Trading First? Stocks, Options, Commodities, Forex? May 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 answer the question – "What should you start trading first? Stocks, options, commodities or Forex?" Now, I think it's actually pretty natural for most investors to start their investing journey by trading stocks. Many people get used to the idea of stocks because we hear about them all the time and it's very easy to understand. You are purchasing shares in the company and you buy and sell the underlying shares. But the reality is that stocks have a high capital threshold to cross and ultimately, are a 50/50 bet unless you're holding them for a really long time period. If you want to start trading and you want to learn how to trade, we believe that options trading of course, is the ultimate trading vehicle for you. It's the only one out of the list that I presented before that allows you to trade with a high probability of success and defined risk reward characteristics. In addition, options trading also allows newbie investors to trade using spreads which allow you to get into positions with as little as $70 worth of risk and again, a high probability of success.

You can't find this in stocks, commodities or Forex which are all directional trading vehicles in which you're making an underlying assumption about where the asset is going in the future. Ultimately, it's going to be more of a 50/50 bet than if you were to trade options and again, all of the other vehicles that we mentioned, stocks, commodities and Forex require a huge capital outlay and investment that leaves you vulnerable to a lot of systematic risk in your positions. If you are going to start trading and you want to know what to start trading first, we highly suggest you look at options trading first. Yes, it's not as easy as just going out and buying a single share of stock, but just because it's not easy doesn't mean that it's not extremely effective. And so, in this case, stocks are very easy, but not effective and options are very effective, but not necessarily the easiest thing to learn. That doesn't mean that you shouldn't spend the time to do it. Again, we have tons of free training here on Option Alpha you can check out and get started on that journey. As always, if you have any questions, let us know and until next time, happy trading.

#602 - Understanding The Bid-Ask Spread May 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 help you guys understand the bid ask spread, talk a little bit about what the bid ask spread is and how it's applicable to the markets. The bid ask spread is essentially just the difference between the highest price that a buyer is willing to pay for an option contract and the lowest price that a seller is willing to accept. The way that I think about it is I think about the analogy of real estate. When a property comes on the market and is going to be sold in a real estate transaction, there's the price that the seller is asking and then there's the price that a buyer could potentially place a bid for it. And so, that difference is the spread, the difference between what someone's asking and what someone is willing to pay for that contract or is trying to pay for that contract. Now, ultimately, in many cases and especially in the options market, what ends up happening is that the buyers and sellers come to some sort of agreement around the mid price or the middle price of the bid ask spread. If the spread is very wide, say $.10 wide, you might often find that contracts are actually executed at the middle price, say $.5 between the bid and the ask spread.

Now, the reason that this is important is because the wider that these spreads become, the more illiquid the markets are. When you look at very high liquidity ETFs and stocks, things like Amazon and Tesla and SPY and IWM that have a lot of liquidity, you'll notice that the bid ask spreads are relatively tight. And so, the relatively tight bid ask spreads means that there's a lot of buyers and sellers on both sides of the market and therefore, market makers don't really have to entertain or build a market because many of the market participants are already there transacting with one another. When we see illiquid offerings or illiquid underlying contracts, especially in the options market, the market makers have to build a market for those contracts and in order for them to be acceptable in taking on the risk of potentially somebody else coming in and not having another party to transact with in the future, they widen out these bid ask spreads to cover the additional risk. In fact, this is one of the things that we talked about when we did our interview with a market maker on our weekly podcast, how you come into an illiquid market and you have to build a market for that security, but what you have to do is also CYA, cover yourself a little bit and that causes them to widen out these bid ask spreads.

Whenever you see a market that has fairly wide bid ask spreads and it is relative depending on the underlying security, how large the stock is. A bid ask spread of say $50 might be fairly tight for a $200 or $300 security versus a bid ask spread of $50 might be fairly wide for a $20 or a $30 ETF. It is all relative. It is relative based on the underlying security and how much liquidity there is in the market, but you will generally get a good idea of how wide these markets can be. The idea is that we never want to really execute positions on the bid or the ask necessarily. I don't think in many cases, you would actually get them filled, so you try to always go for the mid price and you definitely always try to trade things that are highly liquid, that you can get in and out of. The worst thing you could have happen if you're trading is trading something illiquid and you become the only person swimming in this pond or pool of liquidity and if there's nobody else there to deal with, then you have to ratchet up or ratchet down your prices in order to attract somebody else to come in and take the other side of the trade. Hopefully this helps out. As always, if you have any questions, let us know and until next time, happy trading.

#601 - Stock Basics: 3 Different Types of Stock May 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 some stock basics, in particular, the three different types of stock. Really, when you look at the broad universe of different types of stock offering, there's only really three broad categories. They can get a little bit deeper in some cases, especially with preferred and grants and warrants and things like that, but we'll just stick to kind of like the broad strokes here. The first is common stock. Common stock is what most people are usually accustomed to trading or investing in. This is just generally stock or equity in the underlying company or ETF that you're trading. Things like Apple and Tesla and GE or J.P. Morgan, those all are generally common stock issuances that you can trade.

The second type of stock is preferred. Preferred generally doesn't trade as easily or as liquid as a common stock because you have to get into preferred offerings that have preferred rights and fix or preferred dividends and so, it's a little bit more complicated, but preferred stock actually is very much the same as common stock, except that it gets paid off before common stock in the event of the company being liquidated. If a company goes bankrupt, first, you pay off the bondholders or the debt-holders, then you pay off the preferred shareholders, then last is the common shareholders or common equity holders. Again, preferred stock really just gets paid off before common and in many cases, it might come with a fix or a preferred dividend or some sort of equity distribution based on cash flow. I've seen a bunch of different things, but again, it's preferred for a reason because it's not as general or as common as common stock.

The last category is really, unlisted or private stock. You're seeing this now actually start to come up a lot more with a lot of these private equity platforms, things like AngelList where companies are now issuing private stock in an unlisted fashion, meaning it's unlisted from the public and it's more private basis, but companies are issuing these private shares to mainly, accredited individuals, although I have seen some companies who are able to issue to non-accredited individuals. I think that's going to be a bigger part of the market in the future as more and more companies come online and they see the value potentially of issuing shares in the private markets or the nonpublic markets. I think it might be a really interesting place to watch, especially when we talk about stocks. Hopefully this helps out, again, just to kind of cover these three basics. If you have any questions, as always, let us know and until next time, happy trading.

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