The "Daily Call" From Option Alpha

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#540 - The Definition Of A Bear Market Mar 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 talk about the definition of a bear market which is simply just this idea that securities or any underlying index would fall at some point. Typically in the same year time period, so in a 52-week time period, it would fall a total of 20% from peak to trough. And so, when we see a security or an index fall by more than 20%, it's classically defined as being in a bear market. Now, this can easily reverse and it can be an intraday bear market. We actually saw in a lot of securities back at the end of 2018 with kind of the reversal and crash that the market had during that period, a lot of securities actually entered a bear market even short-term for a day or so before they bounced out of a bear market. It can happen on a very short period of time, but it's just simply the correction in pricing of 20% from peak to trough.

Now, my personal problem with this is that everyone's always looking for 20% as the linchpin of saying this is where the bear market starts, but we all know that bear markets can start much higher and can take much longer to get to 20%. I really think about bear markets as being stagnant growth or no growth at all. If I see a stock chart or if I see a security that's starting to trend lower, it may not hit 20% yet, but if it had been trending lower over the last two years and it's really not going anywhere, losing 1% or 2% a year, I basically consider it to be in a bear market. We also see stock charts that are basically sideways or lots of volatility with no meaningful action up or down and a lot of sideways movement. Again, to me, that would be more of a bear market. If you're not actually growing, if you're not making new highs and higher highs and higher lows on a stock chart, to me, that's really where stocks start to enter bear markets or sideways markets which could be problematic for traditional investors. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#539 - Where To Get Free Real Time Quotes Mar 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 answer the question – "Where to get free real-time quotes?" A lot of people who get started are very apprehensive to paying for market data and so, for many people, when they get started, they're trying to find free stock quotes and free option quotes. The reality is that there's a couple places where you can get free quotes out there and you can just Google search it. There's probably a list of 30 or 40. What I've even found in doing this just the other day and kind of researching this a little bit for the podcast is that a lot of these places have tons of ads, they're riddled with opt-ins and boxes and things to check. Even the CBOE, you have to physically type in the security that you want, then pull up the quotes, then type in potentially the expiration month that you want, then pull up the quote and at that point, you're already probably 10 or 15 seconds into actually pulling up a quote on something. How likely is it that that quote is still going to be relevant in that 15 second time period?

I think probably the easiest answer to where to get free quotes is to just simply open up a brokerage account and just fund it with some money. I don't think you actually have to start trading at many brokerages to actually start accessing the data, but actually having the capacity and the ability to trade and having the account open will allow you to start pulling in the brokerage data from the different exchanges. You can open up an account at Thinkorswim or Robinhood or Tastyworks or wherever you want to open up an account and then you can start seeing real data come in. Again, you don't have to make a trade, but that's probably the best place to get real-time quotes on an ongoing basis. A lot of these other places that offer what they say are real quotes come with a lot of stipulations and a lot of strings attached which really don't make that very useful for somebody who needs real-time quotes. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#538 - What Is The DJIA? Mar 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 – "What is the DJIA?" DJIA is just a short code for Dow Jones Industrial Average and to put it simply, the Dow Jones is basically just the top 30 largest American publicly traded companies. And so, back in 1896 I believe is when Charles Dow created it and he basically just threw together the largest 30 companies and this became what was known as then the Dow or the Dow Jones. And so, the idea is that this is a price weighted index that basically tracks some of the largest corporations and companies in the US and it's a gauge for how the US economy and how the US market is doing.

Now, I say it's a price weighted index because what the Dow Jones does is it price weights all of the movements of the underlying stock based upon its place in the index with regard to stock price. This means that if it's a higher stock price security, then it generally carries a little bit more weight in how the Dow moves. If you have a company that's like Goldman Sachs that's trading for a couple hundred dollars versus something like GE that was originally in the Dow and then got replaced, but was trading for low dollar amounts, $2, $4, $6 at some point, then the movement in Goldman Sachs is going to have a bigger impact and weighting on the movement of the Dow Jones in general because it's a higher priced security. If we have a 5% move in Goldman Sachs, that's going to carry more weight than a 5% move in say GE because of just purely the stock price. Now, they adjust things for splits and buybacks and mergers and spinoffs and stuff, but ultimately, it's still going to be a price weighted index.

The big benefit obviously to tracking and following the Dow is just you get a good idea of what the biggest 30 companies in the US are doing and these are companies like 3M, American Express, Apple, Coca-Cola, Exxon, Goldman Sachs, Smerk, McDonald's, J.P. Morgan, etcetera and so, you get good broad picture of what's going on. The downside obviously is that 30 companies is not the total representation of the US market, nor any market or even sector and so, there's a lot more companies that are not included which is why people often refer to both the Dow and the S&P 500 as both of the indexes you should track and follow. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#537 - What Are Derivatives? Mar 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 – "What are derivatives?" Derivatives are probably one of my most favorite topics because most people really don't understand how they work and yet, they're all around you. You probably used derivatives or you're already in a derivatives contract. You just don't know it yet or maybe it's called something different. But all derivatives are, are financial products or investment products that derive their value from some other asset. And so, basically, if you just break down the word, it's basically deriving value from something else, so a derivative. That's how it kind of comes up and that's the way I always think about it.

One of the things that you're probably in right now is a derivatives contract and you don't even know it, is any type of insurance that you have. It could be personal insurance for your life insurance. It could be insurance on your house, on your automobile, on your motorcycle, on your boat. It could be insurance for your healthcare. But all of those insurance products were price based upon you as the beneficiary or based upon your exact house or your exact automobile and driving record. Those insurance contracts are deriving their value… Their price, their premium that you pay is being pulled from the source which is you, the underlying asset which could be your house, your automobile or you as the individual person. For example, if you are say in your later stage of life and you're a little bit older, you've been smoking and you have a lot of health problems, well, naturally, your insurance cost for health insurance and life insurance is going to be much higher and if we compare this to somebody else and somebody that's young, that's youthful, that has a lot of life ahead of them, never smoked before, doesn't do anything risky, their insurance for health and life insurance is going to be a lot cheaper. Now, it's the same coverage in both cases. Maybe you get the exact same benefits when you actually buy the insurance, but the price of the insurance to get into the policy is wildly different in these two scenarios and this is how insurance products end up being derivatives because each individual contract, the contract with the older person and the contract with the younger person is deriving its value from each respective person. There's no blanket value that's derived across the market. They look at every single individual entity or every single individual asset and then derive the value from that.

That is exactly how options contracts work as well. Options contracts derive their value from a very specific ticker symbol or ETF or futures or index contract and then it's also the exact month that the contract is in and the exact strike price and what side of the market it's on, whether it's a call or a put. That's exactly how the value of those contracts are derived. They're very specific. It's not blanket across the board. We see different option prices across all the option pricing table and spectrum because each individual option contract is being derived for its value based on all of these different sets of criteria for that strike price in that expiration month in that individual ticker or individual index. That's all derivatives are. It's just something that derives value from something else. And so, it's important that you understand this because then, you can start to build frameworks and models around how value starts to be created or destroyed based on the underlying asset. If the option contract that we're trading has intrinsic value, what does that mean for us? How can we maybe increase the intrinsic value or maybe decrease the intrinsic value if we're trading on the short end? I think this is a really interesting topic in general and I think one that many people again, just don't understand because they don't take the time to understand it. But we're using derivatives and we're trading derivatives all the time when we deal with insurance and the exact same thing can be done in the options trading market and you can basically be the insurance company as an option seller. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#536 - Company Share Price Basics Mar 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 go through some company share price basics. If you're just getting started with stock trading or starting to get into options trading or as many people probably in this space have been doing since they were little kids, you've obviously been watching share prices of companies. Apple is trading for X, Amazon is trading for Y, GE is trading for Z, whatever. It doesn't matter what the company is, but we all know intrinsically that there's this company share price that's attached to each company or ticker symbol as they trade and the problem is that most people don't really understand how this number is effectively derived and they get fooled by this absolute share price and they don't ever adjust necessarily for outstanding shares or shares that have been issued by the company and this can sometimes lead people into making decisions wrongly potentially just based on the absolute share price of a company.

To kind of prove this point, here's an example I want to use just on today's podcast. If I told you to quickly make a decision as to which company you would buy, stock A which is trading for $2 or stock B which is trading for $5 and you had to make a decision right now right here to buy the cheaper company, so buy the company that is worth less money, many people would immediately default to buying stock A which is worth $2 versus stock B which is worth $5, but that may be the wrong decision. The right answer to that question would be is that you have to figure out how many shares are outstanding, what the true value of the company is because the absolute share price has nothing to do necessarily if we can't adjust that share price based on the number of shares outstanding or the float that the company has issued. Now, if I told you and gave you a little bit more information and I said, "Okay. Stock A which is trading for $2, they've only issued 100 shares of stock." Basically, the equity value of the entire company…"And this is a really exaggerated extreme answer because it's only 100 shares of stock. But the entire value of company A is only $200, $2 per share, 100 shares of stock. In this case, you could say that basically, company A is worth $200. Now, in this case, what if I said, "Well, company B is trading at $5 per share, but has only issued 10 shares of stock." In this case, company B, although it's a higher per-share price, because they've only issued 10 shares of stock, technically is the least valuable company. You're buying company B at a potentially cheaper price than company A because you're buying a company that has less float in shares, they only have issued 10 shares of stock, but the shares are actually priced at $5 versus $2. I'm assuming at this point that both companies do the same thing, they're in the same industry, they're generating about the same money. Company B actually ends up being a better investment because you buy the same stream of revenue for a much more attractive value once you factor in the shares.

Again, this is where people get fooled all the time and I see this actually time and time again even with family members. I have this conversation all the time with seemingly relatives and they always ask my opinion which I always give them the disclaimer that I have no idea where a company is going to go anyway, but they still want to know. And so, we gossip about stock and they say, "Oh. Well, XYZ is trading for $15, so that's really cheap." And I always reply back and say, "Well, it doesn't really matter because $15 could be really cheap or it could be really expensive. It depends on how many shares they've issued." The great example of this is Berkshire Hathaway which has never split their stock and so, they're trading per-share, upwards of $150,000, $160,000 per share. Now, does that mean that Berkshire Hathaway is overpriced? No. Potentially, it could be a really cheap deal at that price point because they don't issue a lot of shares. For this reason, it's also interesting to note that many companies split their stock all the time as a means to get their share price lower on an absolute basis, so that people are more willing to buy the stock. Sometimes, you'll see companies go through say a 2:1 split or a 4:1 split and they'll split their stock in half and issue twice as many shares, so that the share price goes down. Now, the value of the company didn't change. It's still the same company. It's just how the bookkeeping works. Now they have twice as many shares and the per-share price gets cut in half, but seemingly, this might make the company more attractive for people to buy. If Apple was trading at $200 and the next day, they split their stock and trades at $100, it really doesn't mean that Apple has changed in price. You're not getting it at a 50% discount because now, Apple has twice as many shares outstanding as they did the day before. Now, you're just buying an even smaller fraction of the company than you would've bought otherwise.

Again, it's really important to understand kind of these company share basics because it can sometimes again, lead you astray if you just see something trading for a small or even high value and then wrongly assume that that is attached to maybe the true enterprise value of the company. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#535 - How Reliable Are Buy Sell Recommendations? Mar 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 answer the question – "How reliable are buy sell recommendations?" And we're specifically talking about buy and sell recommendations that come from analysts. Speaking as someone who was an analyst and I was in the REIT space, so I used to cover multi-family and specialty housing office, industrial REITs which was a really cool industry, loved it a lot, I was part of a team that would write the reports. And so, we would sit down together and we would compile research, we would do analysis on the company, the industry, the sectors, the real estate holdings that these RIETs had and we basically put out our buy sell hold recommendation. The question now is – "How reliable are these?" And the answer is – I don't think they're that reliable. I mean, as a person that was actually doing it, again, what you're looking at is you're looking to figure out some sort of intrinsic value, some fundamental value in the company, but unfortunately, because of how fast things move and the fact that we have no idea how markets react to different pieces of information, I don't think that it's actually that reliable moving forward. In fact, a lot of research has shown that Wall Street analysts and analysts in general are not great predictors of stock price. Again, I was in this industry, so I'm part of this group of people who did what I think is still good work. I mean, it's hard work and it's good work. I don't think that they're deliberately trying to deceive anyone. I think it's just really hard to actually predict where a stock is going to go or how the returns are going to start to be shaped by the company.

One story that I always tell and kind of use as a reference to this is that we knew for example that with a lot of these REITs, it's a really actually simple business for many of these REITs. They have long-term leases, there's annual bump-ups, there's very little overhead. I mean, there's really not much surprise, so you can pretty much predict and figure out, project what the cash flow is going to be. And we knew for example that this one REIT was going to announce their earnings and we had pretty good assumptions after talking with management that they were going to have a pretty good quarter, that most people were kind of maybe undershooting where they were going to come in at. And so, sure enough, the REIT announced their earnings and they beat expectations and the stock just absolutely started to tank and I think it was down 4% or 5% that day. And so, the thing that I learned in that experience is that even though say an analyst, we might have known that this was a great opportunity because they had performed really well, they had bought a lot of great property, they had sold some crappy property and this ultimately ended up being a really good quarter for them, but it's the market's reaction that no one predicted and so, at that point, even though it had great expectations and beat expectations, did everything great, like top line growth was great, earnings per share was great, they paid a bigger dividend, I mean, everything you would think would send a stock higher and yet, the markets sold off on the news. And it's just really important to understand how the market reacts to different information is very unpredictable.

And so, in that moment, I realized once and for all, that market's reaction to information is not what we always think. And we see this time and time again, so it wasn't just this one event, but we've seen this with all the big names like Tesla and Google and Facebook and Apple has had it a bunch of times where Apple has just absolutely crushed earnings and beat expectations and yet, the stock sells off because maybe people's expectations were even greater than the analysts on Wall Street. Again, it's not to say that I think that people are doing bad work by writing these reports. I think they're shedding a lot of light on what the company is doing and maybe some of the long-term fundamental value in a company, but as far as short-term buy sell recommendations even on a year or two-year basis, I think it's very hard to do moving forward. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#534 - What Are Absolute Returns? Mar 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 answer the question – "What are absolute returns?" I think there's a lot of confusion out there when people talk about returns and performance and oftentimes, you'll hear people boast about their returns on a particular trade or even asset or portfolio and what they're usually referring to is absolute returns. Absolute returns basically just look at the return or the appreciation expressed as a percentage over any given period of time. This could be over a year. It could be over two years. It could be over five years. For example, if somebody invested say $1,000 and over the course of five years, they made $300, then they would say, "Oh, I was up 30% on my investment." But that's over the course of five years. Did they make 30%? Sure, no doubt. No disputing the fact that they generated 30%, but over what timeline? Then you actually get more true representation of what maybe say like an annualized return might have been during that time period.

Oftentimes… And I actually see this a lot actually with investing prospectuses lately. I don't know why, but I feel like people are starting to send me their investing prospectuses for private equity which I have no interest in doing and I see people say, "Oh, well, I invest in this portfolio or this fund because it's returned 292%, but it's been over 25 years." And so, that really isn't that great of a return over 25 years. It's actually kind of subpar what the industry should be. I think it's important that you understand the difference between absolute annualized-adjusted, cyclically-adjusted, inflation-adjusted returns and just have an awareness of them, so that when you see something, you just double check and know what that return number actually means. Hopefully this helps out. Again, as always, if you have any questions, let me know and until next time, happy trading.

#533 - American Association of Individual Investors Mar 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 describe what the American Association of Individual Investors is, also commonly referred to as AAII and basically, what their purpose is and why I think they're missing one critical ingredient to their entire system. Again, the American Association of Individual Investors, commonly referred to as AAII which you can get to by going to aaii.com I think is actually a great resource for people just getting started. It's a nonprofit organization that's basically trying to help people figure out their own financial assets, portfolio allocation, portfolio modeling, guides to mutual funds versus ETFs. They basically offer a lot of programs, a lot of education. I think they've got almost two million members as part of their whole community and their whole platform.

I think what's great about AAII if you read any articles from them and you go through some of the chapters and some of the coursework I guess you could say and journals that they have, is that they do bring in a lot of really good experts, guys like John Bogle and Ben Carson and Carl Richards, Jeremy Siegle, Thomas Howard. They've done a lot of good stuff and kind of pulling from the best of the breeds in the industry. I think what they are tremendously missing out on or like a big missing piece to this is that they don't cover options for some reason. To me, it's actually the most kind of bizarre thing, is that they barely cover… I think they maybe have three articles on options trading of all the stuff and it's just briefly mentioned. But to me, it's such a disservice to most individual investors not to at least cover options trading. Whether they agree with it or not should not be the determining factor anyway because they're not here to tell you what to do. They're here to help you make decisions and kind of lay out the facts and say, "This is the risk and this is the potential upside." or "This is the drawdowns. Here are the benefits." But for me, the fact that they don't give any real guidance on options trading I think is a huge miss, so for that reason, when people always ask me, I think it's a good starting point for people who don't know anything about investing, it's a great tool to use as a stepping block in your journey and in your path, but ultimately, it's something that I think is really missing from their program.

The other thing that I think is good from them (so, I'll kind of end it on a high note) is they always do this sentiment survey. That's always a cool little reading to see where investor sentiment is. They basically survey their audience weekly. They've been doing this for years. This is a great contrarian indicator basically. We see all the time that when investor sentiment is really high and everyone's bullish, it ends up usually being a pretty bad time for the markets and vice versa. When everyone's uber-bearish and they're very fearful, it ends up being a pretty good time for stocks in general. If you want to, you can subscribe to that. It's totally free to get that sentiment email survey and again, it's just another tool in your toolbox moving forward. Hopefully this helps out. As always, if you have any more questions, let me know and until next time, happy trading.

#532 - The Ultimate "Quick" Guide To Trading Stocks Mar 08, 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 go through our ultimate quick guide to trading stocks. I think this is actually going to be fairly short because what I want to talk about with regard to stock trading is only just a couple of key bullet points, but if you're new to trading or you're new to investing, likely, the path that you're going to take when you start is you're going to start looking at trading stocks. In fact, this is the most typical or usual path that options traders eventually get down, is they start trading stocks and then they do potentially covered calls and then they just fully commit to options trading or some sort of derivative product trading. But trading stocks is actually pretty simple, pretty easy to do because all you're trying to do is take advantage of different price points. There's no time aspect of it, there's no volatility aspect, there's no Theta decay, there's no Gamma risk. It's actually very simple on the outside. The problem is that stock trading in and of itself is very inefficient because it requires a lot of capital and it requires you to be right in your directional assumption which is by default, inherently very risky and practically unable to do on a consistent basis. We see this time and time again in research that pops up across the board, not only research that we've done, but also research that other firms and other people have done that stock trading in and of itself is incredibly unprofitable for most people because of the capital requirement that is required to purchase stock or to short stock and then of the directional risk that comes out of trying to pick where stock is going to top or bottom or if a stock is going to trade in a range or break out. It's very hard to do.

Now, this doesn't mean that there aren't people who have done it before or consistently do it now, but I think they're the exception rather than the rule. And so, my advice would be is that if you're trying to get started and you want a quick guide to trading stocks, I would say the quickest way to make money in stock trading is to actually not trade stocks and skip right over it and start going into options trading. Options trading allows you to use strategies that create high probability risk defined payouts and give you an opportunity to make money in ranges or in zones versus trying to plant your flag in the sand and saying, "Okay. This is where I need the stock to trade above and I'm going to risk a ton of capital to purchase shares in this stock and hope that it works out for the best." Because ultimately, it is really a recipe for disaster and most people are not good stock traders. I know that I originally started out trying to day trade, realized very quickly 10 plus years ago when I started doing this that I'm not a good day trader, I have no idea how to predict the market and that's okay. You don't need to be good at day trading. You don't need to be good at predicting where stocks are going to go. You just need to play the numbers, the high probability options trading system like the one that we teach at Option Alpha and use the numbers to your advantage. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#531 - Close For Small Profit OR Roll For Small Credit? Mar 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 making the decision between closing for a small profit or rolling for small credits. This is again, a question that came out of our Facebook community, so if you have questions and you want to send in there, you can do that. You can also submit them at optionalpha.com/ask. But someone said, "Let's say you're a week or two out from expiration and you are nowhere near your profit target, but you are showing a small profit. Is it better to close the trade and take the profit or roll the trade for a small credit and try for a full profit in the next month?" This one's on the wire. This is an interesting question because it's ultimately a judgment call of what you want to do. Here's how I would think about it though. I think obviously, you could close for a profit and remove the position and bank a win. That seems like the default answer and obviously, in this case, if you're not at your profit target, but you're showing a profit, that's easy to do.

The question on deciding to roll for a credit actually comes up when I think about this as asking myself where my position is next month for next month's portfolio. If I have a position now that's kind of iffy and maybe it's a bearish position, do I want to roll another bearish position into next month's portfolio? Let's say that next month's portfolio was already super bearish and tilt. We already have 45 different bearish positions. Not that that would be the case. I'm just trying to use an exaggerated example, so it proves the point. But let's say next month's portfolio already has 45 bearish positions. Do I really want to roll this position to the next month just so that I have an opportunity to take more profit off of the trade when that would create more unbalance in the next expiration period for me? Now, if this was a bullish trade that I had, maybe a put credit spread and I'm looking towards the next month and I've got too many bearish trades on, I need some bullish trades, well, then yeah, in this case, maybe rolling to the next month (because it's a bullish position that helps balance the next month's portfolio) is maybe ultimately a better decision to make, so in that case, maybe I do roll for a credit and try to maintain the position.

Another thing I would think about is what other positions do I have in that same ticker for the next month. If I've got two positions in the current expiration month and I've got three in the next expiration month, do I really want to have five positions when I roll my existing two to the next month? Is that something that would take me over-allocated for that ticker? Would I allocate too much money? Is that too much risk for that type of position? I think some of these little ancillary things, you have to think about and consider. Ultimately, it's not a bad situation that you're in. It's either take profit now or hope to take a potentially bigger profit later. I think it's a function of what the portfolio looks like the next month. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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