The "Daily Call" From Option Alpha

Latest Episodes:

#440 - What Is Historical Volatility? Dec 06, 2018

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 historical volatility?" Historical volatility is simply the volatility that has happened historically in the past for a particular security at any given time or during any given time period. Now, most people actually honestly still confuse this with implied volatility. But implied volatility is forward-looking. Implied volatility looks at the possible or projected or expected volatility that a stock might exhibit moving forward into the future. Historical volatility is easy to figure out. We know historically that Apple might have been volatile with a 20% up or down move in any given time period. That's something that we can look at retroactively or retrospectively and figure out what the historical volatility is of Apple.

Now, the reality is that historical volatility has sometimes very little to do with what their projection of future implied volatility could be. We could see a dramatic shift in a company and they go from a low volatility company to a much more high volatility company or vice versa. We could see a company go from high volatility to an extended period of low volatility. But again, historical volatility is only one metric that we maybe should be looking at or factoring into our analysis when trading options. The good news is that most things that are highly liquid, most ETFs, most highly liquid stocks already factor in historical volatility to its implied volatility projection and again, implied volatility is more often than not, going to be an overstatement of the actual or historical volatility that happens in the future. It's important that you understand the difference between historical volatility, what happened in the past and implied volatility, what is expected to happen in the future. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#439 - Great Swimmers Can't Beat Strong Currents Dec 05, 2018

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 great swimmers can't beat strong currents. And this topic comes in the face of potentially a declining market in what we've seen over the last couple of months, is definitely the markets having a little bit more volatility. And what I think is particularly interesting about this market downturn is that you could even say that some of the tech sector stocks including most of the FENG stocks have really kind of led the decline. In fact, some of the FENG stocks are actually technically in a bear market or at least intraday, we're in bear markets this last week.

It's interesting to me because I think a lot of people have this misconception that great companies have this ability to circumvent the broad economy, the broad market dynamics and I always think about this line in that great swimmers can't beat strong currents. No matter how good a swimmer is, no matter how good a company is and how great their trajectory is and how fantastic their product is, sometimes they just can't beat, they can't overcome the overwhelming force of a strong current pulling them lower or pulling them back and I think this is what we're seeing now in the FENG stocks and I think it's a great reminder of the age-old saying that a rising tide lifts all ships and that's the whole saying in the market, is that the market is still one big economic force in the ecosystem. And so, when the market goes down, when the global economy starts to maybe falter a little bit and we start to see declines in the global economy, that doesn't mean that all these great companies are going to buck the trend always. They still might have some sort of exposure to global economies, to other sectors or other countries that you might not have thought about, but the market does and the market always is right in that it's always looking forward in the future and sometimes these really highflying companies just don't have enough power to power through a market downturn.

I think it's a good reminder again and just keep it in the back of your mind. Again, even if you Michael Phelps on your team, he can't probably beat the current and the power of the Amazon River. Strong currents are always going to beat great swimmers. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#438 - How Do You Find Weekly Options Contracts? Dec 04, 2018

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 do you find weekly options contracts?" If you are interested in trading weekly contracts or if you have an interest in trading the nonstandard monthly contracts, then the easiest way to find these weekly contracts is most likely to go into your broker platform and just simply look at the date of the options expiration and what you're looking for is you're looking for the expiration date to be not the third Friday in the month and that's a very simple way of saying basically, you're looking for every expiration date that does not line up with a regular or traditional expiration dates for monthly contracts which is the third Friday in the month. For example, heading into December this year because we're doing the podcast right now in December, the December contracts that would be the monthly contracts would expire on the 21st of December. That would be the third Friday in December. You would look for weekly contracts which would be any other expiration date in December except for the 21st.

Now, as one other additional caveat, what you have to understand is that the December 21st monthly contracts will basically act as the weekly contracts once you get into that week of expiration. There's no weekly contract for the same expiration date because the monthly contracts, the last week or that last week of expiration will now act as the weekly contracts. But for example, you could trade the December 7th contracts, the December 14th or the 28th. Those are pretty standard weekly contract dates. Now again, many broker platforms have some sort of way of distinguishing between the monthlies and the weeklies. Thinkorswim and the other brokers like Tastyworks also just label these as weeklies or monthly contracts, so you have a better understanding. But again, all you're looking for to find these weekly contracts is any date that is not the third Friday in the month. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#437 - Investing Styles Do NOT Exist Dec 03, 2018

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 investing styles do not exist. Now again, I know this might be a little bit controversial and I want it to be. I want to get your opinion on this. I want you guys to hear my opinion on this. But I've often seen and people actually just sent me an article the other day which kind of prompted this quiz as to – "Kirk. Take this quiz and see what investing style you are." And I thought to myself – There are no investing styles. I totally do not believe in this ideology that there are investing styles that exist in a vacuum and that everybody no matter what style you are could eventually get to the same point because it doesn't happen that way. In investing, there are things that are and are factual-based investment decisions and things that are not and you have to differentiate between those and there's no style that one style would then get to the exact same point as potentially say another style. For example, if somebody walked up to me and they say my style is high-frequency penny stock trading. Well, that's great that that's what you like to do, but that style does not exist. That's just your vehicle of choice that you're choosing. You're choosing a vehicle which is high frequency penny stock trading, but the fact remains, the data proves that that is not the most optimal vehicle that you could possibly select for your portfolio. In investing, I think of kind of in black and white terms like either something increases my ability to generate income and generate wealth while reducing risk or it doesn't. It just increases risk and it's very speculative, super low probability of success. That's why I don't think that there's any styles. You hear styles like, "Oh, I'm a diversification guy." or "I'm a value and growth guy." But the end result is that some of those things either work or they don't and just because your style is to have a propensity towards investing in growth companies does not mean necessarily that that is the best avenue and just because you're going to force it with your style of investing in growth companies does not mean that you can't be beaten by somebody else.

I think about this in terms of like even people who graduate from high school or college because this is where we see a lot of style and diversity, but people get to the same result and then they think that it can translate over in the investing world, but it doesn't. You take somebody who is a night owl and they study all the time at night and they do all of their best work at night. They could end up graduating with the same degree, the exact same outcome as somebody who would wake up early in the morning and study and do all their work early in the morning. Two different styles of studying or learning, the end result is that graduating or getting that degree is the same exact outcome. Well, that does not happen in the investing world. You have two different styles of people, one person who invest high frequency penny stock trading and another person who might run an option strategy. Those outcomes are going to be completely different. And so, we can't say, "Oh, it's good to have your investing style." I think it's probably bad to choose an investing style. Your style of investing should be to generate the most amount of money on a per unit of risk basis humanly possible and whatever that ends up being for you ends up being where you should gravitate towards. I think it also pigeonholes people to choose an investing style because it limits their ability to then select a different type of trading vehicle or to move funds into a different vehicle. If you say that you're a growth person, well, now you've pigeonholed yourself into only growth companies and although it might seem kind of trivial that you wouldn't think to yourself – "Well, I could definitely change, Kirk. I can move." But once you have identified yourself as one style of trader and you've put your flag in the sand and you've made your public or private declaration to yourself, in either case, you actually pigeonhole yourself mentally and psychologically to only looking for those opportunities and you miss a huge sloth of opportunities that could come down the pipeline. Again, I don't think that there's investing styles. I would totally disagree on this. I think there's things that either work or don't work in this business especially in the investing world and I think you just have to find the things that work. And so, maybe my style is find the things that generate a positive expected return and go after those. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#436 - Financial Markets Often Do What We Least Expect Dec 02, 2018

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 financial markets often do what we least expect. This is a really interesting topic and I think one that I really wanted to drive home today in the daily podcast, is this idea of taking the contrarian or opposing view with respect to where financial markets are and where financial markets might be going. Now, it's hard to do because we are so bombarded by media and what we hear and what we read and influences of others that we often get pigeonholed into an ideology or a thought process that can be completely backwards from what actually might happen in the markets. And so, what I try to do often is try to remove myself from all of the noise and the chatter and try to figure out what do most people expect the market to do and then assume that the market does the complete opposite because what I know to be true is that the market is a very difficult thing to manage and I'm not trying to predict where the market goes on an ongoing basis, but basically just try to keep my head on a swivel and look at different opportunities and play through different scenarios in my mind in case the unexpected happens. And I'm sure there's a zillion examples of this, but I want to go through potentially three examples of the markets doing exactly what we least expected them to do and these are really good examples to remember as you keep moving forward.

The first example would be the Trump election. Heading into the Trump election, everyone would have thought that a Trump election was going to be bad for the markets. In fact, the initial kneejerk reaction of the markets after Trump was elected was that the S&P 500 futures were basically crashing. I mean, the overnight futures were crashing. But then everything turned around and we had a massive rally in the stock market. Now, I don't care if you like Trump or not and it doesn't really matter on this podcast which political opinion you're on or which side you're on. The idea is that most people would have assumed heading into that, that a Trump election was bad for the economy, bad for the markets, bad because it was unexpected and it ended up turning out to be a huge rally in the stock market that nobody saw and "nobody saw this coming." Another example of this would be potentially the dollar run that we've had over the last year. If you would've looked back over the last two years or so, we would've seen that the dollar had a huge drop and nobody would've maybe expected the dollar to be as strong and as stable as it was. And even in the face of potentially higher interest rates and a higher deficit and all this additional spending at the government level, many people might have assumed that the dollar was going to go lower, but it didn't and that's again, a huge disconnect between what people expect and what actually happens in the market. Another great example of this is just literally this month with the huge rise in natural gas prices. Natural gas has been basically nonexistent, has been a no headline type of event and then out of nowhere, natural gas prices rise I think 30% or 35% in a matter of a couple of days. It did exactly what people least expected it to do and as we talked on the last podcast, blew up one hedge fund as a result of it.

The idea here is that when you're trading, please don't assume you know where the market is going to go and I'm not saying I do for any at all. I don't know where the markets are going to go and that is a huge advantage I think to trading, is just having this understanding that – "I don't know where the markets are going to go and that's okay." But try to put your head on a little bit of a swivel and think to yourself – "Okay. At this moment, everyone's thinking this is going to happen, but what if the other alternative happened?" I often think right now as we're maybe in some sort of topping process or not in the markets, we're starting to slow down with the gains on the S&P and the US equity markets. What if the markets did turnover? What if we were in the middle of a correction and we don't even know it? What if we're in the middle of the next recession or depression and we don't even know it? And trying to get your head to start thinking about these alternate paths that the market might take, so that you preplan your trading strategy around that. We've talked about it before on the podcast, this idea that in football, a quarterback would go to the line of scrimmage and they have an idea of where they're going to go with the ball if six or seven different things happen in that play. They don't just walk up and say, "Okay. I assume that this guy is going to tackle me." No. They know that – "Hey. I could get pressured from this guy or this guy could come off the edge or they could blitz from here or they could not." And that could change the whole dynamic of the play kind of mid stream. It's having this awareness of different opportunities that you might have in different markets or how you might adjust your portfolio if different things happen. I think it's really, really important and this kind of preplanning and mental game is not something that people talk about often, but I think it's super important. Again, expect that the markets are going to do what is least expected. If everyone's expecting a huge rally, expect a decline. If everyone's expecting a decline, potentially expect a huge rally and try to prepare yourself for either scenario. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#435 - The Only 2 Reasons Why OptionSellers.com Blew Up Their Hedge Fund Dec 01, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through the only two reasons why I believe optionsellers.com blew up their hedge fund. If you're listening to this podcast or if you clicked on it from Google or somebody shared it with you, hopefully this will give you a little bit of insight and understanding as to why this hedge fund that was shorting naked calls and puts in the market blew up and I think that the reasoning behind this is a little bit different than what most people would assume. I think the problem that I see with optionsellers.com is twofold and then at the end, what I want to talk about is why they were basically doing things completely wrong. You'll see as we go through the number one and two reasons here, but again, you'll see why these things are completely wrong and backwards even probably based on their own logic and in-house risk management system which they probably just failed to follow. But the number one reason why they blew up is probably over-allocation and position size. I would dare to say that once all the information comes out that this is probably the number one reason why their hedge fund blew up and it's because they had too large of a position not only in natural gas, but also in short contracts in crude oil. And so, this huge exposure on the short side when selling option contracts leaves you open to the possibility that a random black swan event like what we saw in natural gas just recently and crude oil creates an exponential type of risk scenario. And so, an over-allocation or too large of a position is cardinal sin number one for me and has been something that we always talk about here at Option Alpha as being the first line of defense for any option selling activity, is to keep position sizing under 5% of risk for the position, not premium, but risk and I would almost 100% bet that optionsellers.com had way too large of a position size for all of their accounts.

The number two reason why I think that they blew up their hedge fund is because they were too focused or highly concentrated in one industry and sector which again, is probably cardinal rule sin number two for us here at Option Alpha, is not to have too much exposure into one industry or sector. Look. They had a huge position size in natural gas and crude oil and not only that, but they had it in basically just the energy sector with almost nothing else in their portfolio. And again, I don't know for sure what they had in their portfolio because none of that stuff is out, but I'm assuming that based on the fact that they blew up overnight and it was mainly tied to those based on the video that they put out that those are probably the largest positions and potentially the only positions that they had in their portfolio for clients. Now, this is a problem because again, what you have here is you have this sequencing risk that if you're focused on one or two industries and just randomly, those industries at the same time or those sectors at the same time experience a black swan a-systematic event, then you have the propensity to have massive drawdowns and huge risk to increasing implied volatility and they basically got hit with the one-two punch of like "Don't do this and don't do this." and they did them both at the same time and basically, their number just came up and the market wiped them out. The lessons that we can learn from this I think are many, obviously and if you're not looking at this as a huge opportunity to learn as an options trader, you're totally missing the boat here.

The problem that I'm going to definitely see with option sellers is that people are going to assume that what option sellers did is then standard for what most options traders do which is probably not the case. The way that you should be trading options includes not doing those two things and it's something that we've always talked about here at Option Alpha for decades now. We've talked about keeping your position size in check all the time, trading small allocations, keeping risk in check for every single ticker that you're in and in addition, what we talk about at nausea is the idea of diversification of tickers, this idea that we never want to be selling options as high as implied volatility is, as lucrative as one industry or sector might be. We never want to be selling options in the same one or two or even three industries or sectors of the market. Many times, we often add low implied volatility option selling strategies to our portfolio in order to reduce the systematic risk of one of these industries or sectors blowing up like what happened in natural gas and crude oil. Oftentimes, we'll add exposure to utilities and retail and financials and bonds in many cases just so that we don't have all of our eggs in one basket. I mean, it really comes back down to like investing and portfolio management 101 and again, why they didn't have these checks and balances in place, I have no idea and maybe that'll come out in the future, but it's pretty clear that these two rules here were violated.

I think the other thing that I'll mention here is kind of like rule number three for us if we were to rank them is cash, is having lots of available cash. Now, I don't doubt that they probably had more cash available at the time that they entered the trade, but clearly, they were not anticipating the huge run-up in implied volatility and by shorting so many naked contracts, they left themselves overexposed to a run on cash. Now, our suggestion for all of our trading is that basically, you should have at least 50% of your account in cash at all times and that includes making the assumptions that if you have some short option contracts that those could double or triple in margin exposure any time. In fact, we often tell people to reduce the number of contracts that they have with short option trading. If you're going to do short naked calls and short naked puts, that's not a bad thing as long as you keep them low and low proportion or percentage of your account. You have to keep those in check because they could double or triple or quadruple in margin requirement overnight and you need to have ample cash to be able to handle those. Again, it's not something I think that they probably did not do over there or at least did not do well. It's a really good learning opportunity. It's a great reminder of why we tell people to keep things small, not to be greedy, to play the long, steady, consistent game which oftentimes does not look appealing and is not sexy, it's not what people want. People don't want slow and steady or low volatility in their account, easy up and down months. They want these massive gains and sometimes this comes back to bite them in the butt because they take on a ton of risk, they over-allocate, do all the things that they shouldn't be doing which ultimately ends in massive failure. Hopefully this helps out. I'm sure there'll be more on this and we'll continue to chat on this, but if you have any questions or have any comments, as always, please reach out to me and let me know and until next time, happy trading.

#434 - How Do You Manage A "Fat-Finger" Trade? Nov 30, 2018

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 how to manage a fat finger trade. What is a fat finger trade? A fat finger trade is basically this idea that you just mistype something on a keyboard or your finger just kind of slipped or you hit two zeros instead of having one zero and so, you ended up trading 100 contracts and wanted to trade 10 contracts or you just incorrectly typed the ticker symbol or miscalculated something, any combination of that, but you basically just entered a trade you did not mean to enter. Now, look. I've done this all the time and in fact, the reason I'm doing this podcast is because I just did this like literally about a week ago where I exited a trade that I should not have exited, but I just didn't catch it. I didn't think through the process. I thought I was looking at one thing. I meant to look at something else and I executed a closing trade on something that we had literally just entered the day before. It caused a lot of confusion, obviously, a lot of emails, but again, it proves that one, I'm human in doing this for real in my real account and then two, it can happen to anybody. I've been doing this now over 10 years and this is still something that happens to me on occasion. Though not as often, but it's a good reminder that it does happen. But the idea behind fat finger trades is again, that it was a trade that you did not need to make.

What do you do or how do you manage them if you made the trade? Well, number one, if it's a closing trade, it's pretty easy because you just close it and if it's an early close of a position, if it was profitable, most of the time, you just let it go. In this case, the fat finger trade that we made was a closing position. We closed it for a whopping $4 profit. That was great because it closed literally the next day. We just let the position go. We didn't try to rush or reenter it. If it's an opening trade that you made and maybe you made a trade in the wrong contract month or you did the wrong number of contracts, the best thing you can do, honestly, is just quickly reverse the trade and that means even if it cost you a couple of pennies in pricing or it cost you a little bit in commissions, the idea is that if you didn't want to be in the position to begin with, then just get right back out of the position and I've done this before myself too where I've made a trade and I just literally typed in the wrong ticker symbol, one extra wrong letter, built the whole trade, etcetera, but it was on the completely wrong stock that I was trying to target and I just reversed the trades very quickly. Sometimes I take a $20 or a $30 haircut because I take basically the next available pricing, get the trade off. I didn't want to be in that trade to begin with, so I want to remove the risk and the exposure and it's just a cost of doing business. We try to minimize these always in trading and this is part of the human error element to trading which I think is interesting, but again, if you have a fat finger trade or you just do something wrong, just quickly reverse it. Catch your breath, walk away for 10 minutes, whatever you need to do and then come back and just reanalyze things and go from there. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#433 - Why Enter Uneven Or Skewed Iron Butterflies? Nov 29, 2018

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 enter uneven or skewed iron butterflies?" There's probably two reasons why you would want to enter an uneven or skewed iron butterfly. The first reason why you might enter one of these is because you have some sort of expectation that the market is more likely to go in one direction versus the other. For example, if you thought that a stock had a higher chance of moving up after a move down, then you might enter a skewed iron butterfly that reduces some of the upside risk should the stock actually move up from the price point that it's at right now. Again, one of the reasons why you could enter one of these skewed positions is basically the assumption of where the underlying security is going to go after your trade entry. Maybe you have some technicals that you're going to use. Maybe you have some sort of charting patterns that you see developing. Well, whatever the case is, you have this assumption that the stock is going to move maybe in one direction at a greater likelihood than the other direction and so, you'd create a skewed iron butterfly for that scenario.

Another scenario or the second scenario where you might use an uneven or skewed iron butterfly is just purely because of pricing and this is something that I see often with the trades that I make here at Option Alpha, is that we end up generating or building skewed iron butterflies not necessarily because we think that the stock is going to move up or down or has a higher propensity to move up or down. We're pretty much neutral traders across the board, but because of the option pricing on one side or the other, suggest or just basically allows us to make a more narrow spread on one side. What do I mean by this? Well, let me give you an example. Let's say a stock is trading at $100 and we sell the at the money strikes to create this center of our iron butterfly position. We sell the 100 strike call and the 100 strike put. Well, if we are looking at this stock that actually has had a huge move lower or maybe has increased implied volatility, we might find that there's a lot of put skew in this particular underlying. In order for us to buy some sort of cheap long option protection on the put side, we might have to go out say $10. We buy the 90 strike puts for say $1 or $.10, some low amount to buy those options. Well, there's a lot of put skew because the stock is going down, but that doesn't mean that there's a lot of activity and volume on the call side. When we look at option pricing on the call side, what we might find is that if we go out just $5 on the call side, we end up seeing that it's the same price as going out $10 on the put side. And so, this might again, lead us to maybe generating a skewed iron butterfly where we buy the 90 strike puts, but on the call side, we only buy the 105 strike call options because going out to the 110 strike call options could be effectively the same price as the 105 strike call options, so why would we add an additional $5 of risk on the call side for exactly the same option premium? We're not getting any benefit necessarily by going further out in strike and reducing the option premium.

We see this a lot, actually. In fact, during low implied volatility markets, we see this actually more so than high implied volatility markets where the skew pricing on the call side suggest that we don't have to go out that for on the call side to buy very cheap protection. I always tell people – When you're building iron butterflies, don't just default to the same spread width on either side. That's a good starting point for sure, but use some rational logic and reasoning to look at the option pricing on the call side or even on the put side and ask yourself – Where can I get the best covered position on this iron butterfly? If I need to make a skewed position and generate a skewed or uneven iron butterfly, can I do that and will I be able to do that for effectively the same price on the put side? Now, we're not always looking for the exact same premium, but it's just a relative understanding of how options are priced on a call side and if they're very cheap, that means that you could bring in your long strike call option and potentially buy something a little bit closer which generates a little bit less risk on one side versus the other. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#432 - Proof The Government Doesn't Want You To Retire Nov 28, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to talk about some proof as to why the government doesn't want you to retire. This may be a little bit of a touchy subject, so I wanted to approach this subject with hopefully a little bit of different insight and different thought process. I've always thought about this in the back of my mind. When I started out in this business, I was actually working in New York. I had an employee-sponsored plan through Deutsche Bank when I worked in New York and I always thought to myself like why couldn't I contribute more to my retirement accounts, why were these limits in place, I mean, all of these things that you just actually kind of learn as you start getting into the workforce. And so, many people don't realize that these are in place until they actually start generating money and have a salary or an income, but regardless, I think it's an interesting conversation that we need to have and something that I always think about in the back of my mind.

The first thing that you have to understand is that... And honestly, I don't understand why this is in place and we'll talk about maybe what the reasoning is and the rationale is, but then I'll give you guys my insight and my opinion on this. But as you guys know, there are contribution limits to how much you can contribute for a retirement and this is why I say that the government really doesn't want you to retire. They want you to put money away for retirement, but by no means do they want you to actually retire or put a lot of money away. If they did, there'd be no contribution limits at all. It would just be unlimited, like save as much money. If you're a saver, save as much money as you want, put it back into the system, invest, save your money. That's what they say they want you to do, but I don't think that that's actually the case because what we see is we see a lot of contribution limits. Right now, the contribution limits for 401Ks is $18,000 or $24,000 if you're over 50 and then you can also deposit $5,500 into a ROTH or a traditional IRA. And again, the IRS if you're over 50, they allow you to do an extra $1,000. Woo! You can catch up with an extra $1,000. But this is mindboggling to me that these are the contribution limits that you see and these are on the broad plans that most people have. Why on earth would the government restrict the ability for somebody who has had a good year or maybe a couple of good years to save as much money as humanly possible? In my opinion, if you're going to save the money and you're going to put it into a 401K or an IRA, you know that it's going for retirement, you know that you're not going to be able to touch it until you're almost 60 years old, so why wouldn't they let you put as much money in?

Well, a lot of the reading that I've done on this suggests that it's because they're trying to level the playing field and they don't want to have this unfair advantage to people who are wealthy or rich as having an IRA or a retirement account as the tax haven or tax shelter. I completely disagree with that. I think that for anybody who's a regular person working a job, busting their butt every single day, you want to save as much money as humanly possible to even have the opportunity to be classified as rich or wealthy in the future and I think the reality is that they cut people off early in the cycle, they cut your legs off as you're trying to really get started here because they say, "Look. You can be sufficient and you can save for retirement, but just don't save too much. Save $5,500, but don't save anything more than that." And so, what happens with the extra money? Well, you end up in most cases, either spending the extra money or it goes into a taxable account which means that it's just that much harder to generate substantial income off of it because now, you have to fight not only the markets and all the fees which you have to fight anyway, but now, you got to fight taxes on top of that on an ongoing basis every single year, so it becomes very difficult I think for people to get to that point of retiring. And we know this is true because these plans have been in place for how many years now and still, most people over the age of 50 don't have too much money to their name. In fact, I think some of the most recent stats suggest that most people over the age of 50 have maybe less than $30,000 in net worth and that's the vast majority of Americans which is really sad. I think these plans need to be overhauled and I think that it's not working the way that it is right now. I don't think that they want you to get to that level. I think they want more people contributing and working and paying taxes on an ongoing basis and I think they have no incentive, honestly, to get you to retirement. Again, that's my opinion on this. Take it for what you will. I'd love to hear your opinion on this as well. Send me a tweet. Shoot me a message on Facebook. Let me know. In either case, thanks for listening in and happy trading.

#431 - Emergency Fund? Nope! Nov 27, 2018

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 emergency funds, in particular, what emergency funds are and if you should have one. Emergency funds I think are a great idea and concept in the sense that what you'd hear often is that we need to save up somewhere between three and six months of living expenses and put them aside into a liquid checking or savings account to be used in emergency situations. What classifies maybe as an emergency situation? A loss of a job, a car that is maybe wrecked or broke down or you need medical expenses. And I love the idea and the concept of emergency funds, but here's my only rub with emergency funds that I want to talk about today, is that emergency funds in and of themselves are okay, but when you look at them in context of the overall financial picture of most people, what often ends up happening is that people end up saving for these emergency funds which might take them a year, two years to save up for in some cases and they miss an opportunity to pay off non-preferred high interest debt or non-preferred high interest loans.

What do I mean by this? Well, let's say that for example and this probably is not out of the realm of possibility, but you have a family and your monthly expenses are $5,000. The typical emergency fund thought process would be is that you would need to save maybe six months of expenses, so that would be about $30,000. Now, a family of four that's living off of two incomes and paying bills and paying for food and trying to travel and doing all the things that we try to do as just regular humans is probably going to take a little bit of time to save up that $30,000. It might take you a year. It might take you two years or three years to save up that emergency fund kind of net. And so, in the process with just focusing on saving up the emergency fund because it's so important to have the emergency fund, you might forego or forget to maybe divert some of those funds to a high interest credit card or a high interest loan. Let's say you just had a credit card that was $30,000 on a credit card and it was at 12%. Well, you're paying basically $3,600 a year in interest on that credit card, so why not divert some of those funds to paying off the credit cards.

Look. I'm not a person that says like I totally don't agree with emergency funds. I like what they try to accomplish and I think there's good intentions, but I think for most people, emergency funds only serve as really kind of a backstop once you've tried to pay down a lot of these credit cards and the other bills that you have and then maybe set aside a little bit of money in an emergency fund, but ultimately, for me, I look at having lines of credit or the capacity to get credit as more of an emergency than actually having cash in the bank. That's the way I look at it. It's a little bit different of an approach, but I thought I'd introduce it today. As always, if you guys have any questions, let me know and until next time, happy trading.

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