The "Daily Call" From Option Alpha

Latest Episodes:

#430 - Financing 101: Understanding "Positive Spreads" Nov 26, 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 a little bit about financing 101 and hopefully, helping you understand how to leverage positive spreads and how to look for positive spreads in any type of investing that you do. Now, this again, like I said, is more of a financing 101 piece or topic, but in all reality, it's probably not something that's covered in most financial books or even in financial courses. But if you look around every single business, every single market, including the options market, what you'll notice is that any business that's going to be successful or any investment that's going to be successful has to have some sort of positive spread. And I'm not talking about option spreads although we love option spreads here at Option Alpha. I'm talking about positive spreads between basically, cost and what you can borrow or the cost of financing or the cost of the position and then what you can charge or what you can make on it. You have to have some sort of positive spread in order to generate long-term wealth and generate long-term income.

What do I mean by this? Well, let's take banks, for example. Banks are probably the most clear example of a positive financial spread. Banks will pay you money on your savings and on your deposits. In many cases right now, at the time we're recording this, the interest rate for savings accounts in most banks is about 2%, so if you deposit $100,000 with a bank, they'll pay you 2% interest on that $100,000 that you deposit. Now, to them, that's a cost. They are going to pay that 2% regardless of what happens. And so, what they have to do is they have to figure out a way to create a positive spread and so, what do they do? They take the money that people deposit, me or you if we deposit money into a savings account, pool those resources together and basically loan that money to other borrowers, potentially even yourself included. They might loan you your money back if you want to loan from them or part of your money back and they charge you interest and they charge you an interest rate that's higher than the 2% and all the cost and fees associated with basically running the bank. They might charge you an interest rate of 6% and so, the gross spread on that then would be about 4%. They're charging you 6% to borrow money or charging someone 6% to borrow money and they're paying 2% to the person who has deposited money into their savings account, but that creates a positive financial spread.

And so, if you think about that concept and then extrapolate it across basically any business out there, any business, any investment on this entire planet has to have a positive spread over time for it to be a viable opportunity to generate wealth, generate income or increase in value. If you can't generate a positive spread, it will never work. And so, you look at a bank that let's say paid 2% interest on savings and then loaned out money at 1%, it would never work. It might work for a little bit, but until they went out of capital, the negative spread that they have in that business would never work. Again, where would you look for positive spreads? You can see this in retail stores. Retail stores buy wholesale. They buy products from a wholesaler, pay it at cheap prices and then they mark it up to charge retail prices and that mark up sometimes can be 20%, 30%, 40%, 50% in many cases, but again, this is what they're doing, is creating a positive spread. They buy wholesale, charge retail. You can see this a lot in real estate too. A lot of people… Real estate is a highly leveraged product as well, but people will borrow money at low interest rates and then invest that money into a real estate property or an investment property that has tenants and generates rental income that is more than the cost of borrowing or financing for that piece of real estate. Oftentimes, even people will say, "Well, should I use a credit card for real estate?" And my default answer would be no, but if your credit card is magically charging you 2% interest and you can invest that money in a piece of real estate for a 12% return, then you've got a positive 10% financial spread. And so, that positive spread over time should cover more than the interest charge on the cart.

Again, I think it's important that we understand these positive financial spreads because you have to look for them in every market. There has to be a discernible edge, a discernible positive financial spread in order for you to be willing to invest and I think this methodology helps out a lot too not only with just regular investments, but any side investments or businesses you start investing in, in the future. In the options market, this positive financial spread comes in the form of implied volatility expectation. We've talked about this at nausea before, but this idea that option pricing is inherently overpriced because of the future expectation of volatility and when we sell options, we are selling something that has high pricing compared to its realistic pricing once we get all the way to expiration and volatility starts to reveal itself, basically. This positive spread that we see in the options market is the same style of positive spread that insurance companies use where they write insurance assuming that somebody's going to crash their car or their house burn down or die earlier than they actually are. And so, insurance companies are basically writing option contracts just like we're doing in the financial markets, creating a positive spread between expectation and reality.

Hopefully this helps out. Again, this is a 101 topic, but it is a little bit more of an advanced topic which hopefully if you didn't understand today, you get a little bit better understanding of. As always, if you guys thought this was good, please help us spread the word here at Option Alpha. Share this with somebody you know. Send it out to them via Twitter, Facebook, social media, LinkedIn, etcetera and if you have any questions, let me know. Until next time, happy trading.

#429 - Simple Tips For An Amazing Credit Score Nov 25, 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 giving you guys some simple tips for an amazing credit score. I actually have four simple tips for an amazing credit score today and the reason I want to continue talking about this is because we haven't really mentioned any of this stuff before on Option Alpha. Most of the time on Option Alpha, it's very focused on obviously investing and options trading, but I think part of the whole financial picture needs to be things like credit score, budgeting, making sure that you're not doing stupid things with your finances in the background before you even get to the point of options trading. As many of you guys know, I'm very much a student of the entire finance game and part of that is credit score. And so, I'm very much a student of understanding how credit scores are determined because I know that credit scores, having great credit scores can lead to potentially hundreds of thousands of dollars in saved interest if you do things like investing in real estate or have any other type of outside investing. I'm very much a student of the game in the sense that I want to understand what the best triggers are and levers to push when it comes to developing a credit score over time.

Here are four things and I think I'll start broadly with these four categories and if we have any other follow up kind of questions on this, please let me know and we'll get them added to future daily podcast episodes. But these four things I think hit a lot of the broad strokes of what makes up potentially a great credit score and increases your credit score over time. Number one is lines of credit. As with anything in life, too much of a good thing can be bad in the sense that what a lot of people do is they open up a lot of credit cards, but the reality is that the more lines of credit that you have, the potentially worse your score is going to be. And so, what the bureaus want to see is they want to see that you have a couple of the key lines, potentially a mortgage, a car or a student loan and then maybe one or two credit cards. There's no perfect formula, obviously, but something is better than nothing, but when you get too many lines of credit, then you start having a credit card for every department store, a credit card for every Amazon website, a credit card for every place that you shop, it starts to become this kind of like credit card soup in your profile and you have too much capacity and what it looks like is it looks like you're desperate for credit. You're opening up all these lines of credit everywhere and that actually could hurt your score. Again, have some of the key lines, be very selective on which credit cards you open, have a couple of credit cards. We have literally two for me and my wife. That's it. Two. That's it. And so, if we ever open another one, we have to be highly selective of what credit cards we open because we don't want to increase other lines. We have no store lines. We have no retail shop. We don't open a CVS or whatever, Amazon credit card. We don't do any of that. We have the main basic two and then we have obviously real estate lines and mortgages.

Number two here is variety of credit. As I briefly mentioned in the first one, what most of the bureaus want to see is that you are not a one trick pony, that you have the ability to manage multiple types of credit. Things like revolving credit which would be credit cards or secured lines of credit, unsecured lines of credit, but also things like installment loans, so that could be student loans, mortgages, auto loans at various lengths, at various sizes, they want to see a good variety in your credit. Now, again, that will come with times. You're not supposed to do this on purpose. You don't want to go out and just get a student loan because you want to see some variety in your credit, but I'm just helping you understand what's potentially going into the scoring model. Number three is utilization of credits. We talked about this on two podcast episodes ago, but one of the big scoring metrics for most of the bureaus is the amount of credit you are utilizing to your capacity. If you have $1,000 of potential credit capacity, what most bureaus want to see is that 30% of that is actually being used or less. Whenever you have a limit of $1,000 for say a credit card, you never want to max that out. You only want to go to about 30% of that limit. That also means that you should on a reoccurring basis, try to increase your credit limits even if you're not going to use it because you want to increase the difference between how much you use and how much credit capacity you have.

Number four here is length of credit and this is a big one. Most people know this intuitively, but the problem is that sometimes when you actually delete a card or you close out of a credit card, it can actually hurt your score more than you think it might impact or improve your score. And so, what I've seen people do and I've seen friends and family members do this, is they go through this period where they're getting rid of credit card debt, they're getting rid of their loans and liabilities and they start closing all of their credit cards. Well, they're basically deleting all of that history for the bureaus. And so, my suggestion would be generally to maybe delete or remove or close kind of those one-off cards that you open for a 15% discount that one day when you went to a store. We all know. We all get pitched that every single time we go into a store. But close those and keep the main ones. Keep the main companies, the main credit card offering providers and maybe keep two or three of those potentially open, so that you don't delete that history or keep the longest card that you've had open. My mom has a card and she's never closed this card. She's had a card literally for almost 25 years. I mean, she's had this card forever. And so, every month, she just spends $5 on it, buys a coffee or buys a little bit of gas just to keep it up and keep the history going because it really is helping her credit score just because she's had it so long.

Hopefully this helps out. I know that this is again, a little bit off-topic, but that's the purpose of the daily call podcast, is that sometimes we can address some of these one-off topics that we can't generally address through the rest of the website and training. If you guys like these, let me know. Shoot me an email over @Kirk at Option Alpha. Send us a tweet, Facebook message, whatever you need to do to get in touch with us. Let me know what you guys think about some of these personal finance topics or what other questions you might potentially have. As always, until next time, happy trading.

#428 - Target Date Funds Are A Scam & Here's Why Nov 24, 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 target date funds are a scam and I want to explain the reasoning behind that. The reason that I say target date funds are a scam is because what target date funds do in theory sounds rational and logical. They're going to basically rebalance your portfolio on an ongoing basis as you approach some target date, potentially retirement, potentially the end of your employment of some target date in the future. For example, when my wife was a teacher and signed up for her benefits package, one of the things that the person who was suggesting benefits for her said, "You need to put yourself into one of these target date funds because you're going to be retiring in 30 years, so when you retire in 30 years, (or 20 years, whatever it was) you're going to want a different mix in your portfolio." And again, this sounds logical and reasonable that that would happen. Her target date fund would start investing most of the capital in her account in stocks and very little into bonds and then over time, it would start to change that allocation. Maybe the initial allocation is 90% stocks and 10% bonds and then after five years, it starts to adjust down to 80% stocks and 20% bonds, etcetera, etcetera until you reach the target date.

Now, the problem with these target date funds is that they generate massive, massive fees for trading and rebalancing the portfolio and that's something that people don't feel. You actually don't feel those fees, but they're actually attached to practically all of these target date funds. When you get into a target date fund, although it rationally makes sense, what they're basically doing is death by a thousand cuts. They have this ability to adjust the portfolio and remove and exit a position only because of the date, not because of some intrinsic value or some trend or momentum or quantifiable measurement as to why they should be exiting stocks and buying bonds or something like that. It's just purely a time and mechanical issue. And so, when they start exiting one position, they incur trading fees and reallocation fees and then load fees, front end load fees, backend load fees. All of these fees are just kind of wrapped up in this allocation of rebalancing the portfolio on an ongoing basis. And so, what you see is that not only do these target date funds charge an initial expense premium, but you have these underlying kind of not felt expenses through the reallocation of funds as you get closer to that target date.

It's my opinion that I don't think that people should do this. I think that target date funds are things that are going to be moving very quickly in the future to their eventual death in this industry and I think on the other hand, what people can do is just more appropriately manage their own portfolios or use an automation software to manage their own portfolios with low or no expense ETFs and then have the ability to buy and sell those low or no expense ETFs potentially in a brokerage that also charges low to no expenses as far as commissions and you can completely replicate this type of system and framework potentially on a better timing method versus just randomly buying or selling based on timeline and actually get better performance because of lower fees. Hopefully this helps out. Hopefully it helps you just reconsider potentially if you have these. I did not let my wife get put into a target date fund when she signed up for her ROTH 403B as a teacher. I was not definitely going to let that happen. But it was a good pitch by him and I wanted to talk about it here. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#427 - Why You Should NOT Payoff Your Credit Cards Nov 23, 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 I believe you should not pay off your credit cards. Why I believe you should not pay off your credit cards does not mean that you keep a massive credit card balance. I want to clear that up as we get started. And I'm definitely not saying that you leave these massive credit card balances and not make minimum payments if you don't have the funds to pay off most of your credit card. But what I am saying is that when you look at what factors affect your ability to generate a higher credit score, one of the key factors is credit utilization and basically, just the capacity to hold credit. And the reason I want to talk about this today is because we don't often talk about credit scores or credit cards, etcetera, but I think it's an important part of just your overall finances. And so, I want to start diving deeper into some of these financial, personal finance topics, I guess you could say. And so, when it comes to credit cards, obviously, we want to have the right number of cards. We don't want to have too many cards. We can talk about that in later shows. But when it comes to paying off credit cards, I'm a fan of paying down your credit card every single month to just $1 and I'll tell you why. Again, it's part of credit utilization, the ability to utilize the appropriate amount of credit based on the capacity you have for credit. Usually, the utilization is around 30%. The credit rating agencies want to see that your ongoing reoccurring balances are under 30% of your total credit limit. This is important because they really don't care if you have a credit limit of $1 million or $1,000. What's important is the utilization of the credit that you have taken out on that credit card as it relates to the total balance that you have available or the total credit limit that you have available. This is also why you could get a quick boost in your credit score by just increasing the credit limit for a lot of cards and that would then reduce the credit utilization percentage.

But one thing that we've heard from a person who does a lot of credit repair and this is somebody that I continuously go to for a lot of updates. They do a lot of credit repair for all the various companies and have a repair agency, but it just happens to be a friend of mine and it's that they see that when rating agencies are looking at credit scores and they're running through their algorithms, one of the things they look for is just the capacity to handle ongoing credit. Even though it might make sense to pay off your credit card all the way, sometimes what the agencies will do as you start to get into the higher tiers and higher brackets of ratings is they will look at your ability to manage an ongoing balance. "Can this person have an ongoing reoccurring balance that they have appropriate management of?" And one of the ways that they look at that is if you just carry a balance. In my opinion and what we've been suggested from this person and as a person I do trust as far as credit repair and credit utilization and increasing your credit scores to have an ongoing balance of just $1 on all of your credit cards every month. We pay down our credit cards every single month. We just use them for the purposes of groceries and gas, etcetera to get all the airline points and all the things that everyone else does with their credit cards. But we don't ever pay them off. We just pay them down to literally $1 and then we always carry a $1 balance and this has helped because we have gone back to lending for a lot of our commercial real estate and a lot of our investing real estate that we do and both of our credit scores over the last couple of years have gone into the upper tiers. We're talking the very higher echelons of potential credit scores. And I'm publicly very proud of this because we've been working very hard over the last 10 years to not have any auto loans, never have any student loans, never have any ongoing credit card bills. We really manage our credit very, very strict. And so, this has been something that I think has been helpful for us, is not paying off the cards, but paying them down to just $1. Hopefully this helps out, a little bit of a tip and trick today. As always, if you guys have any comments or questions, let me know and until next time, happy trading.

#426 - Why Are SPX And ES Different Prices? Nov 22, 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 are SPX and ES different prices. If you are a trader and you start trading in the broad markets, you'll likely come across these two ticker symbols. SPX represents the S&P 500 index and ES represents the E-mini futures, also commonly referred to a /ES when you're trading in your broker platform, but it represents the E-mini futures on the S&P 500 index. Many people get confused because they look at both of these and they think to themselves, "Okay. Well, you have the S&P 500 index, SPX and then you have the futures on the index, so why are there different prices? And more notably, why does the futures contract trade at a little bit of a "discount" compared to the SPX contract itself?"

Here's what you have to understand. The SPX is an index. You can't actually trade it. There's no tradable security. Just like what we looked at yesterday with the VIX where you can't actually trade VIX, you can only trade options on it, the same thing occurs with SPX. You can only trade options on SPX, but those option contracts are not priced to SPX. They're actually priced more to the futures which are then adjusted for dividends and interest. And so, that's why there's a disparity in pricing because the futures contracts have to be adjusted for the fact that it's going to collect dividends and interest over time and that's why it literally trades at a little bit of a discount to SPX. Now, most people think that you can exercise SPX early potentially and force some sort of arbitrage opportunity to force an early exercise of SPX and buy E-mini futures, but it's not the case because SPX contracts are European-style contracts which means that you can trade the contracts before expiration, but you can't actually force the exercise of SPX early. Only at expiration can you exercise your contracts in SPX.

That's why most people think there's probably an arbitrage opportunity to be gained here, but it's really not because you can't really do it on a synthetic basis with the option contracts since they'd be already factoring in the fact that the futures prices are adjusted for dividends and interest. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#425 - Can We Buy VIX? Nov 21, 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, "Can I buy the VIX?" And the short answer to this question is no. We cannot buy VIX itself. We have to trade either VIX futures or VIX options. The VIX in and of itself is just an index. It just tracks rolling 30-day implied volatility for S&P 500 option contracts and so, it's just one metric of measuring volatility in the market. And most people use it and gauge it as the fear index of the market because as people get more aggressive and buy put protection, the VIX option prices go up. And so, as a result, you can't actually trade VIX itself. There's no bid or ask spread. It's just an index. But you can trade VIX futures which is /VX if you're in most broker platforms or you can trade options on the VIX itself. Now, we also like trading options on other volatility products like VXX and UVXY which we've talked about before on the podcast. But again, you can't actually go out and buy the VIX or sell the VIX outright. You have to trade it through a derivative contract. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#424 - Why Did An Option Order Get Rejected? Here Are 5 Possible Reasons Nov 20, 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 a question, "Why did an option order get rejected?" And here are five possible reasons why that might have happened. We often get questions from our members and they're frustrated because sometimes they place an option order and their broker might reject the order for some reason and they don't know why. Here are five possible reasons why your broker might reject your option order.

The first is not enough money. It might sound intuitive, but sometimes people do not understand the risk that's associated with the trade that they're making and they think they're making a defined risk trade when it turns out they're making an undefined risk trade or they're just toggling in too many contracts and they didn't recognize it. But many times, the first line of defense is just the fact that you don't have enough money or enough trading capital in your account to make the trade. Double check that you're position sizing accordingly and you have enough cash in your account. Number two is not the right approval level. This is probably the second most common thing that happens with brokers, is that you try to make a trade and you just don't have the right approval level to make that trade in the market. Again, you want to make sure that you've got the highest options trading approval level possible even if you don't plan on making undefined risk naked option selling strategies part of your portfolio. You still want to have the ability to do those types of trades, so that you can adjust and hedge and manage your portfolio as needed. Number three is trading naked contracts in an IRA. If you are trading in an IRA retirement account, ROTH account, SEP IRA, 401K, etcetera and you have the ability to trade options, you most likely have to trade those options in a risk defined manner which means no short call option selling, no short put option selling, no straddles, no strangles. You can do all of these synthetics of these positions, iron butterflies, iron condors, credit spreads, etcetera, but you have to be trading risk defined position. Sometimes if you place an order in an IRA and it creates or is going to result in a naked position of some kind, then the order will get rejected.

Number four is inaccurate price. I see this a lot actually when people send me screenshots of their orders that get rejected and they just have inaccurate prices. Sometimes they are putting in extra numbers in their pricing and they're not just using the regular standard pricing of two decimal points in many option contracts. I've seen people that place an order instead of for $.15, $15.1 and that's just an inaccurate price. Again, it's little things like this that can kind of throw it off, but usually, if you double check your order before you send it in, you should be okay. Number five is pattern day trading. If you did place a lot of orders in the same day and you repeatedly get into and out of the same option contract on the same day, you might be tagged as a pattern day trader which just means that you need to have a little bit more capital in your account before you can continue to do those day trading activities. And so, if you get tagged as a pattern day trader and you just didn't know it, that might be another reason why your order gets rejected. The brokers want to make sure that you have the ability and have the capital in your account to handle pattern day trading or day trading activities, so they might reject an order until we let those trades clear for a day and then the next day, you have the ability to start making new trades. Again, these are five possible reasons, I think the five most common reasons why your order might get rejected. As always, if you guys have any questions, let me know and until next time, happy trading.

#423 - The Impact Of Fees & Taxes On Investing Performance Nov 19, 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 talk about the impact of fees and taxes on investing performance. The impact of fees and taxes on your investing performance is so great that I don't think people really take the time to understand how much control you have in many cases, over fees and taxes and how cutting these and reducing fees and taxes before you do anything else can make some of the biggest differences in your returns over time. Now, we've all seen the charts of the investor's portfolio that grew for 30 years with an advisor fee or without an advisor fee or with a hedge fund fee or without a hedge fund fee and we know the impact of fees over time. But we don't still understand how much we're paying in fees because many times as we've said before, fees are hidden in products that we are trading or products that we're investing in. In particular, the mutual fund space is very good about hiding the fees that they're charging and these fees can come in many forms. They can come in front end fees when you get into a security. They can come in fees when you are selling or relinquishing shares of the mutual fund. They can come in the form of trading fees as the fund rebalances for your best interest over time, but incurs a lot of trading fees along the way. And so, you have to understand where the fees are being charged in every investment that you get yourself into and I think that if you understand where the fees are, you can understand where you can control your risk and reduce your fees as much as possible. Now, we've talked about in previous podcast how right now, the entire industry is going towards a model of low to no fees and most of the biggest ETFs that are out there that can track global performance of practically every market have almost no fees. We did a podcast called, "You can basically own the world for five basis points." And that's the reality that you can own the market portfolio if you're just going to invest in stocks and trade that way and own the world of trading and investing for basically five basis points much cheaper than any advisor, than any mutual fund or than most ETFs. And again, just doing this one thing can put you light years ahead of everybody else even if your performance in that underlying is not as great as somebody else. Because of the fees and the drag that fees might have on your performance, you might be in a better position with lower fees and less of a drag.

Now, the other thing is obviously taxes. Now, when we talk about taxes, we're talking not only about federal taxes if you live in the United States, but we're also talking about State and local taxes and you have a big impact on this. Even though you don't think you do, you can move if you choose to do so. You can move from a high tax State to a low tax State and in some cases, that will dramatically change the outcome of your financial and personal financial picture. Moving from a State say like California which has really high personal income taxes to a State like Texas or Florida with no personal income tax can have a dramatic impact on your financial security in the future and not only that, but people think they're going to potentially take a job cut or a pay cut by moving to some of these States, but if you factor in the fact that you'll be paying dramatically less in taxes, it might actually be after adjusted taxes, a pay stabilization or a pay increase by not paying as much in taxes. Same thing goes for investment accounts. As much as possible, we want to still fund all of our money into ROTH IRA, SEP IRA, any tax favorable account first. If you are trading and you do have the ability to do it at the end of the year, you want to cram as much money into these tax favorable accounts as humanly possible. Now, unfortunately… And I truly say this unfortunately because it's an unfortunate thing that the government limits the amount of money that people can contribute to a ROTH or to an IRA or a 401K. But if you hit those limits, you've done your civic duty to yourself to protect yourself in the future for retirement income and give yourself the best possible way to grow your account tax advantage and then from there, you start trading your account in a regular taxable or margin account at a brokerage. But again, you should be focusing first on how much you can fill up in those tax advantage accounts moving forward.

The other thing that you can reduce as far as fees when it comes to options trading is obviously commissions. Now, again, this is a little bit of a sticking point for me because I think not going with the cheapest broker is sometimes the best choice because you do pay commissions at some brokers, but in many cases, the commissions that you pay to go with a broker might also translate to insanely better technology and better fills, better order pricing, better screening software, better analytics, automated orders, things like that that actually could more than overcome the fees that are charged. But again, you should negotiate with your broker. You should try to move your fees down. We've consistently done this with our broker over the years. I know a lot of people have done this as well. I do think that over time, all brokers are going to be commission free. It's just a matter of when that happens. But the industry is going that direction, so everyone will be commission free I think in the next couple of years and the differentiator is going to be technology and resources and access to the market which is going to be a huge advantage for those people who have kind of the inside scoop. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#422 - Is Selling ITM Or OTM Options Safer? Nov 18, 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, "Is selling in the money or out of the money options safer?" And so, what do we mean by in the money or out of the money? Well, if you're selling option contracts, we're talking about the relationship between the strike price and the current stock price or current ETF price of the underlying. For example, if a stock is trading at $100, you could sell an out of the money call option at $105 or an out of the money put option at $95. Both of these strike prices would be out of the money on their respective ends. In the money contracts would be if you reverse the calls and puts. And so, if a stock is trading at $100, you might sell an in the money put option at $101 and you could sell an in the money call option at $99. Again, that's if the stock is trading at $100.

So, to get back to the question, "Is it safer to sell in the money or out of the money?" Well, it's all relative based on the credit and the premium that you took in from selling those option contracts. Sometimes we do sell option contracts at the money and in that case, we are selling strikes that are very close or maybe even slightly in the money compared to where the stock price is. But in exchange for doing this, we collect a massive premium for selling those option contracts which then moves our breakeven point far away from where the stock is trading at the current time. If we are selling options near at the money or slightly in the money, that doesn't necessarily mean we're taking on more risk and in some cases, it could actually mean that we are taking in higher credits and could see potential profits come in a little bit sooner. Generally, people like to sell options out of the money, but there is a distance so far out of the money that it doesn't make sense to sell options, typically around the five Deltas on either end of an option contract spread. It's probably too far out of the money to generate reliable consistent returns over time because you're selling premium that's too cheap. You do have to come closer to at the money or start selling options at the money or near at the money strikes and collecting bigger credits. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#421 - Why We Use Multiple Savings Accounts? Nov 17, 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 a question which is, "Why do we use multiple savings accounts?" What I want to start to do is I want to start to (as we progress towards the end of the year) include every now and again, some of these personal-finance style podcast and the reason I want to do this is because I get a lot of questions from members in the community about how I manage my personal finances, how I think about or what I think about credit card debt versus auto loan debt versus mortgage or real estate debt, how I manage savings, investing, expenses, types of accounts that we have, budgets that we do, so I want to start doing some more of these types of shows. Again, this is going to be potentially the first of many of these styles, so if you have questions on like how I manage my personal finances and you want to add those to the potential roster for the daily calls, please shoot me an email, send me a tweet, go over to optionalpha.com/ask, leave us a message. Any way that you can get that question to me would be really helpful because I want to answer as many of these as I possibly can and we have lots of days moving forward, so we have plenty of room to add these in.

This question here today comes from a member and they were basically just asking and wondering… I've mentioned before that my wife and I use multiple savings accounts for our managing of personal finances. I think it's a very simple strategy, very effective strategy and actually, I don't think a lot of people do this. In fact, I think I've seen research that says that many people have one savings account, but they don't have multiple, so why would you have multiple savings accounts? Well, my wife and I basically have about 10 different savings accounts and we basically use one as kind of like a little bit of like everything else goes in that bucket type savings account. But we have 10 different savings accounts and the reason that we use multiple savings accounts is because when we do our budget every month, we earmark certain things for major items during the year or for major things that we want to save for and we immediately transfer that money to those respective savings accounts, so that we have the money there and it's basically quarantined from our use and our ability to spend it every time that we do our budget. For example, we know that we will always have a need for a car. We have three kids. We will always have a need for a car. And I've never had a car payment in my life because what I've started doing from day one was saving up and buying only the car I could afford. Shocking revelation, right? Because a lot of people don't do this and I'm shocked that people don't do this. But I bought originally a car that was $2,000 and it was a piece of junk when I originally got out of school, but the reason I bought it for $2,000 was because that's what I had to spend. I had to buy a car that was $2,000 because that's all the money I had to spend and I never wanted a car payment. I did not care and I still don't care about looking flashy or buying a Lamborghini or a Maserati. I have a minivan and truck. I'm about as boring and regular as you could possibly get in that department.

And so, once I bought that first car for $2,000 though, I knew that I never wanted a car payment and so, what I did is I said, "Okay. If I could afford a car payment, what might that car payment be?" Maybe $200, maybe $300. People get approved all the time for $200 to $300 or more in car payment. What I decided to do was set aside every month from what I was making to put aside $200 to $300 in an account that would then save up for a potential new car and when I got to the point that I needed a new car, well, whatever I had in that savings account at that time could then go towards the purchase of the new car. Now, we've done this now multiple times and that's how we run that particular savings account to save up for a new car. Every month, we contribute about $200 to a savings account that just saves up $200 at a time until the point at which we need a new car. When we need a new car, we trade in our old vehicle or sell our old vehicle, get whatever value we can out of it and then we combine that or try to do it actually less than that most of the time, combine that with what we've saved out in that savings account to now purchase a new car with no financing, no monthly payments, no interest, nothing. Now, again, this is different than how many people do it and I know that there's zero interest or no interest payments on cars. I've just never been a fan of having car payments. I don't think that people should have car payments. That's how I believe in personal-finance. Like one of the things I believe is that if you don't have a car payment, you're not beholden to somebody for that. And so, that's how we use one of our savings accounts.

Another one that we would have, for example, is we have savings accounts for insurance. We have insurance on our house, we have insurance on cars, we have life insurance, all these things and we put money aside every month for insurance and then insurance payments come out of that account. We save for gifts, we save for holidays, we save for vacations, we save for… I think the other one is like house repairs we save for. A lot of these different accounts that we have are again, just like earmarked for the major items that you know you're going to have moving forward every single year. You know you want to take a vacation? Start saving for it now. You know you're going to have insurance? It should never be a surprise. Take your annual premiums of all your insurance, break it down into a monthly amount and start saving that monthly. That's why we use the multiple savings account kind of method. I know it sometimes can be confusing and a lot of people get really confused with having multiple accounts at one time, but again, we find it to be really, really easy and again, it's a great way to know where you stand financially and how much you need to save and just having that piece of mind that the money is there when you need it for different life events. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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