The "Daily Call" From Option Alpha

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#390 - Worrying Is An Illusion Of Control Oct 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 talk about why worrying is an illusion of control. I am a self-described worrywart if you want to call it that, but I used to be, I guess and I would say that I'm not so much anymore… Although seem like being a parent, you always worry about something with your kids. I don't think that ever actually ends. But when it comes to finances, investing, trading, the markets, I used to worry a lot and I was one of those traders that would stay up all night and think about positions. In fact, I remember vividly when I started trading and I was trying to trade Forex initially for a little bit that I literally sat up all night and kind of babysat that position. I sat there and watched the markets all night and I think back to those days of doing that and just realized how ridiculous and ludicrous that probably was. But I've often found through reading and being a student of the game that when you worry, it is actually just a coping mechanism that you have that gives you the illusion of control, this idea that if I worry about something, if I think about something enough that somehow, magically, I might have some sort of control over it. And so, you often hear people that are control freaks or that are controlling because they have this need to be in control of a situation and therefore, they worry about things a lot, they feel like they're stressed, they feel like they're always kind of on the edge of breaking down. And in the market, in particular, especially with trading and options trading, there's no place for this in the market because frankly, the market doesn't care what you think or how much you worry. You could stay up all night worrying about a position and still, it might go against you.

And so, what I think a lot of people do and we're even recently just seen this a lot with recent moves in TLT and EWZ that have been seemingly big moves. They're not major moves historically, but big enough moves that we haven't seen in a while to cause a lot of people to worry and to feel like the more that they worry and email me all their worried concerns that it gives them some sort of control. But again, what I found is that none of this stuff actually works. It doesn't help to worry about your positions and your portfolio. You can only do what you can do to control positions. You choose the ticker symbols, you diversify your tickers, you keep your position size appropriate, you balance out your portfolio and beyond that, there's really nothing you can do to control what happens in the market. It's an uncontrollable event. We have to use the tools at our disposal to set ourselves up for the best possible probability of success. Again, the reason I want to talk about this today, like I said is because I used to be somebody who stayed up all night and worried about positions. Never got sleep or whatever sleep I got, it was very faint because I was still thinking about what if this happened or what if that happened. And if you're in that space right now, you just have to understand that you truly have no control and if you actually release the control and the worryness from your body, it actually gives you an incredible sense of freedom and a very calm feeling to understand that everything is taken care of and is done to the best of your ability. Again, hopefully this helps out. If you guys have any questions, let me know and as always, happy trading.

#389 - What Is A "Head Fake" In Stock Trading? Oct 16, 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, "What is a head fake in stock trading?" I love the idea of understanding some of this terminology and jargon when you hear it talked about and we use this a lot too. I don't use the word, head fake all the time, but we talk about it sometimes when we have very specific setups in stocks and we might refer to as one thing as a head fake or not. Let me build the context around this because I think it's better to understand it contextually in a scenario. Let's say we have a stock that's trading and it's trading at $100. Quickly, the stock moves up to $105. Now, this is where the fake part of this comes in because what people might see if the stock makes a huge move in one direction, say from $100 to $105 very quickly, they might think that that is a big breakout in the stock and what might happen then shortly after that where the head fake kind of comes into play or is completed, I guess is that the stock might completely reverse that $5 up move and might actually move down say $6 or $7. The stock starts at $100, a day or two later, it's at $105 and then another day or two later, it's all the way back down at say $96, $97.

And so, what that ends up being is it ends up being this head fake, this initial move that really shakes out a lot of people potentially or traps a lot of people into a possible move in one direction when it's actually going the other direction. We see this sometimes a lot in short side trading where if we get into a short squeeze type of situation where a stock is starting to make a big move lower, then it has this massive rebound or bounce and everyone thinks that the bottom is in, but in many cases, that might just be a lot of institutions or traders who are covering short positions by buying back the stock. You get this head fake where the stock looks like it's rebounding and is forming a bottom, but actually, people are just continuing to get out of the position and maybe reloading some short interest in the stock and then it continues its move lower. As always, we never know where markets are going to go, but it's sometimes interesting to see what happens in these situations because they do happen often enough that it becomes a real issue where people get a false sense of security that the stock is making a big move in one direction or another. As always, hopefully you guys enjoy these. If you have any questions, let me know and until next time, happy trading.

#388 - Can You Exercise An Option Contract Even If You Don't Have The Buying Power For The Stock? Oct 15, 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 user question that was submitted which is, "Can you exercise an option contract even if you don't have the buying power for the stock?" This is an interesting question, but basically, the person emailed in and said, "If I had a debit spread or a credit spread and I didn't have the buying power to exercise the option, could I still conceivably submit the order because it's covered by the other contract that's out there?" And so, the short answer to this is probably no. Your broker is going to reject that order when they see it coming through. You could probably get all the way to submitting the exercise, but when it actually starts going through the system and through the technology to be able to actually exercise that contract, buy shares of stock or sell shares of stock depending on what contracts you're trading, then it's likely going to get rejected at the broker because you don't have enough buying power to enter that position and hold the underlying shares and yes, this means even if you are still trading the other side of a spread because even though you're trading the other side of a spread, that doesn't necessarily mean that it's covering the fact that you want to own shares long or short of the underlying security. Great question. Again, as always, if you guys have other questions like this, even little one-off questions that come to mind, please submit them to us. We'd love to get them as part of the daily podcast and the daily call here, so again, if you guys have any questions, let us know and until next time, happy trading.

#387 - Volatility In Stock Prices vs Volatility In Option Prices Oct 14, 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 the difference between volatility in stock prices versus volatility in option prices. Now, most people assume that when we talk about volatility that it has the same impact on stock prices as it does on option pricing, but it's not the case. When we specifically refer to a stock or stock prices that are volatile, we're talking about the underlying equity or ETF that we're looking at and the price fluctuations that that ETF or equity is going through. If a stock is moving wildly, the price of the stock or the ETF is going up or down dramatically over the course of a trading period. That is what we refer to as the volatility of the actual stock itself. Now, when we talk about volatility of option pricing, we can similarly look at the volatility of the prices of options as they move, but what we're really talking about is we're really talking about how much implied volatility is baked into option pricing.

What we can typically see during really big times in the market where there's maybe market turmoil or stocks are going down and implied volatility is rising or during these earnings type events or market driving forces like a FED announcement or an election, what we see is we see that stock prices actually generally tend to be very calm, but the underlying implied volatility that we can see through option pricing shows that there is a perceived expectation that the stock price is going to be more volatile in the future. And we see that because we can look at option pricing and see the implied volatility or the bid up in option pricing across the board as the market's representation or best expectation that volatility will increase in the future. It's kind of different because you can actually look at a stock that's really not moving, but then implied volatility could be very high in actual option prices, again, suggesting that market participants are expecting a big move at some point in the future, again, maybe because of an earnings event or a catalyst like an election or a big FED announcement or economic data report that's coming out.

Hopefully this helps out, again, just describing the differences between these two and as always, if you guys have any questions at all, please let us know and until next time, happy trading.

#386 - Is TD Ameritrade A Good Brokerage Platform For Beginners? Oct 13, 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, "Is TD Ameritrade a good brokerage platform for beginners?" Specifically, I think we can talk about TD Ameritrade's main platform for trading which is the Thinkorswim platform which they purchased a number of years ago, but I do think that TD Ameritrade has its limitations for new traders. It can sometimes be a little bit overwhelming for new traders to get acclimated to the TD Ameritrade platform and the Thinkorswim platform and the reason is because honestly, there are so many buttons and tabs and things to press, it almost feels like you're in a jet engine cockpit. And you don't want to touch too many things, but you know you have to basically push some buttons to make charts appear and to make trades work. Overall, I do think it's still the best platform out there. I think the learning curve is something that you can get over very quickly. We have a lot of videos on our website and also on our YouTube channel that go through in detail and step by step, how to get started with the Thinkorswim platform from TD Ameritrade, also how to setup your charts, how to setup the trade tab, how to start placing orders and start adjusting and analyzing your portfolio. It really is one of the best platforms that's out there. I think, like I said, for beginners, it's definitely going to be a little bit of a learning curve, but hopefully you can get over that with our help and our free training and videos. As always, if you guys have any questions or comments, let me know and until next time, happy trading.

#385 - What Tool Can I Use To See A Stock's Implied Volatility? Oct 12, 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, "What tool can I use to see a stock's implied volatility?" Implied volatility data is not that hard to find, but in many cases, you will most likely have to go through your broker platform to see a stock's implied volatility whether it's the raw implied volatility or any type of IV ranking or IV percentiles. Now, you can get this data from other sources like the CBOE. You can also get this data from ivolatility.com, quandl.com. There's a lot of other resources if you just search online to get this data, but in many cases, those are paid subscriptions or paid access to volatility data. This is actually really not that cheap to find volatility data if you don't already have an existing broker platform which integrates that as part of their feed and their data from the exchanges. Now, like I said, most broker platforms including TD Ameritrade, Trade Station, also Interactive Brokers, Tastyworks, all of these other brokers have the ability to show you implied volatility data if you have an account with them. That would probably be the easiest way if you're looking for implied volatility data to actually login and go to your brokerage account and try to get the data from there. As always, hopefully this helps out. If you have any questions, let me know and until next time, happy trading.

#384 - Should Buy Near-Dated, Weekly Options As A Hedge? Oct 11, 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, "Should you buy near-dated weekly options as a hedge?" Now, the answer to this question is not a simple black and white, yes or no answer. What you have to understand about buying near-dated weekly options specifically buying them as a hedge is that they are a tradeoff of risk and reward. To me, I always try to help you guys understand what are you giving up and what might you potentially get in reward by entering a hedge that's a weekly contract. Now, specifically, a lot of traders like to use weekly contracts because they want to hedge a very particular time period. Maybe there's a special FDA announcement, a legal proceeding, an earnings announcement, a merger announcement potentially coming, all of these things that could happen in a very defined window of time. And so, for that just one week, they choose to buy weekly options or sell weekly options, whatever they're trying to do with their strategy just to protect themselves for that exact moment, that one time period when there could be a lot of volatility in the stock. Now, the other side of that you have to understand is that if that's the case, if there's say an FDA announcement coming for a stock and you want to hedge your long stock position, then what you have to understand is that everybody else might be doing that as well. And so, the price of these weekly options gets bid up, so that now, we're paying a huge premium for the perceived protection that we might get from this option contract. Now, if you want to use an analogy to prove this point, it would be like us knowing that a hurricane is going to hit our house and we try to buy insurance the week before the hurricane hits. Now, we don't know exactly what the damage is going to be. We're still a week out from the hurricane hitting our house. Well, we know it's going to come real close or hit our house directly. How much would that insurance be? If everyone else knows that the hurricane is there as well, the premiums to buy insurance to protect yourself are going to go up dramatically. Here's the thing. It's a tradeoff of risk and reward. You are giving up some premium and potentially some high premium in exchange for protecting yourself against the catastrophic or huge loss you might have in your account. Now, with most things that I think about in trading and that we've researched on our research team, what is sometimes the perception is not necessarily always the reality of the market. We see this time and time again in earnings trades specifically which is where people like to use weekly options as a hedge, is that people will assume that a company is going to have great earnings and maybe the company even does have great earnings, but then the stock falls or the opposite happens where everyone assumes that the stock is going to have terrible earnings and the stock does have terrible earnings, but somehow, it magically rallies because people are now expecting better quarters in the future. What you think may happen that would cause you to create a hedge type situation may not actually play out in reality. My suggestion would be is that if you are going to buy near-dated weekly options as a hedge, you keep it very, very small and you focus more on your position size, of your core position in that security, ETF, stock, whatever it is and the diversity of the rest of your positions in your portfolio than trying to pay a bunch of money to protect against what may or may not happen. It's like trying to buy insurance and hoping that your house is going to burn down. You really don't want it to happen, but you keep shelling out all this money for insurance. It's going to start to reduce the total returns of your account after the insurance or hedge is calculated. As always, hopefully this helps out. If you guys have any questions, let us know and until next time, happy trading.

#383 - Odd Lot vs. Round Lot With Examples Oct 10, 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 help you understand the difference between an odd lot versus a round lot with some examples. I've seen a lot of definitions out there of the differences when orders go through with regard to stocks or futures or options contracts and the differences between odd and round lot orders. And so, there's no one definition of it, but here's generally the concept around these. Round lot orders are orders that are easily disseminated across multiple parties in the market. Order types for stocks would be orders of 100 shares, 200 shares, 250, 500, 1000 shares, something that is a generally round number of orders kind of rounded to a nearest grouping of trades that can easily be exchanged with another party in the market. If you're trading 100 shares and someone else is trading 100 shares, it's very easy to make those two parties come together and create a filled order. An odd lot might be something like 97 shares. Instead of just rounding up to 100 shares, you buy exactly 97 shares. It's a little bit harder to fill those orders because now, the market has to split that order into possible multiple fills across different parties. They might take 90 shares from one person and seven shares from another person to complete this order for you which means that it might take a little bit more time for your order actually to get filled. We see this a lot actually in options trading as well. Typically, people end up doing groupings of contracts, sometimes five, 10, 15, 20, etcetera contracts at a time, so I would consider those generally to be round lot orders. If you do an option contract order with say seven contracts or nine contracts, you might see your order get split among different exchanges or even within the same exchange, have partial fills with your order. You might get five contracts filled initially and then you have to wait for the other four or three contracts to get filled later on maybe at different pricing, at a different exchange, so sometimes a little bit harder to fill these odd lots. Now, all of this being said, I don't think this should make a big difference in your trading. I think you should still go with whatever contract size or premium size you need to go with to keep your risk in control. A lot of times when I make trades, I will base my contracts purely on amount of risk or the percentage of risk that I can take in my account. I won't really factor in these like odd versus round lots in my decision-making because I don't really care about filling trades exactly when I make the order. I have the patience that if a trade doesn't fill, I can try it the next day or the next day or the next day and I can adjust my strike prices as needed. Hopefully it helps out in at least understanding potentially why maybe some of your orders are taking a little bit longer to fill than some others and as always, if you guys have any questions, let me know and until next time, happy trading.

#382 - How The Option Experts Short Volatility Oct 09, 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 how the option experts short volatility. There's really two main ways to short volatility in a portfolio. The first way is to choose a volatility product. That's probably the easiest way that most institutions as well as many personal traders or many portfolio traders choose to gain exposure to shorting volatility and they do it through these volatility products. Now, it could be things like VIX, VXX, UVXY, etcetera and each of these products have their own differences which we've covered actually in a couple of episodes just previously to this. With these volatility products, it's an easy way for institutions to gain broad-based exposure to volatility in general. And so, they can easily move in and out of these products as needed. They can add volatility exposure or they can reduce volatility exposure. The second way to add short volatility exposure is to short option premium. Now, this is I would say a not necessarily preferred way to go about it with large institutions because they have to allocate a lot of money to different positions, but as retail traders or semi-retail traders if you're even trading a large portfolio or a portfolio with clients in it, this is a great way to gain exposure to short volatility because you can spread your risk across many different asset classes and industries and you're not pigeonholed into the volatility products themselves which are usually tied to the broad-based markets. My opinion is that short option premium is one of the best ways that you can short volatility because you have the advantage of spreading your risk across these different industries and sectors. What they would typically do is they would sell short premium via option strategies like straddles and strangles, iron butterflies and iron condors and credit spreads as well as short single leg option contracts. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#381 - The Ultimate "Quick" Guide To Call Vs. Put Options Oct 08, 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 our quick guide on the differences between calls and puts and I want to do this using a very simple mind matrix, I guess. The idea behind this is when I think about call options and put options and when I teach calls and puts and the basics of options trading for beginners, I think about things in the form of a matrix and the reason I do this is because I just compartmentalize a lot of things when I learn and I think that this is often useful for those who are getting started. When you think about the differences between calls and put options, you have to understand that there's two sides to every trade. You can be a buyer of calls and puts or you can be a seller of calls and puts and for every buyer, there's a seller and for every seller, there's got to be a buyer. When we go through this matrix, you'll understand that each opposing side to the position has the opposing force on the other side. If I am a call buyer, that means that whatever my rights and obligations are might be different or are the exact opposite of what they might be for a call seller. Let's start off with a very simple buy call option or long call option which basically gives you the right, but not the obligation to buy stock in the future at a specific strike price. With a call option, you are hopefully deliberately bullish on the position and you have a limited amount of cash outflow with an unlimited upside potential in the position. You pay an option premium for the right, again, but not the obligation (it's your choice) to buy stock in the future at a specific strike price. Now, if we think about the other side to this trade which would be the option seller, somebody who's selling you a call option, that option seller collects the option premium that you paid them and they have now an obligation, not a right, but an obligation to sell their stock at that strike price if the call option buyer chooses to do so. You can see how there's got to be a balancing act. The premium that is paid by the option buyer goes to the option seller, the option buyer has limited risk, the option seller has limited profit potential, the call option buyer has unlimited profit potential and the call option seller has unlimited risk to the upside. It's very much a balancing act that happens in the markets. It's a fair trade because people are exchanging risk and reward on different aspects. Now, when we go and start talking about put options, put options work very much the same way as far as buyers and sellers except now, the difference is that with a put option, specifically a long or a buy of a put option, you are buying the right to sell stock in the future at a specific price. A put option buyer is going to be deliberately bearish on the position, they assume that the stock is going to go potentially down in value and they basically want to pre-buy the right to sell stock at a higher strike price than where they think the market value will be in the future. And so, when they do this, they pay again, a premium just like a call option buyer pays a premium and they have unlimited profit potential until the stock reaches zero. With the other side of a put option buy, you have the put option seller and the put option seller is now obligated, does not have the right, but is now obligated to buy stock at that strike price from the put option seller. Again, it happens in the same fashion. There's the same rights and obligations except the only change between calls and puts and this is the really quick thing that you have to understand and learn, is the differences between a call and a put, is that a call option is the right to buy stock and a put option is the right to sell stock. And so, when you are the option buyer of those, you have the right to buy stock with a call and you have the right to sell stock with a put. As an option seller, with a call option, you're obligated to sell stock and with a single sell of a put option, as the option seller, you're obligated to buy stock at the strike price. Hopefully this helps out. I know we went back and forth a lot through this matrix, but it's really important that you understand these differences not only between calls and puts and how they interact in the market, but also the differences between buyers and sellers and how they balance each other out in the options market. As always, hopefully this helps out. If you guys have any questions, let me know and until next time, happy trading.

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