The "Daily Call" From Option Alpha

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#380 - Should You Always Have A GTC Profit Taking Order Working? Oct 07, 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, "Should you always have a GTC profit-taking order working in your account?" If you don't know what a GTC profit-taking order is, GTC stands for good till canceled and it's basically an order type that you can put into the market in your brokerage account that basically stays in place every single day going forward in the future until the options either expire or until the contract is executed at your price. For example, if you sold a straddle for $500, you might have a GTC profit-taking order to buy back that straddle at say $300. Whenever the straddle price goes down to $300, it would automatically execute that order and take profits out of the position. My thought process on – Should you always have one? is that I don't think you should always have a GTC order working. I think they work for different accounts and different scenarios in your life and how you trade and how much access you have to the markets. If you don't have that much access to the markets and you have a regular day job and you don't have the ability to monitor or check positions, then yes, 100%, a GTC profit-taking order can definitely help you out. And I don't want to look like I don't agree with these orders. I think the vast majority of people should and can use them in their account. Where I think that a GTC order sometimes fails is when you have a trade that's perfectly neutral and centered and you reach your profit target very early in the expiration cycle. Sometimes what we've seen and we don't use them all the time, though I do use them a lot, is that when we have a GTC order working and the stock is trading right in the middle of our range, it might be a little bit more advantageous for us to remove that GTC order and to potentially let the position increase in value just a little bit more. For example, if we sold a 110 call and a 90 strike put and the stock is trading at $100, there's really no reason for us to execute a GTC profit-taking order because the stock is trading literally in the middle of our short strike range. We might be better off to let that position decay in value and collect a little bit more profit, just slightly more, maybe another 5% or 10% more in profit over the next day or two as it gets closer to expiration.

What we've seen is that with our positions, we usually try to let them go a little bit longer. If they are in the middle of our range, not being challenged on either side, let them go a little bit longer and potentially take a little bit more money off the table. Now, why do we do this? Now, the reason that we do this is because a lot of our research specifically through the profit matrix research that we did last year shows that when we let positions stay on a little bit longer, potentially take a bigger profit target or hold them to expiration in some cases, we end up generating higher returns on average. Now, this doesn't come as a freebie. We have an expense to this, meaning that we generally see maybe a little bit more volatility in our account, potentially less winners over the long run. We're comfortable doing this though because we know that the end result is higher total returns at the end of the day. And so, again, it's not that we're going to take these GTC profit-taking orders off and not use them. I use them in many, many different trades. But if the trade is middle of the road, not really being challenged, I might move that GTC order. I might move it down to maybe a potentially bigger profit target. If I'm initially targeting a 50% win, I might move it to a 60% or a 65% win because the stock is trading in the middle of the range. Hopefully this helps out. Again, it's never just a total black and white scenario. Again, I think that there's times where you can remove these and kind of let the position go a little bit more because it's going favorably. I'm still generally a fan of taking orders off. I rarely let things go all the way to expiration. It's just something that we've seen in research that ends up working really well, is to take positions off, but if we can squeeze out a little bit more premium from some of these trades, if they're trading in the middle of the range, I will typically end up doing that. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#379 - JP Morgan's You Invest Brokerage Offers 100 Free Trades - What's The Catch? Oct 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 talking about why JP Morgan's You Invest brokerage now offers 100 free trades, but answering the question, "What's the catch?" If you haven't heard, recently, JP Morgan decided that it was going to get into the personal retail investing space with brokerage accounts through a new company called You Invest. And so, what they're doing is they're offering 100 free trades a year to all of the Chase customers and unlimited free trades to customers who maintain large account balances in their account. Now, obviously, this is insanely important and a huge pivotal shift in this industry that I called literally three months ago. I will definitely say I called this one out. I knew this was going to happen. We talked about it in my live stream which I called "the world is flat" and this idea that in the future, all brokerages are going to move to commission free trading. It's not a matter of if. It's just when. And so, for me, this is very reassuring because now, it's telling me that things big brokerages like JP Morgan are now starting to make this shift and are now starting to chase each other to the bottom and that's really what it's going to become. Every brokerage in the future… And I don't know when in the future this will all happen, but every brokerage in the future will offer commission free trading and it will be across the board. It will be stocks. It will be ETFs. It will be options. It will be everything. And I talk about this because when you have the likes of Robinhood who's been so popular and has performed so well, has gained so much exposure and stole clients from many different brokerages, it's only natural that everyone else chase them and what we have now is we have literally a race to the bottom and it's very similar to what has already happened in ETF commissions and ETF expense ratios and fees and that compression that we've already seen happen and we've talked about previously on this podcast is now starting to play out in the brokerage space.

What's interesting to me is that they're all starting very slow and the idea is they're trying to figure out if they can actually still maintain some sort of commission income or revenue source, but eventually, all this stuff is going to be wiped out. In the case of JP Morgan, there is a catch, right? The catch is you have to be a Chase client first and then to get free unlimited trades, you have to have this huge, large account balance. That's the catch. You have to move all your money over there and then you can trade commission free. Now, the downside to that is – Well, what's the platform? What's the technology? What's the underlying resources that you can use if you move all your accounts over to JP Morgan? Now, what they also say is they say users who exceed that amount, so 100 trades a year or have the smaller account balances will then execute their transactions at a $2.95 per trade fee which they note is lower than the $6.95 publicly noted fee for TD Ameritrade and other E-Trade assets. Again, what they're trying to do is they're trying to literally dip their toe into this pool. They're trying to see – Okay, look. If we offer free trades to some people and not all people, but start with Chase customers, try to get people back over to Chase, how does that impact what we're doing? And they recognized that they are going to have to go deeper and I will definitely bet that in the future, it will be 500 free trades, then it will be 1000 free trades or the commission charge will go down as a result of this. We are going to see across the board, a lot of other brokers join this bandwagon and offer a lot more free trading, unlimited free trading as the compression in this industry gets more condensed in the next couple of years. I think this is insanely important. I think it's very cool to see this happening. You're literally seeing a pivotal shift in the brokerage industry happen right before your own eyes. I would definitely pay attention to this because in the future, people are going to laugh at us that we used to actually pay commissions to trade online. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#378 - Should You Withdraw Money From Your Investment Account To Pay Monthly Expenses? Oct 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 answer the question, "Should you withdraw money from your investment account to pay monthly expenses?" In this case, I wanted to read actually a member email that I got. And as you guys know, I get a lot of these emails which serves as the basis for a lot of the questions and topics that come up on the daily call. If you want to get your question answered or if you have some topics that you haven't heard us cover yet, please go ahead and shoot me an email, send me a tweet, Facebook message or submit your question at optionalpha.com/ask which is the best place to go. This person said, "Well, what are your thoughts on withdrawing money from your account to pay for expenses? I know that you prefer to take a standard monthly draw, but what percentage of your account is too high where you risk having to constantly decrease your account size? Obviously, in an ideal world, your monthly expenses would be low enough that if you were very small percentage of your account size, you can handle it. But what do you consider to be a safe level where you can continue to grow your account? Have you ever considered withdrawing a percentage of the monthly profits for smaller accounts where you have a strict monthly amount that might cause too much of drawdown in total account size?"

The idea here is just trying to find this wiggle room of where is the perfect amount of money or how do you calculate the perfect amount of money to withdraw from your account. Now, there's a lot of talk on the 4% rule or the 5% rule as far as like an annual draw from your portfolio and although it has a good merit as far as basis for guideline post that we can potentially use, it doesn't always serve as the principal amount that you should necessarily take from your account. What I mean by this is that when people talk about say the 4% rule for finance and withdraws, that takes into account a lot of different things that could happen based on when you start actually taking a 4% drop. In many respects, that 4% rule was done on research that was in the bottom of a market and started to have this huge bullish uptrend throughout the end of the research. What this means is that if we start drawing money on our account based on a percentage, maybe we want to allocate a little bit less of a percentage during the top of a market and potentially more of a percentage during the bottom of the market. To put number to paper, I guess, if we were at the top of a market which I think we are right now or at the top of a cyclical cycle, you maybe want to start withdrawing less than 4% from your account because there's a good chance that if you're holding a big stock portfolio or if you're holding too much long equity exposure, you could lose some of that value. If you're holding something at the bottom of the market, so say we were at the bottom of the market in 2008, 2009 and you wanted to start withdrawing money, maybe you could do something at or a little bit above 4%, so maybe 4% or 5% from your account per year.

I'm not a fan of doing the percentage basis. My thought process on withdrawing money from your account is to figure out what your monthly expenses are, do all of the personal finance stuff that we don't even have time to get into, but things like pay down non-preferred dept, get rid of all your student loans, all your credit card debt, any lines of credit that you have, reduce your monthly expenses as much as possible. What me and my wife did is we ended up moving from outside of DC to Pennsylvania. We had a drastic change in living expenses. It was about five years ago when we actually made that move and ended up reducing our expenses dramatically. We don't have any ancillary stuff. We've done all the right personal finance stuff that you need to do and I truly say you have to do that stuff first. Pay down all that stuff first. Try to allocate some of your resources towards non-preferred debt or high interest rate stuff that you have. Once you do that, figure out what your minimum monthly expenses are going to be, the minimum amount that you truly need to live off of after you've cut everything else out and I suggest if you have enough money in your account to do this and if you're at the point in your life in which you feel like you can retire from doing this, then I suggest just taking a monthly draw or salary. Now, me and my wife calculated this figure for ourselves and we've literally lived within this same figure now for almost eight years. We've done the same monthly draw, month in, month out, every month, no matter where our portfolio goes. We take the same monthly draw and that forces us to keep our expenses low even in the face of rising prices like fruit prices now with kids and diapers. We've forced ourselves to cut back on other things to keep our budget within the monthly draw that we take.

And I think that you should do this because when you start allocating for percentages, what you end up doing is psychologically start changing and you start maybe wiggling and shifting a little bit more than you should. And so, one month, you say, "I'll take 10% of my profits." Well, the next month if you don't have profits, do you still take 10% or do you take 8%? And now, you've started to immediately start wiggling and shifting your number until the point at which I think it doesn't serve its purpose of being an automatic safety net or income source for your family and for your future. That's my opinion on it. I think if you are at the level that you can start taking money and you would know if you are or not, then I think you should start taking a little bit out and slowly start increasing that to a minimum monthly standard. And again, I think that everyone should know if they're at that level or not. You would just have a gut check. Feel comfortable enough retiring off of your trading account and the money that it's generating and if not, you're probably not at that level. If your gut is telling you right now, "I don't know if I could do that." it's probably not the best thing to start taking money out of the account. You want to leave money in the account to let it grow. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#377 - How Theta Decay Impacts Straddles vs Iron Butterflies Oct 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 talk about how Theta decay impacts straddles versus iron butterflies. It's important to understand as we talk about the differences between Theta decay as it relates to different option strategies, what the basic building blocks or core elements of each strategy are. In this case, straddles and iron butterflies are effectively one in the same strategy. They are synthetic equivalents of each other, so long as you're buying options far out on iron butterflies. Iron butterflies core strategy is a short straddle at the money, selling the at the money call and the at the money put. It's the same strategy that you would use if you were doing a short straddle. Now, the difference is that with iron butterflies, you end up going far out of the money on either end and buying cheap protection. Now, the idea behind Theta decay would impact iron butterflies a little bit differently than straddles depending on how far out you buy those long options. Now, if you buy options a little bit out of the money on iron butterflies, say one or two strikes out of the money on either end, then generally, you're going to pay a little bit more money for those long option contracts and therefore, the impact of Theta decay is going to be much more slow than it would be on a wider iron butterfly or naturally on a straddle.

On straddles, we have very quick Theta decay because you're selling pure premium and it's at the money. With iron butterflies, you still have that core straddle position on the inside strikes, but the outside strikes because you are buying options have a muted effect on Theta decay for the position. Now, if you end up buying along outside strikes on the iron butterfly and it's far out of the money or say $5 or $10 away from where you sold the inside strikes and you pay a very cheap premium for these… In our case, we usually like to pay around $8 to $10 or so for these long option contracts. If you'd pay a cheap premium for them, then naturally, they're going to have a little bit less of a time decay suck on your core position. And so, when that happens, you actually see that these iron butterflies actually perform in very similar fashion, though slower in pace than a short straddle, but in very similar fashion as far as how quickly time decay erode the value of the position. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#376 - What Is Option Buying Power? Oct 03, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, "What is option buying power?" In its most simple terms, option buying power is the amount of money or funds that is available for you to actually go out and start trading options. Now, I think this terminology should be switched and it should no longer be called option buying power, but actually be called option trading power because it's not just limited to the buying and purchasing of option contracts. Your option buying power just tells you how much funds you have available in your account for the purposes of options trading and this means that you can also sell option contracts and put option contracts on margin or sell spreads, buy spreads, you can sell complex strategies. You could do everything you want with options trading with this amount of capital.

What typically happens is that when you have an account say $100,000, if you start investing that account and you start either getting into option strategies or purchasing stock, you might use say $50,000 of your account to get into other strategies. Let's just say we're going to purchase stock and that stock purchase is $50,000. What's left over is about $50,000 which is typically associated with your option buying power. You have that amount of money generally to then go out and execute new options trading strategies, whether you're buying or selling contracts until you reach the point at which you dwindle that amount of money down to zero. Now, we typically suggest that you keep this buying power available of around 50% of your account. You don't need to actually invest all of your account to generate higher returns than the market on average long-term. In fact, you can generate higher returns on the market on average just investing 30% to 40% of your account and keeping the vast majority in cash. I typically like to follow this strategy because it leaves a lot of wiggle room for margin expansion and for volatility in the market and always leaves enough cash available to enter new trades or better opportunities whenever those opportunities present themselves. As always, hopefully this helps out. If you have any questions about option buying power, just let us know and until next time, happy trading.

#375 - What Happens When You Buy A Put Option Contract? Oct 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 answer the question, "What happens when you buy a put option contract?" I want to talk about the logistics of what actually happens when you buy a put option contract and the first thing to understand is that when you are an option buyer in this case of a single put option, you do have to pay money to get into that contract. Logistically, what happens is that the money that you paid for the contract or the option premium gets transferred over to the option seller and in this case, if you're a put option seller, you would then receive that option premium or that option contract value as income in your account.

Now, when this happens now, you have this put option contract that you've now purchased from the option seller and it's in your account valued at the value that you priced it at and it's immediately going to start changing in value based on time until expiration, volatility, the underlying stock movement, etcetera. And so, when this happens, you just basically are going to hold onto this put option contract assuming that you're trading in the right way and you're hoping that the stock goes down, you want to see an increase in the value of this put option contract. But that's it. That's all that really happens. Money gets transferred from your account to the option seller's account. You now have this put option contract which you can decide what to do with. You have the right, but not the obligation to choose to trade that contract away or to exercise your right for shares and you can do that any time typically before expiration or at expiration. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

#374 - Earnings Surprises - What Are They & 3 Examples Oct 01, 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 earnings surprises, what they are and I want to share three examples with you. Now, the key thing to understand about earnings surprises is that they can happen in either direction and it doesn't necessarily always have to be this difference between what analysts or Wall Street expects the company to make and what they actually make. In fact, a lot of earnings surprises can come as a result of guidance that the company has or based on the underlying expectation of actual market participants. What do I mean by saying all this? Well, when a company announces earnings, typically what will happen is you will also have some of these big companies that are followed by research analysts. And so, a research analyst might publish their expectation of where the company's revenue and earnings and growth should be for this quarter. Now, all of these research analysts pull their numbers together and basically, we get this consensus estimate. You know, what is the mass of research community, what do they think the earnings per share are going to be, the revenue growth, the top line revenue, etcetera. And so, that builds the basis for where the benchmark is for that company. But when a company surprises, they usually have a number that is significantly higher or significantly lower than what research analysts expect as a consensus. And so, that causes the stock to either jump or fall based on that differential. But what also might happen is we also might see that the stock might beat earnings estimates, meaning that the stock might actually outperform earnings estimates, but still fall because even though it outperformed what analysts thought it would do, it still wasn't enough for the actual market. That often happens as well and that can cause a lot of traders to kind of scratch their heads and wonder what is actually happening. Now, at the same time, we also can have companies that will issue different guidance after they announce earnings. Even though their earnings might have been great or better than expected, they may now issue guidance that says that they expect next quarter's earnings to be lower. And so, that revises their forward-looking projections which obviously has an impact on the stock price.

When we look at three examples… I'll just bring up three general case studies, but you can look at a lot of these examples because they happen all the time. But the ones I'm going to talk about right now are Apple, Tesla and Facebook. Tesla just recently in the last couple of quarters, went through an earnings event where the company announced earnings, the top line revenue was great and the company actually opened higher than expected. But then actually, as the company started to get into its conference call and started to provide guidance, the stock actually closed about $40 lower on the day. In this case, you had literally two earnings surprises in the same actual trading day. It was very hard to trade Tesla probably during that day. In the same vein, what we've seen before time and time again with Apple is we've seen Apple have above average earnings, above consensus or Wall Street estimates in as far as their earnings per share or revenue growth and still, the stock traded lower. In fact, this has happened at least six times before in the past where Apple has outperformed the market as far as expectations, but has actually traded lower. And so, the reason is because it's still not at the same growth rate or it's still not at a growth rate that people truly expect Apple to be hitting at. Apple may have outperformed what analysts expected, but it's still not outperforming what actual investors have expected. In the last vein or I guess the last example here with Facebook, what we've seen recently with Facebook is Facebook has done the same thing with Apple, except it's gone about it just a little bit differently in that Facebook has usually outperformed its expectations. In many cases, analysts are catching up to this outperformance and pricing Facebook accordingly, but what we're seeing in Facebook is dramatically different changes in guidance. And so, last quarter, Facebook had a huge surprise where its guidance and its expectations were much lower because of all the privacy and policy issues out there and the stock basically opened down around 175 when the previous day's close was 218, so a huge dramatic surprise, again, mostly around the expectation of future growth because the earnings were up on the quarter. It actually made more money on the quarter and year over year, but it's the expectation in this future growth.

What does all of this mean if we just kind of wrap this up? The hard truth about earnings is that you have no predictive power over where the company is going or where the stock is going. In fact, we've done a lot of research on this and we'll be publishing our earnings trading research report that talks about how you can trade these earning strategies. But one of the things that we learn in that research is that we truly have no idea where a company is going. There's usually about a 50-50 chance of a company making a move up or down regardless of the situation, environment, expectations, consensus estimates. All of that stuff rolled into it, it's still just a coin flip. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#373 - How Long Does It Take To Learn Options Trading The Right Way? Sep 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 answer a question, "How long does it take to learn options trading the right way?" This is a tough one because I know there's a lot of options trading education out there and I would like to tell you that it takes literally no time at all to learn how to trade options, but it's just not the truth. You can't learn how to trade options overnight and you certainly can't learn how to trade options at a weekend or a multi-day seminar or a boot camp. It's just not going to get ingrained into your mind and you're not going to understand and really believe in the concepts in that short amount of time as much cramming as you try to get in. I think that options trading is truly probably a six to eight week process to learn. I think there's concepts that you have to master and you have to give your subconscious and conscious mind time to basically absorb and learn some of these concepts and methodologies, the terminology that is required to be successful as an options trader.

Some people might catch things and learn at a much faster pace and some people might take a little bit longer, but I think somewhere around six to eight weeks is probably about as long as you need to really master some of the big rocks and main components. Now, I can truly tell you that it will take much longer to master the intricate details of options trading that might come after a course of a couple of years or even a decade or so in this business. I truly am learning new things about the market all the time and new things about option strategies or different ways at looking at options pricing or how options pricing has evolved in different market environments and situations. That's always a constant and ever evolving path for me, but I think understanding the core concepts, the core methodology and foundation of options trading really probably takes about six to eight week. Luckily for you and for many people who listen to this podcast, we've basically laid out that entire process on our website through the tracks and certification program, so that you can basically go through this at the right pace and in the right order and again, all totally free at Option Alpha. As always, if you guys have any questions, let me know and until next time, happy trading.

#372 - What's The Difference Between An Iron Butterfly And An Iron Condor? Sep 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 go answer the question, "What's the difference between an iron butterfly and an iron condor?" Structurally, there's only one real difference between these strategies and I'm not going to get into the basics or to the pricing principles between them or how they interact in different markets. But as far as how they're structured and how they're built, iron butterflies are different than iron condors in that iron butterflies have the exact same short strike on both the call and put side and iron condors on the other hand, have different short strikes for calls and puts. For example, if we have a stock trading at $100, the iron butterfly strategy might sell the 100 strike call and the 100 strike put option and then buy options out on either end say at 105 on the call side and 95 on the put side.

An iron condor on the other hand, might sell the 99 strike put and sell the 101 strike call option, so not the same strike and then similarly, buy the same 105 call and 95 put option. You'll notice that the iron butterfly and the iron condor could conceivably trade the same long strikes and could conceivably trade similar short strikes, but an iron butterfly trades the exact same inside short strikes and an iron condor trades different inside short strikes. If you think about them as actually, their synthetic main components or original components being straddles and strangles, that's where you get those inside short strikes for iron butterflies and iron condors respectively and a straddle is selling the same strike price at both the call and the put side. With a strangle, you're selling different strike prices on the call and the put side. As always, hopefully this helps out. If you have any questions, let me know and until next time, happy trading.

#371 - thinkorswim Account Info Basics Guide Sep 28, 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 go through the Thinkorswim Account Info Basics Guide which is basically my fancy way of just saying, "We're going to tell you what all those numbers in the account info box on the top left-hand corner of your Thinkorswim platform actually means." There's a couple of different things inside of that box. It can be confusing because there's a lot of numbers trailing around in there, buying power, day trading limit, cash and sweep. And so, what we want to do is help you understand what each of those boxes means. Again, if you're logged in to your Thinkorswim platform on your desktop or you can even see this I believe in your mobile platform, this is what you'll see in that top left-hand corner. It's the account info box which you can toggle open and you can move around in your platform.

The first box there is the option buying power box or at least it's the first box for me because I actually have option buying power approval on my account. And basically, what that does is that tells you how much money you have to go out and in many cases, buy options or sell options. Now, I think they should honestly rename this. Instead of option buying power just because that has this connotation that you should be buying options with this, I think it should be options trading power, so the available funds you have to trade options, whether you buy options or whether you choose to sell options, but that's just me being nitpicky. But that's exactly what it is. It tells you that you have that amount of money to go out and start actively trading options.

Now, the next one, there's a dropdown box in that one and the dropdown box for net liquidity and day trading power basically shows you how much you have in net liquidity for your account. Now, the net liquidity box is a rolling five-day basis that tells you how much money you've had in your account should you liquidate everything that you're trading right now, meaning if all the positions were closed and reversed, that current prices, how much money would you be left over with? Now, this to me is the most important one because this tells us exactly how much or how little our account is growing in the future. As much options trading activities you have with all commissions rolled in, everything in there, your net liquidity should be growing and that means that you should be generating money after commissions and after expenses and losing trades and all those things going out into the future, so to me, this is the most important box. Now, this also means that when I talk about position sizing, I'm always talking about position sizing as it relates to net liquidity and that is because at the end of the day, if you closed out all your positions, how much you left with, that's how much you should be basing your position sizing on.

Now, I skipped over one in the top, so we'll go right back to it. But when you actually click on the option buying power or stock buying power, whatever your account shows, there is another box that will show or should show stock buying power and what this will do is this will show you how much available funds you have if you were to also include margin as a part of your stock buying strategy. If you do have a margin account and if you're able to trade on margin, not necessarily that I think you should, then that'll show in the stock buying power. It's usually at least double what you have in your option buying or liquidity remaining for the account, but sometimes, it could be more.

The third box down on my side is day trading buying power. And so, what this tells you is this tells you how much funds you have available if you were to day trade a bunch of contracts back and forth or a bunch of stock back and forth. This is important because if you do get into the business of day trading where you're actively trading lots of contracts in and out, you want to take a look at this because the brokers will limit your available day trading power because what happens is that even though you might day trade in and out of a couple of hundred shares here and there, those trades still have to clear through all the exchanges and they don't happen instantly and sometimes, they can take a little bit of time to clear. They want to make sure that all those trades do in fact clear before you have the ability to trade more funds. Now, this day trading power is typically much higher than your net liquidity and in many cases, much higher than your options or stock buying power because they know in many cases that all of these trades will clear and should clear very easily, so they give you a lot of leeway to do that. Now, again, this is mostly for accounts that have day trading power which is generally over $25,000.

The next rundown, number four down on our account info tab is cash and sweep vehicle. This is exactly what it sounds like. It's basically the cash that's in your account, whether it's cash remaining or cash that you've collected from option premium selling and it's the cash that the brokers allow to move in and out of the sweep vehicle. The sweep vehicle is just a fancy way of saying, "Look. In many cases, many brokers, specifically Thinkorswim will move the cash, excess cash in your account to basically like a holding tank for all accounts and they lend that money out to other people, collect interest on it and then they give you a portion of that." Now, don't get too crazy and get all worked up. It's very, very small interest. It's a very low risk, low investment that they're doing. But they're moving your cash back and forth between all of these sweep vehicles, so that it allows you to gain a little bit of interest, just very small amount of interest on the amount of cash that's just sitting in your account, waiting to be deployed.

Now, the last box is your available funds for trading and this is important because the available funds for trading is very similar too or should be almost exactly the same as your option buying power, but it also tells you how much is available after the inclusion of a bunch of margin and if you have bought margin on stock or bought options on margin, it will include that as well and how much money you have left over to basically work with. Now, if this number gets too low, that's when you start running into these maintenance calls or margin calls that you typically hear about all the time. My suggestion has always been that you keep your account at 50% max allocation and that means that available funds for trading should generally be around 50% of your net liquidity. And if you do that, I think you should be okay. I think you won't over-allocate. You'll have plenty of cash, plenty of cushion to withstand a lot of margin fluctuations or volatility fluctuations in the future. Hopefully this has been a good little overview. As always, if you guys have questions on the Thinkorswim platform, please let us know and until next time, happy trading.

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