The "Daily Call" From Option Alpha

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#330 - What Happens When Options Expire Out Of The Money? Aug 18, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha. Today, we're going to be answering the question on the daily call here. "What happens when options expire out of the money?" This is actually a really simple one to answer. When options expire out of the money, nothing happens. No premium gets exchanged because the options basically are worthless and you don't have to deal with any stock. It's actually a very simple process because they just cease to exist. It's very much like if you were to buy insurance on your car in case you get into a car accident. If at the end of the year, you don't get into a car accident, then nothing happens. The policy expires. You don't get any money back as the option buyer. The insurance company as the option seller collects and keeps the entire premium and you just have to renew your policy and basically start over and start a new one. It's very much the same process with options. When the options expire out of the money, the option buyer gets nothing, the option seller keeps everything at that point and then no stock is traded hands or exchanges in the open market. There's nothing to do. It's not worth anything. It just ceases to exist and you have to reestablish a new position maybe in the next contract month.

A very simple answer here. Hopefully this helps out. I know this was a short one today, but if you have any other questions that you want to get added to the daily calls that we do here or on our live stream that we do on Facebook every week, please head on over to optionalpha.com/ask and click the big red button in the middle of the screen and leave me a voicemail. That's the easiest way to do it and it gets your content here, so that we can get your questions answered. As always, hopefully this helps out and if you guys have any questions, let me know. Until next time, happy trading.

#329 - Why I Think Volume Flow In Options Is Overly Subjective Aug 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 be talking about why I think volume flow in options is overly subjective. I was on a radio show, an internet radio show just a couple of weeks ago. You may even be able to find it online or search it on YouTube. But I was on a panel, if you will with some other people and we were just talking about stocks that people had questions about and the markets and where things were going and I think it was interesting and I enjoyed being there because I found that a lot of these guys have so, so subjective views of the markets. And I don't know any of these guys personally as traders, so I have no idea if they're actually good or not or if they're just blowing smoke, but in many respects, the entire hour segment of this radio show with all of these different interview guest was mostly me sitting on camera in my little Google Hangout corner of the video, mostly me sitting on camera just sitting back in my chair, just rolling my eyes in my head and thinking to myself, "I cannot believe." And I will never go back on that radio show. But I cannot believe this is the kind of stuff that people are getting out there because it was all of this stuff so highly subjective on charting and volume and order flow. I mean, it's just crazy.

But two of the things that actually came out of that I think were interesting. It's that during the show, one of the guys was talking about options order flow on Snapchat and Twitter and he said there's some announcement that he was watching a news feed because that's what he does, that's part of his strategy to see what the chatter is and apparently, there were some newsfeed that Snapshot was going to either buy Twitter or Twitter is going to buy Snapchat, something like that. And so, he said during the show, he goes, "The order flow right now is crazy for the call options. People are really, really thinking this is going to take off, so I'm buying a bunch of call options right now." And I literally rolled my eyes on the camera and I was not in talking mode and I'm not talking to him. The camera was recording me nonstop. And I remember somebody adding in the comments like it's funny that we rolled our eyes at the same time, at this exact moment because what this guy didn't know about order flow in this case was that during that time that there was a lot of order flow for Snapchat and Twitter and the stock was rising just a little bit like intraday, was that a lot of that order flow seem to be closing positions, so seem to be potentially people closing out positions which may have suggested that they actually didn't think that Snapchat and Twitter was going to go higher. And so, you can only see that if you go back and look at the open interest and how that change kind of retroactively. And so, as a result, actually, Snapchat and Twitter both ended the day extremely lower and started to move lower, so whatever the news was. I guess it wasn't right or there was a knee-jerk reaction in the market.

But in either case, the idea here is that – Look. I mean, a lot of this stuff is highly subjective when you start getting into charting patterns and candlestick movements, stuff like that. I'm not saying it doesn't work. I'm not saying there are people who aren't good at it. I think there probably could be. There's one in every bunch. But it's really hard to do that on a consistent basis. And the same thing with option order flow, is how do you know if the options order of volume flow. Is people establishing new positions or exiting existing positions? You don't know that unless you look at the other side of the equation which is open interest. Where is that really going? And even if people are establishing new positions which means they're highly speculative anyway, you don't know if those new positions are hedges or speculation positions or even if those people are right. Recently, Facebook went through a huge decline in a stock, a 20% move in one single day heading into that earnings event. People were buying call options and open interest was rising and generally, people were either speculating or hedging that Facebook could've moved higher. But at an almost 2:1 ratio than put options on the weekly contracts, so a lot of people were expecting Facebook to have a huge move higher and it did the complete opposite. Even if we think we know where things are going to go, it may not be the reality. We may be totally surprised. And so, that's the real downer with a lot of people who try to read the flow or read the option order volume and see were orders are coming in. We have no idea what the makeup of those orders is and what the outlook of those people who are placing the orders are. Don't try to read it. I don't try to read it at all. Just look for good open interest and volume just for liquidity and move on from there. You really don't need to do anything else. Hopefully this helps out and as always, let me know if you guys have any questions. Happy trading.

#328 - Short Put Vs. Long Put? Aug 16, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to briefly describe the differences between a short put option and a long put option. This gets back to some of the options basics that I think are really important foundational elements that you have to understand if you want to start trading options or trading for a living.

Let's talk about a long put option actually first. Long options are some of the first option strategies that you learn because they're very easy for most people to understand conceptually. With a long put option, you are doing two things. One, you are paying money to enter the position and two, in exchange for paying money to enter the position at a particular strike price, you have complete upside potential in the sense that if the stock continues to move down, you could make a lot of money on that contract. Long put options profit from a quick and rapid decline in the underlying stock price or a rise in volatility. What would happen with a long put option is if a stock was trading at say $100, you might buy a 98 strike put option for $1. And so, your hope is that the stock goes down below at least your breakeven point which is around $97. The strike price of the option contract which is $98 plus the premium that you paid to get into it gets your breakeven down to around $97. You can see that it would actually make money as long as the stock were to go down as low as $97 or lower. Every $1 or $.50 that the stock goes below that level, then you start making money on your long put option. Long puts are really popular on the outside for risk hedging and for portfolio hedging, but the reality is that this type of insurance contract which is exactly what a long put option is, is actually very costly for your portfolio unless you have the ability to pinpoint exactly when the stock is going to start dropping. Very much like insurance on your house or your vehicle, it's really not in your best interest to have insurance unless you get into a car accident. It only serves its purpose when the markets crash or when the stock crashes, again, which you don't know when that's going to be or at what velocity that stock is going to go down.

Now, let's contrast this with a short put option. Using the same strike prices from our example, if we were to take the other side of this trade and be a short put seller, then what we would be doing is two things. We would be collecting a premium from the long put option buyer (in this case, $100 from our example) and in exchange for collecting this premium which is the maximum amount of money that we can make, we take all of the risk that's associated with the stock potentially going below that strike price. If we were to sell a 98 strike put option which is the same strike price as the put option buyer that we had in the example and we collected $1 in premium which is $100 in notional value for the option contract, that means that our breakeven price is also $97 on the stock price. As long as the stock stays above $97 and assuming it's trading around $100, we've got about a $3 cushion, so that anywhere above that $3 range or above $97, then we make that $100 premium that we collected from the long put option buyer. It's a very similar concept as insurance. When you are an insurance company and you sell an insurance policy to somebody and you ensure their vehicle or their house against catastrophic loss, well, if the house never burns down or if the vehicle never gets into an accident, the insurance company keeps that entire premium for the duration of the contract. It's very much the same, similar concept. As an option seller or a short put option seller, what you're doing is you are trading a lower potential payout for a much higher probability of success. And so, that is the key, we believe to how you can generate long-term, sustainable growth and income in your portfolio, is to do strategies like short selling puts which can seem scary on the outside, but statistically and market wise, from all of our back-testing research as well as many other outside companies and firms is one of the more profitable strategies you can employ.

Hopefully this helps out. Again, it's just a very basic overview of both of these strategies. We do have much more training inside of the Option Alpha platform. You can just search long puts or short puts. There's tons of training videos, other podcast, as well as some live trading videos that we've recorded of us actually executing some of these strategies inside the platform. If you guys have any questions, let me know and until next time, happy trading.

#327 - Selling Covered Calls For A Living - Myth Or Really Possible? Aug 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 be talking about selling covered calls for a living. Is this a myth or really possible? This is a question that we had from one of our members and just the idea around it was – Can you sell covered calls for a living? When I think about trading for a living, I think about the income that comes in from a trading strategy. Does a trading strategy or does an investment strategy generate enough income to actually live off of? To pay bills and to put food on the table, a roof over your head, etcetera? In the case of covered calls, I don't know if necessarily that they would generate a living for you because all you're doing is buying long stock and then selling a covered call to reduce the cost basis on them. Now, do I think that it's a great strategy for long-term buy-and-hold investors? Absolutely because we've even seen in our own research, as well as outside research from CBOE and other options regulatory houses like OIC, OCC that selling covered calls even on the S&P500 index outperforms the market.

This whole notion that you can't use options to outperform the market is completely bogus. You can and just a very simple covered call strategy can be the first step in accomplishing that. Can you use covered calls for a living? I guess it depends on how much capital you have and how many shares of stock you own. Selling covered calls if you have hundreds of thousands of shares in an underlying security can absolutely generate some income and again, still reduce some of the cost basis in the position, but ultimately, the stock still has to continue to slowly float higher. I think it's a little bit of both. I think it could be a myth, but I think it could be possible to generate some pretty good income from selling covered calls. It's just wondering if you would actually live off that income or if it's just really for portfolio enhancement. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#326 - How Do You Make Money Selling Options? Aug 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 answer the question, "How do you make money selling options?" I think this is one of the biggest questions that many new investors ask. In particular, many new options traders ask how exactly do we make money on a consistent basis, generating income for our portfolio by selling options. There's a couple of bullet points I want to go through here that I think touch on a lot of the big rocks that we talk about in our strategy, so the really important things that you have to master. In many regards, if you master these couple of big rocks, these really important key concepts, everything else should generally fall into place or it should be a lot easier to generate money selling options. Now, as we go through these, I want you to continue to remember or reference the concept of both the casino business as a casino owner and the insurance company business as again, an insurance company owner because the options trading market on the option selling side is very much like those two business structures. There's a lot of overlap and a lot of similarity and it's no wonder why in many respects, Warren Buffett is one of the biggest option sellers and single individual biggest options traders in the market because he does option selling strategies which many people don't know and he publicly discloses all of this in his quarterly and annual reports for Berkshire Hathaway. Now, that also means he does this because he's also in the insurance business. He sees the value in this type of framework, in this type of philosophy not only in the equity markets because he's selling option premium outright, but also in the insurance business because he's selling insurance which is very much the same thing.

The way that we make money selling options is purely by getting paid the volatility premium. If I could narrow it down to one thing, the thing that makes money, the edge that we have in option selling is the volatility premium, this concept that when options are priced on a forward-looking basis or a future value basis, they are priced assuming that the stock makes huge moves, but the reality is that the stock on a consistent basis will not meet up to those expectations or outperform those expectations. To put this in hopefully better terms, if the market participants are expecting that the stock is going to move 10% over the next month, we may actually see that the stock only moves 8% and it's the same concept that insurance companies use with actuaries and with probabilities and death rates, etcetera. They basically assume that people are going to get into a car accident or their house is going to burn down many more times than it actually might happen in reality. And so, they base all of their insurance premiums, all of the money that we pay as individuals to insurance companies to ensure our stuff, they base that off of higher expected default or higher expected fire or crash rates or ratios than what might actually happen in reality and that difference, that premium is where they make their money. As option sellers, we are selling options and taking in this lower payout that most people don't want to take in, but in exchange for doing that, these smaller premiums on a consistent basis, we have a much higher probability of success. It's again, very similar to a casino or to an insurance company. Casinos will take in small… Basically, I call them donations. But they take in small bets and every so often, they might have to pay out a jackpot, but it never overshadows the small bets that they take in on a consistent basis. With insurance companies, they take in small amounts of premium. Maybe you pay $200, $300 a year for your car to protect it against the crash and every so often, people do get in a car accident unfortunately and the insurance company has to pay back the value of that car, so $30,000, $40,000, but it never overshadows the small premiums that they collect across-the-board.

If we use this analogy then and kind of continue moving forward, then the next logical step is that in order for this option selling system to work, to make money selling options, we have to stay overall neutral in our portfolio. We have to not be directional traders in the US equity markets. Now, it's easy for insurance companies and for casinos to be neutral because every game is an individual occurrence and outcome. In the equity markets, we have trending markets and we have sectors and industries that we have to hedge against. And so, one of the ways that we do this is by selling options on both sides of the market, so selling put spreads and puts and selling calls and call spreads and this keeps our overall portfolio neutral to any expected move. I think this is one of the coolest things that we can do as options traders that is totally unique in our business in that we have the ability to very quickly on literally an hour or a daily basis, reestablish new positions based on new information. There's no other business on the planet where you can actually change the entire business model or a potential payout as quickly as you can in the options industry. If you're running a restaurant, you can't just close the restaurant and move it across the street if you get new information that across the street, it has better traffic for that restaurant and it's really hard to do. But in the options market, if the market starts moving down, well, we can move all of our positions down to compensate for that accordingly. Staying neutral is one of the key concepts to making money selling options.

The next one that we have to talk about is keeping position sizes small. If we think about again, insurance companies and casinos, they don't just gamble with one person. They don't just ensure one person's house. Insurance companies and casinos know the value of small, manageable risk positions. That's why they try to ensure hundreds of thousands of people. That's why casinos try to get hundreds of thousands of people into the casino to play. It's not just one table at the casino. If it was more profitable for the casino just to have one table in the casino, then that's what they would do, but it's not. They have to keep lots and lots of small positions going at all times, so that no one single person or one single position could ever knock them out. And this is a key concept that many traders don't understand. They try to over-allocate with their position size. But when you do this, you run the risk of one single bad trade or a single sequence of trades knocking you completely out of the market. We have to keep our position sizes extremely small and then the next step from there is we have to play the expected values. If we understand that we got to stay neutral, we understand that we have to sell premium, then we have to (the next logical step) play the expected value game which means that we have to do this on a reoccurring basis, so that we increase the number of frequency of trades or occurrences of trades or high number of trades in order to hit some sort of expected payout. Again, if you think about an insurance company or a casino, none of their business models work if they only ensure people and they ensure a lot of people, but they only do it for one year. The model may not work in a single given month or year or quarter because they may have at any one period of time, a sequence of returns that is not what it should be. It's like flipping a coin. If we expect to flip a coin and hit 50-50 heads and tails, we may run into a sequence of 10 heads in a row when we flip that coin. Now, that's not the expected outcome, but we may run into that string. When you're trading options, you may run into a string of losers, you may run into a string of winners, but it's only where the income and the portfolio really solidifies itself, is when you start trading and reaching higher trade counts overall because then, the expected value starts to gravitate more towards its true probability and that's where you get a lot of stability in your account, you get a lot of stability in your income and it actually makes this entire thing so much easy.

Hopefully this helps out. I've tried to condense it down into what I think are kind of the top things. I'd love to hear what you guys think. If this is helpful, please let us know. Share us online, like us, thumbs-up. Do whatever you need to do to let us know that this was really helpful and as always, if you have any questions, let me know. Until next time, happy trading.

#325 - What Time Of Day Do Options Expire? Aug 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 answer the question, "What time of day do options expire?" This is an important question because as you're getting closer to options expiration, even trading options during the last day of expiration, it's really important to know what time of day they expire. Now, there is a difference between the time of day that they expire and the time of day that you can exercise or assign the contract and the time of day that they stop trading. There's a lot of different days and times that are kind of rolled up into one. The first thing you have to understand is that for most option contracts, they actually stop trading at 4:00 o'clock Eastern Standard Time. And so, that's when you can place your last potential possible trades in the market to close your position or remove the position from your account or get rid of the option position completely. That's the last kind of trading time during the day. But when you actually look at when the options expire, in many cases, they actually expire later in the evening that time afterhours trading. If the stock that you're trading ends the day at $5 per share at 4:00 o'clock, but it actually starts trading up to $6 a share in afterhours trading, in like the hour, hour and a half after that, then you could actually be subjective to that option contract going in the money or not, depending on how you're set up because of that afterhours trading. You have to keep that into account. You got to keep in mind that where the option stops trading at the end of the day is not necessarily where it will expire at the end of the day because it has to include afterhours trading if they do.

The other thing that you have to remember is that different exchanges like the NASDAQ and CBOE, the Chicago Board of Options Exchange have different times in which you have to send in your notices for expiring options to convert them or exercise them. In the case of the NASDAQ, they publicly say about 5:30. The CBOE I think right now says about 3:00 o'clock on the last trading day, third Friday of the month. Again, you just got to double check and see maybe potentially where those contracts are or if anything, just basically if you want to exercise your contract or assign it, you would want to do it literally the last day of expiration early in the morning and at that point, you probably made your decision, whether you want to keep the contract or keep the stock or not. The rule of thumb here is – Don't give yourself the last minute of the trading day to make a decision. Make those decisions during the week of expiration. At that point, most of the option contract, extrinsic value, time value and volatility value is out. You're basically just dealing with intrinsic value or the value if it was assigned or exercised. Make those decisions on whether to close or move the positions early in the expiration week. Don't run it all the way up till the end and then you have to deal with all these different time parameters. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#324 - Buffettology Is Missing One Key Investing Concept Aug 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 be talking about why Buffettology is missing one key investing concept. Buffettology is just framework around how Warren Buffett invests and there's actually a couple of good books on this that are out there. You can just search Buffettology and pick one up at Amazon or wherever you buy your books. But I think that the books and just this whole framework around investing is really interesting and a lot of good stuff that comes out of it naturally and Warren Buffett is probably one of the best investors of all time, if not, arguably the best investor or all time and I think he got a lot of things going for him. Obviously, he started at the right time. He was big on compounding. He was big on intrinsic value. A lot of that stuff worked in Buffett's favor. One of the things that we talk about at nausea here is why Warren Buffett is actually a big time option seller. Now, he does this not only through actually selling options where he sells out of the money options on the indexes, but he also does this through his insurance companies. And one of the key lessons in there and then we'll talk about the one thing it's missing. But one of the key lessons in Buffettology is this idea of insurance float and why Warren Buffett holds basically the biggest single person conglomerate of insurance companies in the country and the reason he does that is because of insurance float because he knows he's taking in premium and then every so often, he might have to pay out a big sum, but it never overshadows the small premium that he takes in from selling insurance policies which is exactly the same business of selling options.

But what he doesn't include in there or what this book doesn't include is… I won't say it's Warren Buffett, necessarily. But what the book doesn't really include or talk about or any of these Buffettology, like summaries that I see online is the concept of frequency or the number of trades, this large number of law. Everything works really good if everything works out, right? If you invest in a company and it says you have to wait for five or 10 years before you see returns, that's all good if it actually works out. But in many cases, the reality of people who are investing at their kitchen table, meaning they're talking with their significant other, husbands, wives and deciding where to put their only $10,000 or $15,000, that doesn't work out so well because you not only have to hold for five or 10 years to see if you're right and you waste all that time, but what if immediately, we have this Netflix effect and the company that you thought was safe that had a "moat" around it, that had predictable returns now has completely turned around? And we're seeing this more and more with disruptive technology and disruptive companies. The company that you think today is totally safe, totally secure could be completely gone in five or six years. And so, that type of black swan event, that risk is really not accounted for it and I think it's a big, big misconception. And so, what I think the book is missing is this idea of frequency or the law of large numbers that all of this stuff works really, really well, but you have to do it on a consistent basis. You can't just invest all of your money. I'm not saying they suggest doing that, but you can't just invest all of your money on something that has a positive potential expected return, but that still has really negative downside when you're only doing five or six companies over the course of the next five or 10 years or even 20 companies over the course of five or 10 years. It's not a big enough sample size for these expected returns to actually play out.

Why I love options trading more so than long-term buy-and-hold investing on a wild scale (I love it way more than long-term buy-and-hold investing) is because with options, you have the ability to quickly and accurately get to that expected payout in the next two or three years. You're going to need to make a lot of trades to get to that expected payout, but it doesn't take five or 10 years to see if your mentality held true. And the reality is again, is that most people are investing at the kitchen table. If you're going to wait five or 10 years before something works out, are you really going to wait that long? I mean, what if the company has seven really bad years? Do you think you're still going to hold it? Do you think you're going to be determined enough and confident enough to keep holding after it's had a huge drawdown and it's not really going anywhere? No. Most people are going to dump the stock. Like the actual mentality or psychology of investors is they're going to dump it and try to chase higher returns someplace else. The beauty of options is that it focuses our attention on really like the next 30 to 60 days every single time. And so, we have the ability to quickly recycle our capital and increase our frequency of trading which gets us to that expected payout much faster. And so, I think that's why that's a key concept that this book is definitely missing. But great read overall, good general investing concepts. But again, keep some of these things in the back of your mind because what may work for somebody who's got a lot of money and companies that have a long maturity to hold may not work necessarily for somebody who's really trying to maybe live off of that income or get some consistent income and not willing to hold or not able to hold for 10 or 15 years before they see if it works out. Hopefully this helps out. If you guys have any other thoughts or comments on this or any other recommended books, as always, send them over to me, kirk@optionalpha or just Tweet at us @optionalpha, Facebook, same thing, Instagram, the whole deal. As always, if you guys have any questions, let me know and until next time, happy trading.

#323 - Liquidity Considerations For Closing Option Trades Aug 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 talking about liquidity considerations for closing option trades. Again, another question that was sent in from one of our members and he basically said, "If I decide to close out a position and there's no liquidity, does that mean that I'm stuck with the options or does it simply mean that I can sell back or buy back for a lesser or worse price?" This is a great question because what we talk about often with options trading is that liquidity should be one of the things that you look at on a consistent basis, that you can use our watch list and toolbox software, in which case, we screen and kind of filter out tickers for liquidity already for you. We try to close that gap and remove that barrier immediately. But if you are going to trade say a random stock or a random ETF, you should be looking at the liquidity. We've done shows on this that you can search in the podcast app or on our website about liquidity requirements. But liquidity is so important not only just because you should be trying to trade something that's liquid where the pricing seems to fit and there's a lot of action in it, but because it allows you the flexibility to get in and out of the contracts very quickly. When you have no liquidity and in this case, this guy was asking when there's no liquidity. No liquidity could be just under maybe 100 contracts of open interest, maybe one or two contracts a day. It does leave you with two choices. The first choice of course is you can stick with the contract and go through the expiration cycle. Now, that of course is up to you, it's up to your account, but it also means you're going to incur a lot of higher commissions because closing out an option contract might cost you $.75 in commissions, going through the exercise process might be $12, $15, $20 as some brokers charge a lot of money to go through the exercise and assignment process.

If you do get stuck with the option contracts which you can do, you can go through that process, but in many cases, you don't want to do that and so then, your second choice is, "Well, how do I close?" Well, if there's no liquidity there, then what you have to do is you have to reduce or increase your price to entice someone to take on enough risk that compensates them for the lack of liquidity. It's very much like real estate. I think real estate is a great analogy for this because if you're trying to buy a piece of land in the middle of nowhere that nobody really wants, that no utilities are connected to, it's probably not that expensive because a land has to be cheap enough to entice somebody to want to come there for whatever reason and to overcome enough risk to be out that far from civilization, to potentially have no electricity, no water, no conveniences around, no Targets or anything around you. And so, the price has to be low enough to entice people to come there. And so, that lack of liquidity means that something has to give and usually, it's price. In the case of option contracts, when you're trying to buy back a contract if you're short before, you might have to buy back that contract for a much, much higher price which reduces the potential profit that you have if you have a profit and that slippage can really, really hurt over time because you don't know what that threshold is. Maybe you have to buy it back for $50 higher than what it says it could be traded for right now and that slippage could be really, really damaging. I think that you have to really look at liquidity as a big means for deciding whether to get into contracts or not.

What I found over just the last say four or five years is that as we start to scale up and our portfolio size starts to grow, I'm really concerned more so now than I was before about liquidity and I'm even forward-looking and saying, "Okay. If my portfolio was three or five times higher than it is right now, how does this change what I would be trading right now? Should I be trading the same products that have the scalability on the liquidity side to handle many, many more contracts?" And if you're looking at something and there's not enough liquidity, it's not worth it. It's just really not because as much as that trade maybe looks like an amazing setup, an amazing trading opportunity, the liquidity really reduces that profit gap and could actually lead you to making a losing trade when you should have made a winning trade. As always, hopefully this helps out. If you guys have any questions, let me know and until next time, happy trading.

#322 - Should We Stop Estimating Earnings For Stocks? Aug 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 be trying to answer the question, "Should we stop estimating earnings for stocks?" Really, where this came out of is – Recently, we've gone through another earnings season here in the US markets and a lot of companies have had huge gyrations or volatility swings in their stock. In particular, we've seen companies like Netflix and Facebook that got absolutely crushed after their earnings and it was all based on expectations and growth. But Facebook alone was down more than 20% the day after it announced earnings. Now, just to again, put it into a little bit of context, they literally went through a bear market decline in one single day. Investors in Facebook lost 20% of their equity and they one minute full swoop between the time that the market opens and started trading and it's huge, huge gyrations. And so, the question that some users had brought up to me was, "Should we stop doing all this estimating of earnings?" Because if Wall Street is terrible at estimating earnings which it looks like they were in the case of Facebook, they grossly maybe overestimated where Facebook was going to be or the growth rates that they expected Facebook to be at, does this really help investors? Does this help investors because it then turns into all of these huge gyrations where stocks are up 10% or down 20% and is that good for investors? I think the answer to this is no. We should not stop estimating earnings. The idea that companies that are public have a public display of information and we tried to present as much information as we can to the markets I think is a good thing. I think hiding information is stopping the allowance of analyst and investment companies to predict and talk with management and try to get a sense of where the company is going I think ultimately is a bad thing for free capital markets like this. I think it crates this illusion, so that when actually events transpire and then they get publicly flushed out, it could be much worse for companies. Imagine that we stopped estimating earnings, we didn't really know what a company was going to do, there was no guidance from management at all, then if we had a big surprise, who's to say that the stock wouldn't collapse 40% or 50% on some of this information versus maybe 10% or 20%? I think ultimately, though it hurts for most investors to go through these gyrations, I think the allowance of free information and as much of free flow of information as possible in the markets is actually a good thing.

The thing that most people should take away from this and I consistently preach about is that we have no idea where companies are going to go after earnings. I love seeing, truly love… I get like a weird thrill out of seeing people on Facebook and all of these investment groups that I kind of like follow and watch online about people who are always bullish on something or always bearish on something and they're just buying these ridiculous options far out of the money and sometimes they hit, no doubt. Sometimes they hit, but it's the exception to the rule, not the rule itself. But they do this with the understanding or estimation that Facebook is always going to continue to make money. And I saw this just recently with Facebook after it went through a 20% decline. The number of people who are buying call options that were out of the money in Facebook was staggering. I think it was almost a 2:1 ratio of people who are buying call options to put options which means that the whole entire herd mentality was absolutely dead wrong. And I talk about this a lot because I used to be an analyst. I used to cover companies. I would sit with the CEO and the CFO and I ask them questions about, "Where do you think the company is going? What's the growth? And where is the stock going to be in the future?" And one of the coolest things about that was that when you sat with the people who are really good at what they did, I'm talking the CEOs that had been there for 15, 20 years, their realization was that even though they knew the company might be worth X dollars per share, say $20 per share, what nobody knew and what every good CEO would tell you is that they still don't know how the market perceives the value of the company. See, a company can be worth $20 because of cash flow and everything else and just even raw book value, but the perception of the company is what ultimately drives the stock price. Where do people perceive the company? Do they see that the company is growing at a good rate or not? This has happened to Apple a number of times before in the past. I mean, I'm talking like five, six years ago when Apple was really kind of growing at a great clip and people had such high expectations and I think one quarter, Apple grew at like 35% which blew out expectations, blew out Wall Street analysts assumptions, but yet, the stock was still down and people kept asking, "Well, why is the stock down? It beat estimates. It beat expectations." And the simple answer is because it still wasn't enough to satisfy the hungry market, the hungry herd.

That's the key for me today, is absolutely another refresher and reminder that with all of these earnings stocks and all these earnings events, we have no idea where the company is going to go. The company could announce bad earnings, but have great guidance and vice versa and that has a huge impact on the market. Stop trying to guess. Stop trying to predict where the stock is going to go. Make small trades, high probability setups. Force these companies on a consistent basis to outperform their expectations which we know they won't do. We have the data that shows that. They won't do it on a consistent basis. And so, you just have to play the long game here. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#321 - You're Running Out Of Time Because The Next Opportunity Is Close Aug 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 be talking about why you're running out of time because the next opportunity is so close. This is one that I think took a little while for me to really understand what this means, but I actually had somebody, a coach of some sort or like a mentor of some sort tell me this a while back and they said, "You never know really when that next opportunity is and when that next opportunity might come." And so, you just have to keep pushing forward and keep pushing forward because it literally could be around the next bend. It could be the next door that you open up. And it's tough because sometimes, like even in let's say like business or in relationships or even in finances with trading, you just feel like you're just pounding the wall and nothing's happening, but it's just that that next hit, that next opportunity to knock down the wall or break through is one more step away and you never know how close you are. And I think most people are so close to doing what they want to do, they just need to push a little more and I think that difference, maybe even that 1% difference in effort or in sticking with it or consistency could make massive improvements in their life, in their finances, relationships, everything.

I do think that you're running out of time. I think many people push things off and they say, "Oh, I'll get to it later." But you don't have that much time especially in the world of investing. The sooner you start, the better compounding returns can work in your favor. We all know this. We've heard the stories. We know the charts of – If you invest early and then never do anything, compounding just takes over. That's what I'm talking about. We have to recognize right now that this is our best opportunity to start investing, to start changing our mindset around trading because one more big drop in the market could knock people out for decades, literally decades. And if you don't have the strategies in place that can help protect against that or hedge against that or trade neutral around that event, then you're going to be really kicking yourself in the butt later on because you're not going to have the stability that you wish you would've had.

And so, I think a lot of people are very well-off generally right now, so you may not be or you may be in that camp. This is a great opportunity to start trading and investing because the markets are not that volatile right now, but I expect that they will be more in the future. It's only a matter of time before we see another bear market. It's going to happen. We're going to have a black swan event. It will affect everybody. It will affect the entire global markets. It's just a matter of when. And so, you have to be prepared and you're literally running out of time. It could be tomorrow. I have no idea. It could be tomorrow, it could be two weeks, it could be two years from now, but it's going to happen. And so, the question is, "Are you prepared to trade through that event? Are you prepared to let your portfolio of stocks (if you only trade stocks) go down by 50%, 60% and try to hope to come back?" I just done think many people would. I think one more big drop like that… And many investors who went through the 2000 crisis, went through the 2008 crisis and potentially go through some sort of crisis in the future are going to give up and I don't want to see that happen to many people. Hopefully you take this as a little kick in the butt to again, just push a little bit further today, push a little bit more than you maybe would've before and as always, if you guys have any questions, let me know and until next time, happy trading.

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