The "Daily Call" From Option Alpha

Latest Episodes:

#320 - When Is It Worth Paying A Debit To Roll An Option Spread? Aug 08, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're answering the question, "When is it worth it to pay a debit to roll an option spread?" This is actually a question that comes in from one of our members and he said, "As I'm preparing or following, training for expiration, I see small debits to roll larger positions like QQQ, IWM and SMH, so definitely not paying to roll even if a small debit. Is this acceptable? What do you think about rolling for a reasonable debit just to extend the trade?" I think just for clarification, sometimes when we roll positions, if we have an iron butterfly or an iron condor, we sometimes might have to roll one side of the position for a small debit, but in our case, that other side that we roll is always taking in a credit that is more than the debit we paid on the previous side. For example, if we have to roll an iron butterfly, we might roll out the put spread first and pay a debit of say $5, but when we roll out the call side, we would've taken in a credit of say $10, more than enough to cover the $5 on the put side.

My philosophy on this is that we should always be rolling for a credit. If we are not rolling for a credit, it's generally not worth rolling the position and the reason is because when we roll for a net credit… So, still a net credit like what we talked about on the example I just gave. If we're rolling for a net credit by extending our trading duration, if the trade still goes against us and nothing else works in our favor, at least what we've done is reduce risk if only by $5 or $10 or however small that credit is because doing nothing sometimes is the worst thing. If we can roll for a credit and extend our trading timeline, take in a bigger credit which reduces our risk, widens our breakeven points, then I think it's worth doing. The reason that rolling for a debit doesn't work is because when you roll for a debit, you are really taking on more risk. You're saying to the market, "Yes, I'm willing to pay money to stay in this losing position for another month." And if that position loses at the end of that following month, then I would've lost not only the original risk that I had in the trade, but also the additional debit that I paid to stay into it.

I really don't think it's worth rolling the position for a debit. Now, of course, people are going to get really technical with me and say, "Kirk, if we roll for a $1 debit, is it worth it?" Okay, maybe. Maybe it might be worth it and I'm talking very granular here and obviously, we can't paint broad strokes for everything. But if you roll for a $1 debit, but it's a $700 position, okay, you might be willing to accept that $1 debit. But the problem with doing that is that if you do it one time, then you start rolling for a $2 debit and a $3 and a $5 and a $10 and you start having trades that shouldn't really be the right type of strategy and mechanics and those trades come back around and you say, "Ha! See? I told Kirk that I should roll for a debit and that trade came back around." I'm sure those are going to happen, but I think that's the exception to the rule, not the rule itself. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#319 - Will My GTC Closing Order Fill If I'm Away From My Desk? Aug 07, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're answering another member question which is, "Will my GTC or good-till-canceled order fill if I'm away from my desk?" The simple answer to this is that it should fill if you're away from your desk. Now, filling trades is a function of a couple of different things. One is mainly the liquidity of the underlying contracts in which you're trading. Just because you have a GTC or a good-till-canceled order going on a stock doesn't necessarily mean that it's going to fill unless there's a liquid market for those options. For example, I always use the ticker symbol GOOD, G-O-O-D. They have options that are optionable securities or optionable contracts to trade, but there's actually very little to almost no liquidity in those contracts, so even if you had a good-till-canceled order, there's probably a good likelihood that it won't actually fill in the market because there's no liquidity. Now, if you have a GTC order on SPY, there's probably a better chance that that would fill because of the liquidity of SPY being one of the most liquid underlyings for options. So, if you are away from your desk and you're trading liquid options, there's a pretty good chance that that GTC order will fill.

Now, the other component to this is if you're trading a limit order or a stop order or a market order, basically. You can use a limit order which is what we typically suggest because then, you know exactly what you're going to get into or out of in the price and yes, it may take a little bit of extra time to get that trade filled even if it's a GTC order, but it will get filled at the exact limit price that you set. You set the price. You know exactly what you're going to get out of or what you're going to get into whenever you're doing that type of trade. You can also use a stop limit or a stop market order which basically means once the price reaches a certain point, it'll then set a limit order or you can use a stop market order which means once the price reaches a certain threshold, the next order that goes in is a market order. So, it basically is saying, "Hey, look. Once the price gets to this level, exit the position no matter what the next price is." Now, in these cases, you do sometimes have a little bit more slippage and the markets can run beyond your target price that maybe you're setting. Maybe if the markets are moving very fast or volatility is changing very quickly, then it'll move beyond your pricing. It's not a huge difference if you're trading liquid securities. You may see a dollar or two of slippage, but it does add up in the end. That's why we always suggest just using limit orders. Don't mess with any of the stop limits or stop market orders. It's just not really worth it. As long as you're trading small contracts, you can afford to have a little bit more patience with your fills. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#318 - What Happens To Deep In-The-Money (ITM) Spreads At Expiration? Aug 06, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering a user question or a member question which is – "What happens to deep in the money option spreads at expiration?"

The question really comes out of this idea of – Well, if I have a spread and the spread is deep in the money… Let's say I've sold a call spread and the stock has rallied well beyond my call spread strikes, both the short strike and the long strike. If I let it go to expiration, what happens? And so, if you do let the spread go all the way to expiration and then go through the expiration process, you will be assigned on your short option contracts and the broker will assume automatic exercise of your long option contracts. Now, this should result in basically no stock to you at the end of the day because you are assigned stock on one end and you are let's say buying stock on the other end and so, that should equal each other out. As long as you have the same number of contracts, it should net out to no additional stock to you, but you will be out obviously the commissions that went with the assignment and expiration or exercise of those contracts.

It is always in your best interest, in our opinion to close out of your spreads even if they're deep in the money at expiration and buy back those spreads either at or maybe even a penny above their full value. And the reason that we sometimes would buy a spread back for a penny above its full value is because paying an extra dollar to close out of the position even if our max spread is $3, we might pay $3.01, is much cheaper than paying let's say a $15 or $20 assignment or exercise fee to the brokers to let it go through expiration. The dollar is much cheaper just to remove the position and exit the trade than to let it go through the expiration process. Hopefully this helps out. As always, if you guys have any questions like this, let me know. Until next time, happy trading.

#317 - The "9 To 5" Collective Social Agreement Is Completely Ridiculous Aug 05, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I'm going to go on a little bit of a rant and tell you why I think this 9:00 to 5:00 collective social agreement is completely ridiculous. What am I talking about? I'm talking about this idea that everyone in the entire world, all the people in the world somehow should get their work done between 9:00 and 5:00 and that seems to be the collective social agreement that work starts at 9:00 and it ends at 5:00. And while I understand the need to separate church and state, meaning the need to separate work from family and life, there's no possible way that everybody in the entire world gets all of their work done in the exact same time block every day, week after week, year after year. It's not possible. I do not believe that this is going to be how many companies are run in the future and I think we're already starting to see that this transition is starting to pick up a lot of steam and the transition is really away from this 9:00 to 5:00 working schedule to just basically getting stuff done however long it takes to get done.

So, of all the people that work now at Option Alpha and we have 12 people who work at Option Alpha now, contractors, developers, people who help out with support now, back-testing team. We have 12 people on the staff right now, basically and of all the people that now work at Option Alpha, nobody is on a regimented 9:00 to 5:00 schedule. In fact, it's one of the things that I really talk about and preach as I'm getting people onboard and showing them the systems and tools that we use to kind of run Option Alpha and help you guys and I tell everyone, "Look. This is not a typical 9:00 to 5:00 job." And that could be good for some people or maybe who's not used to for other people, but all I really care about is making sure that what we need to get done in a given day gets done. If it gets done in three hours, great. If it gets done in five hours, great. If maybe one or two days, you need to work longer into the evening and take the afternoon off to recharge, great, that's fine.

It is not possible for us to totally focus immediately every single day on the most important work just between 9:00 and 5:00 and in fact, me, myself, like I wake up many days very early. As you guys know, my routine is to wake up very early, do all of my emails and all of my most important stuff early in the morning and then for the later part of the morning, I spend with my wife and kids. We go to the gym, we go to the pool or hang out and then I come back in the afternoon and kind of finish up tidying up things that I need to do in the afternoon. For me, that works out really well and I can't just say to all the people that we have here working on our team, "You have to do the same thing as me." or "You have to be here at 9:00 to 5:00." I really don't care. I think that in many respects, as long as work is getting done, if it can be done in 20 minutes or an hour and they can take the rest of the day off, fine, I'm good with that and I think that that mentality is a lot more attractive to people and leads to I think more productivity because what you end up finding is that the people who are most productive, most efficient and most eager to grow and learn and develop rise to the top naturally. It's kind of this self-selection process that you put everybody through.

I think it's just fascinating because where I live in Pennsylvania now with my wife, this area as a whole is really still stuck on this 9:00 to 5:00 I would guess like workers assembly line mode. In fact, many places here because of unions and contracts around working prohibit people from leaving the building one minute before 5:00 o'clock. I mean, they literally have to just sit there locked in a cage, in my opinion until 5:00 o'clock and then they are allowed to leave because God forbid, they would leave one minute before, they could get written up, they could have their contract canceled with the employer. I mean, it's really just a bad… It just feels like it's such a David and Goliath type of situation all the time and that's not what it should be. It should be everyone collectively working together, people choosing to be at that job or not be at that job and employers understanding that it doesn't require just 9:00 to 5:00 to get things done. Sometimes it may require less, sometimes it may require more, but ultimately, I think this whole social agreement on 9:00 to 5:00 is ridiculous and I think it's totally outdated. Feel free to send this to any of your employers or bosses if you want to and I would be happy to argue on your behalf as to why people are actually more productive if you don't give them strict boundaries. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#316 - How To Convert A Bull Put Spread Into An Iron Condor Aug 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 be talking about how to convert a bull put spread into an iron condor. Let's start with the first part of this trade which is entering into a bull put spread. The idea behind a bull put spread is that you're selling option contracts on the put side below where the stock is trading, hopefully seeing the stock either stay the same or potentially rally higher. Now, you could actually see the stock fall and still make a profit as long as it stays above your short strike price. If we have a stock that's trading at $100, we might sell a 95 strike put and buy a 94 strike put to create a 95/94 bull put spread. The idea is we hope that the stock continues to rally higher or stays the same around 100. It can fall. As long as it stays above 95, we'll still make money. Now, when you want to start converting these into an iron condor would be when the stock starts to move against you. One of the very easy techniques that you can use to adjust bull put spreads is to convert them into an iron condor and why this works so well is that it takes advantage of the stock moving in the direction of your spread to increase the overall credit while not taking in additional risk on the trade. It's a very easy technique that you can use to make an adjustment.

Let's say that the stock is again, trading at $100 and starts falling towards your 95 strike put option which is your short strike level. In this example, if the stock starts to fall, what you could do is then sell a 100 strike call and buy a 101 strike call, basically selling the opposing or corresponding call spread and that in turn would create an iron condor payoff diagram. Now, when you sell the opposing call spread, you want to maintain the same width of the strikes, so a $1 wide spread if you did a $1 wide spread on the put side. If you did a $5 wide spread on the put side, you'd want to sell a $5 wide call spread and you still want to sell the same number of contracts. If you sold three put spreads, you want to sell three call spreads. Now, when you mirror this trade with the opposing call spread side, it adds no additional risk to the trade and what this does is that it only adds additional credit from the selling of the call spread. That additional credit then moves your breakeven point further down and moves it away from where the stock is trading at this time. Again, it's a very easy adjustment strategy that we go through a lot here at Option Alpha. It's a very easy way to convert a bullish position into a more neutral position to hedge and protect it and it's something that we've talked about a lot inside of our training courses. You can just search put spread adjustments or iron condor adjustments on the website. We've got lots of videos, lots of case studies that you can go through and look at examples. As always, hopefully this helps out. If you guys have any questions, let me know and until next time, happy trading.

#315 - Can You Close Short Option Trades Before Expiration? Aug 03, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer a question, "Can you close short option trades before expiration?" The simple answer to this is yes, you can always close your option contracts before expiration and this does mean that you can do so on American-style and European-style option contracts. I think where people get confused is that they think about American and European-style options, but that only refers to the exercise process that it goes through. American-style options can be exercised at any time between now expiration and that means that most of your general contracts you'll be trading on ETFs and stocks are American-style. European-style option contracts can only be exercised at expiration. These would be things that are more cash secured like RUT, NDX, SPX, etcetera. Now, again, this only has to deal with the exercise of the contracts and the conversion of those contracts from options to stock or cash. It has nothing to do with actually trading the option contracts themselves and that's where people get confused.

See, all option contracts have the ability to be traded and/or closed before expiration, so it doesn't matter if you're trading American-style or European-style option contracts. If you decide that you want to close your short option trade, you can do so. You can buy back your contract and remove the position before expiration regardless of the style of option contract that it is. It's a really easy way to remove risk and to exit the position, is just to simply close out of the option trade. And what we tell people all the time is that we generally like to close all of our positions for an expiration cycle the last week of expiration. Any trades that have not been taken off or rolled for a credit, we would close before the last couple of days of expiration just to remove the potential risk of being assigned on those contracts. Again, the option contracts themselves can be closed or opened at any time. The only thing that changes is if you ever wanted to exercise your contract or the assignment process and that deals with the difference between the American-style and European-style option contracts. Hopefully this helps out. As always, if you guys have any questions, let us know and until next time, happy trading.

#314 - How To Adjust Short Strangle Option Strategies Aug 02, 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 talking about how to adjust short strangle option strategies. As a basis, short strangle option strategies are a strategy in which you are selling a call option and a put option out of the money from where the stock is trading. For example, if a stock is trading at $100, you might sell the 105 call option and the 95 strike put option and the idea is that the stock trades between your strike prices and you profit at expiration with a stock not breaching or breaking out of your strike price range. In our case, we want the stock to trade within a $10 range between now and expiration.

Now, the trouble comes in when the stock starts to challenge one side of your position. Instead of the stock staying exactly where it should be at $100, it starts to move higher towards 105 or starts to move lower towards the 95 strike. And so, the idea behind adjusting is that we first do not move the challenged or tested side. If a stock is moving against our call strike, we are not going to move or roll up our call strike and the idea behind this is that we don't want to give ourselves an opportunity to compound our losses by digging our hole deeper. If we are challenged on a position or if one side of the trade starts losing, we don't want to roll that side higher because what we've all seen before historically is that stocks have a tendency sometimes to have long moves in one direction that last many months in some cases. And so, if we keep moving our challenged side, let's say our call spread side and we roll our calls higher, we're going to do so for a debit and then we roll the calls higher again for another debit and again for another debit and what this does is it basically eats away all of our potential credit and it also digs us potentially into a hole where we are paying to maintain the strategy and that's not what we ultimately want to do. Again, the first thing is we don't move the challenged or tested side.

The second thing that we want to do is we want to then adjust or move closer the unchallenged or untested side. Again, let's assume that the stock is now rallying towards our 105 call strike. We do not touch the 105 short call option. Instead, we move up our short put options to a closer strike price. We might close out of our 95 strike short puts and we might then reopen a 100 strike short put and start to move up or adjust up our short put side of the trade. And the idea behind this is that we are being opportunistic about what the market is giving us. With the market rallying higher, that short put option that we sold at 95 is now going to show a mini profit. And so, we can close that profit, reopen a new put option closer for a higher price and increase our overall credit in the position and by doing this, we then widen our breakeven points by the additional credit that we take in. It's a very mechanical process that we go through. It's the exact same process that we use time and time again here at Option Alpha and it's what really works. That's the best way to adjust short strangle option strategies, is to roll up and adjust the unchallenged or untested side.

Now, if you want to see live examples of this, you can just search our website for short strangle adjustments. You can also check out a very nice podcast that we did on our weekly show, optionalpha.com/show72, so just the number, 72, optionalpha.com/show72 where we talked about what these adjustment triggers might be and how you can use Deltas as a trigger point to tell you when to adjust a trade when it's starting to go against you. As always, hopefully this helps out. If you guys have any questions at all, please let us know and until next time, happy trading.

#313 - Avoiding False Urgencies Is A Learned Skill Aug 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 avoiding false urgencies and why this is a learned skill. I will be the first in line to say that this is absolutely one of my biggest weaknesses as a person also running a business, father, everything. I am 100% the type of person where if I see something that needs to be done or I get pulled in a different direction, I immediately try to finish or complete whatever I get pulled into that direction of doing before I get back on track and start to get focused on I guess the bigger task of the day or the more important task of the day. You could say that in some respects, I very much act like a fire starter and fire put or outer. I like too, it seems like and I am retroactively looking at this or I'm looking at this in the rearview mirror now. I like to generally look at a lot of things during the day, I have a lot of applications open on my computer and if something comes up, even though it may not be extremely urgent, the fact that it actually popped up and I maybe got the red little dot on my phone for a new email message or a new text message, I have a tendency to want to clear that and that's just my, I guess type A personality, is that I hate when my phone looks like it has chickenpox and that's probably a good job on the designers and the app developers who developed all these tools to basically engage you and get you back into their platform. But it's a learned skill for me, so I'm saying totally publicly right now, I'm absolute horrible at this. My wife, on the other hand is really great at not looking at everything. She has 4,000 emails that are unread in her phone and that would drive me insane because again, I don't like my phone to have the red dots of chickenpox of all these unopened, unread messages.

But I think this idea of avoiding these false urgencies is really a learned skill. I mean, you can't just walk in and do it one day. You have to actually try to physically habit your way out of this with a new routine as we talked about in other podcast and I think it's important because what I've realize over the last couple of years as I've truly been dealing with this because it is something that I want to improve on, is that the bulk of what knocks us off track are these little things that can honestly be either A, avoided completely or can be pushed aside and deferred to a later time. And so, you just have to learn to look at the things that are really, really important drivers of success, things that you have to do, important dominos that you have to knock over and truly learn to tune out the rest of it. Again, that's my biggest weakness for sure as a person, is I don't have that ability yet to 100% tune it out and I have to really work at it to make sure that when I do a podcast like this in the morning or when I write a blog post or do a case study video that I honestly take everything else off of my desktop. I close down programs, I've now gone in and figured out how to remove the little notification icons everywhere. I mean, I'm really trying at the hardest level to avoid these false urgencies because they end up derailing me because I see somebody doing something and just because they're waving their hand or they've sent an email, I feel like I have a duty to get back to them immediately. And while speed it important, it's not necessarily as important as maybe the big task that I'm working on, developing a new course or helping out with the new auto-trading bots. That's the biggest, most important leverage area that I have. Everything else can wait for a couple of hours or the next day.

I think hopefully this helps out in just maybe honestly sharing where I'm at in this struggle because this is again, my biggest struggle for sure. If you have any ideas or you have any insight, anything that's worked for you if you struggle with this as well, please let me know. I'd love to know kind of what techniques you use, what tools you use maybe. Please share it with me, kirk@optionalpha or Tweet us at Option Alpha, Facebook, Option Alpha, etcetera. Hopefully this helps out. As always, if you guys enjoy these, let me know and until next time, happy trading.

#312 - Can Option Prices Trade Below Their Intrinsic Value? Jul 31, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're answering the question, "Can option prices trade below their intrinsic value?" I think today's question is actually two parts. There's the first part which is – Can they trade below their intrinsic value? And the second part is – Should they trade below their intrinsic value? The first answer is they can actually trade below intrinsic value. Now, the second part is really, they should never trade below intrinsic value. And if they ever did trade below intrinsic value, those trading opportunities would be extremely short-lived and would probably be gobbled up by some algorithm that is looking for an arbitrage opportunity to buy the option contract or sell the option contract and deal with the stock and take a guaranteed profit in either case at expiration.

This typically happens, again, because option pricing should be generally perfect to intrinsic value or at least that is the threshold for in the money options, but sometimes the contracts can actually trade below that. If people are trying to dump the position or trying to get out of it, they can actually be willing to take less than the intrinsic value of the contract. We see this all the time in just real life with real estate or people buying or selling cars or items online. The thing might be worth X amount of dollars and they're willing to take X minus whatever that fraction is to get rid of the position.

When we talk about intrinsic value, what we're really talking about is the value of the contract if it were to be exercised and go through the assignment process. In the case of let's say if we're trading SPY and right now, SPY is trading at 208, if we were looking at the 279 call options on SPY and SPY is trading at 280, well, those 279 call options have intrinsic value of $1. At expiration, once the time decay and volatility have come out of the contracts, they should never really trade below $1 so long as the strike price is still 279 and the stock is still trading at 280 exactly. And so, if it ever traded below that $1, again, it would be an arbitrage opportunity to really take advantage of a potential free profit right before expiration.

Again, there's two parts to it. Can they trade below it? Yes, they can, but if they do, it's extremely short-lived, probably not going to last that long because it's a very quick arbitrage opportunity. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#311 - Are Brokers Ripping You Off With Mini Options Commissions? Jul 30, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're answering the question, "Are brokers ripping you off with mini options commissions?" Really quick, mini options contracts are just a couple of ticker symbols that actually have mini contracts that actually trade in. The name sounds just like what they do. They trade a miniature sized number of underlying shares per contracts. Whereas most regular options would trade $100 or control 100 shares per contract, with mini options, you only control 10 shares per contract and therefore, the option price is generally 1/10th of what the regular standard price would be because you're controlling less shares. Now, on a few symbols, Apple, Google, Amazon, SPX, etcetera right now and I think it may expand into the future, but the idea behind minis has always been to give people a more cost advantage way to trade some of these higher underlying prices like Apple, Amazon, Google, etcetera which are multi-hundred dollar stocks. Instead of actually buying the actual shares or trading the contracts which could be very expensive on the option side, they wanted to get people an opportunity to trade them on a miniature basis or a smaller basis.

Now, the question is really – Are you getting ripped off by commissions because they don't actually charge a mini commission for these which would be actually very logical because you're not controlling or dealing with the same contract size. You're dealing with something that's wildly different. And the answer here, I think is that you're not really getting ripped off. I think there's a lot of talk about this right now about brokers ripping people off with commissions on mini contracts, but there's a lot of other contracts that are out there that also don't perform exactly the same as 100 shares per contract. A lot of the futures contracts and the options on futures have various degrees of multipliers that lead to values that are different and so, nothing out there is really standard. I think on the commission side, the brokers are not necessarily doing you a disservice because you still have to trade those contracts. They still have to manage those. They still have to be sent through the exchanges and still have to be potentially exercising or assigned. I think it could be logical that – Look. You want to get a smaller commission, but ultimately, I don't think they're necessarily doing you a disservice by charging the same commission for mini contracts.

I think you're better off, honestly just trying to negotiate with your broker and get all of your commissions down rather than try to fight them on this one point. We have a bunch of guides on Option Alpha. You can just search commissions on our website. We talked at nausea about how we've reduced our commissions at Thinkorswim down to just $.75 per contract at the time of this recording with no ticket charge. What they publicly post and what they will actually give you as a trader are two different things. You just have to ask and negotiate lower. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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