The "Daily Call" From Option Alpha

Latest Episodes:

#290 - Is It Possible For OTM Option Contracts To Get Assigned? Jul 09, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha. Again, welcome back to the daily call. Just to kind of dovetail on the podcast that we had yesterday, today, we're going to be answering the question again that relates to option assignment and out of the money contracts and that is, "Is it possible for out of the money option contracts to get assigned?" The question really comes from a member who was wondering, "During an expiration month, if you have a contract that's out of the money, typically, people would associate that contract with having very little to no risk of assignment." But he was wondering, "Do they ever get assigned and if so, what would be the reason that somebody would then assign an out of the money option contract?" To back up a little bit, I would say that it's very unlikely that out of the money contracts get assigned. Again, if you listen to yesterday's show, 289, you'll understand why those out of the money contracts are very unlikely to get assigned and it's because there's no intrinsic value for out of the money contracts. If somebody was to do this, they maybe are just making a bad decision, ultimately. I wouldn't ever say that it's 100% not possible. I mean, somebody could absolutely choose to assign a contract. It could even be a fat finger trade which means that they just did it and accidently hit the wrong button and assigned contracts, didn't know what they were doing. But on a rational level, most people would never assign out of the money contracts because they have no intrinsic value. They would never assign a 105 strike call when the stock is trading at $104 or $103. It'd be much cheaper financially for them to actually just go out and buy contracts in the open market.

Now, the other reason why they would potentially not assign these contracts and this is actually the case in many respects for in the money contracts as well, is that until you get up till expiration, in the money and out of the money option contracts have extrinsic value. They've got value because of their lifespan and because of the possibility that the stock could continue to move in a favorable direction. This time value and volatility value in these contracts are going to be forfeited if somebody were to exercise their contract. If I bought a call option and I bought the option, obviously paying for the extra time and volatility value of that contract, if I decide to assign that contract early, even if it's in the money or slightly out of the money, I'm basically forfeiting the value that's left in those option contracts. I would be much better suited just to actually reverse the option trade and never deal with the stock itself. Again, it's kind of weird because it actually could happen. I mean, again, I'm not going to say it can never happen. I don't think we've really ever had it happen to us, maybe one time before. I can't even remember if it has happened like that before in the past for us. But if it were to happen, it would totally be a mistake on the other person's side and it would be a trade that they probably are going to lose money on because of either the extrinsic value factor or just the fact that the option contracts are out of the money and they'd be much better served to buy contracts or buy shares in the open market.

Hopefully this helps out. Again, hopefully it kind of clears it up a little bit. I love these types of questions. If you do have more questions that you want to submit to us, so we can get them queued up here for the daily call, please head on over to optionalpha.com/ask and leave me a private voicemail. Again, there's no software to download or install. You just have to click the big red button in the middle of the screen when you get there. Again, optionalpha.com/ask and until next time, happy trading.

#289 - Why Do All OTM Options Expire Worthless? Jul 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, "Why do all out of the money options expire worthless?" This is a common question that I get, honestly from newbies and the question is, "Well, why do these things expire worthless? Why don't they have any value at expiration? Why do we, in many cases, leave these out of money option contracts on to expire worthless? Whether they're long contracts or short contracts, why don't we just let them go through the expiration cycle or choose to exercise those contracts and deal with the shares?"

I want to use an example which hopefully will illustrate this point very clearly as to why these option contracts expire worthless when they're out of the money. Let's say that you have a stock that's trading at $100 and you buy a 105 call option on that stock. You might buy that call option. Of course, since we're at Option Alpha and we do option selling, we might be the person that sells you that option contract at a $105 strike. Now, that $105 strike gives you the right, but not the obligation. There's where your choice lies. You have the right, but not the obligation to buy stock at $105 any time between now and expiration. The stock is trading at $100 right now, so clearly, you're not going to buy stock or exercise that option contract right now because then, you'd be forced to buy stock at $105 when stock is trading at $100. That would create a losing trade for you. You'd buy a stock at $105, you'd sell it at $100 and you'd lose $5. The value in that contract is obviously not at exercising the contract right then and there. There's got to be some sort of external or extrinsic value between now and expiration and maybe you think that the stock is going to go much higher than $5 much more than $105 in the future.

Now, what you do is you say, "Okay, look. I'm going to buy this option contract at a $105 strike, but I think that the stock is going to go up to $110 or $120 or $115." It doesn't really matter. But let's say you get all the way to expiration and the stock has now gone to $104. It's actually moved up. It did what you thought it was going to do, but it just didn't move up far enough. Your $105 strike is still out of the money and it's out of the money because if you were to exercise that option contract, you would put yourself in a financial deficit or a losing position willingly which is what nobody would actually do, no rational person would actually do. If you were to exercise your call option as the option buyer, you would buy stock at $105 and you would be forced in the open market to then immediately liquidate and sell that position for $104. Now, of course, you can hold onto the stock if you want to, but the idea is that if you're going to exercise your option contract, you're going to do it in a way that would be advantageous to you. If you have to buy stock at $105, but it's trading in the open market for $104, why even deal with the option contract? Just go out into the open market and buy $100 shares at $104 and let the option contract expire worthless.

That's why options that are out of the money always expire worthless because at expiration, if they are not in the money, they have no intrinsic value and because they're at expiration, they have no extrinsic value. They've run out of time. Their life has come to an end. There's no more time. There's no more possibility that they could move higher or that they could be traded further out on the time horizon or duration. Those option contracts always expire out of the money and worthless. It's just exactly how it happens. Hopefully this helps out, just kind of again, looking at a very simple example with a long call option. But what you have to realize is that for options to have any value, they have to have value intrinsically in the money value at expiration. If they don't, then they just expire worthless. As always, hopefully this helps out. If you guys have any questions, let me know. Until next time, happy trading.

#288 - The Only 2 Absolute "Truths" Of Time Management Jul 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 discuss the only two absolute truths when it comes to time management. Time management is a favorite topic of mine because I'm always trying to manage my time a little bit better and now that we have three kids and a baby, it's becoming increasingly difficult. I have to get back to these hard truths about time management and it is hard. I mean, it's not easy to manage yourself and to manage your time at home and even if you have a job, it's hard to manage that free extra time that you have because we always want to just relax and chill out or have a drink or just sit outside. I mean, we want to do something besides actually doing work in many cases, so we have to motivate ourselves and we have to figure out what do we do and how do we do it, so that we make the most of our time, whatever time that we do have during the day.

Two things that I get back to when I was actually reviewing a lot of notes that I have on time management because I kind of keep everything in little folders and files on my computer about different topics, time management and efficiency and I mean, everything. I'm just again, very much a geek and nerd out on the whole idea of self-improvement. Two things that I came back to were these two truisms. One is that doing something unimportant well does not make it important. This one's a favorite one of mine because I really got into this a long time ago. I would do a lot of things that made me look busy, whether it was on the site or work or at home. But ultimately, they were just unimportant tasks and when I did them well, they really serve no value for me, whether financially, health wise, relationship wise. I mean, doing something unimportant well doesn't make it more important. Like tying your shoes perfectly does not make it insanely important that you did that. I mean, you could tie your shoes terribly as long as they're tied. It's just done. You complete the task. And number two, the second truth is requiring a lot of time also does not make a task more important. I think nowadays, what I spend a lot of my time doing is actually kind of thinking before I start working and trying to figure out – Okay. What is that one domino or that first or second domino that I could really knock over here today that maybe doesn't take a lot of time or maybe I think is going to take me a lot of time, but it won't if I focus on it? And that will start a cascading effect or a ripple effect of other activities that are going to get done.

I think a lot of people just run around and as my mother would say, they look like cats on a marble floor. They just are lots of activity and absolutely getting nowhere. The fact that people say that things require a lot of time and they spend so much time on it doesn't mean that they're actually doing something really important. Where this comes to sometimes is actually just having this idea of just quitting on a project because a lot of people, they think, "Oh. Well, I can't quit because I'm halfway into it." Well, if you're halfway into a project that really serves no value, you're much better off to actually just quit and give up on it and move to the thing that's more important or that is going to serve more value. That's the one I find all the time, is that people just end up putting out a lot of garbage or doing stuff because they want to feel like they've completed it. But if they're working on the wrong stuff, then it doesn't matter if they complete it or not. It's the wrong thing to be working on. Again, what you do is infinitely more important than how you do it, so take some time today to do less meaningless work. Do less meaningless work, so that obviously, you can focus on the things that have greater importance, greater value, greater impact. That's not laziness. It's not lazy to sit and think about what you're going to do before you do it, to really spend some time analyzing your next move and your next position, your next project that you're going to be working on, your next job, your next investment. Spend some time now to do it because that is where the efficiency lies. Hopefully this helps out. Hopefully it motivates you a little bit. As always, if you guys have any questions, let me know. Until next time, happy trading.

#287 - Can You Sell Options Without Owning At Least 100 Shares Of Stock? Jul 06, 2018

Show notes

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we're answering the question, "Can you sell options without owning at least 100 shares of stock?" This is actually a really interesting one and a very common misconception that people just don't understand as they get started into options trading. Now, it's not their fault that they don't understand it. I don't think anybody really explains it. That's why I'm trying to do this podcast about it, so that people understand what the risks are and what you actually need to do or what capital you need to have if you actually want to start selling or buying option contracts. A big common misconception is, "Well, I can't sell options if I don't have 100 shares of stock." And what I think the root origin of this misconception comes from is from when brokers initially approve people to start trading options, they usually approve people to trade covered calls and covered puts. And when you do a covered call or a covered put, yes, you do need 100 shares of stock, either long stock or short stock to be able to then sell that option contract, but that's where it kind of ends. After that, if you wanted to sell option contracts, you don't necessarily have to own 100 shares of the underlying stock and in fact, 99% of the time when we're actually making trades, we do not own the underlying shares of stock. The only time we would ever own shares of stock is if we got assigned and then we wanted to sell a covered call and maintain the position. But for the vast majority of trading that we do, we never actually deal with the underlying stock.

I think the misconception is – Well, if I don't own the shares of stock, then how can I sell options against it? And the way you can sell options against it is either one of two ways and I guess they both actually work the same, but generally, you can do it two different ways. One is you can put up what's called margin. Now, margin is not the margin that you're typically associated to learning about and that's borrowing on margin to buy stock. I'm talking about putting up margin in your account which means that the broker basically takes a certain portion of capital associated with the risk of that trade and sets it aside, so that you can't trade it. Now, it's your own money, but they're basically just saying, "Look. You can't trade this amount of money in your account because you have this short option contract and if that option contract goes bad, we need to make sure that you're not trading some other part of your account or some other capital that could then cover that risk in that position." Say you have a $10,000 account. You sell an option contract. The broker might take $1,000 of margin and put it aside. Now, again, they didn't take it out of your account. They're just saying, "Look. You can only trade with $9,000 now for any new positions that you enter because the $1,000 that we took aside in margin is basically to cover that one option contract that you sold." You don't actually need the shares of stock to do it. You can do it by putting up margin.

Now, the other way you can do it is you can trade a spread. You can sell one contract and buy another contract and in that case, you just put up the difference between the contracts less the credit that you receive as again, the margin. It's much less capital-intensive. You're going to make potentially less money on the trade because you have to buy and sell contracts instead of just selling options without buying. But in that case, you also don't have to own the shares. You're basically covering the position by buying the other option contract. This is a great alternative if you don't have a margin account that you can trade in and you want to sell options, but you're in an IRA or retirement account. IRA or retirement accounts don't allow you to sell naked option contracts at many brokers. And so, if you want to do that, you have to go ahead and do a spread or a very wide spread to synthetically replicate a short option contract. But in either case, you don't have to own the underlying shares of stock.

The last question is probably then, "Well, what happens is I get assigned? Because I don't have the underlying shares of stock, what would happen?" Well, there are two things that can happen. One, you either have enough cash in your account to then cover the shares. If you get assigned stock, now the broker will assume that you had to buy or sell those underlying shares at whatever the market price is and whatever the strike price is. If your account does have the amount of capital in there to cover that, well, then you can choose to hold the stock or not. You can decide – Hey, I don't want the stock, so I'll sell or buy it back in the market or choose to hold onto if you want to. If you don't have the capital to then cover the 100 shares of stock, then what the broker will force you to do is just to liquidate the stock position the same day. And so, yes, that means that if you are assigned 100 shares of stock, then you can go ahead and sell back that stock because the broker knows that you're liquidating the position and you're not taking on risk for more than a day. They're going to force you to do this. Now, you can do this yourself or if you just don't have the time to do it or missed an opportunity to do it, the broker will do it for you. They'll do it for you by the end of the day, so that you basically don't carry risk overnight. You don't have to have capital in there to deal with it. Again, the brokers know that you're basically removing risk or you don't have the capital to deal with it, so they'll allow you to sell or buy back the shares in the open market to close and liquidate the position.

As always, hopefully this helps out. I know this is a common misconception, a common point of confusion for many people, so hopefully this podcast cleared it up. If it did, let me know. Share it with your friends and family and as always, if you guys have any questions, please let us know. Until next time, happy trading.

#286 - Pros & Cons Of Forex Trading For The Average Investor Jul 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 be talking about the pros and cons, generally of Forex trading for the average investor. We did a little bit of a series a couple of weeks ago on Forex trading and I wanted to circle back and just go over some of the pros and cons, I guess for the average person who's maybe considering it or thought about Forex trading. Look. Forex trading in general, I think is very attractive to a lot of people because of the liquidity, because of the 24/7 markets that you can trade Forex in. I think it draws a lot of people in because of the appeal and the size and just this connotation that Forex trading is awesome. But I think it carries a lot more risk than people are really ready for. And so, I think for the average investor, it's not something necessarily that they have to do or that they need to do to be successful. I think Forex markets serve a very definitive purpose as we talked about in other shows in allowing companies and nations to basically hedge and trade risk and I think that that's what the purpose is. I don't think it's meant necessarily for the average regular kind of retail trader like me and you. Now, if you wanted to trade Forex pairs or currencies, you can easily do it with ETFs and that's the way I'd suggest doing it. Use an ETF product and then trade options around that. That's a much better way to control risk and manage positions as opposed to just getting into some of these Forex pairs and taking on a bunch of risk that's associated with it. The Forex market can move very fast. I don't think people understand how fast and how violently things can happen even when they're sleeping, so that's definitely a risk that I think many people don't associate with trading until they get into it. Hopefully this helps out. As always, if you guys have questions, let us know. Until next time, happy trading.

#285 - Zero Risk Option Trades? Yes, It's Possible Jul 04, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about risk-free option trades. And yes, it is possible to have risk-free option trades, but I see a lot of crap being submitted out there online and people writing up articles about this and honestly, trying to bait and switch people into getting into programs that teach you how to do risk-free options trading. But I'll show you how you can do it here. It is possible to do, but you can't do it right off the bat. You have to do a position that actually takes on risk before you basically convert an option trade into a risk-free potential trade. Now, we've done these a couple of times. It doesn't always work out perfectly, but we've done them a number of times and we have case studies on the website that you can check out. You can look up one that's called risk-free DIA iron condor. That's a great little case study that we walk through and I'll mention this as we go through today's daily call, but that's probably one of the better ones that we took our time and really, really walk through that process with you guys. But look. The idea here is that when you make a risk free trade that you have absolutely no downside, not even like losing any money at all. Option buying in and of itself is not a risk-free trade. Some people actually say option buying is risk-free because you have no downside. Well, you actually lose the premium that you pay if you're wrong, so there is some downside. You have to lay out some investment. Yes, that investment is capped as an option buyer, but you also have a low probability of success. That's the first hurdle we have to cross over, is that option buying is actually a risky investment and some people out there I think are maybe promoting it as not a risky or a risk-free investment, but it actually does carry risk.

Now, when it comes to actually getting into a risk-free trade, you have to start with a risky trade to begin with. Now, the reason is because there's no free lunch in the market. There's very little, almost no arbitrage possibilities, meaning you can't get into something and then immediately reverse and sell that thing that you got into or vice versa, sell and then buy back and create an arbitrage opportunity where you make money without taking on any risk. There's got to be some sort of transfer of risk or obligation. Something has to transfer from one party to the other. That's why we see markets with a bid ask spread because that bid ask spread prevents people from buying one contract and immediately selling it back, like literally, instantly selling the contract back and then profiting. You can't do that with a bid ask spread because you'll have to buy at a lower price, sell at a higher price. If you sell at a higher price, you'll immediately have to buy at a higher price, sell at a lower price, buy at a higher price, but you can't immediately do that with an efficient market. Now, what you can do is you can get into a risky position and then convert that position into a risk-free position if the pricing works out. What we did is we actually got into basically like a broken iron condor a while back in DIA. We sold a $1 wide call spread above the market and then we just sold a flat-out naked put below the market. We had a call spread on the top side and then we had a naked put. Now, obviously, this original position, this is what I said in the video on the case study, is that this original position takes on, obviously a decent amount of risk because we're selling still naked options on the bottom side and we took in a $1.33 credit for this whole combined position. The call spread plus the naked put, we took in $1.33 of credit. But later on, as the market was actually moving, we had an opportunity to buy a put below where we had sold our other put that created a $1 wide put spread below the market effectively creating just a $1 wide iron condor on either side, so we sold the 179 calls, bought the 180 calls. We sold the 160 puts originally and then later, bought the 159 puts and we bought those puts for a $.30 debit which means that we still took in a total net credit of $1.3.

And so, if you think about the width of an iron condor and the risk in an iron condor, the risk in an iron condor is the width of the strikes. Well, the width of the strikes in this case is $1 on either side, so that's our max risk and then we subtract out the credit that we received which is $1.3. In either case, no matter what happened with this iron condor, once we adjusted into it, we were going to make $3 no matter where the market went. In fact, we ended up making more than that because the market stayed between our strikes. But this is a great example of how you can actually convert trades into a risk-free alternative. Now, we gave up, obviously some profit potential. Our potential profit originally in the trade was $133. Now, we've reduced that down to $103, but we've actually taken out all of the risk in this trade. Now, again, that doesn't always happen and you have to have the right setup for that to happen. You have to get into a risky trade to begin with, meaning a trade that actually carries some risk, some margin potential before you can convert it into a risk-free trade. Again, the reason I wanted to go through this today on the daily call is because I've been seeing this a lot lately and I see people with all these sales pages about how you can do risk-free options trading. Yes, it's possible, but not without first getting into a risky trade and then converting it over. And so, can you convert it over? Sure. We've done it a number of times. It doesn't always happen that way that the pricing works out, but if it does happen, then you can get into a risk-free trade. Hopefully it helps out. As always, if you guys have questions, let us know. Until next time, happy trading.

#284 - What's The Best Timeframe For Stock Charting? Jul 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 answer the question, "What's the best timeframe for stock trading?" This is actually a user submitted question. Somebody submitted this question into us, again, which is a great way if you have questions about options trading, stock trading, the market, etcetera. Get those questions into us, so we can queue them up on the daily call. But somebody said, "Can you give us an idea of what the timeframes are for indicators in particular that are best and useful? On a month-to-month as you show in many of your examples or day-to-day or do they work just as well on three or one hour or five minute charts, etcetera?" Really, the idea here is when you're looking at charting and when you're looking at in particular, technical analysis indicators, what do you use? Do we use a one hour chart, a one day, a one month, a one year? I mean, there are many different chart formats you can use. I think for most of the testing that we've done, obviously, we've done it on a daily basis, so daily charts. Not intraday charts. We're not doing one hour, one minute or tick charts, etcetera. We're doing one day charts or one day closes and wicks. For a lot of other people, if they use charting patterns, I know there are some big-time traders that like to use charting patterns using weekly charts or monthly charts.

I think the thing that I would say on many of these charting techniques and indicators is that the indicators are only as good as the timeframe that they're used on. In many cases, if you get a sell signal, but it's on say a daily chart, well, that's going to be reflective in potentially a move of a couple of days. If you get a buy signal and it's on a monthly chart, well, it could be a very big move that takes many, many months to actually play out. You have to be understanding in just looking at what chart you're looking at and how long that signal might last. On a say intraday chart, that's one minute or two minutes for every tick. If you get a buy signal, that only may last for maybe four or five minutes. I mean, it's going to be that quick. Do you have enough time to appropriately react to that? Can you get into positions that are liquid enough and then get out of it? We've really never found with technical analysis that intraday stuff really works well for us, nor do we like to trade options on an intraday basis. We're not selling option contracts and then buying them back or vice versa every single day. We're trying to be position traders. We like to trade using daily charts. A lot of our back-testing and research has been done using daily data which is a lot easier to get. It can get longer timeframes. And so, that's what we like to use. Hopefully it helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#283 - Should You Look At Individual Stock IV Or The VIX? Jul 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 talk about – Should you look at individual stock IV or VIX? The simple answer to this, I believe is you should be looking at both. The VIX in and of itself, I don't think is the only thing you should be looking at because remember, the VIX is measuring implied volatility on the S&P 500, so it's basically just a way to chart or to track volatility on the S&P. Now, we could obviously track individual volatility on every stock and ETF out there. It's not that hard to do. Every individual stock and ETF could have its own VIX like ticker symbol if we had exchanges that wanted to trade these and products that were related around them. The VIX in and of itself, I don't think is the only thing you should be looking at. And case in point to use kind of some concrete examples and numbers right now, the VIX right now is trading in the low teens and the S&P 500 is rallying higher, so it's up on the day at the time I'm recording this and there's a lot of other individual stocks right now that have much higher implied volatility than the VIX and in many cases, much, much higher implied volatility than even some of the other peer groups and ETFs that we track. Things like EWW, EWZ, XOP, XLE, SMH, etcetera all have high implied volatility right now on an individual basis. If we just looked at the VIX and we didn't look at individual stock IV, we might be missing an opportunity to trade these kinds of higher IV, low hanging fruit type opportunities as an option seller. That's why I think actually both are important. I mean, look. You can use the VIX as a gauge or general broad market brushstroke of where implied volatility is, but you definitely want to dig into some of these individual stock IVs because sometimes you can find really good deals there, really good IV deals, if you will. I think again, the answer is both. I wouldn't look at just the VIX, I wouldn't look at just individual stocks, but you should be monitoring both. Hopefully that helps out. As always, if you guys have any questions, let us know. Just head on over to optionalpha.com/ask and get your question submitted and we'll get it added up to the queue here on the daily call. Until next time, happy trading.

#282 - Parkinson's Law Applied To Options Traders Jul 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 how we can apply Parkinson's Law to options traders. Parkinson's Law is probably something you've heard about before, whether it's in psychology class in college or high school or you just heard people talking about it. If you're a geek of success and understanding people who are successful and companies who are successful, you'd understand that Parkinson's Law is talking about generally, the idea that a task that you're trying to do or some activity that you're trying to do is going to swell in perceived importance compared to the relation of time that you allocate for its completion. For example, if you said, "Okay. I'm going to build a shed in my backyard." And you gave yourself a year to build the shed because you figured, "I need time to draw up the plans and do the base and the framing and the roofing and put the shingles on, the whole deal." It's going to seem like this huge monstrosity of a project. And so, because you gave yourself a lot of time allocated towards its completion, you naturally perceive it as a very important and complex project to work on. Now, the reality is you could probably put up a shed in two days. If you said, "You know what? I'm going to put up a shed in two days." You might have to cut back on perfect plans. You might have to reduce the time it takes to shop around for the possible shingles or materials that you're going to use. But the end result is that that time pressure forces you to complete the most essential elements and then the result is typically very, very close or same to what you would've done had you had more time. In fact, they've tested this numerously and various studies at major institutions, you see that people end up doing about the same work and they just basically consolidate all of their effort and time into just the last like 10% of what they allocated. If you allocate let's say a week to do something, you're still going to end up doing it the last day because you gave yourself a week, but you didn't do anything the first six days, you end up doing all of it anyway the last day.

How do we apply this to the markets as options traders? I think what it comes down to is applying this from the educational side. I think what you have to do is you have to look at options trading as this thing that you start to take bites out of in understanding different categories or topic areas of options trading and then give yourself a really short timeline to try to crunch through some of the stuff. Now, I'm not saying you just watch the videos and keep your eyes down and fall asleep and just because the video played on in the background and you were asleep that that counts as going through the material. I'm saying try to learn all about earnings trades in the next four days, just as much as you can in the next four days. It doesn't matter if you get through everything or not, but try to apply some sort of time pressure to your education, so that you can finally get the most essential elements, the most essential pieces out of say earnings trades which I could probably just rifle off the top of my head. High IV, enter the trade right before the announcement, be neutral. Small position size, exit the trade right after the announcement. I mean, there are really just a couple of key elements to an earnings trade that you have to have in place. You could learn those very, very quickly. If you want to learn how to trade, I think you take bite-size chunks out of this business. Learn one topic and focus on it really, really hard for a couple of days, get the most essential elements, you'll get 95% of the way there and you can fill in the gaps later. The reality is that in this business and in many businesses, you're never going to learn everything, so let's stop being perfectionist in assuming we can only move to the next stage once we've completed everything 100% and we have a 100% understanding. It's never going to happen. You're always going to have missing gaps and things that need to be filled in. I still have that all the time. We talked about this on the weekly podcast just the other week that I still have things that I'm learning and mistakes that I'm making in my trading that I need to improve on. If you ever think you're going to be 100%, you're not, so fill in 95% of the gaps and then move onto the next thing and things will just naturally kind of dovetail into different topic areas and different understandings as you complete more courses and modules and categories, etcetera. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#281 - Commissions Are Less Important When Compared To This 1 Thing Jun 30, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about why commissions are way less important when compared to this one thing. The reason I want to talk about this is because I get a lot of people who email me and always, the sob story is around commissions. Now, don't get me wrong. Commissions are a part of trading, but it's a cost to doing business. It's like emailing me and telling me that my commissions are too high on my electric bill. I get it. You can reduce the cost of your electric bill, you can reduce the cost of your commissions, but ultimately, it's a cost of doing business. Now, this even means it's a cost to doing business when it comes to free broker platforms like Robinhood. Now, I know I harp a little bit on Robinhood because I think that although it is a free broker platform and everyone likes to gravitate towards it, there is a cost to go towards the free type commission model and when it comes to speed and technology, you do pay a little bit, a little bit of a sacrifice for having free commissions. Nothing is free, absolutely free in the world. You do give up something for going towards a free model or paying a lower commission. But in the end, what I want to talk about is why commissions are way less important. Everyone is focusing on commissions, but what they should be focusing on is latency. And the reason I want to talk about latency is because when it comes to options trading, the ability to do something quickly and to do it right is way more important than any commission that you would pay and I've often said that I think commissions when paid are actually helpful to your business. It's a cost that's a good cost. It's an investment in your business because if that commission pays for amazing technology and reduces latency in your trading system, then it more than pays for itself.

Let me give you guys an example hopefully to kind of prove this point because I just see too many people just like focusing on it way too much and missing the big picture. Let's say that we're trying to invest in real estate. There are two types of people who invest in real estate and by the way, my wife and I, we invest in real estate. There's people who love to do the work themselves because they want to save money and then there's people who don't want to do the work themselves because they realize that if you don't do your own work that you could actually do exponentially more units and more properties, thereby increasing your total profit, cash flow, whatever you want to do. There are people who will buy a house and they'll do all the work themselves. They'll even list it themselves. "For sale by owner." They won't use an agent because they want to save, save, save, save, save all of these commissions and fees that are in there and that works for sure because you can do that and then you can save all that money and you can feel really good about what you're doing. What I have learned though not only in the real estate business, but in the options trading business is that when you do this and you try to cut, cut, cut, cut, cut from every angle, you basically end up cutting yourself out of business. And so, we used to do a lot of work on our properties back when we're younger and we didn't have any money. We had no choice basically to do it. But now that we actually have investments that make money and we do 15 plus properties, we're doing two flips right now, when we do this, we don't touch the properties at all. Like when we're flipping a house, we do not pick up a hammer, a paintbrush, nothing because what I realize is that my highest and best use is finding and allocating capital not actually doing the work. Although I might end up spending a little bit more money to hire a contractor and hire an agent to do it, I can end up doing a lot more properties, thereby increasing our portfolio much faster than if I was to do the work by myself.

Now, to use this analogy now on the options trading side, what everyone thinks I mean when I say latency is they think I mean that you have to throw, like who can throw mud against the wall quickest. When I talk about latency and speed, it's every broker platform can enter trades really fast. Like you want to get a trade in, it can be entered really fast. But it's not about how quickly you can throw just like random mud against the wall. It's how accurate you can be in choosing the right strategy, the right setup and making the best decision. And so, if you have let's say a broker platform where you don't have the ability necessarily to enter a trade that quickly or they don't even have a mobile application where you can enter a trade or they don't have a desktop application that you can enter a trade, that increases latency. That reduces the amount of speed in which the time it takes for you to make a decision and get a trade executed starts to become wider. And during that time period, spreads increase, the market moves and let's say the market moves just $.5. On a $.5 option contract, that's $5. That more than makes up the difference in commissions that you would ever pay at most with these brokers. Whether you're at Robinhood or Tastyworks or you're at Thinkorswim, you're going to be paying zero to a dollar per contract. A $.5 move in the market is $5. Literally, if you can't get in the trade at the right price, at the right time with the right option strategy, then saving the dollar in commission to go to a cheaper broker or doing whatever you need to do to save commissions still doesn't negate the fact that you missed an opportunity to get into or out of a position when you could've.

And I think the ultimate example of this is what we're trying to do with the auto-trading technology because even still today, every single broker out there has no ability to automatically enter and exit and adjust your trades for you on-the-fly. Everything has to be done with our fingers. We have to click. We can do GTC closing orders which is great, but you can't find the opportunities in all markets at all times and you can't be everywhere at the same time. And so, because we're releasing auto-trading technology that reduces this latency, it doesn't matter honestly in the end. I don't think it'll matter if you have regular commissions, high commissions, low commissions, no commissions. Commissions are a non-factor when you can increase the speed in which you do things and reduce the latency. The time it takes for the software or the bot on our end to find a great strategy even if you're at the grocery store or changing a diaper and immediately execute that strategy and save you the cost of doing the strategy later on when the premium is lower or totally missed the opportunity because you were doing something else and didn't have time to watch it, that in and of itself is way more important than any commissions that we could possibly pay. On our end, we always think about commissions as a cost of doing business, an investment basically in technology that reduces latency and that is way more important than what you guys should be focusing on right now. Everyone is too focused on commissions. Again, not to say you can't get them reduced. For sure, get them reduced. But once you get them reduced and you're comfortable with the platform, focus on other things because there are way bigger things that move the needle more so than commissions. As always, hopefully this helps out. If you guys have any questions, let me know and until next time, happy trading.

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