The "Daily Call" From Option Alpha

Latest Episodes:

#280 - Options Market Size & Growth Jun 29, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be talking about the options market size and its growth. Now, there's a lot of data that's out there, but frankly, it's a little bit fragmented when it comes to the actual size of the option market and then actually the growth from year-to-year because you have all these different exchanges and clearinghouses, so it's a little bit fragmented. But I wanted to share some stats because I think generally, when you look at the CBOE which is one of the biggest exchanges and then also the OCC which is the options clearing corp. which does vastly all of the options clearing that's out there, you get a really good understanding of kind of where the market is and where it's headed. Now, the good news is I think that the options market is continuing to grow at a really, really good clip and for me, this is good because I always think about where do I want to invest my money, where do I want to invest my time. A long time ago, I knew when I'm starting this process that I wanted to be in a market that was ever-expanding, that have the opportunity to expand not only in the people that are trading it and the liquidity, but also in the products that are traded and the contract sizes that are traded and it's interesting to me and it's encouraging to me to hear how much the options market has grown even in the last like say 10 or 12 years because that allows us wiggle room to be able to increase the number of people that we can help trading and as traders, it allows us to have a certain level of confidence that when we grow and when our account starts to grow and we have to trade more contracts and we're forced to do more things in the future that we have liquidity backing, we have a base of a very deep, very wide market that's out there that can absorb a lot more people trading and a lot more people making money trading from options.

To start off which is kind of the raw statistics and I think using the OCC's numbers is probably about as best as you can get because they do have data on all the different exchanges that clear through them, including BATS and BOX and CBOE and GMX and AJX, etcetera. All of these are kind of rolled into the OCC stats. But last year in 2017 which was the last kind of like fiscal year for the options market, the OCC cleared more than 4.3 billion option contracts and that's a 4% increase from 2016. And so, while 4% doesn't seem like it's a huge steppingstone, you have to realize that in the last 10 years, the options market was growing at about like a 10% to 12% clip for a long time. I mean, it's really been growing quickly. And so, naturally, as you start to reach certain levels of higher and higher saturation in the market, you start to dovetail on that growth. 4% at 4.3 billion contracts is nothing to shy away from and in fact, most of that growth has been in some of the weeklies and VIX and volatility type options. What's interesting to me is that if you look and dig into let's say just futures and VIX options, the growth from say 2018 to 2017 is astronomical. The average number of VIX contracts that were traded in 2008 was 102,000 contracts. The average number of VIX contracts traded in 2017 was 636,000 contracts. I mean, really, a 6x improvement over the last 10 years in growth of these underlying contracts. Again, you can then spread that out over a bunch of different ETFs and stocks which are all increasing in liquidity, increasing in the number of contracts that are being traded which really just leaves us to a huge opportunity as traders to realize that this is a growing and ever increasing market for us to be in. In fact, many years in the future, maybe 10 years in the future from now, that will be well over a million contracts traded average each day. I mean, that's crazy to even believe that the options market can be that big, but I think it can.

Now, when you look at actually like growth charts of the options market, I think the only thing I notice that's a blip in the growth of options trading was the 2008-2009 period. Now, just before that, kind of that leading run-up to 2008-2009, that's really when I think the retail market was starting to explode for options trading. And so, I think we naturally saw in 2008-2009 with the market kind of moving down, people started to get back into what was familiar. They started to go back to stocks. They started to shy away from options. Maybe they got burned on some stuff and they just started to basically let go. I don't think that that's going to happen again. I think when the next downturn happens, people are going to actually start gravitating even more towards options trading. I think actually right now, the growth in options that's been maybe slowing down at the growth percentage pace than it has been historically in the past is because a lot of people are getting sucked into this idea that just blindly passive investing index funds are going to be the wave of the future. But as I've mentioned many times before, the problem with passive index investing is that it's only as good as the next dummy that was passively index investing right before you. People are just saying, "Look. I just got to blindly cover my eyes and buy the index." Well, at what point do you stop blindly covering your eyes and buying the index? There's got to be some value that says, "Hey, look. It's too high for us to stop buying." I think when that happens and we get the next downturn, I think actually, the options market is going to continuously grow. I think it's going to really even pick up its pace which is why I'm so excited about staying involved in it, staying engaged and hopefully why you should be too. This is a market that is growing exponentially year after year after year as far as activity and different tickers and number of contracts. I mean, it's just really growing at a very, very good clip and so, I would definitely be paying attention to this and if you're not already involved in options trading, you need to be because this is a business. It's something that's very stable and very sustainable for the future. Hopefully it helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#279 - How I Became An Options Trader Jun 28, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, I'm going to talk about how I became an options trader and just a little bit of my path and journey basically since I graduated college and what I started doing and how I took this path and becoming now a full-time options trader for over 10 years. I originally started in college as a finance major. I've always been a finance major in college. And when I graduated from the University of Virginia, I decided that I wanted to be an investment banker. Now, all full disclosure, looking back on it now, everybody in my class decided they wanted to be an investment banker or a hedge fund analyst or an equities trader. I mean, it was literally the only thing that you did. I mean, if you said you did anything else, it was kind of looked down upon to some degree that you are deciding to take a different path. All of my friends were getting interviews in New York and going back and forth to New York to become investment bankers or work on Wall Street. Naturally, I thought, "Well, yeah. This is what I want to do." I love numbers, I love math, I love the markets. I've always had a love for understanding business and finance and so, I thought to myself, "Well, yeah, of course. This is what everybody wants to do, is work on Wall Street and become an investment banker." I eventually got a job, an internship and job at Deutsche Bank and worked at Deutsche Bank for a while which was right on 60 Wall Street. In fact, I still think that the company is still there, although I think their stock has been tanking over the last couple of years. But it was a great place and I really enjoyed my time there. I think the people there were great. I learned a ton and I was in the mergers and acquisitions group which is one of the probably better groups that you can be in because you see a lot of stuff. It's on the private side of the Chinese wall, so you have very much private information, companies that are coming together that the market doesn't know about, people are talking secretly, they're trying to merge with each other or buy each other out and it's just a really fascinating time to be part of this and this was all well before the markets kind of collapsed. Things were going crazy. There was leverage buyouts all over the place, but again, very, very fascinating.

What I absolutely hated about that job, however, was the hours and time commitment and trajectory of my life at that point. I originally saw one of my managing directors come in one weekend, obviously coming in on the weekend which is not something I thought should be really kind of the norm for some guy who was leading this group. But he came in on the weekend and worked pretty much all day. We were in there on the weekend all the time. I mean, it was kind of a social norm to come in at 6:00 and don't leave until midnight, basically. And he called his kids and tucked them into bed on the phone and I remember asking him, saying, "How many nights do you see your kids?" And he said, "Maybe two nights a week, I see my kids." And he spent most of his time actually in the city. He would rent a hotel. The company would pay for him to stay in a hotel a couple of blocks away, so that when he left the city and went to New Jersey for a day or two, that's when he would see this kids and I thought to myself like, "That is absolutely the worst possible thing in the world. I couldn't even imagine even at that point that'd be my life trajectory, working so hard every single day and that's the type of success level that I reach." All else being said, I learned a lot being at Deutsche Bank, got an opportunity to do a rotation on the derivatives trading desk. Now, what I loved about Deutsche Bank unlike maybe some of the other banks out there is that they actually, I think to some degree like wanted you to kind of move around and find your own fit. And so, when I had a chance to move over and do a rotation on trading desk, that's where I really learned a little bit and kind of got my feet really wet in understanding how the markets worked and how an institutional bank like Deutsche Bank saw the equity markets, saw the derivatives market and saw options trading in general from the institutional side. And even though I was there for a short amount of time and kind of rotating around to different groups, I really, really got sucked into that. I mean, that's really what I consider to be my official start. I mean, I learned about options trading and calculated Black Scholes models by hand in college, but from an understanding and just like watching and witnessing how they thought about markets and expected value and pricing and position sizing, how they thought about all of that stuff was really, really interesting to me.

Following that, I left New York and moved back to DC. At that time, I was dating my wife. Well, now wife and mother of three kids, but fiancé, girlfriend at the time. I had an opportunity to work as a REIT analyst for a capital markets bank, regional bank outside of DC. Again, really good opportunity, I want to try something different. I wanted to be on the other side of the Chinese wall, if you will, so I wanted to be on the public side. In mergers and acquisitions, I was on the private side, so I couldn't say anything to anybody. On the other side, I was a REIT analyst, so I could ask questions, I could dive deeper, I could try to understand how these REITs were operating, how their business model was structured, how they thought about capital and how they thought about allocating resources. It was really, really interesting and still why I really like real estate and REITs even to this day. I just understand and love that business as well. But even during that time period, I realized that this is still not something I want to do. It always seemed like I was just chasing this proverbial tail or it's just always just updating models and improving systems and trying to figure out what the growth rates were and even though we have no idea where companies are going to be in the future and we don't know how fast technology is evolving. I mean, it was just this constant like cat and dog chasing each other around. The company would say one thing. How does that change our model? The industry published a new growth expectation. How does that change our model? I mean, it was just this constant bereavement that I just really, really hated and seemed like it served really no value to the outside world, nor to myself really. I left that business and decided to them start trading at home at that point and thankfully, my wife was able to help facilitate this. She was a teacher and so, she was able to support us as we started trading at home.

But you know, when I went home and started trading and as many of you guys know, it was not like a very easy journey. I mean, in fact, the first week, I lost a couple of thousand dollars and I remember my wife saying like, "If that's going to be how it's going to be, you better start polishing up that resume." But I started doing basically what everyone else was doing at that time and very, very quickly learned how not to do things and that's okay and I kind of moved past those. I tried day trading. That didn't work. I tried Forex trading. That definitely didn't work. I tried futures trading. That didn't work. I tried swing trading and using chart patterns and drawing lines all over the place. I looked like I was a 13-year-old kid drawing colors on charts. I mean, it was crazy. And I quickly learned and kind refocused my attention back onto options trading. I kind of sat down after a couple of weeks and said, "Look. None of this crap is working. What works?" And then that's where I really started to dig in and what I believe to be the very start of a very long journey that I'm still on now in understanding exactly how the options market works. At that time, when I started digging down, I said, "Okay. What are the numbers? What can I really hang my hat on as far as the math behind trading? What can I use as far as a system that can produce predictable results or some sort of model or template that I can use?" And that really started my journey into understanding the options market in all facets. And what we started doing even a couple of years ago with our Signals and profit matrix research, to our back-testing software, to our upcoming auto-trading software has all been in an attempt to basically from that day forward, understand more and solidify more how the options market works. It's been for me a very, very long journey, but a very fulfilling journey because it's a labor of love. I truly love trying to figure out the markets, trying to improve even incrementally how we're doing things and understanding the psychology all around it.

I would say that my start in becoming an options trader got started many, many years ago, over 10 years ago now, but the process and journey has been a constant improvement. I mean, it really has. I consider myself to be not yet fully there and I don't think I will ever be there to like consider myself to be a great trader. I think there's always room for improvement and I'm always looking for the next iteration, the next edge, the next thing I can change or tweak or adapt to make myself a little bit better. Hopefully that helps out. I'd love to hear your guys' story if you do have a story of how you got started in trading options. I know it's probably always a little bit different, but seriously, I really want to hear this, so please shoot me an email, post on Facebook, on Twitter, LinkedIn, YouTube, wherever you follow us online. I'd love to know your story of how you came to the markets, how they found you, how you found the markets, kind of that serendipitous love story between you and options trading and please share it with us. As always, hopefully you guys enjoyed this and until next time, happy trading.

#278 - Best Place To Open An Online Trading Account Jun 27, 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 best place to open an online trading account. I'll start off by saying I'm never going to say that one broker or one company is the absolute best place to open up an online trading account. There's a lot of different brokers that are out there that fit many different needs in the marketplace. And so, when it comes to choosing the best place to open up your online trading account, you have to go with a broker that fits your needs and your requirements for your long-term trading activities. And so, for that reason, I think there's many possible brokers that you can choose from. Today, I want to go through what I think are some of the top brokers out there and some of the good things that they do, some of the bad things that they do, so that you can make hopefully more educated decisions. Now, we have a list of all of this, as well as all the commissions and fees that brokers charge on our website. You can just go to optionalpha.com/trading-platforms. There's a broker tab that you can search on our website and we have all of this listed and we're constantly updating it.

But with regard to, I think some of the top brokers right off the bat for options trading, I think the top couple of brokers are Thinkorswim, Tastyworks and I would say Robinhood and Interactive Brokers are probably in that list for me. Let's start off with Thinkorswim. It's the broker that I use and that I choose to use and it integrates directly with our auto-trading platform which is why we are still with them. I think by far, they are the leading dog, if you will, in this race of technology. They absolutely have some of the best technology out there. Their commissions when you start can be high, but you can easily negotiate their commissions low. We pay under a dollar per contract at Thinkorswim. A lot of people who are also in our community, they pay under a dollar per contract, so don't be afraid to ask for a little bit of a reduction in your commissions or work towards that. But using the Thinkorswim platform in combined with the Option Alpha auto-trading platform is one of the, I think premier integrations and technology pieces that are out there right now. I would definitely say that that would be the first place to start.

The next place would be obviously Tastyworks. These are the founders of Thinkorswim, the original creators that spun off and created their own newer broker platform geared all towards options traders. Now, what I love about their platform and I hope that we can integrate with their platform in the future for auto-trading… They don't yet have a public API, so until they do, we won't have the ability to integrate with their platform. But what I love about Tastyworks is that they are focused on options traders. Even IRA accounts have the ability to trade naked options which is something that we don't really see a lot in brokers out there and their commissions are really good. In many cases, you're just playing a dollar per contract with no closing cost fees, so it ends up being very, very cost-effective for an options trader. Now, the problem with Tastyworks, obviously at this point is that they don't integrate with our platform which for me is a big one because I want to have the ability to use our auto-trading technology to automatically scan, enter and exit trades as I see fit. In the future, if Tastyworks does have the ability to integrate with our platform and they do open up a public API, that might be something that we start transitioning over to or start working with them on very quickly.

The other major platform that's out there that is getting a lot of attention is obviously Robinhood. Now, we've had the cofounder of Robinhood on here, Baiju before doing an interview. Obviously, Robinhood is zero commissions across the board. The unfortunate thing about Robinhood is in some respects, you pay for what you get. It's a completely free platform, but they have a lot of limited functionality and like ability. In fact, some of their charting is just absolutely like very basic bare-bones and they do that on purpose. I mean, that's who they are trying to attract, somebody who doesn't care about that type of stuff. They don't have a lot of the IV ranking, the technology stuff. They don't have integrations with auto-trading yet. A lot of the functionality that you might otherwise need to make smarter decisions is not there and not present. Yes, you could save money on commissions, but if you're still making bad decisions and getting into the wrong trades, what good is there to save a dollar or so in commissions if you're not getting into the right strategies? I think Robinhood is going to be a player in the future. I think hopefully if they continue to invest and continue to partner up with people, hopefully like Option Alpha to integrate their technology and their commission structure to what we're doing, I think it could be a really interesting opportunity.

The last one I want to talk about is Interactive Brokers and the reason I threw this one in there is not at all because of the technology. I think the technology on Interactive Brokers is terrible and old and very antiquated, but it has the widest reach for many people. When it comes to being able to access US markets from an overseas base or an overseas country, Interactive Brokers is probably one of the best, if not, the only that has that ability. Now, their commissions are also pretty fair and pretty low. I mean, you're not paying that much for commissions, but there's a lot of trade and technology fees that go into it. You got to pay for your own data streams. You got to pay for your own quotes, etcetera. There's a lot of things on the outside that seem like when you look at their pricing page and it's no trade base and $.70 a contract and $.1 per share, but there's a lot of intangibles that they don't really show you as far as data feeds and exchanges that you want to pay for to be able to get and use that trading capacity.

Again, each broker is a little bit different. I mean, like it literally is like looking at different people. I mean, they all have their own personality, they all have their own client that they're trying to attract and person that they're trying to move over to their platform, so I think it's worth the time and effort to go through the different broker platforms and see which one kind of suites you. Now, again, we've got a couple of guides on all of these different brokers and we do a nice little write up for you on each of them and show you all of their cost and fees that are associate with them, so you can just search brokers on the Option Alpha platform. You should be able to find that page really easily. As always, hopefully you guys enjoyed this. If you have any comments or questions, let me know. Until next time, happy trading.

#277 - Block & Tackling, Throwing & Catching, Shooting & Passing Jun 26, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we're going to be talking about the importance of blocking and tackling, throwing and catching and shooting and passing. And you might think to yourself, "What on earth does this have to do with options trading?" But what it really comes down to if you look at most sports and the reason this is, I guess a sports related analogy is that most sports teams that are really good, win championships, have high-scoring teams, etcetera, what it ultimately comes down to is always the basics. It's being able to block and tackle in football. It's being able to throw and catch in baseball. It's being able to shoot and pass in basketball. It's really these very basic fundamentals and mastering those to the nth degree that leads teams to be very successful. When it comes to options trading, it's obviously no different. Even like in the world of finance and budgeting, it's saving money and able to invest. When you are trying to be healthy, it's working out and eating right. Like there's always a couple of things that it comes down to and these basics are things that have to matter no matter what because it's what's going to get you to the point of being successful and then it's going to keep you there.

And so, when people become, I think successful in anything that they do, they tend to forget about the basics which is one of the reasons why I still love doing this daily podcast. I love writing. I still love replying to emails. I still love actually making trades every single day because I have to keep the basics in check. I've got to do the same things that made me successful and got me to this point and I've got to keep doing them because that's what got me here. Many people forget that and so, today's show is hopefully just a quick reminder that the most important thing sometimes you can do are just absolutely the basics. If you're trying to save money, it's just budgeting, budgeting and spending less. That is the basics. Everything else, the way you go about it, what apps you use, do you use Excel versus Mint versus Personal Capital. The tools of doing it are no different, but the actual mechanics of it are really what is important. Are you actually budgeting and are you actually saving money? Those things, you can master and then will lead you to being able to save more money and invest.

When it comes to options trading, I think what it comes down to is consistency and persistence, doing the right thing every single time even when it feels like you shouldn't be doing it, so continuing to sell options even when it feels like you shouldn't, continuing to take money off the table even when it feels like you want to get greedy and stretch for more profits. It means leaving positions on even when you get challenged because we know the research shows that stop losses create more losing trades. It's getting into a small position even when you have a really good feeling for a trade because we know that nothing is always guaranteed and things could always blow up in our face. It's keeping these basics in check all the time, so that when things go wrong, we can fall back on our fundamentals. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#276 - The Ultimate Guide To OTC Stocks Jun 25, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be going through a little ultimate guide here to OTC stocks. As we've done just over the past week and I don't know why I'm just dovetailing into these little areas, but it's always stuff I want to talk about. I never thought that the weekly podcast, doing it as a longer form episode was really the right medium for this. But I get a lot of questions on futures and OTC stocks, etcetera, so I want to do a quick little podcast on what OTC stocks are, do I trade them, do I not, where can you find more about them and just kind of a little guide on that.

OTC stands for over the counter stocks and basically, all you need to understand about this is that these are stocks that do trade on these dealer networks or dealer exchanges that are not traded on the regular exchanges, I would say or the bigger exchanges like the NASDAQ or the NYSE, etcetera and for whatever reason, these stock either are too low in price, too low in float, didn't meet certain requirements for listing capabilities and so, they choose to have their security traded on these over the counter networks. There's a lot of different over the counter networks that are out there, the OTCQX, OTCQB. There's a lot of ones that are out there. And a lot of the quotes that you see are often published on what are called pink sheets. And so, people will talk about pink sheets all the time and the terminology gets thrown around, but it's basically just an update of where these over the counter prices are. And many of the technology stuff now has actually really improved to the fact that you could basically trade these and look at them in semi-real-time if you wanted to.

The problem with OTC comes into a couple of different forms, really. One is that with an OTC market, there's a lot less that's known about the company and the requirements. There's a lot smaller hurdle to cross over to get onto these exchanges. And so, as a result, many individual investors have to assume a lot of that kind of unknown risk or fear of the unknown risk. The other thing is that it has a strong lack of liquidity. In many cases, if a stock is listed on the OTC, it's because the share price is too low or it becomes some sort of a penny stock and so, liquidity becomes an issue. If you wanted to get in or out, who is going to be the other counterparty to that trade to help facilitate that transaction?

If you want to learn more about these though, I mean, I could probably go into more details on this, but there's a lot of stuff about OTC markets that you can dive into. I do not trade OTC markets, never have. I don't really think it's anywhere that you need to be. There's no scalability in my opinion there and definitely no options capability in the OTC market, so that really puts a damper on things for me. But if you want to learn more about it, probably the best resource to go to is otcmarkets.com. It has a lot of information on it. You can start digging into it. But again, don't be sucked down, I think a rabbit hole when it comes to over the counter markets and the possibility because there's a lot of things that still have to go right for you to make money in those markets and it's not something that I put any money into at all. If you want to, knock your socks off for sure. I just want to give you guys a quick understanding of how those markets generally work and what they are used for. As always, if you guys have any questions, let me know. Until next time, happy trading.

#275 - Futures Market Basics In Less Than 7 Minutes Jun 24, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. On today's episode, we want to again, go back through some of the futures market basics and I want to try to do this all in less than seven minutes. Now, the idea behind today's call as opposed to some of the other ones that we've just done previously is that I want talk about more of the structure of the futures market and just generally how it works. We talked about the E-minis, we talked about some commodity futures, but I want to kind of run through some of these specifics on just general futures contracts and how the futures market behaves and what it can do for you as a trader or a speculator because I think it's really important to understand.

The first thing you have to understand about a futures contract is obviously, it's just simply an agreement between two people in the future for a specific asset at a specific price. Now, this is a little bit different than implied volatility in options trading because futures contracts have a P&L diagram that's very similar to a short stock. It's very much a one-dimensional payoff diagram. See, they're just going to be at that future price higher or lower or not. There's no implied volatility basis that's factored in because the futures contracts trade basically at the money or to a slight discount or premium to the future price. In this case, it's a lot more similar to stocks to some degree except for the fact that they derive their value from some actual physical asset. Now, in many cases, futures contracts are what's called, cash settled which means that at the time of expiration or at the time that the contracts expire, the only thing that changes hands is cash between investors. Now, there are some contracts like corn contracts which are actual physical delivery. At the time that you actually get to expiration of a corn futures contracts, you might actually have to deliver the physical commodity if you're short or take delivery if you're long. But look. Again, most people don't ever want to do this because of the holding cost and the risk that's associated with it and frankly, like what are you going to do with billions of bushels of corn in your backyard. Many, many, many of the futures contracts end up being cash settled and I think it's only less than 2% or less than 1% of all futures contracts that actually go through full to delivery. And so, again, that just shows you that most of this market is just money changing hands back and forth and risk changing hands back and forth.

Now, most of the contracts that trade for the futures market are traded on quarterly expirations, so March, May, July, September, December, those types of expirations for contracts. It's not always that they trade March and May. They may trade March and July and September and December, but you have to check and make sure you understand which contracts you're trading, but those are kind of the most common months that those contracts are generally traded and then obviously, the options contracts behind them can have a lot more expiration dates including weeklies. Now, when it comes to the futures contracts, one thing that people should understand about these futures is that they do have slight premiums for longer duration contracts. Now, again, that makes total sense. If you're locking in a price or you're locking in a contract that's a little bit longer out in time, say six months out versus three months out, then those longer dated contracts are going to have maybe a slight premium that's associated with that extra time and that extra risk and that also means that they're going to have a little bit less liquidity as well because they're further out and that increases the cost to buy or sell those contracts, it also increases the risk that maybe not a lot of people want to be trading or speculating that far out in the future just yet. That's probably one of the biggest differences, is just that associated cost over and above an underlying stock or ETF position.

And the final thing that we want to talk about with futures contracts is the leverage that's involved. Now, leverage obviously can be good or bad. But when it comes to actually physically buying stock or choosing to buy a futures contract, usually, a futures contract will be a little bit more favorable when it comes to capital that you have to outlay. You'll have to outlay just a little bit of margin to cover that position or set aside some margin in your account to cover that position versus a stock position, you'd have to outlay the entire cost to do that. This leverage obviously comes at potential risk because if you're over levered and you basically get yourself into a situation where the margin on all futures contracts or on the market starts to go up, then you could run into a margin call situation. This again, presents an opportunity for you to use a futures contract to hedge or speculate or potentially play a different market with a little bit of capital compared to actually trying to play that market with the actual underlying value of the stocks or ETFs or kind of associated securities in that market. Hopefully this helps out. Again, I think I did it under five minutes or so or right around five minutes or so, so hopefully that helps out. If you guys do have questions, we'll be doing more of these daily podcast on futures trading a little bit just to kind of start helping you understand a little bit more about how the market works and if it's worth it for you to start trading. As always, hopefully you guys enjoy it. Until next time, happy trading.

#274 - Commodity Trading Through Futures Contracts Jun 23, 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 commodity trading through futures contracts. This is a topic which we don't often cover and we're doing kind of a couple of little episodes here because I'm on the topic of futures trading and futures contracts. But I wanted to bring up this idea of trading with commodity contracts not necessarily because I think people should be trading commodity contracts, though you can if you want to. It's not something that we do here at Option Alpha. But just as an understanding of why it's out there and really, what the importance of having these futures contracts are in the market. I feel like the market for futures contracts and commodity trading gets a really bad rap from people who are not in the industry or people who don't understand the industry. And so, I want people to understand why we have it and why it's important and I hopefully want to use a really quick simple example here to prove the point. But when it comes to futures contracts, we can actually trade if you wanted to, a lot of different commodities out there and trade their future value or future worth and hedge or speculate on where that price is going to be in the future. Things like coco futures and crude oil and cotton and corn and soybeans and all of these things have futures contracts which you can trade and you can speculate on these commodities and assets and their future value going up or down or staying the same. But the real utility of these contracts actually comes when people need to hedge or buy, sell these underlying utilities at some point in the future, but not right now.

So, to use a very simple example, hopefully to prove this point, let's say that I'm a farmer and I'm farming corn. That's my main source of income, is I farm corn and I know I'm going to sell X number of million bushels or whatever per year. Well, if I'm early in the growing season and the price of corn has been rising and now, I see that the price of corn is really, really high, it's been going crazy high for some reason, but I'm not yet at a point in which I can sell my corn. I mean, the corn still has to grow. I still have to harvest it. We still have to deliver it to the market. I mean, there's a big lag time between now and some future date. Well, if I was smart about how I could hedge my risk in my portfolio, I could go into the market and sell futures contracts for corn in the market as a trader and as an individual or a corporation. And when I do that, I'm setting my predetermined sale price at some future date in a couple of months or a year from now and the reason people would want to do that is because if the prices are up and if they're acceptable saying, "You know what? I think that corn prices should be X number in the future and I'm okay with that." Well, you can sell futures contracts that basically lock in that price in the future. Now, if the corn futures go down in value, well, then you're going to make money on your futures contracts because you've already preset a sale price. As the futures contracts go down, meaning that when you actually start to deliver your corn to the market, you may have to deliver it at whatever future price less some factors, say 10%. You'll have to actually deliver the value of your corn to the market at that price, but you would've made up the difference by selling short those future contracts earlier in the growing season.

Now, on the other side of it, let's say that I'm some sort of industrial producer and corn is a big input for me. And so, I might take the opposite side of that trade and say, "Well, you know, corn is going up really fast. I want to lock in the price of corn right now. I'm going to buy some futures contracts on corn and lock in that price, so that if the price goes down, then I'm not losing a ton of money on that investment because if the price goes down, then I can actually buy raw material in the future for much cheaper and I would've just basically lost or made that difference in the contract. But if the price goes up, well, I'm locked in. I have to buy actual raw corn material at a higher price, but my futures contract also went up at the same rate." So, it still evens out to be wherever I ended up pinning that pricing. Now, a lot of companies, a lot of very big companies, a lot of industrial companies and production companies use futures contracts as a way to hedge and protect the cyclicality of their business and they'll use these in regular daily operations. That's really the underlying utility of it. I mean, a lot of people speculate and trade back and forth, but this is really where commodities trading kind of comes from, is that core understanding of how people can actually use these contracts to benefit and reduce volatility and improve margins and improve the stability of their business. Hopefully it helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#273 - The Easy Guide To Understanding E-Mini S&P 500 Futures Contracts Jun 22, 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 be talking about the easy guide to understanding E-mini S&P 500 futures contracts and basically just trying to walk you through a little bit of understanding of how these contracts work, how they're structured and what you need to know about them if you're going to start using them for trading purposes, not only on the futures side, but also on the option side. Again, it's going to be a very basic introduction to these E-mini futures just so you have a little bit of understanding of the history behind them, why they're available and kind of the specifics of the contract. Again, the reason that these eventually came out and I think they came out in like late 90s or something like that. I'm not sure exactly the exact time, but around the late 90s or so. The contract size of the regular S&P 500 contract just got to be a little bit too big, so what we ended up seeing is we ended up seeing these E-mini contracts, so these electronically traded mini versions of broader indexes and markets. And now, the E-mini has become one of the most liquid and most highly traded contracts out there, but there's also E-minis for the Russell and for the Dow and for bonds, etcetera. There's a lot of different E-mini contracts that you can trade, but when people typically talk about the E-minis, they're talking about the S&P 500 futures contracts.

And so, the key thing that you have to understand about all of these E-minis is that they do have some very, very specific differentiators when it comes to contract sizes and tick sizes and months that they're available that are different from literally different index to index. The S&P is different than the NASDAQ which is different than the Russell which could be different than something else. When it comes to the E-minis, the one thing you have to remember is that the contract size for E-minis is $50 times the S&P 500 index value. That determines the actual contract size that ends up getting traded or that value of that contract that's traded. They still trade basically with last prices around wherever the S&P 500 index is. At the time I'm recording this podcast, I'm looking at the September E-minis and they're trading at $27.91 and the market right now is trading at $27.90. It means literally like within a tick of it and it's going back and forth. But when you actually get into contract size, if the market's trading at $27.91 and we multiply that by $50, that means that the actual value of that contract is $139,550. Now, before you freak out and get really scared, that doesn't mean that you have to have $139,550 to actually trade those contracts. It's just that's the actual underlying notional value of those contracts. When it comes to actually then trading those contracts, you'll have to have a certain margin amount to then cover that trade. It's not always going to be that you have to have the full amount in your account. If I click on these… And I'm actually doing this as I'm recording this daily call podcast with you guys here today. But if I click on those and I'm just trying to simulate buying one of these contracts, the actual buying power effect that I see in my account is only $7,700. If I actually wanted to get into it, yes, I still need to have a lot of capital available to trade these contracts, but I don't need to have the full notional value of those contracts in my account.

Now, when it comes to actually trading anything other than the individual futures contracts themselves like the options contracts, it actually again, becomes just a little bit more complicated and it's not that it's overly complicated that you can't understand it. You just have to literally take one step back and slow down in your thinking and thought process. But the contracts for options have one extra denominator that you have to factor into when it comes to the printed value versus the, I guess notional or true value of that contract. When we're used to trading options contracts, if we see that an option contract is listed at $2.00 on the pricing table, then we know that that contract is worth $200. It's going to cost $200 to get into it or we're going to get a $200 credit. It's pretty straightforward. But when it comes to some of these other ones like the E-mini contracts, you also have to use that kind of like multiplier or factor to then break down the value of these option contracts. To give you guys an example, right now, I'm looking at the $27.70 put options which are just below the market, but again, for the September expiration at the time I'm doing this recording and those contracts are trading for $40. That's the mark, $40.00. But when you actually go in to buy those contracts, say I was going to be an option buyer and wanted to buy those contracts for some reason, the actual value of that contract is basically half of what's printed on the option pricing table. That value gets reduced by a factor of 50 which is the same factor that we talked about earlier in kind of the tick or contract multiplier. The actual value of that contract is not $4,000 which is what it would be had it been printed any other place out there, regular stock, regular ETF, but the actual value, the notional value of that is only $2,000. That's really what it would cost to get into that trade or that's how much you would get. It looks like things are always overinflated. That's what people always see when they get into these futures options and they start looking at them. They see all these prices and they're like, "Wow! This thing is so, so expensive. I can get some great premium by selling it." But then you actually start using those contract multipliers or denominators and start breaking these things down and you can see that sometimes it's not what the actual printed price is. Again, it seems like it's a little bit more complicated than it actually is, but you'll get used to it if you end up starting to trade these a little bit more.

The other thing that we want to talk about is obviously the contract months for the E-minis. E-minis and a lot of the other mini contracts trade only on the quarterlies, so that's March, June, September, December, etcetera. All of the option contracts do have many more expiration dates, not only the monthlies and quarterlies, but also weeklies. There's also talk of having even more weeklies and like by weekly contracts starting to come out. I think there's a lot of variation in those option contracts that are then driving their value from the E-mini contracts. The key takeaway for me just to kind of wrap this up is that the E-minis are a great trading vehicle because they do have the ability to trade basically like 24 hours a day, five days a week. There is some time period. It doesn't trade 24/7. But it trades 24 hours a day, generally five days a week and that does give you the ability to see where the markets are going and see how the markets react even if you're afterhours from regular trading time. Oftentimes, we'll see the futures or you'll hear the futures contracts are starting to rally or starting to fall when some news event happened or some market moving event happened and we're not actually in the market regular hour session. The E-mini contracts are a great way to look and see where the markets could open up and start to position yourself accordingly. I also know and we'll be doing more podcast on how other traders are using E-mini contracts to hedge their positions afterhours. There's a really good hedging strategy that you can use with E-mini contracts if you're trading some of these bigger S&P, RUT type index ETFs and options. There, you can use these contracts to hedge positions and give yourself some more time to get out of them or kind of wait for the regular market hours to come before you trade the actual contracts. I think there's a lot of good stuff that we can dive into. I've probably gone a little bit over today, but I wanted to give you guys a brief introduction and kind of a mini deep dive into these E-mini contracts which I think hopefully you enjoyed. As always, if you guys have any questions, let me know. Until next time, happy trading.

#272 - Intraday Trading - Can It Work For Options Traders Too? Jun 21, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about intraday trading and answering the question, "Can it work for options traders too?" I think a lot of people are drawn to the idea of trading intraday, so day trading, if you will, entering a position, having this huge profit show up in 15 minutes or 20 minutes and then exiting the position. And in fact, as I've been watching a lot of communities and Facebook groups out there, particularly in the Robinhood space because people are getting in for no commissions, I'm seeing people posting all of their gains and profits and losers and winners on intraday trading and then everyone else is supporting them and saying "Keep at it. Intraday trading works." and people are starting with a $200 account and risking $100 per trade. I think the reality is that of course, it probably works for some people. I'm not going to say that it absolutely emphatically does not work. That'd be ignorant of me to say 100%, it doesn't work. I can tell you though, all the people I've ever coached before, all the research I've done, all the back-testing that we've done, all the technical analysis indicators that we've back-tested during intraday timeframes, it's really, really hard to make a case to say that it's going to be profitable long-term. You just can't get the moves in the underlyings that you need. You don't get the time decay that you need. You don't get the implied volatility edge to play out over time like it should.

The way that I think about options trading is I think about options trading in the sense of – You enter a position now when implied volatility is wherever it is and you have locked in your edge and your profit. It just takes all the way till expiration for you to actually be able to pull that money out of the bank. You've often heard the saying in real estate that you make your money when you buy. It's the same thing with options trading. You make your money when you sell when you're trading options. It's just that you realize your money after the expiration month has played out, the implied volatility edge has played out, time decay has eroded the value of those contracts and now, you can withdraw that money and hopefully take home some income with it. For that reason, intraday trading just is too short of a time period to profit from the things that we know to be edges in trading mainly implied volatility, time decay, etcetera. Intraday trading has no impact on that or very little impact on that which is why I don't think that it really works for many options traders. By all means, knock your socks off. Go try to do it. See if it works for you and then when it doesn't, then you can come on back to Option Alpha and we'll teach you how to do it on a monthly and income-based approach. As always, hopefully this helps out. Let me know if you guys have any questions. Until next time, happy trading.

#271 - Being Busy Is A Form Of Laziness Jun 20, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we are going to be talking about why being busy is a form of laziness. This I think is one of the most interesting things that I think about all the time. I mean, I literally geek out on this stuff all the time, on productivity and psychological hacks and just like how the mind works and how we as humans and investors, how we operate and how we think about things. And this one to me, I'll tell you a quick little story as to where this really kind of started. We always hear this, I think in many cases, but to me, I saw this firsthand and it really made an impression on me back when I was working for Deutsche Bank and I was in the M&A space, so I was in mergers acquisitions. And our director, like our global head of M&A worked on our floor, so we were in the building on Wall Street and he would come in later in the morning for sure, so he would not be there the same time that we were there. But he would come in later in the morning and I literally had my desk and office like across from his and I see him all the time, very nice guy, but he would literally sit in his chair for forever it seemed like and do nothing and just think and you could see that he was thinking. He wasn't sleeping, he wasn't reading a book, he wasn't listening to a podcast, he was just purely, purely thinking. And I remember at one point just asking somebody at that time, saying like, "What do you think he thinks about all the time?" And somebody said, "He's thinking about what to do next." And I really thought that that stuck with me because what he was doing that I didn't know at the time is that he was being super, super selective on what he was going to work on next. If that meant that he sat there for an hour and try to figure "Okay. What is the best next step that I can make?" then it ends up being a very effective and efficient way to go about his business and to work and manage the group. Because if he was just running all over the place and looking busy for the sake of looking busy, then we may not have gotten the ultra-selective, ultra-important work done. And so, what I have definitely found is that when people look really, really busy, it's probably because they're not doing the right things.

People have often asked me and they say, "Kirk. How do you do all the stuff that you do on Option Alpha?" Like I get it probably every single day. I'll get an email from people saying, "I can't imagine that you've done all this. I can't imagine that you've put together all these trainings and you do all these podcasts and you do all these emails that you reply to people." But for me, it's really, really efficient because I'm hyper-focused on what I need to do. I don't watch the TV, I don't listen to the news, I read in the morning, I don't do anything else at night, I just am hyper focused on the activities that for me, create the most value for you guys and for myself. And so, I think that when people are busy, they're just lazy thinkers and they are indiscriminately acting on whatever kind of comes their way. They're just kind of catching snowballs as they're being thrown at them and so, for them, it's very easy to be overwhelmed and then feel unproductive because they feel like doing nothing means that they're not actually making progress, so they start doing a lot of things, but they start doing them half you know what. I'm not going to say that. I don't want to make this an explicit podcast, but you know what I mean. They start doing them 50% and it becomes very, very unpleasant and very unfulfilling. My suggestion to you guys is today, try to be ultra-selective, try to do less things, but do the important things and then forget about everything else that isn't important or it becomes busywork. Sit there and think about the next thing that you need to do and make sure that it's the best next step, it's the most important thing that you can do today and try to knock over that first domino. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Our TOPPODCAST Picks

Follow Us

Stay Connected

The “Daily Call” From Option Alpha

Related Podcasts

Links

Stay Connected