The "Daily Call" From Option Alpha

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#270 - Should You Hedge Domestic Currency Risk By Trading Forex? Jun 19, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha. Welcome back to the daily call. Today, we are answering another question from our community and that is "Should you hedge domestic currency risk by trading Forex?" A couple of episodes ago, we gave you a brief description of the Forex markets which you can go back to and listen, but now, the question from somebody is "Okay. If I have a lot of my assets denominated in Australian dollars or Canadian dollars or Euro, then should I hedge my domestic currency risk by trading Forex? Should I protect it in some cases?" And so, I think the natural answer to this or the easy answer to this would be yes, like people would assume yes. "Oh my gosh! Absolutely! You have to hedge your domestic currency risk." I think it can be hedged easily by just trading ETFs or trading currency pairs in other markets. We often trade a lot of the Forex currency type ETFs like FXE, FXY, etcetera, so that's an easy answer. But the easy answer being yes is not actually what we see in a lot of research. There's been a lot of research done recently on currency hedging risk and exposure and I think one of the best ones that came out of the market was a third-quarter report from GMO which basically said they went back and looked through the history from 1995 to 2015 and they looked at all of these emerging market funds and then they basically hedged the local domestic risk of the currency wherever they could. If they had a fund that was trading in Euros, then they tried to hedge the risk of Euros. If they had a fund that was trading in all Japanese industrial companies, they try to hedge all the risk of the Japanese Yen.

What you saw over that 20-year period is that when you actually tried to hedge out and remove the currency risk from each individual market, as a collective, you actually underperformed not doing anything at all. And I think to me, this is fascinating because what we often think about is we often think that we have to hedge currency risk, that "Oh my gosh. I have all this risk in this denomination of currency and so, I have to protect it by investing someplace else." And in some cases, maybe that might be true or if you're moving abroad, maybe you want to start moving your money there, like I can see instances where that happens. But as a framework for investing, it just didn't make sense because the problem was, as is the problem with every hedge that you try to do, is that hedges cost money. Insurance, again, something else happening, whether you do it for free or for a little bit of money or there's some hidden cost to it that shows itself later on in the expiration cycle, ends up costing money and ends up reducing returns. This is no different than people who try to hedge exposure in the US markets by buying put options that are out of the money. That insurance contract cost money and that cost of insurance has to be reduced by your overall gains. I think that this was a really, really interesting case study. There are a lot of other ones that are out there. The Brandeis Institute put together a really good one back in 2007 that you can look up as well. Like I said, the reality is that in many cases, it's probably not worth your time and effort to go through and hedge in many cases, like a smaller portfolio compared to like a large multinational company or an investment bank. It's not really worth it to go ahead and hedge for currency risk.

I thought this was a good question. Hopefully this helps out. If you guys find any other research out there, please let me know. I'd love to see it and like I said, I always geek out on reading other research in other markets as you guys are well aware and we try to bring this to you here in the daily call. Hopefully that helps out. If you guys have any questions, let me know. Until next time, happy trading.

#269 - How To Invest In Oil Jun 18, 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 how to invest in oil. Now, we're definitely not talking about buying oil rigs or investing in offshore drilling platforms, but we're talking about how you can invest in oil if you want to gain some exposure in your portfolio, whether that's directly with some ETFs and tickers or you want to gain some exposure with futures contracts, etcetera. Some of the ways that you can obviously invest in oil is you can invest directly in some of the major corporations that deal in oil, Exxon Mobil, ticker symbol XOP, Chevron, CVX, some of the other ones. There are big names out there you can just search. That's a very direct way to go about it. You can also invest in a lot of baskets of ETFs around the oil market. Some of the popular ones and ones that we actually trade options around as well are XOP which is the spider oil and gas exploration ETF. You have USO which is the United State oil find. You also have XLE which is just energy in general which also includes oil as one of its components and then finally, OIH which is the vectors oil services sector. Again, there's a lot of different ways that you can go about trading oil in your portfolio or oil denominated ETFs or oil focused ETFs.

The other way that you can trade oil if you want to trade it more of a direct fashion is through crude oil futures which is ticker symbol CL or in many broker platforms, /CL, so you can trade futures contracts. We don't trade the futures contracts here at Option Alpha. We have randomly traded some of the option contracts when implied volatility is really, really high in oil. But otherwise, we stick to some of the major ETFs. But futures are a good way if you really have for some reason, some major exposure to oil prices, maybe to a business or a company that you invest in. That would be a good way to hedge that with futures contracts. Hopefully this helps out. It was just a kind of off the wall question that we got from one of our members and figured we'd throw it in here into the daily call. As always, if you guys do have any questions that you want us to answer here on the call or live on Facebook as we've been doing here every single day, please let us know. Head on over to optionalpha.com/ask and just leave me a message. Until next time, happy trading.

#268 - How To Setup An Iron Butterfly Jun 17, 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 how to setup an iron butterfly, so walking through some of the basic mechanics around how you can setup an iron butterfly strategy. Before I even talk about just a very simple example, as always, when we're setting up iron butterflies, we are mainly using our trade optimization and back-testing software to determine how far out to buy the wings of these iron butterflies based on whatever market situation or IV environment we find ourselves in. Oftentimes, if we are trading say 30 days out versus 60 days out and implied volatility is 50 IV rank versus 70 IV rank, that may have an impact on how wide and how we setup our iron butterflies. It's always I guess advised to go back through and make sure that you're using the trade optimizer for what it was built for, the purpose it was built for and that is to optimize positions for market scenarios. As far as a general setup goes, obviously, iron butterflies are the synthetic and risk defined cousin of short straddles. The very first thing that you do to setup an iron butterfly which is really no different across the board, this is the easiest part, is to sell your inside short strikes at the strike price that's closest to the at the money of where the stock is trading. For example, if a stock is trading at $40 a share, you would sell the 40 strike put, the 40 strike call. That sets the foundation of the iron butterfly, it sets the peak and that's the inside short straddle part, that's the synthetic part that you really want to go after.

From there, now it becomes a little bit more of a dynamic approach as to how wide you want to buy wings. Now, as a general rule, what I like to do is I like to buy wings that are far enough out to give us plenty of room to collect a big credit because that's the goal of doing iron butterfly, is just to collect a big net credit, but not too far out that there's no point in actually buying those contracts. Let me use hopefully an example just to prove the point. If we were to sell let's say the 40 strike calls and puts, I might then look to buy the 35 strike puts and buy the 45 strike calls, so doing a $5 wide iron butterfly. Now, if the 35 strike puts and the 45 strike calls are say each trading for say $.10, then I might look to use that trade as the basis for my iron butterfly setup. That's around what we generally like to pay. It depends on the underlying security. But generally, we like to pay $.10 to $.15 on each side and we feel that that's more than adequate for cheapness, but also not too cheap that it doesn't really serve us any purpose. But if we were looking at the same option pricing table now and let's say I looked at the 34 strike puts and the 46 strike calls, so just $1 further out, let's say that those option contracts then only cost me $9. For an extra dollar on each end that I am saving, so by moving the strike prices out one extra dollar, so buying the 34 puts, buying the 46 calls, I'm moving those strike prices out by a dollar, but the savings that I get by doing that is only an additional dollar on each side. If you think about the risk to reward of that change in the payoff diagram, you're basically saving a dollar, but taking on $100 or so of risk and so, for that, we would generally never do.

There's going to be a natural breakpoint when you start looking at iron butterflies. You see where the premium starts to tail off. It's not always that we want to sell the furthest contracts out because that's what Kirk said, to sell them as far out as you can. You want to sell them as far out as you can within reason, so that it still makes sense to do it and you start seeing the option pricing chain and as you go further out, the pricing might start looking something like $30, then $25, then $20, then $10 and then it just tails off and that's where you want to stop. Again, if we look at our trade optimizer, our trade optimizer says, "Hey. This market environment, you want to buy your strikes $10 out on either end, great. We'll go look at the option pricing table. We'll look to see "Okay, hey. Does $10 out on either end accomplish our goals?" Maybe we can actually come in a little bit closer and the $10 out strikes are the same price as the $8 out strikes." You have to be a little bit dynamic with your approach to it and just using the underlying stock pricing table to see where the best approach is. Again, you don't want to be too cheap. You don't want to buy everything for a dollar because it doesn't serve you any real purpose, but at the same time, you want to try to maximize your credit as much as possible. Hopefully this helps out. As always, if you guys have any questions or want to see more training on iron butterflies, see some of the live trades that we've done, just go ahead and search iron butterfly on the website. You'll get a bunch of content on there, including some live videos and some trainings that we've recorded for you. As always, hopefully this helps out. Let me know if you guys have any questions. Until next time, happy trading.

#267 - What Are The Best Trade Tools? Jun 16, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha. Welcome back to the daily call. Today, we're going to be answering the question, "What are the best trade tools that you can use for options trading or for stock trading in general?" I think the best tools that you can use are first, a broker. A broker accomplishes most of the goals or checks most of the boxes when it comes to actually trading. You pair yourself up with the right broker that has great technology, great speed, great customer service, great commissions, etcetera, I think that accomplishes a lot of it. From there, you definitely want some charting software. If you're looking to start trading, you want to figure out how you can get charting software. If you don't get it through your broker, if you can't get good charting software through your broker, you want to use a third-party service provider. Something like tradingview.com is a good alternative. I know a lot of people who are now trading on Robinhood because of the free commissions, but Robinhood does not offer any technicals. It offers very, very minimal charting. It's basically just a line or one day, one week, one month, one year, etcetera for each stock, so really not too much information in there. It just kind of looks good, but it doesn't really give you any details that you might need to make a trade. We suggest people start using a third-party alternative like Trading View or stocktradingcharts.com, something like that that can help out with the charting software.

The other thing that you would definitely need is you definitely need some analytical tools or back-testing tools. Now, of course, we've got our own here at Option Alpha. We've built our own suite of tools for finding, scanning, analyzing and back-testing trades. There are obviously service providers out there who also have their own tools. We think we've put together a pretty good suite of tools for you guys for one time price and kind of buy in to help us cover the cost of additional updates and releases to everyone in the future. Some other service providers charge monthly or charge one time buy ins plus monthly, so just do your homework on these. But you definitely need something to run tests through and to use for scanning purposes. It's not enough just to blindly cover your eyes and say, "Okay, I'm going to trade this today for this reason." You need to know why you're doing that. Is implied volatility high? Is the ticker symbol moving, having a big move up or down? And then from there, trying to figure out what the best strategy is for that market situation. We know there's no unicorn strategy that works best in every scenario. You have to be a little bit more dynamic with your options trading. Using tools that allow you to find the best strategy for whatever scenario you're in right now is really what we've been after for a long time.

And then finally, the last thing is auto-trading capability which practically nobody has, but us right now and I think we're definitely going to be and continue to be the leader in this space for many years and that's the ability to then if you wanted to, setup automated trading bots or machine learning bots that basically make trades on your behalf. They find, they scan, they analyze, they enter, they manage, they exit, they do the whole thing start to finish, A to Z and I think that's going to be the future of what this industry is going towards and we're definitely going to be the forefront leaders in that space. As always, hopefully this helps out. If you have any questions, let me know. Until next time, happy trading.

#266 - How To Adjust Short Straddle Option Strategies Jun 15, 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 how to adjust short straddle option strategies. Short straddles are probably one of our favorite strategies here whether we do them regular, I guess or naked short straddles or we do them synthetically with iron butterflies because sometimes we will sell a short straddle and then buy protective wings because they're really cheap during low implied volatility and basically create an iron butterfly. But a lot of people have confusion on how you should adjust these strategies or I guess there's a lot of confusion on how you should go about adjusting new strategies. Now, the first thing you have to understand is that with these strategies, whether you do them as a regular straddle or as an iron butterfly, is that because you're selling at the money strikes, your first style of adjustment is going to be to go inverted. We're not talking about rolling contracts to the next month. We're talking about simply making an adjustment in the existing month that you're trading and because you're already starting with at the money strikes on both sides, you know wiggle room to adjust these strikes and make them less at the money or make them more narrow without going inverted. The inversion process then is what I think trips everyone up. Inversion is actually really, really easy to understand if you just take a second to slow down and think through the process.

Let's assume that we have a stock that's trading at $50. We sell the 50 strike straddle, so the 50 call, the 50 put and let's say we take in a credit of $5. That means that our breakeven point is $5 above and $5 below our strike price. We're looking for the stock to trade in a range of about $10 in either direction, so up or down by $5, $10 range. Well, because we've taken in a credit of $5, we now have a little bit of wiggle room to make an adjustment where we go inverted on the short straddle by a width that is less than the credit that we took in. Again, I'll say it slower. I just want to make sure I get it right too. Because we took in a credit of $5, we now have the ability to invert the position by $5 or less, okay? Now, that's not assuming any additional credits that we take in. If by inverting, we take in another dollar of credit, we have $6 in total credit, now we can invert the position by $6, okay? It's all based on the credit that you take in. But now, let's say that the stock starts to go against you to the call side, so the stock starts to run up. It was trading at $50, now it starts to go up and now the stock is trading at say $55. It doesn't really matter, but it's trading high enough that you want to make an adjustment. To adjust these short straddles, all you would do is roll up your unchallenged side or the untested side by rolling up your short put and selling an option contract a little bit higher. In this case, if we originally sold the 50 strike puts, we might sell the 52 strike put options, we might roll it a little bit up higher and take in a bigger credit. Now, in this case, we have now gone inverted by $2. We have a short call at 50 and we have a short put at 52 and that $2 inversion is still okay. We still are leaving room to make money because we took in a credit that was more than the width of the inversion. The inversion is $2, the credit that we initially took in before the adjustment was $5, so even if the stock didn't go where we thought it was going to go and came back into the range, it still would leave us with about a $3 plus profit, okay?

Again, the key with adjusting short straddles (not to really belabor this too much longer in the daily call) is just to pay attention to the width of the spreads when you go inverted and the total credit that you took in. You always want to try to make sure that you collect a total credit that is worth more than the width of the inversion and again, always adjust by moving the unchallenged side of the position higher or lower depending on where the stock goes. As always, hopefully you guys enjoy this. If you have any other questions, let us know. We do have some additional training inside of the platform on adjustments in going through this process, so if you want to watch me walk through it on a video tutorial, just search straddle adjustments inside of the Option Alpha platform. Until next time, happy trading.

#265 - Don't Spend Your Life "Avoiding" Failure Jun 14, 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 why I believe and I will try to subscribe myself to not spending your life avoiding failures. I'll tell you a quick little story which I think will help because it really helped me and I kind of (I don't know, for whatever reason) thought that it was impactful on my life which is why I wanted to bring it to your attention. But I was at mastermind event a couple of months ago, the only mastermind that I go to with a bunch of people and we had a chance to meet and speak and sit down and talk with Sara Blakely who is the founder and the woman who runs SPANX, multi-billion-dollar company and she's a billionaire by her own right, very interesting story. And what she said in her story which I think stuck out more than anything was that at their dinner table when they were their kids, her father would go around the table and ask each of them what they failed at that day and if you didn't have an answer, he would actually be mad. He'd be mad at them and say, "Why didn't you try? Why didn't you try something new? Why didn't you try to do something and go out on the limb and let it break?" For her, it was kind of very much normal course of business, I guess if you will to try something new every day and potentially fail at doing it and that was okay because you're pushing boundaries and you're trying to figure out what challenged you or what squeezed you or what tested you. And so, I thought this was really, really interesting because what I took away from this was – Hey, you know, we should stop avoiding all of the things that seem like they could be failures.

I think most people or like let's say average people probably only move forward when conditions are optimal. They look at a job change or they look at even investing in the market and trading. "Well, I'll start trading once I have some X amount of money or once my kids get out of school or once I move jobs." And it's always just looking for that perfect point or that perfect time to make a transition change or make a move, but we know it's never going to happen. The conditions are never going to be exactly conducive for us at that exact moment. The stars are never going to align, so why do we keep looking for this? And it's because we're truly trying to avoid being failures. I think for me and I did a podcast on this the other week on our weekly show, just talking about some of the mistakes that I think I've made and some of the things I've learned in the last couple of years trading and with all the data, is I'm okay recognizing where my downfalls are and where I think I have room for improvement, things that I've learned on the way that maybe I thought were true before and turned out not to be true. I have definitely found that the greatest rewards, I guess in doing all of this have been from the times where I really challenged myself and tried to push the boundaries, tried to do something that nobody else has done and that to me has been really rewarding because once you actually get there, it might take some time and some effort to go through it. I think once you actually get there, it's a great rewarding experience, you feel very successful, you feel very accomplished and I think a lot of people are just spending their entire life just avoiding failure when actually as Sara Blakely said or would say, you should try to go out there and fail a little bit every day and then learn from it. Hopefully it helps out. As always, if you guys have any questions or comments, let me know and until next time, happy trading.

#264 - The Simple Guide To Foreign Exchange (Forex) Markets Jun 13, 2018

Show notes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to try to walk through a very simple guide to understanding the foreign exchange or Forex markets. The purpose of doing this is just to give you guys a little bit of an overview of what the Forex markets are and generally, why they're around and how you could potentially use them if you wanted to trade or hedge in the foreign exchange markets. Again, the Forex market or FX market as it's commonly referred to is really just a huge over-the-counter or decentralized market for currencies all over the world. And so, the point of having a foreign exchange market and having all of these large institutional banks and international banks and financial brokers and interbank markets is basically to set a bunch of foreign exchange rates. And so, the idea is that the market is not necessarily setting a price of any particular denomination of currency, but it's setting it by pairs, so what is $1 if you were to pay $1 in Canadian dollars or if you were going to pay for a dollar in Japanese yen or Swiss francs. That's what it's trying to do, is trying to setup all these relationships between currency pairs that then people can use to operate either businesses, invest in different overseas operations for companies, to move money back and forth or hedge their risk. It's really just this huge marketing pool to control or speculate on currencies, on sovereign governments, on credits, on financial interest rates, etcetera.

I can't understate the importance of having such a huge foreign exchange market as a means for global trade and global economies. For the purposes of trading, the way that we like to trade at Option Alpha when we trade options, it's not something that we typically participate in because it doesn't have a lot of optionable securities and lots of strike prices, etcetera. The liquidity in the Forex market is insanely big, it's definitely the biggest market in the world by volume and trade size, but it's not something that we want to necessarily participate in because I don't think there's really too much of an edge that can be gained in Forex. Forex is really just like stocks as far as directional trading. You're going to make a bet that the euro, US dollar pair is going to go up or down or the great British pound versus the Swiss franc is going to go up or down. That's really how people start trading the Forex market. Hopefully it helps. Again, it's just a very simple overview, so you understand what it is and how it kind of generally works. The biggest benefit to Forex markets is that in many cases, they trade 24-hours a day except on the weekends or through holidays, so there's a lot of liquidity, things can move very quickly and you can even see in some cases, if the currency markets are moving before the regular equity markets are open, it might give you a little bit of a hint as to where things are going with equity or oil prices, etcetera which is all denominated by currency. Hopefully it helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#263 - Stop Discounting The Importance Of Variance In Your Portfolio Jun 12, 2018

Show notes

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we're going to be talking about why you have to stop discounting the importance of variance in your portfolio. The reality is that when a lot of people get started in trading, what they often do is they often over-allocate. This is nothing new. This is something we've talked about at nausea before. And the trouble with over-allocating is that when things go right, it gives you a false sense of false positive that you're doing the right things. You allocate let's say 50% of your account to a trade and the trade goes really, really well and for that reason, you think, "Okay, great. Now, I have to allocate 50% or whatever the threshold is to all of the trades that I do moving forward." The truth is that when you do this and you get those false sense of positives, you eventually run into a string of losers. Murphy's law implies that when something bad could happen, it probably will go happen and many of you guys have been in that situation where it seem like everything's going well and then you have a string of losing trades, maybe five or six in a row and that could really, really crush your account. Using our 50% example again, if you're trading 50% of your account and trying to hit a bunch of homeruns, you could easily find yourself into a scenario where one or two trades or a string of trades totally wipes you out and from that point forward, now you don't have to go and make a 50% gain to get back to zero, you got to make 100% or 200% return from that point to get back to zero just from where you started.

I don't think people really accurately estimate the risk in losing money. The reality is that we want to try to lose as little money as possible. We want to try to allocate our positions as light as possible for our account size because we don't want to get into a situation where sequencing risk and variance risk ends up being something that hurts our portfolio. I would much rather have a portfolio that is steady and slow and growing than a portfolio that has all types of zigs and zags and basically looks like an EKG monitor with huge spikes and huge drops. And so, I think not a lot of people give credit to the fact that when you build a portfolio that's stable and smooth and consistent that that is actually more representational of a high sharp ratio type risk-adjusted return atmosphere or setup than anything else. I think that's the note for today, is just really don't discount how important variance is. If somebody tells you that you can make 50% trading, but the variance is 50%, meaning on your way to making a 50% return, you could lose 50% or make 50%, that to me is not the type of trade that you want to be in. It's important that you know exactly what return you're targeting, but also what the drawdowns could be, what the variance could be in that portfolio because it's just not enough to shoot for a total return. You have to understand the path to getting there. That's one of the reasons why in our back-testing and trade optimization software, we list and show you what the drawdowns are, how often they happen, how often you win, how long the typical drawdown last, how long the longest drawdown last, so you have a really good understanding of saying, "Hey, if I'm going to make let's say 18%, 20% on a particular strategy over the long-term, I might have to hold through a 30% drawdown at some point or I might have to hold through a 20% drawdown." It's just having a good understanding of the road ahead of you, I think makes you a better trader. Hopefully that helps out. As always, if you guys have any questions, let me know. Until next time, happy trading.

#262 - Cheapest Options Trading Brokers Jun 11, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com where we show you how to make smarter trades and welcome back to the daily call. Today, we are going to be talking about the cheapest options trading brokers. And when we say the cheapest, we are naturally talking about the option trading brokers that have the cheapest commission rates. Now, before we get into what I think are the top three as far as cheapness goes and commissions go, I just want to make one disclaimer and that is that in most cases, you get exactly what you pay for when it comes to an options trading broker. Although it might seem a little bit tempting to go with the absolute cheapest broker and in many cases, that might fit your needs very well, you have to understand that the reality is in this business, commissions are a cost of doing business and if you go with a broker that charges commissions, you will likely find yourself in a trading platform and in an environment that might end up making more money because of the broker charging commissions. I'll explain this thought process here in just a second.

The three I think cheapest options brokers out there and I'll start in order of cheapness, so the ones that costs the least, all the way up to the ones that cost a little bit more. I'll start with obviously, Robinhood. Robinhood is the cheapest broker because they actually charge no commissions at all. And yes, that seems too good to be true, but it actually is, the fact that they do charge no commissions. There are no commissions to enter, no commissions to exit and no commissions to assign or exercise contracts. Robinhood has grown tremendously in popularity and we had the chance to interview their cofounder and one of their CEOs, Baiju Bhatt on our regular weekly podcast. You can just search Robinhood on our platform and you can check out that podcast and my interview with Baiju. But I think the thing with Robinhood that I do realize is their growth pain point. It's that although they offer a very cheap platform as far as commissions go with no commission cost, the reality is that the technology and the indicators that you get are virtually nonexistent. They have really streamlined themselves into being the lowest cost provider, zero cost to the end user, to the retail trader which means that they cut out all the frills and everything else that you could you with other brokers. In fact, at the time of this recording, they don't even yet have the ability to do advanced order functionality like spreads, iron condors, iron butterflies, etcetera. Rolling seems a little bit costly and it seems like it's not as intuitive as it should be. There's no charting, there's no indicators, there's no IV rank, none of that stuff is included, so you really get like the barebones of what you want to do.

The next layer up from that, so the second I guess cheapest broker would probably be a tie almost, depending on where you're at in the world and what type of account you have. It would probably be a tie between either Tastyworks or Interactive Brokers. I'll start with Interactive Brokers because I think Interactive Brokers has probably the cheapest commission rates and in many cases, the stock commission rate is pennies, the options commission rate is also under $1 in many cases per contract. Again, with Interactive Brokers, you get a huge ability to cut some cost out of your platform and out of your portfolio by going with a very cheap broker. But very much like Robinhood, the limitation to Interactive Brokers is the technology and I would dare to say that unfortunately, the Interactive Brokers' technology and platform for anybody who's even tried to use it is so old and so archaic that it really becomes cumbersome and hard to use. I know a lot of people like it, a lot of people are used to trading on it, I for one have tried many, many times to trade on Interactive Brokers and use their demo software, but it is really, really old. It's like going back to 1997 and using like a Windows 97 version. It seems so old and so outdated, but it is what it is. It's their structure and again, you get what you pay for. Very cheap commissions, lots of ability to trade internationally, so that's why it's good for people who are trying to trade internationally in options, but unfortunately, it's a really, really bad platform, terrible to use, the mobile platform is nonexistent, basically, so it's really, really hard.

The last one then is then Tastyworks which I think is a happy medium in many cases for a lot of reasons. I think the technology is good. I think that they're obviously improving it and trying to make it better. We are trying to partner up with them once they release their public API to integrate into our auto-trading and bot software, but it's not something that they actually allow people to do yet, so nobody's able to integrate to their platforms which is why we're just waiting for that to happen. But their commissions basically started $1 per contract with no closing trade fees and then have a maximum of $10 per leg. There's kind of this dynamic pricing model that they run which I think ends up being very, very cheap and when they actually came out with their pricing model, they were the lowest before Robinhood officially launched into options trading. But with Tastyworks as opposed to Robinhood, you actually do get a full-fledged trading platform with indicators and the ability to manage positions, etcetera, so I think it's a happy medium and again, you get what you pay for. Yes, it cost a little bit in commissions, but I think the commission cost that covers the platform and the technology more than pays for itself.

My rub with a lot of these low-cost providers is that (and especially with the likes of people like Robinhood and other low-cost providers are starting to come out) because of the inefficiency of the technology, the commissions that you save are more than overshadowed by in many cases, the slippage or the inability to get into or out of contracts quickly that you find in these platforms with bad technology. To use an example not necessarily to pick on Robinhood totally, but if you have to get into or out of a contract and let's say you want to do a spread trade, because you can't do a spread trade right now in Robinhood in one single order, that creates a real problem because if you let's say buy one leg for $10 and you're hoping to sell the other leg for $15, between the time that it allows you to buy one leg for $10 and sell another for $15, the price may have moved up to $16. Now, you have some sort of pricing inefficiency where you thought you were going to get let's say a $5 spread, now you might get more, you might get less, but that slippage can be really dangerous. And if you don't have the ability to actually do spread trades or do dynamic pricing and to do stop losses or trailing stop losses or market orders or non-market orders, that creates a real inefficiency and that slippage and that inefficiency from technology is not directly felt by the user. You don't feel that necessarily because you don't see it on your statement that you maybe could've priced that strategy for $1 better or $2 better per contract, but that's exactly what happens. And so, in so many cases, even though cheap commissions are a really big draw for a lot of people, it ends up creating an environment where people maybe take on more risk than they necessarily think they're doing. It could be a little bit dangerous. Again, just take your time with it, as always. I always tell people like – Use whatever broker platform fits and suits you. Many have really good rates to start off with, so you can trade commission free or get used to their platform. They have lots of demos. We obviously have lots of training on all kinds of different option platforms on our website already, so you can check out some of the training that we have for free and pick and choose which one you feel most comfortable with.

As a side note and a reminder, we do use Thinkorswim because it integrates with our options trading software. Like I said, I want to expand that out to other brokers like Tastyworks and like Robinhood in the future, although they don't offer and neither of them offer public APIs to be able to connect into. Although we'd love to expand our options trading technology, auto-trading technology to other brokers, we also need them to allow you guys and us as the users, the ability to access their platform with our technology. Anything you guys can do to help out, just sending them emails and requests and saying, "Hey. We want to connect our Tastyworks or connect our Robinhood account with Option Alpha." the more that they hear from people like you in the community, the more willing they are to open up those channels to us in the future. That all being said, even though we trade with Thinkorswim and their public rates are a little bit high, you do have the ability to negotiate them lower. We have negotiated much of our options trading and stock trading rates to the same ranges that you find at the Tastyworks and the Robinhood's of the world, so you do have the ability to negotiate commissions lower. I always suggest that you do that and we obviously work with our members to get them low commissions as they get started with our auto-trading technology. As always, hopefully this helps out. If you guys have any questions, let me know. Until next time, happy trading.

#261 - How Do You Make Money Buying Non-Dividend Paying Stocks? Jun 10, 2018

Show notes

Hey everyone. This is Kirk here again and welcome back to the daily call from Option Alpha. Today, we're going to answer the question, "How do you make money buying non-dividend paying stocks?" This is a question I think a lot of people have. In fact, this recently came up at a family barbecue because somebody asked in our extended family. He said, "You know, I was talking to somebody…" They were talking to their financial advisor, whoever and they just didn't really understand why people would buy non-dividend paying stocks and I think this is actually a very old mentality, meaning that people in the old days, I guess maybe 30 or 40 years ago, the big thing was you had to buy stocks that paid a dividend because you wanted that income, you wanted that cash flow. Nowadays, not all stocks pay dividends. We know this intuitively. I think some people are starting to learn this which is actually kind of interesting that this is not something that everybody knows and everybody understands the market. But there's companies who choose not to pay a dividend and they choose to then reinvest the cash flow and the capital from the business back into growing the business.

Again, the question becomes, "How do you make money buying some of these stocks or investing long-term in these stocks?" And it's really just about forward expectation of growth. With a dividend paying stock, the company is taking money and cash flow that it receives through its business activities and paying out a percentage of that to its investors. Now, if you think about it logically, if the company is choosing to then pay out that money, then that means that in some respect, they are choosing then not to reinvest that capital that they're paying out to investors in the form of a dividend and they're choosing to not invest that money into growing the business or to investing in plant and capital and equipment. There's an interesting dynamic there where you could actually make the argument that in some cases, if there's a low dividend paying stock out there or say they're paying a yield of 2% a year, why isn't that company using that money to then generate even more money and capital for the business and grow the business even further? Interesting dynamic maybe for a different topic.

But when you look at a company that's not paying a dividend and they choose not to pay a dividend deliberately, it's because they think that investing that extra money can grow the business at a much faster rate. You see this a lot in tech companies where tech companies obviously choose not to pay out any dividends because capital is so important and so, one quarter, they might grow it 10%. And so, people buy up their stock and let's say they buy the stock up to $100, so now, the value before the next quarter is $100, but the company announces earnings and now, the expectation is that they've grown more than 10% and yes, they announced earnings and now, they've grown 20% quarter over quarter over the last year. Now, the stock goes up in value because hey, look, the company is growing at 20% now instead of 10%. And that's how you increase the value of the underlying security and basically, get a return on your investment as an investor in non-dividend paying stocks, is because the company is growing its forward expectation at a much faster pace.

The caveat to that is that once it starts not growing at the expectation that everybody has, then the stock starts to retreat. If everyone is expecting the stock to grow 20% quarter over quarter and now, the stock announces earnings and they only grew at 18%, well, they're going to start trading lower because now, growth is slowing and so, the expectation is it's not going to be worth this much in the future as maybe we thought initially. We thought it was going to be growing at 20%. Now, it's growing at 10%. I think in either case, it's really interesting just to hear people's comments on this. I really kind of geek out and ask people a lot of questions curiously all over the place when I meet people. When this topic comes up, I like to hear their thoughts on why they are choosing a dividend paying stocks versus a non-dividend paying stock and I think it's really interesting. I just wanted to add that today because it was a question that came up and I thought that it would be helpful to talk about it a little bit more on the daily call. As always, if you guys have any questions, let us know, optionalpha.com/ask and until next time, happy trading.

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