The "Daily Call" From Option Alpha

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#241 - The "Unicorn" Options Strategy Theory Destroys Many Portfolios May 21, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about why the unicorn option strategy theory destroys many portfolios. The unicorn option strategy is just this concept that there is one overarching strategy in the market, the best strategy, the ultimate strategy, whatever you want to label it as. There's one option strategy that is the perfect strategy in every market environment. And so, if you could only find that one perfect option strategy or that one perfect indicator, then you wouldn't need anything else. And the reality is that destroys a lot of portfolios because what people end up doing is they're treating all market situations as exactly the same which is what we shouldn't be doing. We should be more dynamic in our approach. We should change and adapt our strategy somewhat to different market situations.

And so, I'll use an analogy because I thought this… And this is really what sparked this idea today for the call, is I was reading a book on parenting and a line in the book said, "If you want to treat all of your kids equal, treat them differently." And so, it's this concept that all of our kids… And I say this as a parent because I've got three kids now. All of our kids are different. They're all unique individuals. They're born at different times and they learn and they develop at different trajectories and they learn different things and they have different experiences. And so, if I want to be a great dad and a great father and if I want to teach them and treat them the same, I have to actually treat them differently. I have to adapt and change to their particular needs and their requirements and what they need to grow for me. Like our first two daughters, they have totally different needs. I mean, we've raised them the same, basically. They came in at the same household, same mother, same father, same family, but they're totally different people and so, we have to adapt and change to their needs.

It's the same concept that you should use for trading and investing, is that you can't use one unicorn strategy that always works in every situation. You have to change and adapt to the market environment. If implied volatility is high, that means that maybe you should do something a little bit different. If implied volatility is high and you're 60 days out versus 10 days out from expiration, maybe you should do something a little bit different. Now, the core concepts of what you should do don't really have to change. The principles of what you do don't have to change. It's like kids. Like we have the same rules, we have the same requirements for them. They have the same chores. It doesn't matter if you were born five years ago or three years ago. We have the same standards, but how we go about teaching and learning that is a little bit different for our children. And so, the same thing applies I think in the options market. You have the same core principle of option selling, small positions, increasing your frequency, but how you go about it, the strike prices, the contract months that you select might be a little bit different from time to time.

I thought this concept was really important and hopefully, it helps out because I know a lot of people are always looking for the quick fix, the magic pill that's going to solve all their issues. We all know. I mean, look. We're adults. We all know that there's no magic pill. There's no one strategy that always performs best in every market environment and so, what we're trying to do is trying to find what strategies perform better in some situations versus others and try to be more dynamic in our approach and I think that's really the gist of what we're trying to do here today in this podcast. Hopefully that helps out. Hopefully the concept resonates with you. I'm sure it will if you do have children. If you don't and you plan to have children in the future, you will definitely going to lean this potentially the hard way as you try to raise multiple kids and you try to do it the same. The kids are all just different anyway, so they just come out totally different and that's something you just lean as a parent, I guess. Hopefully this helps out. Until next time, happy trading.

#240 - Why I Believe Options Trading Is Seen As A "Dirty Business" May 20, 2018

Show notes

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why I believe options trading is seen as a dirty business. I use the word, dirty business because that is the word that somebody used when they were arguing with me and trying to tell me that options trading serves absolutely no purpose in the market, basically that it should be outlawed, it should not be something that people can do, there's should be no way that people could trade options. I was trying to explain to this person why options trading and the derivatives market in general serves a very important purpose and position and role in an efficient market and in a mature and growing economy or global market. The idea here is that with an options or derivatives market, you have the ability to transfer or remove risk and that's really what it comes down to.

If you think about it like insurance because that's really the easiest way to do it, when you buy a house, you are able to take a little bit of capital from the amount of money that you used to buy the house or what you have in your annual income and you're able to buy insurance on that house, so that if that house burns down or floods or gets hit by a hurricane or a tornado, then the insurance company is taking on the risk of replacing your asset, your thing that you want to protect. And so, if that's true that options trading serves no purpose in the market, then it would also be true that we should never have insurance companies and we should never have health insurance because it's all about transferring risk. If people are willing… And this is the key here. It's got to be both parties who are willing to do this. We don't hold a gun to anybody's head and say, "You have to trade options. You've got to buy these option contracts." People are doing this because they want to transfer risk. Whether they want to do this to hedge a position or they're just speculating on the transfer of risk, they want to transfer risk by buying and selling option contracts and it's like insurance. People want to buy insurance on a house, so that if the house burns to the ground and they don't have hundreds of thousands of dollars to replace the house, then that small contract, that small investment for buying insurance on that house pays huge dividends because they don't have any risk if the house burns to the ground.

That's where an options or a derivative market comes into play. That's why it's so valuable because it allows people to transfer and mitigate risk. And so, when somebody is trading say a particular stock, if they want to hedge that position, they can buy a put option on that and that put option, that premium that they pay goes to the put option seller, probably in this case, potentially Option Alpha members because we're willing to take on that risk. And if the stock tanks, then we have to pay out on that put option contract. It's either black or white. Like we either pay out or we don't. That's the same thing with insurance. We're taking on the risk that they don't want to take and for that, we charge a premium or insurance companies and option sellers have to get paid a premium. We got to get paid something to take on risk that potentially won't happen and in many cases, won't happen, but if it does, we have to take on that risk. That's why I think that people see options trading as a dirty business because they see it and they just don't really understand what's going on.

Now, again, a lot of people are not really hedging. I mean, many people are speculating. Believe me. I see it all the time on all these Facebook groups and forums and people emailing me all the time with crazy ideas and speculations. But the core of what they're still doing is they're transferring risk from one party to another. When you buy an option contract assuming that the stock is going to make a huge run-up or a huge move down, you're basically saying, "Hey. I want to participate in that, so I'm going to transfer the risk to you, assuming that it's going to happen, that this event is going to happen and I'm going to get paid this huge windfall." It'd be like buying insurance on a house and then deliberately hoping that it burns to the ground. That's what people are trying to do. It doesn't mean that they'll do anything wrong or bad. It's just what their thought process is in trading. And so, I think the options market is really important. The derivatives market is insanely important. If you think about futures contracts for people who invest or trade and deal in commodities like corn and weed and oil and soybeans, I mean, those markets are insanely important to help spread and manage risk. If you have a company who has a huge stake and one of the inputs to their system is oil and gas, then trading in the futures market is a way to stabilize their business, so they don't have to go through all the ups and downs of the oil market. If they know what their profit margins are and can sell or buy futures contracts to control and maintain their exposure to the oil markets, that helps and without that, you'd see a lot more companies going into and out of business probably a lot quicker and not having the ability to control their risk.

Hopefully this helps out. If you want to really help us out by sending this podcast or sharing this episode with somebody who you think you've had a little bit of a discussion on with options trading and they don't really understand it, they don't see what the purpose is, hopefully this helps clear it out a little bit more and shed some light on this topic which is my goal in doing this. As always, if you guys have any questions, let me know and until next time, happy trading.

#239 - How Loss Aversion Behavioral Finance Applies To Options Traders May 19, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about how loss aversion and behavioral finance applies to options traders. What is loss aversion when it comes to behavioral finance? It's this idea that we, as humans and investors, we value gains, but we only value gains a little bit compared to losses, meaning that the pain of a loss is significantly more than the pleasure or than the gratification that we get through having a gain. If you look at a simple concept of say – You are given $50. You might think to yourself, "Okay. That's awesome. I'm given $50." But if I give you $100 and then I take $50 away from you, that pain of taking away that $50 after you had $100, even though you're left with the same $50… Instantly in the same moment, I just give you $100 and take $50 away, the pain of losing that $50 is way greater, sometimes two or three times greater than the pleasure that you got from getting the original $50, even though you ended up at the same place. It's this fear of loss that we have, this loss aversion and we'll do anything, basically to avoid a loss and squeak out a small gain. In some cases, we'll take on massive risk to be able to do this.

This is why I think that many people when they get started options trading and I definitely know this because I see it all the time in forums and Facebook groups, etcetera. There's a ton of people right now who are trading on Robinhood because it's free and all they're doing is buying options and they think it's amazing because they take an option contract and they buy it on a penny stock and they buy it for $.2 and it's worth $.4 and so, they have a 100% gain. It's crazy what people are doing right now, but our fear of loss is so great that we are willing to take on undue risk to potentially make money. In the case of buying options, people will buy options contracts because they have defined risk because you can only lose the $50 premium that you put into it, so why not? There's all this upside potential. It's like a lottery ticket. People know they lose money on lottery tickets, but yet, every single month, it seems like the jackpot or the Powerball or whatever it is always goes up in value. It's the biggest it's ever been this month and then next month, it gets eclipsed. Why do people do that when they know that they're going to lose money on this? And it's because we have this fear of loss. If we can invest a little bit of money with all of this upside potential, then that's better than doing the opposite. But the reality is that when you do that, your probability of success, your probability of actually making money is dramatically lower, so you're taking on all of this undue risk just because you have this fear of actually taking a loss.

This also means that people start getting into trades on the option side where they start letting positions go, trying to make as much money as possible because they fear a loss. If they have a position and if I send out a trading order that says, "Hey. We're closing this position at 25% or 50% profit target." A lot of people will still leave the trade on even though statistically, it's better to close these things out. We know this from back-testing, closing them out at profit targets and recycling the capital a little bit faster. People leave those trades on because they fear losing money that they try to stretch for these outsized gains, these huge gains potentially in the market and what they end up doing is crippling themselves in the process. They're reaching higher, but at the same time, they're cutting themselves off at the kneecaps. We see this a lot. The same thing happens on the other side with losses. People fear a loss so much they'll do anything to adjust out of it. And sometimes, you just can't adjust. Sometimes, you're going to take a loss which is why position size becomes super, super important when you're trading options because we know we're going to take a loss on trades, we know we're never going to have trades that go 100% our way. Stop fearing the loss. Stop looking for that loss aversion max potential pill that could turn things around and not create a loss and you'll do anything to do it. You end up digging yourself deeper into a hole.

I was actually on a call with a coaching client who has a significant amount of capital. We're not talking about $10,000 or even $100,000. We're talking about multiple million dollars of trading. And they were looking to roll a position to the next month and while rolling, they were going to increase the position size and double up on the number of contracts that they had because they felt that that would be the only way that they could turn the position around, is to increase the credit and potentially hope it works out. I was trying to teach them and coach them and say, "Look. This is a trade that just didn't go well. This is one trade of a basket that was okay this month. This is a trade that didn't go well. Why are you trying to increase your position size and double up on the contracts? You're basically digging yourself into a hole, hoping that there's a little bit of light at the end of the tunnel, so that you don't have to deal with the reality of a losing trade. But it's much better to deal with the reality of a loss now and just move onto the next trade than to try to avert the loss or avoid the loss by doing something you wouldn't normally do." Hopefully this helps out. I think it's a really interesting concept. I love just how people behave and how they act around money and finances. It's totally interesting to me. I geek out on the subject completely. If you have any questions or thoughts around this, let me know. Until next time, happy trading.

#238 - Why Being Lazy Ironically Is A Great Trading Strategy May 18, 2018

Show notes

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we're going to be talking about why being lazy ironically is a great trading strategy. Although we want to be active in entering new positions, once we get into new positions 6and we have a balanced portfolio, we've taken care of the position sizing issue that plagues a lot of investors, the reality is that being a lazy trader from that point on is actually not that bad of a strategy. Basically, don't touch it, don't mess with it. Stop fidgeting with your trades and trying to overcorrect them along the way. Let the numbers, the probabilities, the system work its magic, basically. Let the probabilities work themselves out over time. I find this a lot with new traders because we get into new positions and immediately, a stock starts to move because that's Murphy's Law. What's going to go bad ends up going bad, right?

And so, as soon as the stock starts going against us just even by a small margin, you have one losing side or one position starts losing and immediately, the thought is, "Well, I have to adjust. I have to tweak this. I have to correct this." But you just have to let it go. You have to be diligent and mechanical enough to say, "You know what? I've got this profit target. I've controlled what I can control (like what we talked about just in the last episode yesterday) and from here on out, I just have to be patient and let the system work because patience actually pays a lot." That's where our implied volatility edge comes from. It comes from the patience in seeing volatility mature into pricing that is favorable for option sellers. Being lazy is not a bad thing when it comes to managing positions. Let them go. Control what you can control. Let the position go mostly towards expiration and then at expiration or the last couple of weeks of expiration, if you need to adjust and start hedging or managing the position, okay, do it at that point. But for the most part, just don't touch it, don't mess with it. Let the numbers do what they're supposed to do.

One of the things that we found in our back-testing research for the profit matrix which you can look up on our website is we found that many strategies that really had no discernible management of any kind when it came to losses, whether that was stop-losses, no rolling, obviously, actually performed the best. When you just let the trade go, took profits when you're supposed to take profits which can be an automatic thing… You can set that up and then be totally lazy and let the automatic closing orders do what they need to do. But as far as managing trades that go against you, we had many, many strategies that when you actually let the trade go, no stop-loss, if it was not profitable, it went to expiration as a loss and it was closed out, that actually outperformed many strategies that had stop-losses or really aggressive adjustment strategies because sometimes when you mess with something way too much, you actually reduce the value that that initial strategy created because you're just tweaking it and messing with it so much, you just basically beat it up with analysis paralysis and tweaks, it cripples the foundation of what it was meant to do.

I think this will be an interesting case study generally when we start doing more of the auto-trading and doing more of that publicly because for me, I've said a couple of times now what I'm going to be doing is setting up a lot of automated bots that trade very simple strategies and then letting them run and being pretty much hands-off with them. There's going to be not too much adjustment, they're not going to be overly-complicated bots that we're setting up and I think it's going to be interesting to see how that plays out over the next couple of months and years because I think what people look back on is they'll look back on some of these and say, "That really wasn't too complicated. Why did it do so well?" And it's because it wasn't complicated and I didn't mess with it too much. I'm really interested in building out some more of those and obviously, sharing what we're doing here with you guys. If you think this has been helpful, let us know. Leave us a rating and a review on iTunes. As always, if you have any questions about trading or want to get your topic answered here on the daily call, please leave us a message at optionalpha.com/ask and until next time, happy trading.

#237 - Day Care & Options Trading Risk May 17, 2018

Show notes

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be talking about daycare and options trading risk. Yes, I know what you're probably thinking. You're probably thinking, "What on earth does daycare have to do with options trading and particularly, risk?" But I think you'll find this little analogy helpful because I think it does help as far as understanding conceptually what we try to do with our trades.

The reason I say daycare is because when I first dropped off my daughter, my first daughter, Molly to daycare… And this is back when I was actually working. And so, we had Molly and I had a job and I was still working and I was doing Option Alpha in its infancy on the side and thinking about leaving, etcetera. And I remember dropping her off and literally crying the first day because this new lady that we know and we've interviewed necessarily, but we don't really know this person, we haven't spent a lot of time with this person who's going to be now managing my whole world, managing my child and I'm placing all of my confidence in this lady when I dropped off my daughter, Molly for the first time and then left. I assumed that I dropped my kid off at daycare and everything is going to be okay. But look. The reality is that you assume some sort of risk for their safety and well-being. I mean, there's only so much you can do to manage the risk of that person that's taking care of her. You can check references, you can look them up online and make sure they've got all the right credentials and they have a business that's registered and they're supposed to be a childcare provider. You can do everything that possibly you can do. You just can't control that person just paying attention to your kid. I mean, there's a possibility that you drop off your kid and the kid just basically sits there all day. I don't know. That's the stuff that I was really grappling with, is really making sure that this person was taking care of my child and really forgetting all the other kids that were there, like focus on Molly, don't do anything else.

But this concept applies really to options trading as well because there's only so much that we can control. And so, you have to realize with trading in the markets and investing, you only control what you can manage. I can't control the markets and I know that and people don't learn that initially. It's not intuitive, but people try. They hope and they wish and they'd fight back against the market and they say things like, "If only it'll come back up." or "If only it'll go back down." But we can't control the markets. And so, we have to learn what things we can control, like position size and what underlyings we trade and what strategies we use because after that, you can't do anything else. With an option trade, you can only do as much as you can do and I think this concept is really important. It's like daycare. You can only control so much and after that, you basically have to say, "You know what? I can't control this and there's a risk all around this." But we have to manage what we can manage and I think that's really the key to this daily call today, is just managing what you can manage and understanding and accepting that everything else is a risk that you can't manage and you can't change it. I can't change what Trump tweets or what this company does or that sector does. I can't change any of that stuff, so I have to be willing to work and manage around it as best as I can. And so, hopefully that helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

#236 - This TLT Rolling Trade Took 3 Months To Turn A Profit May 16, 2018

Show notes

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we are going to be talking about our TLT rolling trade that took three months to turn a profit. Now, if you want to get a copy of the video version of this which is sent out to our members, the one that was sent out to our pro and elite members when we actually completed the trade and did the analysis visually on a video, you can just search on our YouTube channel, TLT option assignment case study, $700 loser to $96 winner and again, you can get another version of this. But we're going to be going over it here today in the daily call, the highlights of this trade that we did. The basis of the trade that we did it TLT was just a simple iron butterfly trade in TLT that we entered into back in the beginning, January of 2018. We ended up closing the full position finally for a win, a $96 win after all adjustments back on April 2nd. It was a long trade. It was more than three months basically of holding this position and having to roll it twice through two different expiration cycles before we were able to finally turn a profit.

The point of doing this and talking about it and nausea, not only on the YouTube video that we linked up here, but also on the daily call podcast is the concept of rolling for duration and extending the timeline of a trade when possible. This TLT trade, literally from the first day that we entered into it went totally sideways on us. If you go pull up a chart of TLT from January of 2018 to basically April of 2018, you can see in January and then in February, TLT basically tanked and it went down significantly and blew through our strike prices. We really didn't even have a chance in the first expiration month. But as soon as we started reaching that first expiration month at the end of February, we knew that we were able to roll for a total credit, for a net credit because TLT tanked and implied volatility went higher. That's something that a lot of people don't do. They usually just take the loss and move onto the next trade. They don't look at adjust. They figure your first loss is your best loss. It's a common thing that we hear all the time. But I really don't subscribe to that. I think there are a lot of things that you can do with a trade, to roll and extend duration and turn something around from potentially a crappy situation into either a less crappy situation or potentially, a profitable trade.

As we got to February expiration, obviously, our position was way in the money, but we were able to roll for a total credit. The reason that that's important is because if we can roll for a credit and not increase our position size, we never added more contracts, we never made our spread width wider, (you can see that on the video when you search it on YouTube) we never did any of that. We basically kept our position size small and all we did was roll for a credit. When you roll for a credit, you reduce risk because if your position size doesn't increase and you're taking in more money, that means you have less risk if the trade continues to go sideways. My thought on that is always that if I can roll for a credit and reduce risk, why not also give myself another 30 days or so to potentially see the trade turn around because if it doesn't turn around in another 30 days, at least I've reduced risk in the process. If TLT stays lower, then at least I've reduced the amount of money that I would potentially lose.

Well, fast forward to March expiration now, so we rolled the contracts from February to March, we got to March expiration and sure enough, TLT did not move. Again, you pull up a chart of TLT, you saw basically between February and March expiration, TLT traded dead sideways and for us, that was terrible. We still wanted TLT to rally back up to where we had originally sold our first iron butterfly position and it never really did in March. Again, we were able to though, roll our contracts to the April expiration and rolling those contracts again, gave us a net credit. We didn't increase our position size, didn't increase the spread width. We just simply rolled the contracts from one month to the next and took in a credit, again, reducing risk along the way and giving ourselves another 30 days to potentially see some sort of market cyclicality play out. And sure enough, after we rolled those contracts, about two weeks after we've rolled those, the market did rally for bonds shortly before it started tanking again, but we were able to get the position off on a quick rally up in TLT and we closed the whole thing for a net $96 win after all adjustments.

The key here with this type of case study and the reason I again, want to talk it about so much is because a lot of people just give in and throw in the towel with trades and that's really the worst thing you can do. You want to be able to roll trades for a credit, extend the duration on trades and have a little bit more patience that market cyclicality is going to come back around. Now, some people said and people always say this every time we post a video like this. "Oh, we just got lucky. Oh, it was just a one-off scenario." I think I've counted before, there are probably 35 different cases, at least 35 different cases where this has happened before to us in the past, most recently in IWM. It happened in OIH. It happened in XLU and XRT and EWZ. It happens all the time. Markets are cyclical. And so, as long as you can give yourself enough time for some sort of cyclicality to come into play and up-and-down movements to happen over time, if you can extend your trading duration and reduce risk in the process, I think you'll be a better trader overall.

In this case, this took one of those huge potential losses and actually turned it around into a winner, so it was another good example of how extending trades and rolling for duration helps break the zero-sum game that most people assume happens with trading. Yes, if we would've just let the position expire and took the full loss the first month, that would've been totally what happens in a typical zero-sum game. You win a couple of small winners, but then you have a really big loser. But we took this potentially big bad trade and by extending and rolling, we're able to turn it around into a winning trade. It's a really cool little case study. Again, you can search for it on YouTube. Just search TLT option assignment case study and you should be able to pull it up. As always, hopefully you guys enjoy these. Until next time, happy trading.

#235 - Hidden Mutual Fund Fees Are Killing Your Portfolio Growth Curve May 15, 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 hidden mutual fund fees that are killing your portfolio growth curve. I assume actually, most people who are listening to this podcast probably don't have mutual funds just yet. But if you are listening or if you're new to Option Alpha and you do have mutual funds, hopefully this will help out because undoubtedly, at least a couple of times a week, probably at least like five times a week, I get an email from somebody wanting me to review their mutual fund positions or their portfolio which I don't do. I don't do that generally unless you're a coaching client of mine. I just don't have time to review everyone's portfolio, nor do I want to. But I get people who are always saying to me, "What about this mutual fund and what about that expense ratio?" And so, I wanted to do at least a quick chat about it because I think there are things that people don't really consider when it comes to mutual funds that might help out.

First things first, I don't think that I'm actually totally shocked that people still invest in mutual funds because we know most mutual funds have higher expense ratios than say an ETF or an index fund. I think the average expense ratio is at least over 1% still for most mutual funds. At least that's according to Morningstar right now. And that expense ratio can actually trim a lot of your nest egg. If you think about how money compounds and how just even a 1% difference, even though it doesn't sound like a lot, actually can really dramatically trim how much money you have after 30 years of investing. In many cases, it could trim hundreds of thousands of dollars and you don't even really realize it. But there's another kicker that's really not seen. Most people can see what the expense ratio is. That's easy. But there are some things that are not seen or kind of subsurface fees that we don't even think about. One is the cost of owning a mutual fund and having money sit in cash. Actually, a lot of mutual funds have some sort of cash balance or they'll probably always have cash because of redemptions and rollovers and what they invest in. And so, that cash balance actually sits in cash in the mutual fund, but you still pay an expense ratio because it applies to the whole fund. That's really again, trimming some of the fees. It's really bloating some of the fees that you see inside of your account. You don't really feel that necessarily, but you don't get paid for money sitting there. You get paid for money that's actually at risk in the market. In this case with many mutual funds, you're actually paying money in an expense ratio for money that's sitting there.

The big one for me though is transactions. Transactions are not something that's typically in an expense ratio. In fact, it takes a lot of work to go back through a mutual fund's history and the prospectus and see how many transactions or how frequently they rebalance. But let's take one of those target date funds because that's always fun and interesting. People always look to invest in a target date fund. If you're going to retire at 50, invest in this. If you're going to retire at 60, invest in this and we'll automatically allocate your portfolio as you get closer. Well, all of those transactions cost money. There was a study done by Edelyn Evans and Cadillac(?) which found that the average transaction cost for mutual fund, just the buy and sell of everything was on average, 1.44% per year. Now, that's not included in the expense ratio. You have your regular expense ratio for just basically running the fund in the expense of getting into the mutual fund, then you have these transaction cost and depending on how frequently they "rebalance" your portfolio, then you have all of these expenses that basically start adding up. The more often they rebalance, the more expenses that you see and then on top of that, if you rebalance within the same year, now you start throwing in taxable gains, short-term capital gains versus long-term capital gains. It really becomes something that… It's no wonder why actually a lot of people are still financially unsecure and are not retired even at older ages now. Even at 50s and 60s and 70 years old, people are still working because some of these things are just not seen and not really felt in your account necessarily.

I think most mutual funds now really, if you add up all the expenses and the transaction cost and money sitting in cash which is unutilized, money at work right now, I think you could easily make a case to say that most mutual funds are probably in the 3% plus total cost, everything rolled in and that's insane. I think that's crazy. You're already at such a disadvantage by just having that right there that it's really, really hard to make money because you have to make that much more money on top of just the total cost, plus inflation. It really, really becomes difficult. I actually am just shocked why people still invest in mutual funds. I don't know if this industry will last. I think it's basically dying, but it seems like it's taking a while to completely go away. Anyways, hopefully this helps out. If you thought this was helpful, please send it to somebody else that you think invest in mutual funds and would love to hear this. I think it's just worth a conversation at least with yourself or your financial advisor or whoever else manages your money in your account to really take a hard look at these and see what you're paying and what it all adds up to. As always, hopefully this helps and until next time, happy trading.

#234 - Stock Trading Seminars & Bootcamps - Still Worth Going? May 14, 2018

Show notes

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be talking about stock trading seminars and boot camps and answering the question, "Are they still worth going to?" For full disclosure, I do have a soft spot in my heart deep down inside for stock trading seminars and boot camps or any investing seminars and boot camps because the honesty is that I got really a good push in the right direction, I guess and pushed down the path of learning more about finance and investing and markets because my mother dragged me to a stock seminar back when I was in high school. I wouldn't say she dragged me. It was actually something I wanted to do, but I wasn't totally interested in it, I was kind of sort of interested in it. I was really looking to get a couple of days off the school and so, my mom took me out of the school and we went to this trading seminar together and I think it was a two or three-day event.

I remember vividly and after walking away from that, I had much more clarity about finances in general and where I just wanted to go. It really ignited a little bit of a passion inside for me and led me down the path of everything I've done since then. That's my soft spot. The other side of that is that I do remember getting pitched to death at that seminar and I was probably 16, 15 or so in high school and was getting pitched to death. I remember the whole thing. "You can do this and we'll have coaches for this." And I think that's the downside to a lot of these now, is that they've become basically a big pitch fest and I've heard from a lot of people actually that even some of the more prominent events like Rich Dad, Poor Dad and some of these other ones out there are basically asking astronomical amounts of money to sign up for coaching with people who get trained to be coaches which is insane to me. I just can't even believe that that still happens. But I understand the business model and what they're trying to do. I just don't think it's relevant for most people like me or you.

So, do I think it's worth going to a lot of these events? I think you have to picky and choosy. I think you really have to selectively choose which events you go to, which ones you don't go to, what you're going to get out of that event when you go there. I would have really a good framework in place to understand what the contents going to be taught. Do you really need this? Is it really something you can get more handholding and more application or motivation towards doing something? I think that's really what it comes down to. I think the people at these events are great. For me, it always comes down to the people who are putting it on and the people that you meet at these events. I go to a few conferences every year. I'm very selective and picky and choosy as to which ones I go to and who I meet with and where I spend my time and I think everyone should be. I think they're still worth going if you're picky and choosy about which ones you go to.

I'd love to know which ones you guys have thought have been really helpful and which ones do you think have not been helpful. You can share that in the community on Facebook, Twitter, YouTube, etcetera. Let everyone else know and share your experience if you've been to some of these seminars or boot camps or workshops, whatever they've been and let us know what you think has worked and what you think didn't work and that would be really helpful, I think for everybody. So, until next time, happy trading.

#233 - Can Options Volume Spikes Predict Market Tops & Bottoms? May 13, 2018

Show notes

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer the question, "Can options volume spikes predict market tops and bottoms?" To be fair, I did a very long stint in researching online, trying to find a lot of articles, research, any publications on really, definitive back-testing and data scraping, I guess to see if option volume spikes actually have any correlation necessarily with market tops and bottoms. I think the data is really fuzzy in this area. I think there's a lot of subjective nature to it. So, what is a volume spike, how much more does it have to spike above the average or above a moving average of volume. And what I found is that generally, volume spike obviously come around binary type events where people are trying to hedge or position their portfolio for something that either may happen in the future or something that maybe just happened. You could take maybe say a presidential election or the vote on Brexit. You typically see a lot of option volume spikes around those, but it's two-sided. People are making bets and hedging on both sides. Say if you're short the pound or you're short UK markets, you might hedge with options one way versus if you're not short UK markets and the pound. There could be a totally different scenario, but still cause both option volume spikes to happen on both sides, calls and puts because we're going into a binary event where we don't know what's going to happen. What is the Brexit vote? Who's going to win the election? All of those types of things.

I don't think that they necessarily precede market tops and bottoms. I think there's some validity to the fact that their increasing volume could signal some sort of either trend change or a new paradigm in the market. That's I think pretty evident that we see huge volume spikes around the same time that the markets are going through some sort of change in trend and that could be a continuation and move lower. We saw this I think really in the oil and gold markets. A lot of volume spikes happened after the top in the gold and oil markets a couple of years ago and that really just signaled a continuation of the move down. It wasn't necessarily the bottom. It was just really the next leg lower with a signal by some option volume spike. For me, it's not something I check all the time. I'm being totally honest with you guys. I don't check option volume and liquidity on a chart. I don't look for spikes. Really, for me, it's just about liquidity at the strike prices I'm trading and open interest at the strike prices I'm trading. I'm not using options volume as a predictor of market tops and bottoms. I could honestly care less. That's now what we're trying to do. We're not trying to pick tops and bottoms in markets. We're trying to trade around a range and basically play our implied volatility edge. But hopefully this helps out. As always, if you have any comments or questions, let me know and until next time, happy trading.

#232 - Do You Have To Own Stocks To Trade Options? (Myths Debunked) May 12, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are answering the question, "Do you have to own stocks to trade options?" This is a very common question and a lot of newbies ask this question. Very realistic question and rational question to ask and the short answer to this is no, you do not have to own stocks to be able to trade options. In fact, many of the trades that we do, practically, all of the trades that we've done here at Option Alpha have no stock involved whatsoever.

Now, that doesn't mean that you won't end up owning stock through assignment or exercise and expiration, but you do not have to own stocks as a prerequisite for trading options. Options by their nature are derivative instruments, meaning you can trade them and they derive their value from the underlying stock. But you can easily buy and sell option contracts without ever touching or having to deal with the actual stock shares. In fact, we think that stock is incredibly inefficient which is why we actually don't prefer to even deal with the stock at all unless we're assigned it and we have to reverse the trade out or we're assigned short stock and we have to buy the stock back to close the trade.

That's one of the big myths about options trading, is that you actually have to own the stock, but you don't. It's all about the contracts that you're trading. You can buy a call option, sell a call option, buy a put option, sell a put option and all you have to do to close out the position is simply reverse the trade. You sell back what you bought or you buyback what you sold and close out the position. It's really no more complicated than that. As always, if you guys have any questions, let us know and until next time, happy trading.

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