The "Daily Call" From Option Alpha

Latest Episodes:

#201 - The Implied Volatility Edge Pays Dividends Through Delayed Gratification Apr 11, 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 why the implied volatility edge pays dividends through delayed gratification. I will continue to talk about this concept at nausea until I basically can't speak anymore. I feel that people still are missing the concept here and I'm trying as many times and as many ways as I can to explain why the implied volatility edge plays out over time. And so, I will take the onus and say if it's my fault that I haven't explained this well enough, I'm going to try a million different ways because I think it's a really key, really critical aspect to options trading and to trading in the market that you have to understand. I still get people who miss this concept, miss this point.

Here's the deal. Markets are efficiently priced at the time of execution. That's the thing that people always (I don't know) miss, but they don't really understand. Markets are efficient at the time of execution, meaning at the time that you make a trade, if you're trading in a liquid underlying like the S&P or one of the other major ETFs or stocks, markets are efficiently pricing in what the probability of that particular strike price or that option contract going in the money or out of money is at expiration because it's all based on implied volatility at that exact moment. How far is the stock going to move? Is the stock going to move 10%? Is the stock going to move 20%? But whatever that number is, that number is known. We know that implied volatility is X at trade entry or 10% at trade entry, 20% at trade entry.

That's where it always hangs people up because they see that and they start running numbers on zero-sum games and expected returns and they see, "Okay. Well, this doesn't make sense because if I win this percentage of the time and win this amount, but lose this percentage of the time and lose that amount, I'm down on the trade and it doesn't work out." The problem is that on trade entry, it's completely different than what actually happens in reality when you get to expiration. The disconnect and the missing piece here is that you have to wait from trade entry to trade exit or expiration, whatever comes first basically. You have to wait that timeline, that delayed gratification period for pricing to mature and implied volatility to show or reveal itself that it's overpriced.

If you think about a trade that you get into, so say you're just selling regular options, no spreads and implied volatility is saying right now at trade entry that the stock is going to move 5% the next month, well, all the option pricing is going to be based off of that 5%. It's going to be pretty efficient. There's going to be no free lunch, meaning you can't just get into or out of contracts quickly and make money. There's no arbitrage opportunity there. But if you hold the contract through the expiration period or until you reach your profit point, what you'll find is that the pricing matures and the market starts to realize or the stock starts to trade and now, the option pricing model catches up with the fact that the stock has not moved 5%, not even close. Maybe it only moved 2%. And so, as you go closer and closer to expiration, now pricing matures and now, that implied volatility edge starts to reveal itself more and more. But again, what you have to do is you have to have delayed gratification to wait for that maturity to happen, to wait for that pricing inefficiency to take place.

I think about it, actually, it's a really easy concept. You place the trade today, but you make money at expiration once it decays and the volatility edge reveals itself or presents itself. The difference between today and that day just requires a lot of patience, a lot of delayed gratification, a lot of confidence in the system. You have to have that. But everyone is focused so much on the entry pricing that they fail to recognize at trade expiration the implied volatility edge that's present and that you're going to win more often than a trade entry suggested. If you get into an initial trade and it says you have a 70% chance of being a winner on this particular contract, well, when the pricing actually plays out, what we've seen in some cases is you might have won 78% of the time or 80% of the time and then you start rolling in things like profit-taking which reduces drawdowns, increases win rates, increases trade frequency, now maybe you're winning 82% of the time and cutting down on huge drawdowns that you could've had if you just let the contract go all the way to expiration.

There's these kinds of secondary or tertiary factors that are in play here that people don't really account for and it's all through delayed gratification. You have to wait for those pricing events to happen later in the expiration cycle. Hopefully this helps out. If it did, let me know. Shoot us an email, send us a Tweet, add it on Facebook, share this with other people or give us a rating and a review on iTunes or wherever you listen to it. This for me is probably one of those podcast which hopefully I will send out to people in the future if they still have questions on it and will be one of those podcast that helps clear up a lot of the discrepancies that people often have as they get started. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!

#200 - Crowdsourcing Options Trading Ideas Through Automated "Opportunities" Apr 10, 2018

Show notes

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, on Show #200 which is actually kind of crazy that we're already at Show #200. I don't feel like we've done 200 episodes, but clearly we have. But today, on Show #200, we are going to be talking about probably one of the coolest things that's going to come out of our auto-trading software, a new platform that we're going to be rolling out here soon and that is the crowd-sourcing of options trading ideas through these automated opportunities. That's a lot, right? You're probably thinking to yourself like, "Okay, Kirk." Well, let's break this down and see what this means.

One of the things that I wanted to do for a really, really long time with Option Alpha is tap into the knowledgebase and pool of trading ideas that are present in our community. We've got thousands and thousands of members and we've got almost 100,000 now free members or registered members on our website which is insane. Once we launch the auto-trading software, everybody is going to be able to at least connect to it and start running bots. Now, it will be bots at different levels and portfolio bots for more upgraded levels and the number of bots obviously will be limited based on the membership level you have, etcetera. But the idea with rolling out this auto-trading platform to basically everybody in our community is that we want to start to build this crowd-sourced intelligence around options trading ideas and strategies. And so, one of the things that we'll have in the new auto-trading platform is a tab or a section called opportunities. And so, what this will do is this will aggregate some of the best bots that are being traded from other members in the community. If you build out a bot and you want to share that bot with the rest of the community, you'll be able to share the bot in a strategy that you're working on, that you're trading with everyone else and everyone else will be able to see in a list, in an opportunities list, things that are coming out or trade ideas that are coming across the screen that meet certain criteria or certain filters.

And so, very much like we've done before in the past with our watch list which helps you filter and hone in on specific trading ideas, this type of automated opportunities is going to be a very simple click to confirm type action. You'll see trades and strategies come across. Maybe somebody, John Doe has created a great volatility bot and it's really killing it and it's doing well and that's something that maybe we wouldn't have thought about or we wouldn't have created, but he's been doing it for the last three months or four months and it's been doing really well, you'll be able to one-click confirm or clone that bot that he's trading and trade it in your own account or one-click confirm, make a trade that somebody else has made and you like that opportunity too, one-click, clone and confirm and make that traded as well. We're trying to reduce as much of the friction as humanly possible and I think we pretty much reduced it to a single click of your thumb or click of your mouse. But reduce that friction that's required to not only find ideas and validate them, but also to quickly execute them in your account, so that you have no lag time. That's probably one of the coolest things about this platform.

In addition to that, obviously, we love the idea of crowd-sourcing all of these different strategies. I knew it will take some time to start building out the data of strategies that people create, but as soon as people start building their own option strategies, their own execution strategies or way of going about it, once that data starts to mature and we start to get lots and lots of trades, it's going to become evident what strategies are working better than others. This is something that I've always wanted too, is I want to know what are other people trading that I maybe not trading and how can I replicate that style of trading or that framework. This is something that we'll have. Again, if you build out a bot, you can put that bot publicly into the community for other pro and elite members and when other people see it, they can go in and they can dig through your bot and they can see how many times you won and how many times you lost, what the return has been. They're not going to see any account information. We'll keep all that stuff private. We're not going to share that information with everybody. But as far as like the statistics on the strategy or the bot that you created, everyone will be able to see that and if they like it, then they can clone it and if I like it, I'm going to go in there and start cloning other people's ideas and strategies and frameworks and start executing it in my account.

This is something that we've really, really lacked in this entire options trading space for many years. In fact, I don't think it's ever been present before. We always have people who post ideas on blogs. We have people who share ideas on videos. That's how Option Alpha started. Option Alpha started by just me posting my trades and running this little blog on the side and people started asking questions. But now, the idea of having a central hub where people not only are actually executing trades, not just ideas, but actually executing trades and there's a way to track their performance and their stats and then a way for users to come in, like me or you and actually clone or replicate that strategy in our own accounts with very little friction, meaning literally one-click and then move the bot over to your account. That is something that has never been done before in this industry and it's probably one of the coolest opportunities in this space and something that will I think revolutionize the entire options trading space because this crowd-sourcing of intelligence is a huge advantage. And so, once we have more people in and we have more people trading, it's just going to get better and better. It's a self-fulfilling cycle that feeds on itself because the more people that trade, the more strategies that people come up with, the better ideas come out of the community. It's something we wanted to do for a long time and now, I think we're very much at the point where we're going to be rolling it out and it's going to be again, something that revolutionizes the industry. As always, hopefully you guys enjoyed this. If you have any questions, let me know. Until next time, happy trading!

#199 - We Just Removed Human Error From The Options Market Apr 09, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. One of the things I'm very excited about with this new auto-trading platform that we're rolling out soon is that we have basically been able to remove human error from the options market. Now, I won't go as far as to say that there's totally error removed because there's error in building out a bot or strategy. If you build out the wrong bot or the wrong strategy, then that error is on the frontend. But what I'm talking about is the errors on the backend in the execution of a strategy and breaking of rules that so commonly happen when we're trading as humans, as people, when we're manually clicking and entering trades.

What has happened for basically all of history in the options trading space, the entire time that options trading has been around for retail investors is that we've had to manually choose, pick and choose our entry points, manually pick and choose our exits in most cases and then manage our portfolio. What we've done now with the ability to do this all through a bot is you can now build out a strategy that has no human error involved in it, meaning that if the bot is designated and designed to execute a closing trade at a specific price, it' going to execute that closing trade when it gets to that price. If it's designed to manage the allocations and not get over a certain number of trades in a particular ticker, it's not going to do it no matter how great the opportunity looks.

When human error starts to become involved in most trading, you start to see people start to bend their own rules. They start to look at a chart and say, "Oh. Well, this is a different scenario. I've already had five trades in here, I'm over my 5% allocation, but this is a different situation. This is why I need to go to 10%. This is what I read online and why I need to go to 10% allocation." That bending of the rules creates a break in the portfolio eventually and eventually, it's going to break. Eventually, it's going to break down and it's going to start to collapse down. And so, what we're trying to do is we're trying to basically remove ourselves, remove the human element of trading in the sense of making decisions and manually clicking and introduce a more systematic and more mechanical approach to options trading with this auto-trading software.

I think it's really cool and I just wanted share that tidbit today because I think that in and of itself is why this thing is so valuable and why many people at least should start trying it out when it rolls out. We'll have bots that you guys can try and trade and all that stuff when it rolls out, so you guys will be able to test this out and see if it works for you. But the concept of it and using this to improve efficiency and streamline a lot of trading mechanics that we have to do manually now as retail traders is something that's really, really cool and something I'm very excited about. Anyways, if you guys have any questions or comments, just let me know. Until next time, happy trading!

#198 - Valuing The Idea Of Options Trading Vs. The Execution Apr 08, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com and in today's daily call, we are going to be talking about the difference between valuing the idea of options trading versus the actual execution. What I've definitely learned in life, not only in my own experience, but also in doing a lot of research in the space of success and mental fortitude, all these things which I geek out on, on the side besides options trading is I've definitely learned that people value the idea of something, like whatever it is, options trading, becoming wealthy, being a good parent, having kids, running a business. Everyone values the idea. It's all about the idea, the dream, the big picture, pie-in-the-sky type thing. But what everyone fails to recognize is that there's execution that's required to make it happen. Now, we know this subconsciously. We know that if we want to build a business, we actually have to build a business. If we want to be good parents, we actually have to be good parents. We have to work at that every single day. It's not something that comes naturally.

But what I think is interesting is that actually, Harvard did a huge study on this, not only with companies, but also with executives to find out what are the things that actually make people start to value the execution or maybe what are the things that they overestimate or underestimate when it comes to the second part of valuing ideas which is the actual underlying execution. They actually found four different things. I think these things were pretty interesting and so, I want to share it today on the daily call. The first thing that they found is they found a discrepancy in duration, meaning that when people start to come up with these ideas… Let's continue on the theme of options trading because that's what we do. But when people want to trade options, they love the idea of trading options. They want to work from home. They want to generate all this income and they want to do all this thing on their own terms with no boss and just their computer. It's a great idea, but what they lack is they lack the ability to see the execution that's behind it. When it comes to duration, the problem is that they assume that it's going to take much longer than it actually does to get started.

Now, this is specifically to get started and to get the ball rolling. Most people assume that it takes much longer to get started than it actually does. In fact, I see this a lot on our end because I see people who are going through our courses and our training and they just watch video after video after video, but they'd never do anything with it. There's no point to doing any of that unless you actually start to execute. You've got to make a trade at some point. Make a small trade, make a small spread trade and start getting your feet wet a little bit in the system because again, the disconnect here is that people assume it takes way longer to get started than it actually does. You can get up and running pretty quickly. Now, you shouldn't just go and blow all your money on random ideas. I want you to do training. That's why we have free courses and training in Option Alpha. But after that, you got to start executing because it's a numbers and high frequency game anyway.

The second thing that they found in that Harvard study was perfectionism, this idea that everything had to be in place before you got started. We know that that's not true. We know that there's no way we could have all the information, know every single detail, every possible scenario that could potentially happen before we get started. But that holds people back. They keep researching. They keep learning. They keep trying to put together checklists and guides and mind maps, so that they have everything on paper when we know that that's not how it works. Again, this whole idea of perfectionism really holds you back from actually starting to execute. What I talk about and I think I've even done a podcast on this is this idea of failing, but failing fast. I've always liked the idea of trying something new, failing, learning from that experience and then trying to do it again. By no means am I perfect at doing this, but I like to try new things and see what works. Option Alpha, if you even just look at the website and where it's been 10 years ago and where it is today and where it's going to be tomorrow, it's a constantly evolving website and different courses and themes and colors. It was never intended to be what it is today 10 years ago. It's constantly evolving. Don't let perfectionism get in your way.

The third thing is commitment. People underestimate the commitment that's required by other parties around them to execute on that vision or that dream. What I'm saying here is that you have to get other people involved. A lot of people assume that when they start going after this or value this idea of options trading or trading from home, they do it in a box. They do it closed off, nobody else around them. Well, what you have to do is you have to loop in other people. You have to tell your spouse, your significant other, your friends, your family, your coworkers. You don't have to tell them everything, but you've got to get other people that you need to become accountable to, so that you basically increase your chance of success in actually doing something because now, you've told it to somebody, now, people know it, now, the onus is on you to start actually executing.

The fourth thing is effort. Now, I think this was interesting. In the study that they did, they actually found two different things when it came to effort. First, people overestimate the long-term effort that's required. I 100% see this in my case with options trading because people burn out in this business. They don't have the fortitude to continue trading for many, many, many years. In fact, that's one of the reasons I've said many times why I continue to run Option Alpha and why I will for many years because it keeps me accountable, because I have to come back here every day and I have to be accountable to you guys and to the rest of the community. That has helped me become a successful trader. And so, people overestimate the long-term effort that's required. They think that there's this big ball of effort that's required and once you use it up, it's done and the business is built or you're a great trader, you've done everything you need to do, but you have to keep at it. It's like going to the gym and eating right and being healthy. You've got to keep eating right. You can't just eat right for three months and then totally quit for the rest of your life.

The other thing is they underestimate short-term effort. This gets back down to a different study and research that I've read before. They didn't reference it in Harvard, but I know this is tied in. But people underestimate the short-term effort that's required because you have to break through your current habits because again, your mind has subconsciously created these habit loops. It does things naturally to reduce energy and strain. You have to break through those habits which require a lot of cognitive effort initially on your part to create a new routine, to think about things differently, to start trading or seeing the world a little bit differently. That's a little bit tough. It can be tough for a couple of weeks for sure. But once you break through and create new habits, then it starts making things a lot easier. Hopefully all this stuff helps out. If you guys have any questions on this, let me know. But I thought this was a good little research paper to reference. You can just look it up online. I think it's Harvard business review and just search valuing the idea versus execution I think is what I finally came up with. Let me know if you guys have any questions as always. Until next time, happy trading!

#197 - Quadruple Witching - What Is It & Should You Pay Attention? Apr 07, 2018

Show notes

Hey everyone. This is Kirk here again at optionalpha.com. Welcome back to the daily call. Today, we are going to be talking about quadruple witching, what it is and should you pay attention to it. Quadruple witching which is honestly the craziest term that options traders could've come up with, but I guess it makes sense for what it basically means and that is it refers to the third Friday of every March, June, September and December, basically the ends of quarters every year. And so, on these days, what ends up happening is you get four different styles of contracts that basically expire on the same Friday. That's why they call it the quadruple witching and more often, they refer to it as quadruple witching hour which is the last hour of these trading days, 3:00 to 4:00 Eastern Standard Time that generally sees that increase in volatility.

But on these four days during the year, these four end of the quarter expiration days, you get market index futures, market index options, stock options and stock futures that all expire on the same day. This naturally creates increased volatility in the markets, naturally creates increased volume. In some cases, I've seen research where they say the volume increases in some cases 50% higher than the general days on average. And so, what happens is that we get to the end of these quarters and all of these different products are expiring at the same time, so institutions and regular traders have to make decisions. That's why it becomes such a volatile time period, especially towards the end of the day, this quadruple witching hour because people have to make decisions. "Do we keep these hedges on? Do we speculate on new products? Do we roll contracts? Do we close out of contracts? How aggressively do we do this?" But it's all got to happen before the end of the day. That's why we see this increased volatility and this increased volume in the market.

Now, that's basically what it is. The question I always ask is "Should we care?" I think we should at least know that it's coming, at least be present and have the awareness to know that quadruple witching is happening because we might see more volatility in our options positions, we might see more volatility in the underlying market and that doesn't necessarily mean anything. Volume and volatility just mean that there's more gyrations. It may or may not distinguish a big trend. There's no discernible research that has been out there that we found that says that quadruple witching always is an up-day or always is a down-day or always means that a turn of a trend. If we're going up, now we're going to go down or if we're going down, now we're going to go up. None of that stuff actually happens. There's no discernible research that says it leads to one thing or another.

All we can then determine is that there's just a lot more fluctuation in the market and a lot more volume. And so, if I'm trading options around this day, I know that it happens, I know that it's coming and I just know to be aware that there is going to be some more gyrations in my positions. If you know that that happens, you should be okay. It doesn't dramatically change in any way, shape or form how we trade options, how we think about strategies, how we execute new positions. In most cases, we've actually seen a lot of profit taking on the days. When we get into quadruple witching, we'll start, again, putting on a lot of our contingent closing orders into the market, so that if there are gyrations that end up going past one of our profit-taking points, we take profits while there's profits to be taken. I would say use the increased volume and the increased liquidity to your advantage to take advantageous and opportunistic profits when they present themselves.

Hopefully this helps out. Hopefully it was a pretty simple explanation. It's not really much else besides what we described here, so don't read too much into it. It's something that you should be aware of. It's something that obviously causes a lot of volatility and volume in the market, but it doesn't dramatically change the outcome and it doesn't dramatically shift how we should be trading or how we should be using option strategies. As always, hopefully you guys enjoyed this. Until next time, happy trading!

#196 - Recency Bias Is Killing Your Potential To Be Successful Apr 06, 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 why recency bias is killing your potential to be successful. This one is a popular one for me and one that I am truly fascinated with. I continue to be fascinated the longer and longer I run Option Alpha with just the psychology of most investors and the psychology of trading, in particular, how it affects options trading and how people become successful or not trading. Recency bias I think is one of the true, true silent killers of options traders.

The whole idea of recency bias is that recent events or past events are going to affect our new decisions that we make. The reality is that we all know and we've talked about before that we are creatures of habit. Our brains are hardwired to do things that require less cognitive strain on our brains. We get up in the morning and we tie our shoes the same way. We go to work the same way. We brush our teeth the same way. We are creating habit loops in our brains, so that we don't have to think about doing things. When is the last time you thought about driving? That you really cognitively thought about what you were doing and how you were steering the car? You don't. You have a lot of habits that your brain has created. One of those habits that is basically in there is the idea that recent events or past events are going to affect new decisions. If you burn your hand, you're going to think to yourself, "Well, I probably shouldn't put my hand on the stove because I'm going to burn my hand."

This then trickles over or spills over into investor psychology a lot. What happens is that if investors get into the stock market and they do really, really well, then they have this recency bias that all of their positions will do well. They might over-allocate. They might get into positions that they shouldn't have because the past position that just happened a month or two or a week ago did really well. They have this false expectation, this false positive that things are going to go well. The same thing can be said during down moves or drawdowns in your account. If you have let's say a bad string of trades like two trades in a row or five trades in a row even that do really, really bad, those recent events, those recent trades are going to more heavily weigh on your decision to keep trading or to keep trading that strategy.

The reality is though, is that none of that really matters, especially when it comes to options trading and high probability expected outcome systems like this because any one given event does not have a dramatic impact on the future expected outcome. If I lose on my first trade of the week or my second trade or even third or fourth or fifth trade of the week, that really has no bearing on that strategy until we are making hundreds and hundreds of trades. The expected outcome doesn't change because we had a string of bad trades or a string of good trades in either case. But what people often do is that they often relate that this expected outcome only works if the first few trades do well. If the first few trades don't do well, then everything that I've said about expected outcome, high probability of success is basically garbage. It doesn't work. But that's the recency bias kicking in, your expectation that recent events are going to dictate future events when that's not true.

Each individual trade is an independent event of the previous trade. No matter how many times people try to disprove this, the reality is that when you are trading in a highly efficient, highly liquid market like this, we don't know what the sequence of returns you're going to have. The focus should always be on the endgame. It should be on the expected outcome. That's why we built our back-testing software which you can get to at optionalpha.com/toolbox, so that you can back-test a strategy and optimize a strategy before you get into the trade, before you start even making that first dollar investment, so you have a pretty good idea of what it could look like in the future, if that setup that you're doing now does see drawdowns or what the win rate is or when you should be taking profits. That's why we built that, so you have this future endpoint to be looking at and to be monitoring. It's also why we built our auto-trading platform because for me, I want to totally remove myself from the equation.

There's still a lot of emotional and perception I guess on my side from a human standpoint that we can still remove with auto-trading. And so, auto-trading is going to be amazing because now, we can take recency bias that we have to feel and have to visually go through and have to click through. We have to close out of trades that are losers. We have to wait for trades to come back around and become winners before we close them. That's all out the window now. With auto-trading, all that happens automatically, so we don't have any impact or any influence on what should be a very systematic, very rigid process that can be done by a robot. A robot can make these trades trading against or towards the expected outcome, so that we have trades, we have setups that should meet our requirements for income, for returns, for drawdowns, for everything in the future and we just let it go and we sit back and we just have to be monitors in patience of that system.

Hopefully this helps out. Hopefully it again, got your mind thinking a little bit differently today because recency bias is really one of the things that I see often with traders, especially new traders that they get themselves caught in. It's a trap that you fall into and it can lead you into not trading or trading the wrong way in some cases because of just the past couple of trades or the past couple of months. But again, it has no impact or no real bearing on future expected returns when you are in a high probability system like the one we teach. Hopefully this helps out. Until next time, happy trading!

#195 - Basics Of Reverse Stock Splits Apr 05, 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 the basics of a reverse stock split. Yes, a reverse stock split which is a little bit different than a traditional stock split. It's important that you understand the difference between them and more importantly, how they generally will affect options if you are trading options in a company or an ETF because ETFs can go through reverse stock splits as well and what the impact is on options. First of all, on the basics – Why do companies do a reverse stock split? What is a reverse stock split? The basic premise of a reverse stock split is that the company or the owner of the ETF wants to reduce the number of outstanding shares or float that they have. They might do a reverse stock split by dividing the current shares by a number such as 5 or 10 or 4 or whatever they want to do. In that case, it would be generally called a 1 for 5 or 1 for 10 split, respective of how they want to split up the company. For example, if a company let's say is trading at $.20 a share and they've got $200 million shares outstanding, if they do a 1 for 10 reverse split, it would basically cut the number of shares from $200 million down to $20 million and then effectively, the price would go up by a factor of 10, so the price actually increases by a factor of 10 to $2.

Now, of course, in this case, it's really just smoking mirrors kind of game. Most companies that do this, either their stock price is falling really, really fast and they don't want to have any influence on this low stock price, so they do a reverse split to get the price back up. Now, effectively, the company is not changed in their market capitalization and how much they're worth. It's the same company. It's just how the shares are divided up. If you even think about Berkshire Hathaway and Warren Buffett's company, they've never split the stock, so there's not a lot of float, there's not a lot of shares. That's why the share price is so, so high for Berkshire. But some other companies, if they get towards that penny stock range and in some cases, they have to meet minimum bid requirements to be on the NYSE or the NASDAQ, they'll do a reverse split to get their price back up. Again, it doesn't change the company. The company maybe still is not doing well or declining and really, the stock price is taking a hit. But it looks like to investors, it's more valuable. That's why you can't always I guess in this case, judge a book by its cover. The stock price is really meaningless unless you look at how much float and how many shares are outstanding for that company and really, what the total market capitalization is.

Now, in the case of stocks, ETFs can go through reverse splits as well. The one that's more commonly going to have this happen is VXX. VXX has gone through a reverse stock split many, many times before in the past and the reason it does is because it is always dragged lower by this negative drag in just its pricing. It's going to continue to go through reverse splits time and time again and in most cases, it does like a 1 to 4 or 1 to 5 reverse split. When that happens, if you're holding options, what's interesting about VXX and some of the other ones that reverse split is that the option contracts themselves don't necessarily reverse split. What most of the exchanges will do and more importantly, the OCC wants to do is they want to keep those option contracts on a pre-split "new contract" so that there's no extra clearing requirements that the exchanges have to deal with. In the case of VXX, let's say they do a 1 for 4 split. Well, if one option contract used to control 100 shares, now, one option contract would only control 25 shares. What they would do is they would basically have these new contract symbols traded. I think what they actually did back in August of 2017 is they had a new symbol called VXX2 and that new symbol was set to 25% of the VXX price. Again, it leaves option traders without some lingering half contracts or quarter contracts if you didn't have an even number of contracts that got split and it really makes it super, super simple for the clearinghouses.

Again, the whole idea though is just to understand how reverse stock splits happen, again, that they can happen on the ETFs, they can affect the option pricing. There's usually a lot of memos that go out before a reverse stock split actually happens. If you are trading something and you see a huge jump in price, don't be totally alarmed by it. It could be a reverse stock split. Everything is basically the same. It's just a new price. It might be a little confusing at first, but I think you'll be able to navigate it pretty quickly. As always, hopefully this helps out. Until next time, happy trading!

#194 - How To Increase Long Exposure Of Portfolio Quickly Apr 04, 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 talk about how you can increase long exposure of your portfolio very quickly. The first question here is always, "If you're needing long exposure, how much?" When I look at my portfolio and I Beta weight it to a market index like the S&P or the DOW or whatever you want to use for Beta weighting, the question I always ask is "Am I outside of my breakeven points for expiration?" That's the main thing I'm really focused on, is "How unbalanced am I at this exact moment?" If the market is rallying, but I'm not outside of my breakeven points, okay, maybe I'll start doing some things that slowly start to improve the balance of my portfolio, but I don't need to trip over myself and I don't need to overextend or over-adjust my portfolio for the sake of balance. I'm fairly balanced. It's always going to be a moving target. Balance is never something that's absolutely emphatically perfect because the market is always moving. You're always making small tweaks and small adjustments to follow the market.

Now, if you're just inside of your breakeven points, so you haven't breached your breakeven points, then I would start using credit put spreads or I would start using debit call spreads. Basically, I would start using anything spread like, preferably option-selling first and then option-buying after that, to be able to make long exposure increased in your portfolio. If you do credit put spreads, you'll be selling options. If you do debit call spreads, you'll be buying options typically around at the money strikes. In either case, you'll slowly start to adjust your long exposure in your portfolio. Again, it won't be overkill at that point, but it'll slowly start to make adjustments. Now, if you are outside of your breakeven points and let's say the markets had a huge move or you just have completely the wrong positions on at any given time and now, you're totally lopsided, you need the market to go down dramatically. Every day that market continues to move up is a bad day for your portfolio and what you need to do is you need to be a little bit more aggressive with this. In this case, you need to do something like doing long stock in maybe the major market index or ETF that you follow as just a temporary hedge, so maybe you do need to buy some stock in that case and get some really, really long exposure or you need to buy some in the money or at the money calls or make really wide debit call spreads. In either case, you're trying to maximize your positive Deltas in your portfolio. And so, the more positive Deltas you can get in your portfolio, at least for the time being to give yourself some balance in case the market does continue to move higher against your portfolio, that's what you need to do.

Again, it always comes down for me, "How far outside of the breakeven points am I or not?" If I'm really far outside of it, then I need to be really, really aggressive in making adjustments and getting new positions on that increase positive Delta for my account or even in some cases, removing negative Deltas. If you've got some short calls that are in the money or just in the money, maybe hedge those with a long call option and create a spread. That will reduce the pain if the market does continue to move higher against your position. It will reduce the drawdowns if the market continues to move higher against your position. Hopefully this helps out. As always, I suggest to use an analyzer or some sort of portfolio platform to take a look at your balance and make sure that you're still good and analyzing trades before you get into them. But this is why balance become so important and it's something that you should often look at, so that you don't find yourself just one day waking up to a completely unbalanced portfolio with no time to adjust. As always, hopefully you guys enjoy this. Until next time, happy trading!

#193 - Option Alpha's New Autotrade Platform For Options Apr 03, 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 a little bit more about our new auto-trading platform for options. As we've hinted to and alluded to many, many times before in the past, we are now in the final stages. We're probably about 30 to 45 days out here from releasing our new auto-trading platform for traders. Again, this is revolutionary software that we're going to be releasing. Nobody has this. No broker, no website, no hedge fund. Nobody has what we're building. It's completely proprietary to us and I wanted to give you some of my thoughts on why we're doing this and what it will look like in the future. Now, of course, we're going to be adapting and changing this thing on-the-fly, on the move if you will with feedback that we get from our users. There's kind of a core foundation to this platform and this technology that we've built and of course, we want to get a lot of feedback from users and once we start releasing that software to our elite and our lifetime members first, I'm sure we're going to get some ideas and some feedback on how we can improve and tweak the system to make it a lot better for you guys.

But the whole idea behind our new auto-trading platform is really to reduce the time drag that you guys have in trading options. Now, I've known that this is an issue for many years. In fact, I talked about why auto-trading is going to be the future of options trading almost a year and a half ago in a weekly podcast that we did. But the reality is that more than 90% of the trading that happens in the market is done by computers and I'm not just saying computers that we are using to then manually click. I think that a manual click or a manual entry is going to be a thing of the past. It's going to be something that we'll look back on and wonder to ourselves, "I can't believe we used to do that." It's probably like making a phone call and having an operator on the other end connect you to somebody else. It's going be that archaic in a couple of years. And so, we want to be on the forefront of that and we want to be a leading factor in making sure that whatever auto-trading platforms that are built are built with the scalability and with the functionality that can facilitate and manage basically anything that your mind can come up with or can create.

Our auto-trading platform is going to be very, very user-friendly to people who are coders, but then also to people who are not. We're going to have a lot of templated strategies in there that you can use based on our back-testing and research. But then if you do have the ability to then code or your own strategy, you'll have full functional capacity to code your own strategy in our platform. That's really cool because now, what we can start to get into is this crowd-sourced development of trading ideas. What I've wanted to do for a long time is I wanted to tap into the resources and to the knowledge that we have in the Option Alpha community. We've got nearly 100,000 traders in our community and by far, that's probably one of the biggest options communities out there and we know that we've got a really smart very successful traders. Well, now, we can start tapping into that by creating bots around those strategies and people can choose to share their bots publicly with the rest of the community. If Joe creates a bot and that bot does really well and that trading strategy is performing very well because we can all see the stats of that… We can't see his account and how much money he has in his account. We keep all of the things private that need to be private obviously. But as far as returns and win rates and drawdowns, we can see that and from one click, we can go over a copy or clone that bot that Joe is trading and then confirm and trade it on our own account.

That type of crowd-sourced options trading knowledge and development is something that we've never seen in the market before. People have tried to replicate it. People have tried to do something very similar. But the functionality to be able to mimic somebody else's strategy with an automated trading robot, a computer basically algorithm that does it for you from one single click to clone it over in your account is again, something that nobody has ever created. This revolutionary software is going to make sure that you can trade highly effective strategies at the right time without having to monitor the markets at all. And so, my goal in building this out has always been to have these bots find trades, place them and then manage them for us, the complete cycle, not one or the other. This is not a system that just finds trades and sends you email alerts. It is truly an automated trading platform, meaning that these bots that we create and these templates that we'll have in there that you can clone and adjust and tweak at your wishes really basically can find trades. It's always scanning, always monitoring the market for that perfect opportunity for whatever that trading strategy is that you're working on. It will enter and execute the trades. It will then monitor the trades for your exits. If you set exit profit targets at 50% or a stop loss at this or you need to have the bot make adjustments, it will do all of that for you. It's totally hands-off.

Now, of course, it's going to be a learning curve and we'll have some more training and some more information and courses that we're going to be developing as this starts to roll out, but this is the ground floor of this new technology for trading and I've always said that I think in most cases, the option industry seems to be behind the technology curve when it comes to new technology that comes out in regular markets, like a new Siri technology or a new voice recognition technology, new facial recognition technology. All of that stuff, we are still behind in options trading. We're still archaically manually clicking and choosing what we trade and what strikes we select. That stuff can be automated. You do not have to do that anymore and that's our goal, is to make sure that you basically get your life back, you get time back while also setting yourself up for success with a completely automated and fully functional options trading system using these bots. Again, we'll have information as we get much, much closer to the release, but I'm just so excited about it, I have to keep telling you guys about it and get everyone juiced up and jacked up about what we're doing because it's truly going to be a stepping stone in the future of trading technology. It's going to be a data point when somebody looks back in the past and says, "That was the day that Option Alpha changed the entire game and everybody started going to that model, everybody started gravitating towards an auto-trading model." I want to be the first that releases that in the future. Now, again, you can just stay on our email list or on our social channels to get updates on when we officially launched.

The biggest difference in officially launching for us is going to be the extinguishing of our lifetime program. We have in the past had a lifetime elite program where if somebody wanted to just join our community, it was a one-time fee and you basically join and you got everything. You got all of our software, all of our research, anything that we have now or in the future and you join at basically the highest level. Well, once that auto-trading platform gets released here in the next 30 to 45 days, that program is going to be going away and the reason it's going away is because as we release auto-trading and have to build up servers to be able to handle this capacity, we are no longer going to be able to offer a one-time cost or one-time investment to get into the auto-trading platform. If you want to get everything that we have now, all the research we have, all the software that we have and access to auto-trading basically for a one-time investment for the rest of your life, you have to get into it at this level now. You cannot wait because once we release it, lifetime is going away.

Now, of course, we'll keep our promise and that's big for me, is that we're going to keep our promise to all the people who are in lifetime. They're going to get the auto-trading platform totally for free, no additional cost required, but everybody else after that point is just going to have to pay the monthly fee that's associated with the membership level that they want for auto-trading. Now, of course, we'll have different various membership levels as it releases and you'll be able to pick and choose how active you want to be, how many bots you want to create, if you want to do single bots versus a portfolio of different tickers. All of that stuff will be things that you can choose and pick and we want to give you guys, no pun intended, but a lot of options in that. But we cannot anymore after it's released, just have a one-time cost for membership into the platform because we have server cost and we have data cost and we have all these things that go into it that we need to make sure that we cover, so that the system is sustainable for many, many years going forward into the future. As always, if you have any questions or comments, just let me know. Until next time, happy trading!

#192 - How To Create An Iron Butterfly On thinkorswim's Platform Apr 02, 2018

Show notes

Hey everyone, Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be answering another user question and basically, actually, it's a question that we get all the time, but we just recently got it from a user and that is how to create an iron butterfly on Thinkorswim's platform. Thinkorswim and TD Ameritrade, that's the platform that we've used for a long time, still the platform that we are going to use when we roll out our auto-trading software. We'll be connecting directly with TOS and TD Ameritrade, so if you have a brokerage account there, you'll be eligible I guess to do the auto-trading. If you don't, you want to get a brokerage account there, head on over to optionalpha.com/TOS.

Inside of Thinkorswim though, they don't have the ability to directly do an iron butterfly the way that we typically define an iron butterfly which is basically short strikes at the same strike price like a straddle, so basically it's a synthetic straddle and then long strikes out on either end. What you have to do is you have to do it two different ways. I'll explain the two different ways that you can do it here on today's daily call. The first way that you can do it is you can add an iron condor order to your position screen or trade screen and then manually readjust the strike prices as you see fit. Right now, the S&P at the time that I'm recording this is basically around like 275, 270 ish. And so, if you wanted to add an iron condor, you could just right click on any of your short strikes that you want, go over to sell and then iron condor and that would bring up an iron condor order and then you could manually just change the inside strikes to be the same. If you want to do a 275 iron butterfly, you change the short strikes to 275 or 270, you change the short strikes to 270. That's one way that you can do it. It's a little bit more clicky and you have to just double check yourself when you do that. That's one way you can do it. It's not my preferred way.

Inside of Thinkorswim, one of the cool features that they have as far as shortcuts is you can use in my case, the CTRL key on a Mac, but I think it's the same on a PC. You can use the CTRL key and you could hold that down and then manually click all of the strike prices that you want and it will automatically associate that trade together. As long as you're holding down that CTRL key when you're clicking different strike prices, it will automatically associate all those strike prices that you clicked into one single order. What I like to do is I just like to hold down the CTRL key, manually select the bid on the short inside legs, so that's in this case, I would do the 275 iron butterfly. I would hit the bid at 275 on the call side, hit the bid at the 275 on the put side and then I would buy the asks on either end. I would buy say the 265 on the put side and the 285 on the call side. As long as I'm holding down the CTRL key, it will just automatically associate these trades together. Now, it's a little bit… You got to get over that learning curve of just holding down the keys and making sure clicking the bid versus the ask to buy and sell. But once you get over that, honestly, you do it two or three times, you're good to go and it's much, much faster to be able to do this.

Now, all of this is still manually clicking, so once we roll out our auto-trading platform, you guys won't have to do this anymore. It can all be setup automatically with a bot and the bot will figure out the strike prices, enter the trade, manage it, exit the trade if needed, all automatically for you. That's what I'm really looking forward too as well. But if you're still trading on Thinkorswim, you're still doing this manually, that's how you create an iron butterfly on their platform. Until next time, happy trading!

Our TOPPODCAST Picks

Follow Us

Stay Connected

The “Daily Call” From Option Alpha

Related Podcasts

Links

Stay Connected