The "Daily Call" From Option Alpha

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#161 - After Hours Markets Overview For Traders Mar 02, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to be talking about afterhours markets trading and just going through an overview for traders and basically some concepts and things you need to know if this is your first time learning about afterhours trading. There's a couple of key things that we'll talk about and you might hear me clicking around because I want to make sure we get all these comments or these dates and things like that right. If you do hear me clicking around, it's just because I want to give you guys the right info.

There's a couple of things you have to understand about afterhours trading. One, that there's regular market trading or kind of like I guess general market trading that typically occurs between 9:30 AM ET and 4:00 PM ET. That's when most all contracts are trading. In fact, that's the wide majority of contracts, volume, liquidity. Everything is traded between these regular market hours or regular trading hours. Again, 9:30 AM Eastern to 4:00 PM Eastern, wherever you are, that's when most of the US equity markets are open and everything is being traded. Now, what they have as they refer to afterhours trading is trading around these hours. You have to check with your individual brokers, see if you're eligible. Most people should be eligible, depending on your account or what trading level and approval that you have, but most people should be eligible for afterhours trading. What you can do is you can trade in the after or premarket hours. That might go in different exchanges from as early as 6:00 or 7:00 or 8:00 AM, all the way up to in some cases, very, very late in the day like 4:30 to like 8:00 PM in the night. There's this wide range where you can actually trade not during normal market hours. Now, why would they have this? Why even have this to begin with? I think one of it is just for access and for the ability to actually get into or out of positions after normal hours. We all know that news doesn't necessarily break during regular business hours. Something could happen overnight. Brexit was a great example of this where the Brexit vote actually came for the US markets overnight after the markets were closed. And so, many people have the ability and want the ability to then make decisions about their portfolio and their positions in these afterhours trading times.

Now, I think there's definitely some inherent risks and dangers to trading in afterhours. One is way less liquidity. In afterhours markets, you're not dealing with regular buyers and sellers, meaning that there's far less trading volume in every particular stock and ETF. And so, what that creates with less liquidity is it creates wider spreads, so you're going to lose a little bit more to spreads in afterhours trading, it creates really, really high volatility because if there's a lot of low liquidity, a lot of low float or thinly traded stock, then anybody coming in and selling or buying 100 or 1000 shares creates this huge seemingly priced spike before the market opens. And so, that can be really dangerous as well because it may look like the stock is crashing or rallying significantly higher when it's just a couple of people who have come in and purchased or sold shares and that low liquidity creates this huge price spike in either direction.

The other thing is it's really tough for competition because as individual investors, you're trading in afterhours against in many times, institutional investors that are really watching the news and this particularly happens around earnings announcements either before or afterhours trading on earnings where the stock has huge moves because of not inside Information because it's not, but just more accessed information by institutional investors. That I think becomes a real negative downside to extended or afterhours trading too. I don't do any afterhours trading, so I think the one caveat to all of this right now… This will actually be interesting to see how this moves in the future. But all options contracts don't have afterhours trading. Options contracts are based on the underlying during regular market hours. There's no market to trade options afterhours, so therefore, I don't do any afterhours trading. I do watch what the markets do if I'm interested in a particular security or if we have an earnings trade on. We can definitely see where the stock is trading premarket or post-market in the day. But as far as options trades or trades that I do, I really don't do anything. I mean, zero afterhours, non market hours trading. I just stick to the regular market hours because it's more liquidity the options are traded and much tighter spreads.

It is interesting to note though that actually, earlier this year, TD Ameritrade which is the parent company of Thinkorswim actually introduced 24-hour ETF trading across the board and this was back I think in January of this year till 2018. But they announced what are called extended hours or EXTO hours for a lot of different ETFs. Some of the ETFs that they had I think were FXI, SPY, DIA, SLV, GLD, etcetera. This is really cool because what they have started to do is make the transition to an extended or 24-hour continuous cycle of trading a lot of these ETFs. I will go on the record of saying I think this is the first step and the first noticeable step by a big brokerage firm like this for the market to start transitioning to a 24-hour type trading cycle which I think can be scary for some people. I think it's definitely scary for some people, is just knowing that the market's trading always 24/7. But at the same time, I think it actually presents a unique opportunity for eventually options to be traded. Now, I don't know if this will happen this year or next year, five years from now, but I think there will come a time where options are going to be able to be traded 24 hours a day just like Forex and things like that. And so, I think that it's interesting because as traders, we have to then start thinking ahead in the future like what will this environment look like and how will this change.

This is one of the main reasons why we started to heavily invest in and started to talk about our auto-trading software that gives you the ability to build these bots that are basically running in the background 24/7. And so, the reason that we did this is because I know that eventually in the future, we're going to have continuous markets and frankly, we just can't stay awake all the time to watch these. We are limited by our own human anatomy that we have to sleep at some point during the day which means that we can't be there. Who's there to watch our positions and make sure that if things go crazy in the middle of the night that a position gets taken off or orders get executed. That's why we built this auto-trading technology, so that that's in the background running for you and protects you along the way. It's an interesting concept, like I said and I think TD is going to be the first one. I think other brokers just will soon follow this and give this extended or 24-hour access to a lot of these ETFs and then we'll start to see this rollout to a lot more ETFs and eventually, some underlying equities like Apple and Google and Microsoft or some of these other ones which will be really, really interesting. As always, hopefully this helps out. Until next time, happy trading!

#160 - Option Strategies To Protect Gains Mar 01, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today's call focuses on how we can use option strategies to protect gains. This is mostly for stock investors. I think that this is important just as we wrap up February here because February was such a volatile month. We had so much volatility particularly in the beginning of the month with stocks falling really, really hard. People are now asking and we're getting questions and we see it all over the place. "How do we protect ourselves from gains? If we had a stock portfolio, how could we have protected some of the gains that we had?"

There's a couple of ways you can do it. We'll cover three general strategies. There's obviously a lot more that we can cover in other podcast, but I'll take the top three or not top three, but the ones that are most often talked about. The first way that you could've protected gains is with a long put option. If you're long stock and we'll assume for the rest of the podcast here that you're long stock. If you're long stock, one of the ways that you can protect your gains is with a long put option. Now, in the case of the markets heading into this recent selloff that it had, if you had a long put option because volatility was so, so low, it probably didn't cost you a lot of money, meaning the insurance on that option was probably actually really low. The volatility premium was pretty low, so it probably didn't cost you a lot of money. The trouble with put options is that if you have to maintain that insurance, meaning you buy that put option month after month or quarter after quarter, it does become costly and it does start to eat into your potential profits to the point at which it doesn't really make sense to do it unless you know (which who really knows when the markets going to selloff) that a selloff is coming.

The second way to do it is to do a short call option or a covered call. This is historically been much better than doing the long put option strategy because when you are in situations where you don't know if the markets going to selloff or not, executing a consistent and rhythmic covered call strategy to reduce cost basis is a great way to go about it. Now, it's not going to protect you and totally hedge you from the markets going down like we recently saw, but it does reduce the cost of ownership. Again, if you're long stock at $100 and you can sell a covered call for say $1, it reduces your cost ownership down to $99. You do that consistently month in, month out, you can start to cut some of the premium out of your cost basis and the shares, so that at the end of the year, say you've collected $12 in premium, now, if the market goes down 10%, you're still okay. You still actually are making money because of that covered call that you've been consistently selling on that stock. Again, it's a different way of going about it. It doesn't protect you totally from the downside like maybe a long put option would, but it's a better income driven approach when you don't know that the markets are going to fall.

The third way to do it and probably a better way to do it generally is to do what's called a "caller strategy." In a caller, you basically combine both of these strategies and you try to do it for no cost. No cost out of your account and what it does is it offers a little bit of protection from the stock going down, but it doesn't offer complete protection. You basically are going to execute a caller strategy which is selling one call, buying another put option down below, using the cost of them to offset one another and do it for no cost and what this does is it allows you to basically get free insurance. In exchange for it not costing anything, it doesn't offer as much protection as say a long put option would. But I think this is probably the better way to go about it especially if you don't want to do the covered call for some reason and you want to do the costless caller. It's probably a very easy strategy to start executing because it doesn't cost you anything and you always have a little bit of built in hedge for your positions. A very, very easy thing to do and again, you can learn more about the costless caller on our weekly podcast. Just search on optionalpha.com and we have a whole tutorial and training on that as well that you can check out. Hopefully this helps out. Until next time, happy trading!

#159 - Should We Trade Options After Merger Or Buyout Announcements? Feb 28, 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 answering the question, "Should we trade options after a merger or a buyout is announced?" This is again, a question that came from our community, so thank you so much for submitting your questions to me because it definitely helps out. The reality is that when a merger or a potential buyout of a company is announced, what people typically often think and what typically happens is that the stock now trades dramatically higher based on the agreed upon share price. If company A says that they're going to buy company B for $10 a share, then the stock immediately starts trading to that. It's usually a premium. The company is going to buy them for a premium, so that all the shareholders and board members will accept the deal and approve it. Then the stock starts trading immediately higher, but the reality is that even though it had a lot of volatility heading into that event or that one-day event is so volatile, the vast majority of them that are approved and that are going to go all the way through to the closing and the transaction, we'd actually see that the stock price changes very little from that offer price of say $10 a share. Can you trade options around this? Sure, you could, but volatility is going to be almost nothing and so, you're probably not going to get as much premium out of it as you think you would.

Now, the only other times you would want to maybe setup a strategy around this is if you think that there are some sort of uncertainty in either the deal being accepted or there is the potential that other bidders might come into place. If company A says they're going to buy company B and they're going to buy it for $10 a share, sometimes we actually might see the stock trading higher than $10 a share and people will ask, "Well, why is it trading higher than $10?" That's because maybe there's company A which is just the first. Maybe because they offer $10, we might see somebody else now come in and offer $12 or offer $15 a share and we might get a bidding war. We also could see the stock actually trading lower than the share price offer. If the company is offering $10 a share, we might actually see the stock trading at $8 and again, the question is, "Well, why is it trading lower? They're offering $10?" Well, because we don't know if it has to pass some sort of regulatory hurdle or some sort of approval process that has to go through where the board has to approve it before anything happens or if it's a hostile takeover. There's a lot of uncertainty in that as well.

I think the reality is that in the case of options trading, yes, you could probably make some plays in that, yes, you could probably trade some things around it if you think one direction is going to be more impactful versus the other. I would say anything that you do in that case has to be pretty much risk defined. I wouldn't do anything undefined risk as far as trades go. I wouldn't do any straddles or strangles. If I was going to do anything, I'd do credit spreads or directional spreads and just make a small bet. It'd be a good play or just have fun with it really, but I would not bet the house on doing these types of trades. They don't come up that often and because they're so infrequent, there's not too, too much data and every position is independent of one another that I don't think there's a consistent framework around how you can trade them. Again, if you want to trade them for one-off type positions, knock yourself out. It's not something that I do typically at all, but it's something that you can do if you want to. You just have to understand the context of how the deal is being setup and presented. As always, hopefully this helps out. Until next time, happy trading!

#158 - Long Stock vs. Long Call Spread vs. LEAP Options? Feb 27, 2018

Show notes

Hey everyone, Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be looking at the differences between long stock, long call spreads and leap options, especially if you are insanely bullish on a particular stock or a particular ETF. This actually came in from one of our members in the Option Alpha community, so thank you guys again for submitting questions because this does really help me figure out what you guys are interested in. I would've not necessarily put all these topics together in one quick little daily podcast, but this is what we're doing because this was a question from somebody.

They were particularly interested in this because they are super, super bullish for whatever reason on Apple. Not that I'm not or the other way. They're just insanely bullish. The question becomes, "What do you do?" Well, I think it really comes down to just tradeoffs and just understanding what the differences are. The first one is long stock. Now, long stock has the ability to immediately take advantage of the stock price. If you get in at say 160 on Apple and Apple goes above 160, great, you're starting to make money. But stock is super, super capital intensive, so in the case of Apple, if you're going to buy 100 shares of Apple at 160, it's basically going to cost you about $16,000. That's not a small nugget to basically outlay out of your account. The benefit to stock obviously is that you obviously maintain all of the exposure to the upside with all of the downside exposure to stock obviously, but you can collect dividends along the way and basically be paid for your position. You can sell covered calls against it which we didn't necessarily mention in the show title, but that's a possibility.

The other thing that you can do is you can do a long call debit spread. You can buy an in the money option and then sell an out of the money call option and basically do a spread. Now, I would prefer given all of these choices, if I'm super long on something or super bullish on something, I would prefer to do the spread versus doing any of the other two options. The reason is because even though you cap your upside potential, you can basically cap your downside potential on a debit spread and you can get your breakeven point close to or right where the stock is trading. We all know it's insanely hard to truly predict where stocks go, so why not get your breakeven point very, very close to where the stock is trading? In the case of a long debit spread, you might do say a debit spread that's one year out or two years out, however far you want to go. You might buy the 150s and sell the 170s and your breakeven point might be right around 160. Again, buy the 150 call, sell the 170 calls. It reduces the cost of the 150 calls that you bought and again, your breakeven point might be right around 160 as well. Now, you don't keep all of the upside potential. Apple goes much, much higher than 170, then you still obviously give up some of that upside potential, but you have much less downside risk and you have effectively the same probability of success as you would holding long stock.

The other way to go about it is to do what are called "leap options" which are basically just option contracts really far out into the future. The example that I gave, if they're out a year or so or two years out, those are probably considered mostly leap options. In the case of Apple right now, I'm actually looking at the chart right now or the pricing table. You can actually buy options out to January of 2020 right now. It's about 700+ days out which is actually pretty far. I mean, that's over two years or so, very close to two years or so out in the option contract pricing table. In that case, those option contracts are going to be definitely more expensive because you're locking in a much longer time period for somebody to either make money or lose money on that contract and that means that if you buy those contracts, you really, really should hope that Apple goes dramatically above that price point in the future. In the case of our example here, even if you bought the at the money contracts on Apple at 160 right now for January of 2020, those contracts cost $25 apiece, so it's still about $2,500 per contract that you get into. It's less capital that's required than if you went with long stock. That's why stock is so inefficient. But you basically need Apple to move above 185 at the least before you start making money in 2020. Again, it's a huge, huge move that Apple needs to make. Not that it can't make it. But it's got to go up at least $25 for you to start to make money by the time expiration rolls around.

The goal here again is just understanding, just trying to figure out where these different things fit into your assumption of where the stock is going to go, your capital that's required. Again, I think that the long stock option is probably the most inefficient way to go. You could definitely do the long leap contract or do something like a leap spread sometime in the future and try to replicate most of what you're trying to accomplish with your stock position without actually having to buy the stock outright. Hopefully this helps out. As always, if you have any comments or questions, let me know. Until next time, happy trading!

#157 - Does Moving Average Convergence Divergence (MACD) Indicator Work? Feb 26, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to be answering the question, "Does the moving average convergence divergence or commonly referred to as MACD indicator actually work?" Now, I can tell you, we have done extensive testing on this indicator and for the most part, it is not a useful indicator. That's the golden nugget that you get out of today. You can obviously check out our research on technical analysis by heading over to optionalpha.com/signals.

But the whole premise behind moving average or MACD indicator actually makes a lot of sense and what it really is trying to do is trying to look at the generalities between or the predictability of shorter term moving indicators as opposed to longer term. Say a 9-day moving indicator versus a 12 or a 26. And so, if the shorter term moving indicator is moving up and starts to cross over a longer term, that might be bullish or if the reverse happens, the shorter term indicator or moving average is moving down, maybe a short term momentum is coming out of the security, crosses underneath the longer term, then that might be bearish. What we have found in testing though is that those indications and those signals of moves actually just happened too late. By the time that it actually occurs, the move is already done and maybe actually is starting to move the other direction.

Now, you could say that there's probably a little bit of inference that can be left here into divergence. Divergence is a big part of I guess technical analysis, just looking at the divergence and signals, the signals are starting to come together, but maybe they didn't cross yet or there's a big spread in these moving averages and that may signal that as getting overstretched. I do think there are some truth to that and I think that there are some validity to that side of the MACD indicator, but it's hard to create a replicable system based off of inference like that, based off of somebody's interpretation of it. That's why when we tested everything with our signals research, we did off of the raw peer signals. You had to get an actual cross or you had to get an actual move above a certain level or below a certain level for us to then be able to make a trade because we can't infer or basically have some sort of assumption that it could go down or it could go back up. If I gave two people the same chart, ideally, they would make in most cases, very, very different predictions based on many different price points going back in the past and the indicators.

I think that that's why for the sake of what I do, I like to have more concrete data points than just divergence because it's always up to interpretation. Hopefully this helps out. As always, if you guys have any comments or questions, I'd love to hear what you think about MACD if you guys used it. If not, hopefully you start using maybe some of the better indicators that we've gone through in our signals research. But in either case, hopefully this helps out and it brings a little bit of context around it. Until next time, happy trading!

#156 - Trader vs. Investor - What's The Difference? Feb 25, 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 differences between traders and investors and really, just trying to figure out what is the difference because the term gets used interchangeably. I know that I mistakenly use the term interchangeably. It's just very easy to say you're an investor or you're a trader. People think it's the same thing. But there is a difference or I think there's a difference in how I think about investing versus trading or how I think about this in the context of options trading versus other investing that I do.

In my opinion, I think a trader is someone who exploits market pricing or market variable differences. They're always looking to turn or roll positions over at an increasing pace, that basically, it's a numbers game, it's a quantity game, that you're taking advantage of some pricing differential in the market. In the case of option selling, we're taking advantage of the implied volatility premium that's present in the market where we can sell options on average long-term and capture the premium because implied volatility is so high it over-expects the market to make huge moves and it really doesn't long-term. That's what I think about when I think about a trader. You could say that that's very similar to someone who's a car dealer for example, like a used car dealership. They buy a car from somebody for a low price because they need cash. They have the ability to then sit and wait on the position. That's basically what we do in options trading. We wait on the position. We let the car sit on our lot for a little bit until somebody is willing to come over and purchase that car for a higher price. It's that same concept as what people do in the car business. I consider a car dealer or a used car dealer to be more of a trader.

Investors on the other hand I think are definitely a lot more emotional and hope-based, but they are also fundamental-based. They're long-term cash flow type people where if they're an investor, they're going to be an investor because they believe in a huge change over the course of a long period of time. Now, some people get into trading and they're really investors and so, they don't understand the mechanics or the concepts. Hence, why we have Option Alpha. But I think investors have a more long-term outlook on something and believe in something a little bit longer and are willing to actually hold through the ups and downs for the long-term gains which is something that they should do on the trading side. In my case, I'm an investor in things like real estate, technology software. Everything that we do here at Option Alpha, I consider this as a long-term play. We've been doing this over 10 years now and that's why I've been doing it for so long because I feel like there's a long-term benefit to doing this. I have my emotions wrapped up in this for sure. I have people that I like wrapped up in this. It's a long-term play for me. I can go through the ups and downs of people signing up and people cancelling and people saying everything is great and then they say everything is bad. I can go through that because I have the long-term vision in my mind.

Same thing with real estate. In real estate, because we start investing in real estate and my wife and I have been investing in real estate for a long time, that's more of a long-term thing for me. I know that real estate is going to be a substantial part of my long-term portfolio and wealth. And so, I'm okay starting to put a little bit of money into that now and letting it snowball by itself. But I'm not necessarily trying to flip every house that we find and try to exploit some pricing differential. Hopefully that helps out. Hopefully again, it just brings a little bit more context to the talk and conversation around trading versus investing. I don't think that necessarily, you can do both in the options market. I think that you either have to choose a side. You have to be an investor in the options market, the long-term leaps, risk reduction strategies, covered calls, etcetera or you got to be more of the trader side. I really think you have to choose which side you're on and this maybe even a good topic to talk about. Let me know if you think you're a trader or an investor. Hit us up on Twitter, Facebook, etcetera and share. I'd love to know what you guys think. As always, hopefully you guys enjoy these shows. Until next time, happy trading!

#155 - False Positives & False Negatives Cripple Options Traders Ability To Stay Consistent Feb 24, 2018

Show notes

Hey everyone, this is Kirk here again at Option Alpha and welcome back to the daily call. Today's call, we are going to be talking about false positives and false negatives and why they cripple, literally cripple options trader's ability to stay consistent. This one is a favorite topic of mine. Literally, I'm actually just really excited. I've sat up in my chair. I'm so much more alert talking about this topic because I love talking about this. I think that this is a huge problem in the investing world. I myself fall prey to it too, so it's not like that it's… I'm not superhuman and I don't have your false and negatives or downsides to how I trade, but I recognize that this is a huge problem with people and it's this false positive, false negative that you get in trading.

Here's how it works. When you make a trade and even if it's a completely bad, stupid, dumb trade, you could still make money on that trade. There's probably a pretty good change maybe even that you make money on that trade because something happened that was out of your control, you didn't really predict, but worked in your favor. Now, you have this false positive that, "Hey. When I made this trade, I made money." And then it happens say twice or three times or five times in a row which we've seen before that people are making the same bad trade, but they end up winning five times in a row and they have this false sense of positive outcome. I'll look at their trades or they'll send them over or I'll have a coaching session with people and I'll say, "Look. These are really bad. You should not be making these trades. They're too big a position size. You're not taking enough premium. You're not balanced." But they say to me, "Well, Kirk, I'm still making money on these. These have all worked." I'm saying, "Yeah. It's only been three weeks or it's only been four weeks. You have a false positive sense of success here. These trades are not going to work out long-term." And so, that's something that I think is really, really important to understand, is that when you get yourself into a trade and if it wins or if it loses even, that doesn't mean necessarily that the trade was good or bad.

That's why we publish so much research and we now have back-testing software that allows you to do this for yourself. Look at the long-term prospects for a trade or a strategy or a setup. What does it do on a long-term basis? If you're making trades at the 70% chance of success level, you don't know when your 70% winners are going to come. You could have let's say out of 10 trades, you know you should have about 7 winners and 3 losers. Well, the first 3 trades could be losers. That could encompass an entire quarter of your trading because you're trading three times, three expiration cycles. That could all be losing trades. And then you stop and you say to yourself, "Well, this is a losing strategy." But that's a false negative. You are falsely assuming that that trading strategy has a negative expected outcome when it doesn't. You just have to keep trading. Then you keep trading and then you have 7 amazing quarters or the reverse happens. You have 7 amazing quarters to begin with or 7 amazing trading cycles and you think to yourself, "I'm superhuman. Nothing is going to happen." And then you have what happened in the beginning of February where we had massive, massive movements in the market, huge drawdowns in a lot of people's accounts because they were totally one sided. And that again, created that false sense of positive outcome. Just trade everything bullish or the mantra heading into February before everything happened was, "Everything is up. Nothing bad can happen. The markets can't go down." Volatility always stays low, so a lot of people were short volatility, just flat out naked short volatility. And so, I think that that's where this topic comes into.

Just try to reassess what you're doing. Literally try to look at it as a business. People just get into this thing and they think it's just this hobby. They call it a business, but they don't. They get into it like hobbyist. If you were going to open up a restaurant, you'd look at – "Do people in that area go out and spend money on dinner?" If you're going to open up a high-end restaurant, you're not going to do it in a town that people don't usually go out and spend money on a high-end type dinner. It's just commonsense. Use our back-testing software, use our auto-trading software to figure out what works and then start to replicate that strategy and be consistent and confident in the numbers that they're going to work out over time. Don't believe or don't fall prey to those false positives or false negatives that you might get. It might be cool to win on a trade where you didn't do something right, but don't assume that it's going to happen every single time. As always, hopefully this helps out. Until next time, happy trading!

#154 - The Federal Reserve Has Never (Ever) Predicted A Recession Feb 23, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, I want to talk about why the Federal Reserve has never ever predicted a recession. I think this is actually pretty interesting. If you actually go back and really study the Federal Reserve and all of their predictions, all of their comments that they've put out… I think we haven't talked about this earlier on a podcast. This is Show 154, so we've done a lot of them before. But I think we did cover the comments that have been made before by Bernanke and others. The thing is that the Federal Reserve literally has never ever predicted a recession in the US and constantly now, the market is looking towards the FED as like big daddy, big brother on where things are going to go. Like, "Hey. The markets are in turmoil. Let's look at the FED. Where do they think that the markets are going to go?" But the reality is that they've never ever predicted a market recession and that's alarming.

Even more so, if you look at… I think the one that's really interesting is actually the Atlanta FED. The Atlanta FED and their GDP indicator now or index, that has been really like the go-to model for a lot of people. People referenced that often as a key indicator of where economic activity is and where the markets are going or where the economy is going. What's crazy about the Atlanta FED, if you look at the history of how they come out with their GDP numbers, in most cases, they will come out with an absurdly high number for GDP growth and then during the entire quarter, will start slowly ratcheting it down. I think they came out recently with a forecast for first quarter of 2018 and it was 5.4% GDP growth and last time that this happened, they came out 5% something GDP growth and then they cut it to 5% and then it was 4% or 7% and then it was 4% or 3% and then it was 4% and then it was 2% and then it was… I mean, they're just literally retching this down.

Now, if you think about this. Our economy in the US is so massive that a .1% change is a huge change. How can they be half off? How can you legitimately come out with a growth forecast that says, "5% growth and by the time we get to the end of the quarter, it's closer to 3% or 2% growth." That's a major shift. That's a 50% difference that happens in the course of a month. What happened in that month all the time… This happens regularly with them. What happens in that month that they lower their estimate by that much? It's still a huge, huge, huge change. I don't think that the news articles really ever catch this. It's always the change. It's always that they lowered it or that it came out with this huge robust growth forecast or a huge exponential growth forecast. It's always the headline that people catch, but they don't ever really dig down into it to see where the FED has been successful and profitable in predicting market recessions. And so, I think it's just a grain of salt for you to take today. Again, not that we need to necessarily act on it right now, but I think it's an interesting comment, so that you can listen to their comments and obviously, hear what they have to say, but then take it with a grain of salt. As always, hopefully this helps out. Until next time, happy trading!

#153 - Core Portfolio Theory For Options Traders: Still Viable Or Frankly Useless? Feb 22, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to talk about this concept of core portfolio theory for options traders and really asking the question, "Is it still viable or frankly, something that's useless?" What is core portfolio theory? You might have heard it from some other people out there and that's basically this idea that you should have a core portfolio on at all times. That can be comprised of futures contracts. It can be comprised of synthetic options positions. It could be comprised of stock in and of itself. You could be long gold because you love gold or long bonds because you want to be long bonds. But something that is your core portfolio and then you trade around that core portfolio. I understand all of the arguments for a core portfolio. I just think it's honestly inefficient use of capital to some degree unless you're doing things mostly synthetic. My biggest rub with it is that I truly believe in most cases, that stock is really inefficient for traders and you can replicate stock positions or get into synthetic stock positions with much less capital, therefore leaving you cash available to adjust or hedge or counteract whatever you're seeing in the market.

I still think that it's viable if you are trading less often. Having a core portfolio probably is more appropriate if you don't have the ability to trade, if you don't have the ability to use like the auto-trading software that we're rolling out. If you don't have that ability, then yeah, maybe having a core portfolio that's on, that gives you some study cash if the market goes up or goes down or gold goes up or bonds go up or whatever your portfolio ends up being comprised of, sure, it might help out. But I think if you have the ability to trade more often and more frequently, you can easily get into those same core positions and adjust them along the way versus just planting your flag in the sand and saying, "I'm going to be long EFA from here or I'm going to be long gold from here." Why not trade option contracts around that? You can still be long and trade contracts and still adjust along the way, so that if you're wrong, you still have an opportunity to make money. I think it's something that's an interesting topic. I'm not going to say… Totally, I don't think it's viable, but I'm not going to say that I think it's the best use of capital and time as long as you don't do everything with equity positions. Hopefully that helps out. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!

#152 - You're Only 5 Degrees Off Your Target! Feb 21, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, I want to try to help motivate you just a little bit to stick with it because I honestly think that most of you guys are about 5° off of your target. What do I mean by this? First, I'll go back and say, "My mom had me read a long time ago, a book called "212." It really was nothing more. It wasn't a book. It was more of like quotes and phrases and people who are just on the brink of being successful and stories about that. But the premise of the book is that at 211°, water is scolding hot and boiling. But at 212°, literally 1° higher, it becomes steam. It starts to evaporate and become air. It's that one extra degree where you don't know how hot it needs to be until it finally starts clicking and converting and transitioning over to something completely different.

I think that many people, especially people who try to follow options trading (whether it's with us or other people) end up putting in so much effort upfront and they just don't stick with it. They're probably 5° or so off of where they want to be. It's not that far off from hitting their target. It's just a small difference, but they just don't know. You don't know when that small difference is going to come in. Is it literally right around the corner? Your big break is coming, the positions, everything is going to start clicking. Two more days or two more weeks of trading and then it starts clicking. I would say that you don't know when your big break is going to come, when the lights are going to turn on. But I can promise you, they will as long as you stick with it. It's different for different people. Even if you're listening to this podcast right now, you're probably so close, you don't even know it and when it happens, you're going to look back on this and say, "Wow! I was so close. I'm glad I stuck with it. I'm glad I put in that extra effort. I'm glad I slowed down a little bit on some of the training and just really understood things before I try to just cram all the videos in."

That's what I'm talking about. I think you guys are actually a lot closer than you think you are. In many cases, you're over-thinking it or making it too complicated. You've got analysis paralysis. This business is not ultimately that hard. It comes down to a couple of key things that we talk about all the time and then a lot of persistence and consistency. Once you get that, then you have a lot more confidence in your trading. Hopefully that helps out. Stick with it as always. If you guys have any questions or need anything, let me know. Until next time, happy trading!

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