The "Daily Call" From Option Alpha

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#151 - How Closely Should You Monitor Option Greeks When Trading? Feb 20, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to answer the question, "How closely should you monitor your option Greeks when trading?" I think this is a tough one to answer because I think there's two parts to it. The first part of monitoring Greeks comes into play with single positions. If you're looking at a single position, maybe a single iron butterfly or iron condor that you have in an ETF or a stock, then you might look at the Greeks a little bit different because you're looking at it in the context of that single position. We've talked about before on the weekly podcast and on videos how you can use Greeks and in particular, Deltas as triggers for adjustments. If you sell the 15 Delta strangle for example and one of the Deltas on one side of your trade gets to 30, then you make an adjustment. That could be one of your triggers.

There's one way of looking at it which is monitoring Greeks on a position type level. Now, the other way of looking at it, I think probably the more important context of looking at it is looking at it with a whole portfolio, so looking at a Beta weighted look at your Deltas. Are your overall positions when Beta weighted to a market index, are you bearish or bullish? Because an individual position could be off for example. Maybe it's suggesting that you make an adjustment, but adjusting that individual position could cause the rest of the portfolio to become even more bearish or bullish than it already needs to be. And so, I think if you look at the portfolio first and use that top-down approach and then start digging into individual positions, that's where I think you get a lot of value in monitoring the Greeks. I think you should closely watch them. I think on the portfolio side, that will give you the first warning shots if anything is starting to get unbalanced or unskewed and from there, you can start digging in and finding out which positions are really causing it, which positions maybe have their Deltas going up dramatically, experienced a big move in volatility, some of those things.

I think it's also important to note that in some cases, if you have let's say large rises in Delta on short premium trades, it may not be the best move to adjust that position. What we had in the recent weeks in the markets is huge spikes in volatility. Although some positions stayed the same, just market volatility went up. It looks like the Deltas are going up because there's a possibility of a big move, but that doesn't mean that the stock hasn't experience it yet. It's still sitting there or it's still generally range bound. It's where it needs to be. You have a good position on. You just might have to carry a little bit more margin for the time being. That's something that we monitor as well too. Don't just look at one of the Greeks. Look at the whole position, the whole portfolio. Continue to ask yourself, "Look. What can I do? Can I be more patient? Can I sit here and wait for volatility to come back in or for time decay to work in my favor?" I think there's a little bit more to it than just looking at the Greeks on an individual basis. As always, hopefully this helps out. If you guys have any questions or comments, let me know. Until next time, happy trading!

#150 - One Trade A Day Keeps The Black Swan Away Feb 19, 2018

Show notes

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we are going to be talking about what I refer to I guess as the dentist adage for traders which is, "One trade a day keeps the black swans away." We've all heard that kid's tale or kid's phrase that you would say to your kids like, "One apple a day keeps the dentist away." But I think in trading, it is truly at least one trade a day on average that keeps black swans away. And so, I think this was timely because as you know, we've just been going through a lot of turbulent market movements. We're starting to see markets really, really pick up in the speed and velocity in which things are moving in both directions. We have days now where we're making 100 point moves within the same hour on the DOW and the S&P and it's crazy.

What I always tell people and I've told people for a long time is that what we need to do as traders is realize that market direction becomes more and more meaningless, meaning it's not as important the more often and the more frequent you trade. It's just really as simple as that. To use this as an extreme example on both ends, let's say that I gave you the opportunity just to make one single trade, one single trade in one single index or stock, but you had to hold onto that position no matter what happens for the next five years. You couldn't adjust it. You couldn't get out of it. You couldn't reverse the trade. It was one and done. Now, of course, that's a total extreme example, but it proves the point of what I'm trying to tell you and that is that that one entry that you have then becomes everything. It is the most important factor, is picking the right time to get into a security, whether it's the bottom or the top, however you want to trade it. You've only got one shot. And so, what people do often in just regular stock trading and investing is they do this. They basically decide to invest and then they invest everything at one time or a big chunk of it at one time or a couple of times during the year and then yes, timing becomes super, super important. It's no wonder that people try to look for timing mechanisms or they try to read articles about how to time and how to trade the markets because their entries becomes super, super important.

Now, on the further end of the extreme spectrum, you have high frequency quant funds and high frequency hedge funds that are trading thousands of times during the day and are just scalping little profits all over the place. Now, we can't do that as regular retail traders. We don't have that capacity yet. But the reality is that they end up neutral pretty much every single day. They're getting into and out of positions all the time. No matter where the market goes, they're just following the market. They have so many entries and so much frequency that market direction becomes meaningless to them. Now, of course, they could get hit on one move or a different move and different products, but ultimately, it smoothes out. Ultimately, the noise dies down and the volatility in the account dies down and you have much more stable growth long-term. I'm not saying that you can't have swings in your account because we have swings in our account for sure. But what I'm saying is that it becomes less and less of an impact the more frequently you trade. That's why we talk about laddering. That's why we talk about trade frequency as being a huge important determinant to success because it starts to solidify the probabilities and solidify your numbers. But that to me is what I think keeps black swans away.

If you can trade during a black swan event which I think that what we went through in early February could be considered like a mini black swan event. Nobody saw that coming. I mean, we were talking about that coming and we had risk defined positions on, so we were well positioned for that type of a move to happen. But even during that event, you still have to trade on the way down and I think that that's a huge part of being successful, is just keeping that trade frequency up and keeping your position size small, so that no one big collapse or position ruins you. If you feel like you can't sleep at night because of your positions, then they're probably too big. That's what I've said oftentimes. Hopefully this helps out. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!

#149 - What Is The Last Trading Day For Index Weekly Options? Feb 18, 2018

Show notes

Hey everyone, this is Kirk here again at Option Alpha and welcome back to the daily call. Today, we are going to be answering the question that was submitted, so thank you for… Bill is the one who submitted this question to me. "What is the last trading day for index weekly options?" Now, I can tell you right now, there's a lot of different stuff about index options because recently, I think it was 2006, the CBOE began offering weeklies on Monday and Wednesday expiration. What typically happens for most weekly contracts and I'm not including indexes in this right now, although they are offered on indexes, is that the contracts will come out on Thursday and then expire the next Friday. That's basically how those regular weekly contracts work. And so, for most tickers, if they have weekly contracts, then that's how it works. The contracts basically get issued or published officially on Thursday and then they expire the next Friday, although in most cases, you can actually see them for many, many consecutive weeks out in the future. I think it was around 2016, the CBOE began to offer weeklies on the S&P, as well as some of the other indexes that actually expired on Monday and Wednesday as well which is crazy because now, you have Friday expirations which they call EOWs which is end of the week and then they have these mid weeks or SPXMs basically that are Mondays and Wednesdays.

It's a little bit tricky actually because there's multiple expirations and most of them are PM settlement indexes which means that they basically calculate on the closing price, but it is important that when you are trading these weekly contracts, especially in broker platforms like Thinkorswim or Tastyworks or any of these other guys, there's going to be a lot of tags for weeklies and you just want to make sure that you're aligning it with whatever your trading strategy is for that weekly contract. Don't just look and say, "Okay. There's the weeklies." Because right now, on the S&P right now, I think there's probably about 15 or 16 different weekly contracts to choose from. And so, you really, really have to check those dates just to make sure it's the one that you want, that you know when the settlement is, if it's going to be Monday, if it's going to be Wednesday or Friday. Ultimately, I think this is cool because then, you actually have very, very precise and pinpointed targets as to how you might use these for hedging or trading purposes in the future. I think it is good, but again, it's just something that you have to double-check. And then of course, some of the other tickers are a little bit different as well. NDXs and RUTs and stuff like that, a little bit of change in variation I think on just actually how they calculate settlement in some cases, but most of the time, it basically is the Fridays, Wednesdays and Mondays that are available. Hopefully that helps out. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!

#148 - Vertical Spread Example Plus Advantages & Disadvantages Of Trading Them Feb 17, 2018

Show notes

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be talking about some vertical spread examples and also going through the advantages and disadvantages of trading spreads. First of all, what is a vertical spread? Well, there's two types of vertical spreads generally. There are debit spreads and credit spreads. Debit spreads are when you are trading two different option contracts and the net result is that you end up paying a debit, so you're paying to get into the position which means that you're an option buyer. If you do a credit spread, that means you're trading two different option contracts, but the net result is that you get paid a net premium or a net credit which means that you're an option seller.

In either case though, they are still classified as vertical spreads because you're trading two different contracts. Where you can adjust your spreads is mostly on spread width, so how far out you end up selling the contracts or buying the contracts from one another. An example of a tight vertical spread might be if a stock is trading at $100. We might sell the 98 put options and buy the 97 put options. We would be a net credit seller in that case and we'd be doing a $1 wide spread. Now, if we wanted to do a wider spread, then what we would do is sell the 98 put options again, but then buy say the 95 put options as a $3 wide spread. Now, we're doing the spread a little bit wider. There's a lot of wiggle room obviously and you can do wider spreads or more narrow spreads as you keep going forward.

The main advantage to doing spreads is that you control your risk in those positions. That's why I suggest it's actually good for new traders, even if you're a little bit advanced. Still using spreads is not a bad idea. We use spreads all the time because we can control the risk. It has built-in risk management. And so, when you do a spread, you can never lose more than that spread differential in the contracts. You know exactly how much you can lose on a contract which means that you can control your position sizing really, really well and not get carried away with any margin calls or margin requirements.

The downside to then trading spreads as a generality is that because of this risk control, you do give up some of your premium. As we said earlier, if you're selling one option and buying another, that cost of buying the other option contract means that you're going to make generally less money or have a little bit lower probability of success. Now, it's not a huge difference and it depends on how wide you sell these contracts and still how far out of the money you buy or sell contracts, but that is the main thing that give up, is you give up a little bit of upside potential on that spread because you have to buy that insurance basically protection, that defined risk protection.

Ultimately though, you can do them really, really wide. That's what we do a lot if we do an iron butterfly trade. We'll do a wide iron butterfly where we'll sell at the money contracts, but then buy our further out wings say $10 or even $12 out in some cases. They're really, really cheap, so effectively, we're buying very cheap insurance or protection in case the market continues to be volatile as it's been over the last couple of weeks. Hopefully that helps out. As always, if you guys have any questions or comments, please let me know. Until next time, happy trading!

#147 - Difference Between Buying & Selling Calls Or Puts With Stock Options Feb 16, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. In today's daily call, we are going to talk about the differences between buying and selling calls and puts with stock options. There's basically four different ways as the major building blocks or fundamental mechanics of how you can trade options and the four different ways are – You can buy a call, you can buy a put or you can sell a call and you can sell a put. And so, today, I want to go through each one of these and break them down just a little bit more, so that you understand what each one entails and what the obligations and the risks are associated with each one of these. Now again, these are the building blocks. This is the framework of how you basically can create any option strategy payoff diagram you want by using these four core fundamental different option types.

The first one is to buy a call. When you are buying a call option, you're basically buying the right to go long 100 shares of stock at a specific strike price at a specific time in the future or before an expiration date. This is the one that most people learn to begin with. They learn about long call options or buying call options and the association here is that you pay a little bit of money upfront, but you have all of this potential upside risk. Now, we've talked that nausea about all the benefits and drawbacks to doing this, so you can check out other videos and trainings on this. But again, with a buying of a call option, you're buying the right to go long 100 shares of stock basically in the future. Now, when you buy a put option on the other hand and you're still option buying at this point, you're buying the right to sell 100 shares of stock at some predetermined price at some predetermined point in the future or expiration date. As opposed to a call option where you are generally bullish on the stock because you want to buy shares, with a put option, you're generally bearish on the stock because you want to sell shares at a higher strike price, assuming that you could buy them back in lower at a lower strike price in the future. Buying a put option means that you're very, very bearish on the stock, you're looking to sell stock and then buy it back in a much lower price in the future.

Now, let's switch things over because now, at this point, we've done only option buying which again, is how most people get started in the options market. They understand the dynamics of buying a call and buying a put. Now, where it really becomes confusing in most cases is when you actually turn the card over and we start talking about option selling. The first one is option selling where you're selling a call option. Now, you're taking the other side of the option buyer contract in this case. When you sell a call option, you are basically taking the obligation to sell 100 shares of stock at a predetermined strike price at a predetermined point in the future. Now, it doesn't mean that you have to go through the assignment process. You can buy and sell these contracts and close them out before expiration. But with an option sell order where you're selling a call, you are taking in a premium from the buyer and you're hoping that the stock does not go above your strike price. Although you're selling a call and you might think to yourself, a call option is associated just with a bullish strategy, but when you're selling a call option, it's actually more of a bearish strategy. You want the stock to stay where it is, it can still rally a little bit, but as long as it stays below your strike price, you keep that entire premium from the option buyer.

On the same side or on the other side, you have the sale of a put option. When you sell a put option, you also have the obligation then as opposed to buying of a put option to buy stock at a specific price in the future at a specific expiration date. Again, remember, a long put option buyer wants to sell stock at the strike price. That means if you are a put option seller, you're going to be required if you go through the assignment and expiration process to buy that stock at that strike price. When you are selling a put option, you actually are entering into a bullish position on the actual stock. You're collecting a premium from the put option buyer and as long as the stock stays above your strike price, you keep that entire premium. You don't want the stock to actually go down. This is actually a very popular strategy, a very effective strategy for generating income and also, one that people use if they want to get into a stock. Sometimes they will sell a put option, collect some premium with the intentions that they want to get put the stock. That's the term, is getting put the stock because the stock goes down in value and that's basically a way to buy stock cheaper if it does go down in value, is to sell a put option and collect money along the way.

These are again, the four basic building blocks of how you can use calls and put and buys and sells to basically build out any strategy you want and from here, it's just a matter of putting these different contract types together into different payoff diagrams like credit spreads and iron condors, straddles, strangles, iron butterflies, etcetera. As always, hopefully this helps out. If you have any questions or comments, let me know. Until next time, happy trading!

#146 - Stock Trading Mistake: Forcing "Revenge" Because Of Missed Opportunities Feb 15, 2018

Show notes

Hey everyone, this is Kirk here again at Option Alpha and welcome back to the daily call. Today, I want to talk about a huge stock trading mistake and that's forcing revenge because of a missed opportunity. This is one that I know I struggle with initially when you start trading and I think everyone struggles with this as an investor. If you don't, I don't think you have emotions maybe or you're just too robotic in your trading to begin with. But this concept that I see all the time and honestly, I see this still in people who say they are veteran traders to some degree, but they end up forcing revenge on the market by trading things that they should not trade or position sizing themselves in a way that exposes them to more risk because they think that they are missing an opportunity or because they think they have to fight back against the market.

This concept really comes from in most cases, the world of gambling or poker, however you want to think about it. But if somebody's dealt a bad hand, what you'll see somebody do is they'll double down. This is even a common term that you hear, is "Well, you got to double down on the next one. If you lose, then you double down and basically double your investment, so that if you win the next one, you basically get back to par." But what happens is when you do this, you end up losing again and then you have to double down even more. Then what if you lose again? Then you double down even more and then you're just out of money. You just continuously feed this negative cycle or this negative funnel of losing value and profits because you think that you're owed something from the market. You think that the market took something away and so, the next one has to be good for you, the next trade has to work out.

We all know that doesn't happen. If we talked over drinks or just without the market there in front of us and just talked as rational human beings and rational adults, we know that that's never the opportunity. The opportunity is a long-term probability model. That doesn't mean that you're going to win every other trade. It doesn't even mean that you're going to win the first five trades or the first 10 trades that you do. That's why position sizing and staying systematic and staying repetitive is so important. But when you get into this mindset of having revenge against the market, it can really, really be degrading to your trading account and to your mental spirit because you're always seem like you're fighting back against the market. I guess that I know that this is something that I struggle with earlier in my career because when I started trading at home and I started trying to day trade, I remember there were days where I would make a lot of money and then there were days that I'd make less money and I'd try to force trades into the market because I had to basically claw myself out of a losing trade from the last day.

That's totally the wrong mindset to get into because again, you start doing things that break your regular traditional rules. By all means, it's very, very hard, especially in an options trading system like the one that we try to teach at Option Alpha, to stay consistent and stay persistent in the face of say a losing streak that you might have. This is really hard for people to do and I've only learned this because I've been doing this now for over 10 years, so I've seen myself do this and I've recorded myself and I have all the videos to go back and review my own trading mistakes and mindsets that I often do. And so, I know this now because I have a lot more patience to just hold through and see out the math, see out the probabilities, keep the end in sight basically. Again, I think that this only comes with time and patience and hopefully mentorship or a community that you can be involved in and to have other people do it or see other people do it. It really gets you out of that mindset of forcing revenge or fighting back against the market.

The one thing that I will say to end this up is that I look at the market not as somebody that I'm competing against. I think that people often look at the market as a competitor. This coined term of beating the market is often misrepresented, so that people actually think that there is something else out there that they have to beat. Like this market is this thing, this animal, this beast that they have to beat. I don't necessarily have to beat the market. I have to trade around the market. That's how I think about it. The market is not something that I have to force revenge on. I have to follow the market, I have to understand it and I have to trade in the context of the market or around the market in different sectors. That might help out also with a little bit of mindset.

But again, really try to keep it systematic, keep it mechanical. Don't assume that every single trade that you make is going to be profitable. I know that sounds so elementary and so simple, but yet, deep down, subconsciously, I still see people doing this all the time. They get into this business, they know that they're going to have losing trades, but then when the one actually shows up, it's like they didn't know that that was going to happen and they get freaked out and they start breaking rules, they start fighting back, they start increasing position size and they basically dig themselves into a deeper grave much faster than if they just would've taken a breath, chilled out, calmed down and get back to the mechanics. As always, hopefully this helps out. Until next time, happy trading!

#145 - Option Writing Strategies & Exiting Positions Before Expiration Feb 14, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. On today's daily call, we are going to be talking about option writing strategies and exiting these positions before expiration. Today's call basically came out of a question that somebody emailed me. Again, if you have a bunch of questions about options trading or strategies and you want to email them or tweet them in or leave us a private voicemail at optionalpha.com/ask, we will definitely get them added to the list for these daily calls because we're doing them as you know, every single day. And so, this helps me just figure out what you guys want to hear and what you guys want to learn.

In this case, somebody emailed in and they said, "Hey, can you close out a trade before expiration when writing options? Do you still get the premium? How does this whole process work out? I don't really understand and it doesn't make sense." Here's the deal and we'll just take this step by step. When you are doing an options writing strategy where you are effectively selling options to open, so you sell a spread or sell a single call option or a single put option, you then have the requirement as an option seller to close that position before expiration or let the position expire. Now, I always say and the easiest way to think about this is that if the position is in the money, meaning if your strike is in the money at expiration, you need to be active in closing the position. You need to take an active role in actually reversing the trade and closing out of that position.

If your strike price is out of the money which is ultimately what you want, you want your strike price to be out of the money, then you can let that option contract go through the expiration process because it will expire worthless and it won't do anything to your account. Now, that doesn't mean that you can't close out that contract earlier or in advance of expiration. You don't have to let the option contract go through the expiration process and expire worthless. You could actually go in at any point as an option seller and physically close back out of that contract. Remember, as an option seller, you have the requirement to fulfill the trade and complete the cycle to close out of that contract or let it expire worthless.

Now, if an option contract is in the money or even out of the money and you want to go back in and close it, all you simply have to do is buy back the contracts that you sold. If I sold a put option at a 50 strike price, at some point in the future, I'd want to go back in and buy back that put option to reverse the trade and close the loop, close the trade cycle and take whatever premium is left. To work through a simple example here, so it helps out, if I sold a 50 strike put option on a stock that was trading at $60, then I would make money as long as that stock traded basically above $50. Let's say I took in a $200 premium for selling that 50 strike put option. Now, if at expiration, the stock is trading at $60, I can basically let that put option expire and I keep that $200 premium. I sold that option, option contract is out of the money at expiration, I don't have to do anything unless I want to and if it expires worthless and out of the money, I keep the entire $200 premium.

But now, let's say that it's expiration and the stock is trading at say $51. It's close to expiration, the stock is trading at $51, I traded the 50 strike put, I'm nervous that the stock might go in the money and the stock might go down by a couple of dollars, so I might go back into the open market and buy back my put option that I sold which might have a little value left in it, maybe it has $10 of value, so I'll pay $10 to close that contract. Now remember, I collected $200 of premium initially for selling that contract. If I buy that contract back for $10 from somebody else, I still pocket $190 of profit and now, my risk is totally gone and I've closed out of the contract and I've reversed the loop and now, I'm totally done. Again, the premium that you collect, you basically hold on your balance sheet or on your ledger, but you have to basically maintain that premium or keep it as much as possible and you can use part of that premium to go out and buy back those contracts hopefully for a lower price.

The third scenario of course is that the stock is trading down below your strike price of $50. The stock is trading let's say at $45, we collected a $2 premium, but now, let's say that the stock ends at 45. We would have to go out and either buy that contract back for $5 which means that we have a $500, so it means we have a $300 net loss on that contract or we'd have to go through the exercise and assignment process which we'd usually don't want to go through, so we would try to actively close out that contract before expiration. Again, if the stock landed at $45 and we have to buy that contract back for $5 of value, that means that we take that $5 and the option contract value is like $500 notional value. If we have to buy that back for $500, less the premium that we collected initially of $200, again, that leaves us with a $300 loss on the position. Again, that's assuming that we don't go through the exercise process, we try to actively close out of those positions before expiration.

Hopefully that helps out. Hopefully it does answer the question. I know that sometimes it can get a little confusing, so try to write it out, try to draw it out the first couple of times that you do it. But yes, you can go through and close out those loops. That's the way I always think about it, is that if I have contracts that are out there, to really keep the money and make sure that everything is done and the accounts closed or those trades are closed, I have to close loops. If I sell something to open, I have to buy it back to close. If I buy something to open, I have to sell it back to close to make sure I complete the full trading circle. As always, hopefully this helps out. If you guys have any other questions, let us know. Until next time, happy trading!

#144 - What Are The Best Option Strategies For A Bear Market? Feb 13, 2018

Show notes

Hey everyone, this is Kirk here again at Option Alpha and in this daily call, we're going to answer the question – "What are the best option strategies for a bear market?" Now, at the time that we're recording this, we are not in a bear market, but inevitably, imagine that at some time in the future, we will be in a bear market and markets do correct, they do go down and we'll probably see some volatility. And so, the question is, "How do we trade this? How do we not only protect ourselves from this, but how do we profit from a bear market move or a decline in the stock market?"

The first thing I will tell you is that you have to wait. This is something that we definitely learned in lots and lots of research of back-testing different bear market scenarios, back-testing market crashes, not only global market crashes, but different actual ETF and sector crashes, like the crash that happened in the dollar, the crash that happened in gold and silver, in the oil markets. All of these different markets have very much similar characteristics. Although no two crashes are exactly the same, what we did find is that the prevailing characteristic that you have to understand as an options trader is to wait and don't try to anticipate the crash. That's where people get really lost in this business and end up blowing a lot of money, is waiting for the house to burn down. I use the house analogy a lot with coaching clients because what I end up telling people that they're doing by trying to front-run a bear market and try to buy options or buy spreads, anticipating a move down, is like buying insurance on a house that's not burning down yet. What I tell people do is wait for the fire to start. Wait for the house to actually start burning down and then start to buy insurance on that. Now, of course, you can't do that in the real world in the housing market. If your house is burning down, you can't call your insurance agent and say, "Hey, I want to buy insurance this house." But the beauty of the options market is you can do that. You can wait until markets are starting to cyclically break down and we start to see industries and sectors really break down. Once that starts to occur… You'll know because everyone will be talking about it and you'll start to see declines and the market really starting to falter, have a difficulty rallying. Once that starts to happen, then you can start to execute a bearish options strategy.

One important note… We actually covered this in the weekly podcast a while back when we talked about different option strategies that we back-tested for bearish market scenarios. You can go back to the weekly podcast and check that out on those one of the earlier shows we back-tested put option strategies. But one of the interesting metrics that we learned in that, just a little case study, is that most of the returns from any option buying strategy in a bear market scenario actually came at really like the depth of the market. You have to understand though, when you get into an options buying strategy, if you choose to do an options buying strategy and you're going through a bear market or a market decline, volatility is going through the roof, so you end up paying higher and higher premiums for more volatility. What that means is that ultimately, it only works best at the depths of the market. When the markets are really at the inflection point where they're really going down hard, it seems like there's no floor, that ended up being the best time to trade them. It's really hard then to anticipate when that happens. We don't know if today's move of 3% lower or 5% lower is really the end or if there's another one right behind it.

When we back-tested different option strategies, you can obviously go one of two different directions. I'll tell you both ways that you can go and you can ultimately make your own decision. I think at the top of a market, when we start to see new stories and data come out and we start to hear the rumors of a cyclical turn or a market turnover and the market no longer is making higher highs and higher lows, but is really starting to try to find its footing and starts to trade more or less sideways for a month or two, I think at that point, the best option strategy from what we've seen is obviously call credit spreads. You still want to be selling options, you still want to be collecting premium, but at that time, you're not taking a directional stance in the market because at that point, the market has not turned over yet and is really not even running lower in any significant manner. It's just trading within a range and trying to find its footing. In the last 2008-2009 crash that the stock market went through in the US, we saw that the market actually went through this type of scenario for almost a year. I mean, really, there was about a year period of lots of volatility, but pretty much sideways action for the market before it had its final plunge lower. In that time period, it's better to trade call credit spreads where you're selling spreads out of the market, even selling neutral iron butterflies, iron condors right around the market scenario where it's at.

When you get into the situation where the market is continuously making lower lows, it seems like all the news is terrible, there's market panic, there's mass hysteria all over the place, everything seems to be breaking down, at that point, if you do execute an options buying strategy, what you want to do is you want to buy spreads. You don't want to go out and buy long options. That's probably the worst thing you can do because at that point, what you'll end up doing is you're paying for all of that fear by buying those contracts. You're basically feeding the cycle anyway and you're buying those option contracts with a lot of high implied volatility which means you're in most cases, overpaying and your breakeven points are really, really low compared to where your strike price is. You might buy a 150 strike put option, but your breakeven price might be 120. The stock really has to move even below 150 to 120 before you make $1 on that contract. What you need to do is you need to focus on trading spreads. You need to be buying options say at the 70 or 60 Deltas and then selling options at the 20 or 30 Deltas and doing spreads. Yes, that means that you are going to forego massive profits if the market totally collapses and you're 100% right, but at the sake of being a more diligent and systematic trader, it's much better for you to consistently trade spreads and do it all the way down if you want to at the depths of the market crash than to do long option contracts solely or individually.

As always, if you guys want to learn more about the different scenarios that we back-tested, we have a whole different section that's part of our profit matrix report that we released a little while ago that has all of these different scenarios, not only with the best strategies for market buying with more specifics on spreads and days to expiration and how far you out you buy these contracts, etcetera. You can check it out on our website in our research section. Again, it's our profit matrix report and you can get to it by going to optionalpha.com/profit. Until next time, happy trading!

#143 - Top 5 Currency ETFs With Tradable Option Contracts Feb 12, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, I wanted to share the top five currency ETFs with tradable options contracts. One of the cool things about options and particularly, the ETF market space right now is that a lot of ETFs are coming out that can trade basically anything that we wanted, so we can have very quick, very easy exposure to global currencies, global markets, global countries basically in the entire economy via an ETF which is very cool.

Today, the top five ETFs… I just looked up this on a bunch of different databases just to see what were the top five ETFs as far as market size and market cap and the top five right now are UUP which is the dollar bullish ETF, so trading basically the US dollar, FXE which trades the Euro, FXY which trades the Yen, FXB which trades the British Pound and FXC which trades the Canadian Dollar. There's also FXF which trades the Swiss Franc too which is also up there, but as far as top five go, these are really the top five as far as market size.

The cool thing about all these is that they do have tradable options. My one note of caution with all of these is that in most cases, options volume for a lot of these is very thinly traded or very condensed around a certain number of strike prices. Like when I just looked up UUP and FXE, there's lots of volume for those ones, but they're really condensed around the even number strike prices and also a couple of different contracts around the at the money strikes. You start getting further out with some of these contracts, meaning further out of the money on either end and volume basically disappears, so does open interest. Nobody is really trading them. Although they're available to trade, you don't really see anybody actually actively trading them.

You can get exposure to currency ETFs through options which is part of stuff that we do on a rolling monthly basis. I think most months, we have at least one or two different currency exposures. It just depends on implied volatility. Just a couple of months ago, FXE had insanely high volatility and it shifted to FXY and now, both of those are pretty much non-existent as far as volatility. It is something that you have to get to get into and out of based volatility, but ultimately, I think it's good to have at least this in your back pocket, is different exposure to quickly move money to a favorable volatility setup in one currency versus another which is just so cool to be able to do this actually from home and basically trade currency ETFs from all over the world.

Hopefully this helps out. Again, just the one note of caution is just make sure you double-check those volumes, those open interest for different contracts. Some of them can be really, really thinly and lightly traded and you just don't want to be playing in a pool where you're the only person that's in there splashing around. As always, hopefully you guys enjoy this. Until next time, happy trading!

#142 - The Basics Of Trading Options In Your 401k Or IRA Account Feb 11, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, we are going to be talking about the basics of trading options in your 401K account or your IRA account. Most people obviously want to trade options, but you might think that it's hindered by the ability to trade options in your retirement account or 401K. The reality though is that it's actually very easy to trade options in these accounts as long as you either go with A, the right broker or B, have the right trading approval levels. We've talked about this before in the past, but approval levels are different levels that allow you to trade more and more complex option strategies. Most brokerages when you start out with a brokerage account and fill out the questionnaire about risk and what you're trying to do with the account, basically, they're trying to assess what type of risk they should allow you to have, what type of options trading approval level they should grant you. When you fill out this, most brokers generally start you with the lowest approval level which I don't necessarily agree with, but the lowest level which is usually level one approval which means that you can trade covered calls and covered puts, things like that. You can trade very basic option strategies.

What you want to do though is you want to quickly work up to the higher trading approval level. Call your broker. Listen to our weekly podcast that we have on options trading approval levels which we definitely have on the website and you can search on optionalpha.com on how to get up to those level three, level four type approval levels which means that you're basically open to trading as much as possible within the restrictions of the account. You want to do that because you want as much flexibility as possible. Even if you don't think that you're going to be trading some of those strategies, you still want the ability to trade them. You want to have them in your back pocket if in the case of one market environment you need to make that trade or not. You want to have the ability to have it right there at your fingertips and not have to wait and go through an approval process. The first thing is always just to work your trading approval level up as high as possible. The second thing you have to understand is that most brokerages should facilitate the trading of options in your IRA or 401K. If they don't, you need to move that IRA or 401K to a more options-friendly broker. Yes, that might be a little bit painful as far as paperwork and the process to move it. It might take you a week or so to get everything transferred over. But ultimately, for the sanity of your long-term portfolio or for the stability of your portfolio, it's worth going to a more options-friendly broker, so that you have the ability to trade it.

Now, the basics of trading options in an IRA is only that you have to do everything on a risk defined basis. Some brokers are a little bit different on this rule, but the general rule is that you have to do everything risk defined. You can't have any lingering naked short positions. You can do long call options, long put options where you're paying money and getting into an option contract, but you can't do any naked shorting of any kind. That means you can't do any selling of call options, selling of put options without creating a risk defined counterpart. This only means that in most cases, your IRA or 401K is required to have spreads at pretty much all times. If you're going to be an option seller, you just have to do everything within the context of spreads, so credit spreads, iron butterflies, iron condors, calendar spreads, etcetera. This is good because this actually allows you to actually still do a lot of trading that you couldn't otherwise do in most brokerage accounts. What we do at Option Alpha is when we send out a trading alert if we do a straddle or a strangle, we also give you basically the framework for how to build out that trade in the trading alerts to do an iron condor or an iron butterfly if you're trading in a risk defined account.

Again, it's always just as simple as adding some very cheap out of the money protection to create a spread. You can replicate the same types of strategies that I might be able to do in a margin account or somebody might be able to do in a portfolio margin account. You can replicate those same types of strategies by just adding a long call option or a long put option to create a risk defined spread. For example, if we are trading a straddle and we sell the 100 strike straddle, meaning that we're selling the 100 strike call and the 100 strike put, we can do that in a margin account because we can cover it with margin. In a 401K or IRA account, you'd have to do that as a risk defined spread. You can take the core fundamental trade that we're doing which is the straddle, do the same thing, but then add let's say a 110 call option and a 90 strike put option. You effectively are creating an iron butterfly using the same inside short strikes of 100 that we're doing and it's basically like a synthetic straddle, although you just have really cheap protection bought at 110 on the call side and 90 on the put side. Those options on either end might cost you $5 or $6, so your overall profit might go down by $10, but at least, it allows you the flexibility to trade in that retirement account whereas you otherwise couldn't have done it if you didn't create a risk defined spread and strategy.

Hopefully it helps out. Again, it's not really too much more complicated after that. Really, that's the big thing that you have to understand about retirement accounts, is making sure that everything is risk defined. Otherwise, you should be pretty much wide open to trade anything you want at any time that you want as long as you have the higher trading approval levels that we mentioned. As always, if you guys have any comments on this or any questions, let us know. Until next time, happy trading!

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