The "Daily Call" From Option Alpha

Latest Episodes:

#131 - Why I've Never Run A Live Trading Room Jan 31, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, I'm going to explain why I've never run a live trading room and honestly, why I never plan on running a live trading room, though have been asked an umpteen million times. I literally get asked every single week. "Can we run a live trading room? I want to see you trade live? I want to be able to ask questions live." I get the concept of it and I understand why people want to do it. I understand the allure and the attraction to it. But there's a couple of main reasons why I'll never run one and haven't run one before in the past. Number one is I think that it's insanely inefficient, meaning that it's an inefficient use of my time and your time for us to sit in a room together and just watch each other or comment amongst each other. I think it ends up bringing up things that aren't really relevant. That's the biggest thing for me. We end up talking about stocks just to fill time. We end up talking about indicators to fill time. We might see "potential trades" that really aren't trades there. But it's just a means to create activity and to create engagement and to fill up blank space.

There is a guy… I try to look this morning as I'm recording this and I didn't find it, so I apologize for this. If you do know, just let me know. Shoot me an email or shoot me a tweet or a Facebook message on this. But there's a guy who outperformed all the other fund managers I think last year or two years ago on one of the university endowment funds and his strategy was to basically do nothing. I mean, he's a long-term investor. I mean, look, it worked because the markets went up. But he talked about – He would go to his office just by himself. He had no employees. There was nobody with him, helping him run this thing and he basically outperformed everyone else. When he was interviewed, they basically said, "Well, why do you go there by yourself? Why don't you have just someone else to talk to you, someone else to bounce ideas off of?" He said that it would basically fill up time. It would fill up space and they would end up maybe creating ideas out of thin air that shouldn't have been investable ideas. That's what I think live trading rooms do. When you actually look at a live trading room… I've jumped on some just to watch what happens. They have those things where it's like, "Watch how we run it." I'm like, "Okay, I'll see how you'll run it." People are talking about so many random different things and it's all over the place. There's no consistency, no framework and it's just creating ideas out of thin air which I don't think is really useful.

The other main reason why I don't do it is because I don't want to be tied to the computer every single day. Frankly, I love you, guys, but I don't want to be tied to the computer every single day and I don't think you do either. I think the people that we're trying to attract at Option Alpha want to know or want to understand how to trade and still have a life and not be associated to the markets being open 9:00 to 4:00. I mean, that's still a job if you have to be tied to the markets every single day all the time, running live room or trading live every single day, day trading, penny stock trading, swing trading. That gets really, really tiring and that burns you out. I don't want to do that. I've got two small girls, I've got one new kid on the way, I've got a beautiful wife. I want to spend time with them and I don't want trading to get in the way necessarily of me being able to do that. I want to be able to trade, run Option Alpha, do our real estate thing and still have plenty of time for my family and my life.

Hopefully that helps out as always, just understanding why I don't do it. I think it's just really an inefficient use of time. I think it fills up space for most people and I think that that space creates some sort of comfort or familiarity with the markets, but you really don't need it. It's not something that's absolutely emphatically needed to be successful which is why I don't run one. As always, hopefully you guys enjoyed this. If you have any other questions about what things I don't do or what things I do, always let us know. Head on over to optionalpha.com/ask and click the big red button there, leave me a message. It's always first come, first serve for these daily calls, so we are always looking for new questions and content to talk about, so don't be shy about asking your question or getting your question in. Until next time, happy trading!

#130 - AAII Sentiment Survey - What Is It & Should You Care? Jan 30, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. On today's call, we are going to talk about the AAII sentiment survey, basically what is it and should you care about it, should you follow it. This is something actually I've known about for a long time. If you're in the investing space, undoubtedly, you've probably come across AAII which is the American Association of Individual Investors. They have a huge following. They've been around since basically I think the early 1980s. They've been basically publishing this reading on sentiment survey of all of their members and basically what happens is that each week, AAII asks all of their members this simple question. They do it through online surveys and polling and they remind people to do it. Obviously, you have to take that with a grain of salt that it's only from one community, but it's probably a good breath of indication because most people who are part of AAII are probably wealthy, probably have some money to spend or probably affluence and probably into their later years. Not in all cases, but it's not totally millennials who are here, nor is it the opposite end and everyone here is over 75. It's probably a good representation of just a general investor in the market, someone who's probably moving some money around.

But each week, they ask their members a very simple question. "What do you feel is the direction of the stock market over the next six months? Will it be up, bullish, no change, neutral or down bearish?" And then people answer. And so, this reading or this sentiment indicator has been out now for a long time. They've got a lot of data on it and they continue to grow and increase the number of readings. This has helped us then, trying to figure out if this thing actually works. Now, they did a huge write-up on the sentiment survey as a contrarian indicator which you can look up online and definitely got to their website and check out. What's actually cool about this and why I like this is because I'm the type of guy who wants to see the data for myself. I don't want to trust a one sentiment indicator. I want to see, "Hey look. If we're going to use that type of indicator, we got to overlap that indicator against the market to see if when people are bullish, does the market go up and when people are bearish, does the market go down." That's really what I want to understand.

When it comes to figuring out if you should actually use this, I think there's a couple of key takeaways. One is that the indicator usually was on one end of the extreme and stayed there until markets change. What I mean by this is that what they found in their research was that people tend to be just generally bullish until markets go down and then they're bearish. It's not like this indicator is flip-flopping every single week or every single month. We don't see people be bullish one month and then bearish the next and then bullish the next. It doesn't flip-flop. It tends to stay at one end of the extreme or another until major market shifts happen. That's helpful because if we see a reading of people being really bullish, that doesn't really necessarily mean anything to us on the outside. If we see a reading of people being bearish and we're in a bear market, it doesn't really mean anything to us on outside.

What I think is most important for this is that it acted as a contrarian indicator which we know is probably actually possible. It's not actually a surprise if you think about this. When everyone's bullish, that's probably a bad time to get into the markets. When everyone's super bearish, it's probably a bad time to start selling. It's probably a good time to start buying. It's probably a very simple concept, but we just all forget about it. Maybe we've forgotten about it over the last couple of years because we've been a super bull market. But when it was found to be a contrarian indicator is when the readings for bullishness or the readings for bearishness were two or three standard deviations above the average or the mean. What I mean by this is that if the reading for bearishness is say 50%, if we start to see that reading start to go two or three standard deviations above that where people are not just bullish, but just super bullish, like more than average, 75%, 80%, 90% of the people are bullish, we start to see those readings consistently at these larger tail ends, that is probably a better indication of the markets potentially turning or the markets stalling at those levels. Same thing on the bearish side. If we start to see people not just bearish, but super, super bearish, I mean, like overly perma-bear type bear people, then that's when it might actually be a good time for the markets to rally.

Again, they track this and they overlaid the time periods where people were super bearish or super bullish against what the market did and it actually ends up being a pretty good contrarian indicator. The way that I would use it moving forward and the way that I monitor this and watch this on my end… By no means do I watch this every single day, but it's something that I glance at maybe once a month if I see it because it always comes out and I have email updates on this or I see it on Finviz because they talk about it there. But whenever that happens where we start to get this insane level of bearishness or bullishness, that's when you might just heed some caution and take a closer look at maybe your portfolio. Ironically enough, at the time that this podcast is going out, we're starting to approach that two standard deviation level for bullish readings. We're starting to see people become uber-bullish on the market, probably no surprise because last year was a really good year for stocks. We're starting to see people forget the past and not take into account maybe potentially the risk. The likelihood that we start to see the market fall as based on this indicator is probably a little bit higher now than it was before in the past, so again, take that with a grain of salt as you keep moving forward.

As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. I'd love to connect with you guys on Twitter, Facebook, Instagram, so look us up at Option Alpha and start a conversation. If you have questions, other topics you want to see on the daily call, let me know. I'm open to suggestions as always and it's first come, first serve. Until next time, happy trading!

#129 - Please Stop Paper Trading Unless You Do This One Thing Jan 29, 2018

Show notes

Hey everyone, welcome back. On today's daily call, I want to encourage you to please stop paper trading unless you're doing this one thing. This is a podcast for anyone out there who's started to paper trade or you're thinking about paper trading which is basically just simulated or fake options trading until you get comfortable with the markets and maybe your broker platform. Paper trading is actually very popular and I don't obviously suggest that you start with paper trading unless you want to. It's just a way for you to get more comfortable and familiar with a platform, but it's not a requirement by any means to paper trade first before you start real money trading. But here's the problem I see with people when they start paper trading. I like the concept of paper trading in the sense that people try to replicate their account. They try to do a paper trading account that's $5,000 and try to make positions as if they were in the real market. Well, the problem is that you're not in the real market. In most cases, paper trading allows you to get fills much quicker than you would've otherwise, better pricing than you would've maybe otherwise. Look. You just frankly won't ever have the mindset of actually trading real money until you have real money at risk. It's really as simple as that.

What we can do though is we can use paper trading to our advantage if you're doing this one thing and this one thing is repetition. You have to be using paper trading for what it was designed to do which is practice. And so, if you think about the concept of football or baseball or basketball or any sport out there, when you practice before a live game, you're going to go over maybe the same play or the same run or pass play. You're going to go over that thing probably 100 times in practice before you actually maybe use it once in the real game. That's how you should treat paper trading. You should treat it with repetition. Here's what I suggest people start doing. If you're going to start paper trading and let's say you want to learn how to trade credit spreads, I think that's great. Go out and trade 25 credit spreads every single day. Now, would you really make 25 trades every single day? Absolute not. You probably maybe don't have the account size to do it. You don't have the stomach to do that. Maybe you just don't even want to start with 25 trades in a single day. But on the paper trading platform, you have the ability to do whatever you want to do, so go out and make 25 credit spread trades today, price them all out, take your time with them, make sure they're good risk rewards, make sure they meet whatever paper trading allocation requirements you have, keep it at 1% to 5% of risk, but get familiar with and get comfortable with the consistency and the activity around placing the trades.

I guarantee after you place 25 trades, the actual act of placing the trade and pricing it out, seeing the thing go through a fill and then watching profits and losses start to come in over the next couple of days is going to make you more comfortable and more familiar with credit spread trades to the point at which you'll start to see better opportunities than you would've otherwise. When people oftentimes… And to use an analogy in real estate, sometimes when people start investing in real estate which many of you know, me and my wife invest in real estate heavily. When people start investing in real estate, they often say like, "I don't know what a good deal looks like." The concept is – Well, you haven't looked at 100 deals. If you analyze 100 different properties, you'll know what a good deal looks like. If you analyze three, you have no basis to figure out if this is a good deal or that's a good deal. The same thing holds true in paper trading. If you make 100 or 25 or 50 paper trades of credit spreads or iron condors, you'll get a much better understanding of what works better, maybe what order type or spread width works better, what ticker symbols usually pay the most amount of money. Over time, you'll start to see which ticker symbols or strategies or setups pay the most at expiration, so actually turn profits, holding through 20 or 30 days. It just is a matter of repetition and time.

And so, use paper trading and this repetition mode to get more transactions on, to get more familiar and comfortable with the mechanics of trading. And then when you go to the live game, when you go to real money trading, then you can pair it back, but you'll have all of that practice in place, you'll have all of those mechanics in place to know what to look for, so you can be targeted in your approach with a small account. You can go after particular strategies that you've seen. You can analyze 10 deals and trade one. That's the real power of paper trading and I don't think a lot of people do this. Not to say that they do it completely wrong by totally acting like it's the real account, but they're missing an opportunity here to get a lot more activity than they would've otherwise gotten in a real money account. Hopefully that helps out. As always, if you guys want to learn more about what we're doing at Option Alpha with regard to which strategies to use, what strategies maybe to start trading, you can check out our profit matrix report which is basically just the whole culmination of all the back-testing that we've done on different option strategies. It shows you when strategies work better than other times, iron condor setups, when to place them, when to get out, if you should use stop orders, the whole deal. You can check that out at optionalpha.com/profit and that'll send you right over to the page where you can learn more about our profit matrix report. Until next time, happy trading!

#128 - Choosing Strike Prices When Buying Options Jan 28, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, I want to talk about choosing strike prices when buying options. Look. If you're going to go out and you're going to actually decide to buy options which is not the first thing that we would suggest to do and hopefully, you've recognized that by listening to this podcast and checking out our website at optionalpha.com. But if you are going to decide to go out and do some option buying, you have to understand the relationship that's present between buying options and the price you pay and your probability of success or the amount of money that might make. Now, understand of course that the markets are pretty fair and efficient. If you trade something that's highly liquid which we suggest you obviously do in any case, then the market is pretty fair and efficient in that you're not going to get a higher chance of winning by paying less money. It's really what it comes down to.

If you think about that as you start choosing different strike prices, you'll realize that when you pay more money for an option contract, especially when buying options, it basically or effectively means that you're buying options that are further in the money or maybe closer to at the money strikes. For example: If a stock is trading at $100, buying the 105 call option might only cost you $50. It's $5 out. It might cost you $50. But look, the stock has to move from 100 up and above 105 for you to make money. The likelihood of that happening is pretty low, hence the pricing on that option contract is also low to reflect the probability of you making money. Now, if that same stock was trading at $100 again and you wanted to buy the 100 strike call option, that might cost you $2. Now, you paid $2, so you paid more money for that contract, but now, your breakeven point is 102, so the stock doesn't have to move as far for you to make money on that contract. Now, is this more risky? Well, it's more money out of your pocket, but maybe it has a higher probability of actually generating any return at all.

I always talk about at this point, the concept of lottery tickets because I think the concept makes sense in this case which people always go out and buy lottery tickets because they're cheap and they have high payoff potentials. You could buy a lottery ticket for $1 and make millions of dollars. But what's the probability that you actually get any of that money, that you see a dime in that? Insanely low. The same thing carries weight with options trading. When you buy, in this case, the 105 call option, yes, it's very, very cheap, it's $50, so it's a small bet. And so, on a total dollar basis or a notional dollar basis, it's a very low investment, low risk to you, but it has an insanely low probability of actually paying out, so it acts more like a lottery ticket than anything else.

As we continue down this path of choosing strike prices, again, as you go in the money, now let's say that the same stock is trading at $100. Now, instead of buying the 105 or 100 strike call, you buy the 95 strike call, so you're buying an option that's actually in the money at this point. Now again, you might pay a pretty decent premium for this. You might pay let's say $6 for this contract. Your breakeven point is still 101. The stock still has to move higher for you to make money. You're not guaranteed a profit at this point. You still probably need some directional movement in the stock, but your higher payment is also locking in a higher probability of potentially making money. Not that you will, but a higher potential to make money.

You can see that when choosing strike prices, especially in option buying scenarios, you really want to try to understand the dynamic between how far out you buy options or how deep in the money you buy options and the likelihood of success. And so, I'm okay taking directional bets and we do option buying strategies here and there to hedge the portfolio and reduce risk, balance out other positions. I'm definitely more of the type of trader where I want to buy options around the at the money strikes when I'm doing it. Far out of the money just doesn't make sense. Far deep in the money is just way too costly. And so, we find a good risk reward in most cases, buying spreads, debit spreads, put debit spreads, call debit spreads right around at the money.

So, just to give you guys a quick example of what we might do. If the stock is trading at 100, we might buy let's say the 98 call option and sell the 102 call option and do a spread. And most of the time, you get a pricing that's right around where the stock is trading. Our breakeven point ends up being effectively where the stock is trading now, so we just need a small movement higher, a small trend higher for us to make money on that type of trade. It's still a high risk trade because it's a 50/50 bet in most cases which is why we don't prefer option buying than compared to option selling, but if we're going to do it, we're going to do it with at the money strikes or strikes that are around where the stock is currently trading. As always, hopefully you guys enjoy these. If you have any comments or questions on this, let me know. Until next time, happy trading!

#127 - Best Websites For Technical Analysis Software Jan 27, 2018

Show notes

Hey everyone, this is Kirk here again at Option Alpha and welcome back to the daily call. On today's call, we're going to talk about the best websites for technical analysis software. I'll actually begin this with two comments because I think it's important before we go through some of these sites and we'll just briefly talk about them. They're not all free sites, although some of them offer a lot of free services. Obviously, when you get more data and you get more access to features, in some of the cases, you might have to upgrade to a paid version.

On that note, two quick comments on this. One, I think in general, you should just use your brokerage platform for your technical analysis because it's in most cases, already integrated to your broker platform, whoever you're using. They'll probably have some sort of charting feature already. They probably already have technical analysis and in most cases, it has a lot more customization options. You can change links, you can change average periods, you can change overbought, oversold levels versus some of the other software that's online that we've been researching for you guys, has pretty much fixed settings. You have to go with that platform's setup or the way that they setup the trade, the way that they calculate averages, things like that.

On that note though, the second thing is you have to know which technical indicators to use. There are so many out there that really just don't frankly work. One of the ones that I love to harp on all the time because we've done such extensive back-testing on it is the simple moving average. Simple moving average, although I see it all over the place… Actually, it was just recently quoted in MSNBC just the other day. Somebody was on, talking about how a particular stock was breaking its 200-day moving average and I'm thinking to myself, "That means absolutely nothing because the simple moving average is frankly one of the worst indicators out there that you can use as a directional indicator of where the stock is going." We tested everything from 10-day and 20-day, all the way up to 200-day moving averages, crosses the 50-day moving average above the 200, the 100, above the 200. I mean, we tested everything and frankly, it just doesn't work. It doesn't generate enough consistent, reliable results to be used as a true indicator for your trading, whether you're trading stocks or options really doesn't matter.

On that note, obviously make sure you're using the right indicators. If you want to see the research that we did on 17 different indicators, hundreds of different stocks, millions of different trades that we basically tracked over 20 years, you can head on over to optionalpha.com/signals and that's our signals research report that we offer. Again, optionalpha.com/signals.

Here's the thing. I'll go maybe in order of the ones that I like, just to really start off with. I think the best one out there is TradingView as far as technical analysis software and just interactive charting. They've got a pretty good community there as well and the features are very easy to use. It's a very simple platform to use. We actually partnered up with TradingView and integrated TradingView charts into our system at Option Alpha for our trading alerts, so when you see a chart, that's probably a TradingView chart for us. I think TradingView is a really good one to start with.

The next one probably I would say is ChartIQ. ChartIQ is very similar to TradingView as far as how they setup everything, but again, a very simple platform to use, very easy, you don't have to jump through a lot of hoops basically to get to the charting software and to get to the studies. In their case, they don't have too many different studies that you can tweak and adjust along the way. You have to use their settings for the most part. There's a couple of studies that you can adjust and tweak, but for the most part, you have to use what they give you and that's obviously a little bit limiting.

The next one I think that's really good is charts.com. This is probably the original website or one of the most original websites that are out there. They've been around forever and they've really started to improve their charting software. I just don't particularly like the way that it looks. I still think it looks old and feels old and I'm definitely a stickler for design and user-experience and user-feel. Technology wise, I think it's fine and I think they pull in all the right stuff. They've been doing this for years. But as far as looks and functionality, I just prefer something else.

The last one is Finviz. I say Finviz because I don't know, I'm on Finviz now and one of those stupid video ads popped up, so I apologize. On Finviz, they have a lot of features for the ability to actually back-test and tweak some of your studies which is good. It's a paid feature to do that, so it costs a little bit of money to have the ability to back-test some of these and to tweak some of these indicators. We've already done this for you in the signals research. We didn't use Finviz to do this. We used a bunch of other different things. We've built our own software to do it. But I think it's a good resource for you. They get a lot more in-depth to things like insider trading, insider trades. They do a lot of charting and analysis on dividends or cash to book ratios. I mean, there's a lot more in there than you possibly need on Finviz which is why it's not the top of my list, but I think it's decent. You can definitely check it out. They've got some good technical indicators that are auto-imported into their platform.

Hopefully this helps out. As always, if you guys have any comments or questions, let me know. Until next time, happy trading!

#126 - Does Open Interest Mean Markets Will Go Up Or Down? Jan 26, 2018

Show notes

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer the question, "Does open interest mean markets will go up or go down?" When it comes to options trading, the real question here is, "What does open interest tell us about the future direction of the market?" Now first, we need to define what open interest is. Really, it's pretty simple when you think about open interest as opposed to volume. Volume in contract trading for options is just the number of contracts that were traded that day, so what is the volume, how many contracts changed hands. Open interest tells us how many contracts are still left open and working in the market. Now again, there's got to be basically two parties to the transaction. There's option buyers and option sellers. Both of these people would have net contracts open or still available in the market. Unlike stock which stock has a predefined amount of shares that you can trade or float, when those shares are traded, there's nothing else you can do, unless the company issues more stock or issues more shares. In the options market, option contracts are created. People can trade a lot of option contracts since they're derivatives of the shares. We can have no option contracts traded which some stocks have those. There's options available. Just no one wants to trade them. And then on the other hand, there can be really, really active periods of time where people want to trade lots and lots of contracts and open interest goes bananas. There's a lot of people getting in on both sides.

When we look at open interest though, open interest increases when people get into new contracts. If I were to buy let's say 10 Microsoft call options, then that might be the same time that someone else starts a new position to sell 10 Microsoft call options. In that case, that's a new transaction for everybody. I'm buying, they're selling or whatever the case is at its new open interest that's added to the system, so open interest goes up by 10. This would be opposed to somebody doing a trade where it's negated or somebody else has taken the other side of a closing transaction. If I was to again, buy 10 Microsoft call options, but at the same time, I'm matched with somebody else who is selling 10 of their call options, so it's a sale for them, but they're selling me theirs, then open interest doesn't go anywhere. It's already contracts that are out there exchanging one party to the next. The contracts have not been totally closed and liquidated. They're still out there and available. This is why sometimes we see open interest go up dramatically or go down or stay the same when there's a lot of volume. Oftentimes, I guess you have questions around this topic come up when people see lots and lots of volume during the day, but open interest basically stay the same and it just means there's a lot of activity, but not a huge increase in the number of people generally trading or a huge decrease in the number of people generally trading.

How can we use this though to determine market direction? Well, we can't. It really doesn't matter. That's really the crux of what we're talking about. Maybe people look at open interest and they say, "Oh well. Open interest has dramatically increased, so people are more bullish because call open interest is higher than put option open interest." But ultimately, we still don't know where the market is going. We don't have a clear picture. I always think about it that if there's a lot of people who are still trading contracts at any strike price, there's two parties to every transaction. And so, if there's a lot of people who are buying calls, there's equally as many people who are selling those call options and assuming that the stock never reaches that price point. For me, open interest is not something that I look at all the time to say where the market is going to go, if it's going to go up or go down. Open interest for me gives me an idea of the depth of a market which is important. I look at open interest and say, "Look. There's 52,000 contracts that are still open and available. That lets me know that there's a deep market here, that people are interested in trading this. Bid ask spreads might be low, the ability to get in and out might be pretty quick and so, that's good for me, that's good liquidity." Hopefully this helps out. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!

#125 - Trading Options With Little Money - Best Practices Jan 25, 2018

Show notes

Hey everyone, welcome back. This is Kirk here again from Option Alpha and on today's daily call, we're going to be talking about trading options with a little bit of money and some best practices around this just as another reminder of things you can do. I really want to focus on five things in today's call because I keep getting lots of emails from people on trading options with a little bit of money or they're just starting out and maybe they're just allocating a little bit of money to options trading just to see if it works before you allocate more money. But whatever the case, I think there's a couple of best practices that you can follow, so make sure you're doing these five things. Number one is before you even start, try to reduce your commission cost. Now, look. This can be hard depending on what broker you're at or where you're at the country or the world. I get that. But try to go towards one of these lower cost brokerages. That's probably the easiest way. Yes, it might take some time to move your account over, but I think trying to check out some of these lower cost brokerages and just get your commission cost down initially is probably step number one.

Step number two, once you start actually placing positions, is really, really focus on position size. I can't harp on this enough. Position size is everything, especially when you're starting with a little bit of money because you don't want one position to kill you. Sometimes what people do when they start trading options with a little bit of money is they look at the dollar size of contracts versus percentage allocation risk, etcetera. And let's say they're trading with $1,000 or $2,000. They might want to make $500. Well, that's 50% of your account. I don't know if you want to take on so much risk that maybe a trade might go bad and you might lose half of your account in one full swoop. Now, $500 might not be a lot for you. It might not. You might just be, "Hey, I'm going to play with $1,000, see if it works, try to make $500." But you're setting yourself up for a bad recipe and strategy or system that doesn't really focus on what you would normally do if you had more money. Please keep that position size in check, 1% to 5% per ticker symbol.

Number three is focus on probably higher than normal probability of success trades. What we do at Option Alpha or what I do with my trading is most of my trading is around 70% chance of success. You might want to start focusing on an 80%, 75% chance of success trade to start with. Again, knowing that you're going to take it off early, take profits early which means that the win rate might even be higher, but it might be more important to get a few wins under your belt. Trade some stuff that has a higher probability of success. Now again, even though it has a higher probability of success doesn't mean that it's going to be a winner. You still could if you trade at the 80% chance of success level, the first two out of 10 trades could be the ones that are losers. Just realize that that is a realistic outcome. The first two out of your 10 trades could be losers. That's where position size comes back into play. That position size is going to allow you to trade through that scenario, so that you trade 10 trades and you do hit your eight out of 10 or nine out of 10 that end up being winners.

Number four then is balance becomes super important. When you're trading with a little bit of money, every little position that you add is actually amplified because you don't have the capacity to add hundreds and hundreds of positions in contracts. You can't spread your capital out over the course of 25 different ticker symbols like we might be able to on a normal month. That means balance becomes super, super important. Just double-check the portfolio balance that you have, try to do things more neutral than not and try to get some of the big rocks in place as far as ticker symbols and things that you trade. Don't trade everything in financials. Don't trade everything in oil. Maybe have an index, bonds, European or currency or precious metals, a commodity. Try to get four or five of the big sectors and big areas in place and trade around those first because that'll help balance you out.

And number five here is focus on trade count. I think the goal should be as you trade with a little bit of money is to focus on increasing your trade count, getting your numbers up, so that you start making over the course of a couple of months, 20, 30, 40, 50 trades over time and they start adding up, so that your probabilities become more focused and more concrete. Remember, even though we're trading at a 70% or 80% probability of success, that doesn't necessarily mean that your first 100 trades are going to see exactly 70 winners and 30 losers. You could have a pretty wide variance in that until you get your trade count up. Really focus on increasing your trade count. Play the long-term game here because the long-term game is what ultimately ends up winning out. People who quit early or give up early always end up failing. They don't really see the numbers to fruition. That's really our goal. Again, number one, reduce commission cost, two, check your position size, three, focus on higher than average probability of success, number four, balance becomes super, super important and number five, focus on that long-term trade count, the long-term output of trading options. Hopefully that helps as always and until next time, happy trading!

#124 - Will My Broker Automatically Exercise Options That Are ITM? Jan 24, 2018

Show notes

Hey everyone, Kirk here again and welcome back to the daily call. Today, we're going to answer the question, "Will my broker automatically exercise options that are ITM or in the money?" The short answer to this is yes, they will if you let that contract go through the expiration date or process. If you're trading a contract that's 30 days out from expiration and you're long that contract, then your broker is not going to go ahead and automatically exercise your contract until you get through the expiration date. If you were to leave that long option contract on and in place and that option was in the money at expiration, meaning for call options that the stock is higher than your strike price, for put options, a stock is lower than your strike price, if your option contract is in the money at expiration, yes, your broker will assume that you want to get delivery of those long or short shares and they will automatically exercise your contracts. The good news here is in most cases, you have the choice of whether you want to go through that process or not. It's just literally a matter of deciding to let the contract go through exercise and expiration or not or closing the position out early, removing the risk, selling the option contract back, buying it back, etcetera.

The reason that brokers do this is because that fulfils the contractual obligation of that contract, that at expiration, you would either be delivered or assigned shares as part of that option contract. Now, they won't do this obviously if any of your options are out of the money. Out of the money options have no intrinsic value. They have no value if they were assigned or exercised, so they just expire. They expire worthless and there's nothing to them. It's very similar… Just so you know how it works, it's very similar to an insurance contract on your house. If you buy insurance on your house in case it burns down and at the end of the year, the house doesn't burn down hopefully, then that insurance contract expires and you renew for another year. You have another premium that you have to pay that protects you for the next year moving forward and it's the exact same concept. If those contracts are out of the money, meaning nothing happened, the stock didn't move the way that you thought it was going to move, then the contracts just expire out of the money and worthless. If they expire and go through the expiration process in the money, then yes, your broker will automatically exercise those for you and then at that point, you'll get a notification that you have the shares or that you need to deliver the shares basically or deliver the capital to maintain the share position in your account.

As always, hopefully this helps out. I know it was a short one, but I want to answer a lot of these questions. Again, if you have questions related to this topic or related to anything basically in options trading, let us know. Shoot us an email. Send me a message on Facebook, on Twitter, Instagram. Head on over to optionalpha.com/ask and click the big red button in the middle of the screen to leave me a private voicemail and then we'll get those questions queued up and answered on upcoming daily calls and Facebook Lives. Until next time, happy trading!

#123 - The Prisoner Of War Psychology Lesson For Options Traders Jan 23, 2018

Show notes

Hey everyone, Kirk here again at Option Alpha and in this daily call, I want to talk about the prisoner of war psychology lesson that options traders should learn. This really comes down to understanding how people get through being prisoners of war which I was never a prisoner of war and I respect people who have been in that situation because I can't even imagine what that's like. But when researchers went back and looked at how people got through prisoner of war type situations, being actually a prisoner of war or situations in which they were confined or in solitude or any of those situations where they were abducted and didn't see daylight for days and weeks, how they got through that situation, the psychology behind that, it's actually interesting to learn about how they got through those situations because I think it can ultimately help us become better options traders and here's why.

When researchers did all of this research around people who are POWs, you would think that people who had insane optimism would have performed the best, meaning they had this insane amount of optimism that – "We're going to get through this." They're always looking forward. They weren't totally focused on – "I'm going to die. I'm not going to live. I'm not going to get out of this situation." But they had an insane optimism to get through the situation, to find a solution, escape or just survive, whatever the case is. I would've thought initially just reading this when I first started reading some of the research on this, what I thought to myself, "How do people do this? Yeah, it's got to be optimism. It has to be just an insane level of optimism." But it wasn't. What I found in doing research on this because again, you guys don't even know, but I geek out on all of this stuff. How I even got down this rabbit hole one day of researching how people survive POW camps, you probably don't even want to know, but I'm just saying I geek out on a lot of this stuff, just trying to understand the psychology and the thought process and skills around success in all walks of life. And so, when I started doing the research on this and I found a lot of research on this, what I found is that people who survived POW camps or those types of experiences, yes they had optimism, but before they had optimism, they had a realistic assessment of their situation, however you want to define that. They realized they were in a really bad situation. Not to say that they looked totally down on the negative aspects of that, but they didn't gloss over it and that I think is more important than anything else because what they found is that people who in these camps, as they studied all the participants when they got freed and when they were liberated, the guys who were just 100% down, "I'm going to die." there's no optimism, they didn't survive or most of the time, they didn't survive or if they did, they were totally messed up afterwards. The people who were 100% mind in the gutter didn't really make it.

The people who are 100% optimistic on the other hand, they didn't really make it either because when things didn't go their way, when their optimism faded and then they realized they were in a really bad situation and things weren't as great and they maybe weren't going to be saved as quickly as they thought they were going to be saved, when that happened, then they started to fall apart. I mean, they just broke down. There was no structure, there was nothing. It seems like their optimism had this energy ban that lasted just long enough and whenever it broke, it broke hard. As opposed to the people who were kind in the middle, if you want to call it that, the people who survived did the best, that lasted the longest, that had the best mental state, that in most cases, came out of it with very few diseases, mental health issues actually did really well where the people who were optimistic, yes, but that actually took a realistic assessment of their situation first. They basically said to themselves, "Wow. I'm in a POW camp. I'm a prisoner of war. I'm a whatever. I might be here for a really long time." They took a realistic assessment of that. "I might not get food, I might get beaten, I might get tortured, all these things, but I'm going to prevail." It's really what it came down to.

As options traders, we should really take that same type of logical approach to how we trade the market. I think this is the big takeaway for me today, is I think about this and I think, "Too many people are way too optimistic or way too negative." It's really one or the other. I am definitely an optimistic type of person. I have all upside potential for options trading. But before I look up, I look down. I often use that actually before in webinars. I tell people like, "Look down first. Make sure you're covering the downside risk before you all look up at all of the upside potential. Look down before you look up." I think as options traders, we need to be reminded of that often and this POW psychology lesson maybe really helps because we should make sure we're taking care of the downside risk. Really realize the situation that we're in. Take a realistic assessment of where we are with our portfolio, with our trades in the market environment and then from there, start building off of that and figure out how we're going to trade or what products we're going to use, what strategies we're going to use going forward, where we think the market might go and how that shapes our opinion, but don't be totally optimistic that everything is going to be sunshine and roses. People get into this situation all the time where they come to me and they say like, "Options trading is going to be great. I understand it." Then they have their first losing trade and then they'd just fall apart and they want to cancel and they don't know what to do and it's just like POWs who were just super optimistic, but didn't actually realized the situation that they were in. As soon as they had one setback, they totally fell apart. I think that people who come also to options trading and are totally negative about it just don't really give it an opportunity. "Everything is bad. The market is bad. Everything is rigged. No one is here to help. There's nothing for the little guy." They don't see the opportunity in anything and you just can't help those people either.

I just wanted to remind you guys about this today because I think it's a different way to think about how we trade options and it's not always the same black and white, "You need to do this and you need to do this." There's a lot of psychology, a lot of mindset in this and if you think about the prisoner of war analysis and case study today, I think that might help out and just as a reminder to look down before you look up. Take care of the downside risk, position size appropriately, make sure you're balanced, make sure you have diversified ETFs and stocks in your portfolio and then you can start thinking about when to take profits and when to remove trades or adjust or all that stuff. That comes secondary to making sure that you control risk first. As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. Until next time, happy trading!

#122 - Why Do People Buy Options If Option Selling Is More Profitable? Jan 22, 2018

Show notes

Hey everyone, Kirk here again. Welcome back to the daily call. Today's call is a very important question that I want to answer and spend the time answering today which is, "Why do people buy options if option selling is more profitable?" Huge question that I get. I mean, really… Hopefully if you saw the title of this podcast, you're like, "Yes! Finally, Kirk! Let's answer this question." Because we inevitably get this or I inevitably get this all the time. In fact, every week as we do our free onboarding webinars even with people who signed up for pro and elite membership, they start going through the trainings and the courses, they realize how profitable it can be to consistently and religiously sell options, but the question then becomes, "If it's so profitable, why do people buy options? Why is there another side of the track?" And so, I want to answer that today in probably three parts because I think there's three main areas or reasons why and then everything else kind of dumps into these three. These are the three reasons that we'll go through here today.

The first reason I think people buy options is pure gambling or speculation. It can't go unsaid that even though something is known to not be profitable for them, doesn't mean that they have enough wherewithal to not try to make it profitable because we've all heard stories or seen videos of some guy on YouTube with a Ferrari that he rented in the background or whatever the case is and they made all this money trading options or we even see this mostly in stock trading, day trading, penny stock trading, you name it, we see this all over the place. Gambling and speculation is rampant and people are always trying to invest a little bit of money with a huge upside potential. In fact, a lot of the mania around Bitcoin, Litecoin, Ethereum, Ripple, all of that is all based on speculation and gambling at this point. Is there an underlying fundamental to these things? Sure, maybe. But is that the reason that people are getting into them? Absolutely not. People are getting into them, assuming that they can put in $1 and make $10 back. That's the first thing. You have to understand that some people are just flat out gambling and speculating and are trying to make a quick buck.

Number two (and this is I think where most people end up, in this range and definitely more on the institutional side) is hedging or insurance. Buying options gives you the ability to hedge a position. You could buy a contract in some related industry, some related ticker symbol, a related company in a sector to hedge another position. In fact, many hedge funds and institutions, financial firms, etcetera. If they have a long position or a big position in something, they might hedge it with something else. That's where it comes into play. Now, they know or they assume that that insurance is going to be something that is basically spent money on and gives them protection, but they hopefully don't use. I relate this a lot to insurance on your house or your car. Everyone buys insurance on their house or their car. Most places, you have to buy insurance. We all know that it's really a losing proposition at the end of the day because we're not often going to be forced to use that insurance, meaning our house is not likely to burn down, we're not super likely to get into a car accident every time we get in the car. But we have to have that in place because in the inevitable event that it happens, we don't want to take the full brunt of that risk, so we'll sacrifice a little bit of money now for the ability not to have to take or bear the full burden of that financial catastrophe.

Again, this is why people buy options. They would buy put options on a stock because they have a huge stock position and God forbid, the stock crashes, they don't want to bear that entire financial responsibility themselves. Now, as an insurance company, (and this is how I think about options trading) that also means that insurance companies don't ensure one single vehicle or one single house. I mean, could you imagine if GEICO or any of these insurance companies out there ensured one house? That's it. Every year, they picked one house to ensure and all of their money was tied up in that one house. That's not a good way to run their business, so they ensure lots and lots of houses, lots of cars, lots of people, so that if God forbid, a house burnt down or there's a car accident, yes it would sting, yes it would hurt financially, it'd be a big downside risk for that individual house or contract based on how much they collected in insurance money, but it's not going to impact the overall portfolio. The business is still going to keep running. And so, we should do the same as options traders. Just as a little bit of a sidebar there.

Number two again was hedging or insurance. Number three is that they do it as part of another spread. This is probably where again, I would say the second big chunk for sure of options trading comes into play is not necessarily that somebody is gambling or deliberately hedging or having insurance, but they're just doing it part of a spread. We do a lot of spreads here at Option Alpha. That means that if a stock is trading at $100, I might sell a 105 call and buy a 110 call. Does that mean that I'm totally speculating and gambling on 110 of the stock going higher? No! It just means I'm doing it part of a spread and that means that somebody else, some other option seller could sell the 110 call individually just as a single naked call option. I assume that my 110 call is going to be out of the money and worthless and that's fine with me because I've already priced it into my strategy and they end up making money, I still maybe end up making money on my spread overall because I sold the 105 and bought the 110 for a net credit. I think that's the other big part of it, is just people are just doing it as part of spreads. It's not that they're individually looking at that contract and saying, "Am I going to lose on this? Should I trade it?" It's just part of the spreads and the strategies that they're putting together.

Hopefully this helps out in just gaining some clarity on why people do it. Like I said, just the three main buckets that people fall into in this case are gambling or speculation, hedging or insurance and then number three is just doing it as part of a spread, as part of other option strategies that they're already doing where they're selling one contract and buying another. As always, if you guys have any comments on this, any questions, let me know and until next time, happy trading!

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