The "daily Call" From Option Alpha: Options Trading | Stock Options | Stock Trading | Trading Online

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Is TD Ameritrade good?” Truth be told, I actually get this question a lot. It comes from a lot of our members and subscribers here at Option Alpha and they always ask me, “Hey, look. I know you use TD Ameritrade, but is TD Ameritrade good to use?” And my answer is always the same, is I think that they’re one of the better brokers out there. I think that there’s no perfect broker. There’s no broker that does everything that I would want. Probably no broker that does everything you would want for the same price. But I think for the offering that they have in totality, I think it’s really good. I think for me, one of the big concerns is things like risk management, an FDIC insurance, an SPIC insurance and I think that TD Ameritrade does a good job of not only those, but then also layers in Lloyd’s of London insurance for portfolios which is something that most people don’t even

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Do you need a lot of money to invest in stocks?” The short answer to this is yes, you do, relative to something like options trading. Now, you don’t need a lot of money to buy any particular stock in and of itself, but if you don’t have a lot of money to start with and you have a smaller account, many brokerages defines smaller accounts as accounts under $10,000 or $25,000, then it requires a lot of your capital as a percentage of your account to invest in a couple of shares or a handful of shares in popular stocks or ETFs or indexes. For example, Apple stock right now is trading at $260. The S&P 500 is trading at over $300. Those are really capital cost intensive stocks that you can purchase that will very quickly dwindle the value of your account and take up space in your portfolio. When you compare stock investing to something like options trading which allows you to u

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What is the process of online trading?” Online trading is simply the process of buying and selling securities, whether it’s stocks, options, futures, Forex, commodities, etcetera through the internet. This process is actually relatively new because say 25, 30 years ago, very few, if any, brokers were actually allowing retail traders to go online and actually process buy and sell orders. Although it seems like it’s been around forever for most people who are new to trading, it’s actually not the case. Now, this is good for retail investors because as the industry continues to consolidate, as technology advances, this has definitely reduced the price and the hurdle to get into online trading. We’ve seen a lot of broker commissions start to decrease. Even just in the last 30 days, we see a lot of brokers start going towards zero which we have predicted for many years. This

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “How does a put option make money?” A put option contract (and we’re probably specifically talking about a long put option contract) makes money in two different scenarios. The first scenario is that the stock continues to move lower or makes a large move lower during the time that you’re holding that put option contract. This would be the most obvious case because many option buyers, especially put option buyers, are looking for the stock to make a significant move lower before expiration. The second scenario in which a put option would make money is if we see an increase in overall volatility for the underlying stock that you’re trading. Even if the stock doesn’t make a significant move lower, you could see a big increase in the underlying stock’s implied volatility and this would suggest that most people are anticipating a big move in one direction or another and as a

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about how to bet against the market and going over three ways in which you can do that. Again, there’s essentially three things that you can do to bet against the market or basically take advantage of or profit from the market moving lower. The first and most obvious way is you can actually short stock. Now, this is the default mechanism for many investors because they only know one side of the trading world which is the stock side. They choose to short stock which means that they basically borrow stock from their brokerage or borrow from the market, sell the stock in the open market and then hope to repurchase the shares later at a lower price to complete the trading loop. And so, this takes advantage of the stock going down, but it’s obviously very capital intensive, leaves you exposed to the stock continuing to move higher. Another thing that you can do which is similar to number one

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why ignorance in trading is actually bliss. And don’t get me wrong and don’t start sending me a bunch of emails about this. I’m not talking about ignorance when it comes to market risk and position sizing and trying to pick tickers and strategies. What I’m talking about is once you actually have a system in place, you know what strategy you’re going to use, you know what position sizing you’re going to use, you’re using enough cash reserves, you have maybe a hedging strategy on. Once you actually start making trades, then at that point, it really is kind of interesting that ignorance into the outcome of the individual trades is really bliss. You should be focusing more on the process versus the individual outcomes. We see this all the time here at Option Alpha where people start trading, they understand it conceptually, they understand the high probability nature, lots of trades,

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What happens when you close an option?” This is actually a question we get often and the short answer is nothing. Nothing happens when you close an option because if you are closing the option order, whether it was on the buy side or the sell side, if you have now completed the trading loop as we like to refer to it here at Option Alpha, then nothing happens and the position is closed and done with. If you sell to open, then you would have to buy to close and once you do that, you’re done. You’ve completed the trading loop. If you buy to open, you would have to sell to close, but again, once you do this, you are done and you’ve completed the trading loop. There’s nothing else that happens after a contract is closed. If you have truly removed the contract and all of the positions around it, then you don’t have to do anything. The position’s closed and you’re free to move onto th

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you short an option contract?” Shorting an option contract is very much a new term for a lot of people when they get started trading, this idea that you can actually sell something that you don’t even own yet in the marketplace and then collect a premium. But of course, there’s always a little bit of a catch and the catch is that you always have to complete what we call the trading loop. Just like when you buy stock, you have to sell it to realize a gain. When you sell an option contract or short an option contract, you have to buy back that contract at some point before expiration or at expiration and let it expire worthless in order to complete the trading loop. The simple process of selling a short option contract is actually very easy. You can do it on your broker platform by just selling a contract that you do not own yet and collecting a premium. This is what we

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Do you get paid dividends with options?” The simple answer to this question is no. You do not get paid dividends with option contracts like you would normally in a scenario where you are long the underlying shares of stock. When you have ownership in a stock that pays dividends and you get through the dividend’s period and it goes X dividends and you actually get paid, that money comes right into your account. With an option contract, that doesn’t happen. It doesn’t matter if you’re long a call or a long put, short a call, short a put. That’s not going to happen with the option contract. However, the option contracts do account for dividend payments. Call option and put option contracts will adjust their pricing to reflect effectively the dividend payout that’s going to be coming down the line. You don’t have to worry about accounting for it. It is actually accounted for in t

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What happens when a call option expires in the money?” There’s a couple of keywords in there that you should be paying attention to if you’re listening to this right now and that is that you have a call option and it is expiring in the money. If a call option expires in the money, it means it has intrinsic value and it will be exercised and/or assigned. Depending on what side of the contract you’re on, whether you’re an option buyer or an option seller, if the call option expires in the money, it has intrinsic value and it will be assigned. That means if you are long the call option, you are going to basically auto-exercise your contract and convert your call option into long stock. If you are short the call option, you’re going to effectively be assigned the contract and convert your short call option into short stock. That’s simply all that happens in the process. As always,

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. In honor of Halloween, I want to talk about the scariest thing about selling options and actually, the reality is I’m going to talk about two things that should really scare you when selling options. Not that they should scare you enough to completely walk away, but it should be scary enough that you should try to build in some sort of model or strategy to counteract some of these things in the market. The two things for me are sequencing risk and autocorrelation. These two topics in all honesty, are never talked about when it comes to options trading. I don’t hear it talked about anywhere in the marketplace. I hear it rarely or vaguely mentioned, but it’s really not something that people teach in-depth like we do. The first one is sequencing risk which is just what it sounds like, a bad sequence or string of trades that has nothing to do with the underlying system being broken or default. And so, when you look at say

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What causes the stock market to fluctuate?” The simple answer to me is only one word and that’s expectation and if we were to expand this out to just two words, it would be future expectation. I think this concept is a little hard for people to wrap their heads around, especially if you’re new to stock trading or stock investing or new to options trading. You’d think to yourself that the market is a tool to value something right now, but it’s really not. The market is always looking towards the future. That’s why if you actually dig into stock market movements and what actually drives the market, it rarely has anything to do with what actually happen today. It’s all based on what might happen in the future based on any sort of data or information that we learned today. For example, the FED interest rate decision that is coming up or that has already happened and what their co

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you calculate daily volatility?” There’s actually two things we’re going to cover here. Daily volatility, we’re going to cover annual volatility and they’re actually pretty easy to do. Most broker platforms do this for you already, so you don’t really have to do anything on your end. You just have to know where the numbers are inside of your specific broker platform. But the formula for calculating daily volatility is simply by finding the square root of the variance of the daily stock price. You have all the daily stock prices. You basically calculate a variance between all of the different stock prices and then you take the square root of that to figure out the daily volatility. If you want to now turn this into an annualized number, you don’t just multiply this by the number of trading days. I think this is actually a little bit of a misconception. Most people think

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What happens when an option contract is assigned?” Option assignment is something that a lot of people actually fear, but the reality is that it’s part of the options trading business. In fact, I would even argue to say that at some point in your career, if you actually do this for a while, you’re going to be assigned potentially multiple times. But it shouldn’t be something that you fear. You just have to understand how it works. I want to go through in this podcast really quickly, how the option assignment process actually works because it is a random process that happens. Nobody targets you necessarily for option assignment and many members know that are part of Option Alpha that sometimes we get assigned and other people don’t and sometimes other members of ours get assigned and we don’t, so it is a random process that happens. The first thing that happens is that the opt

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What causes implied volatility changes?” Implied volatility is so very important as an options trader and this is a really interesting concept because I don’t think a lot of people understand what actually causes implied volatility to change and it’s simply this. Implied volatility changes only because of expectation and that’s it, the expectation that the stock will be more volatile or less volatile in the future. That is the only thing that changes implied volatility because remember, implied volatility is implying or guessing basically at some predicted volatility in the future. If a company says, “We are going to have an FDA announcement a week from today.” Well, then we know that that FDA announcement is going to either be an approval or a disapproval, right? Naturally, investors in that particular stock might have a much higher implied volatility expectation. They

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Do stocks expire like options?” The simple answer to this is no. Stocks actually don’t expire. As long as the company stays solvent, stays viable, stays valuable to the public market, then its stock price does not expire. It can keep trading for decades and in some cases, hundreds of years. Right now, we’ve got a bunch of companies that have been trading for over 100 years, the likes of IBM, Console, etcetera. I think it’s going to be interesting to see moving forward which companies actually stick around for 200 years or so. I think there will be companies that stay around and stay viable for 200 years. That’d be really cool to see at some point, but I don’t think we have any of those companies that are still being traded today under the same or similar ticker symbols. But needless to say, the end result here is again, stock prices do not expire like option prices. They can

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Why are stock prices so volatile?” I think this comes down to a basic understanding of just the difference between individual company expectations and broad market dynamics or structure and expectations and so, today, I want to look at Tesla and say the S&P 500. And so, the S&P 500 broad market index comprised of 500 individual components, so naturally, when you start to see new stories or major market-moving events happen to one or two or three or five or even 10 of the individual components of the S&P, that market movement is going to be broadly neutralized or averaged out or smoothed out as you start to go all the way up the chain through the 500 components because the S&P’s price is not just that single company or that group of five or 10 companies. It’s 500. A big movement in five companies or 10 companies gets smoothed or averaged out when you look at th

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Is volatility a good measure of risk?” We’ve recently actually said in our covered calls paper when we were writing up the research that volatility is but one side of a two-sided coin. There’s returns in our opinion and then there’s volatility and those are the two sides of the coin that you should be aware of as a trader. Volatility is just one way to measure risk. It should not be the only way to measure risk. It should be looked at in conjunction with a bunch of other risk metrics like win rate, returns, sharp ratios, ortina(?) ratios, calma(?) ratios, etcetera. It’s another way to measure risk. But generally, even though something has high volatility, means that it just moves a lot, that’s all it means. It means that it just moves a lot. As long as you’re compensated for that movement, it should generally be acceptable. Now, if you’re looking at two different investments,

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What are the different types of brokerage accounts?” For me and the way that I think about this, I really think that there’s probably three main types of accounts and then there’s sub-labels or categories within each. The three main ones for me I would say are cash accounts, margin accounts and then a discretionary account, so an account that might be managed for you by an IRA or something like that. And so, within those, then you can have multiple levels or labels depending on the brokerage that you use. For example, TD Ameritrade has a bunch of different standard, retirement, education, specialty accounts and then within those, so in particular, within the standard accounts that they have, you have individual, tenants-in-common, tenants with joined right over survivorship, community properties, tenants by entireties, guardianship or conservatorship. There’s always different

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “Does opening a brokerage account affect your credit score?” The short answer to this is no. Opening a brokerage account does not affect you credit score and it’s because you are not taking on liability or taking on debt. When you open up a brokerage account, your intention is to actually invest the money that you have and to buy securities, trade options or other types of investment vehicles. When you open up a brokerage, you’re not taking on debt and that’s where the impact on the credit score really comes. Credit scores are impacted when you open up new accounts for credit cards, auto loans, student loans, lines of credit, mortgages, leans, personal lines. Those are the types of things that would affect your credit score. Opening a brokerage account does not affect your credit score. I don’t think that there’s any scenario which it would, unless there haven’t been a p