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

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to try to answer the question, “Should you consider trading pot stocks with options?” I think that the rise in popularity of pot stocks or marijuana companies I think is very interesting to watch. Now, whether you are on one side of for legalization or not for legalization of marijuana is not something obviously we discuss in this podcast because we don't get into the politics or to the legislation side of any of this, but it does present potentially an opportunity in the future to trade some of these companies with option contracts. Now, the one caveat that I have to this is that as we start to see the rise of both recreational and of medical marijuana in this country and we’re starting to see this not only just recently in the last couple of months with more country or more States legalizing marijuana in one form or another, medical or recreation like Oklahoma did earlier this year in 2018, but also

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, “Are covered calls safe for investors to trade?” Now, covered calls being safe for investors to trade is a relative question. Safe compared to what? Say at not trading at all? Safe compared to a credit spread, compared to an iron condor? What are we basing this off of? I want to start this podcast by saying that I think we should base this particular question off of just trading regular long stock. Should we trade a covered call or should we trade regular stock and not include the option contract? What we know from a lot of research that using covered calls is a great way to reduce the cost basis of stock ownership. You’ve often seen this in CBOE studies, as well as the studies that we've put out here at Option Alpha and we do have some new research that shows that in some cases, using covered calls actually might not be the best use of your capital and you might (using

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 to manage options spreads?” The root of this question in managing options spreads comes from the assumption that in order to be profitable trading, we need to be very active or super active in managing options spreads, either managing potential profitable positions or on the other hand, managing potential losing positions. I take maybe an alternative approach to managing spreads in that if you are trading a spread option strategy which would include credit spreads, iron butterflies, iron condors, etcetera, you are defining your risk on that trade by the width of the spreads that you’re trading. When you enter a credit spread or an iron condor trade, you can define how wide that options spread trade is going to be and therefore, you are defining whether you know it or not, the amount of risk that you are willing to take on that position. Now, since we know from our researc

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 the difference between fundamental analysis versus technical analysis. Whatever analysis camp you come from, you do have to understand the difference between fundamental versus technical analysis and hopefully what we can do here is just quickly go over the highlights of these different types of analysis when it comes to stock and ETF and index trading. Fundamental analysis is the understanding or the analysis of the company itself, the industry, the macro or microeconomics of the market and how it relates to the value of the stock at the current price. A lot of fundamental analysis investors or fundamental investors will look at the difference between where the stock is priced now and maybe some projections on where the fundamental value of the company is moving forward in the future and they try to buy based on these fundamentals. If the stock is basically underpriced and has an

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, “Can you generate an instant profit buying in the money call options?” Many new traders and many experienced traders as well wrongly assume that you can generate an instant profit buying in the money call options. The reason that they assume this is they attribute most of the value to these call options as just the difference between the strike price or the in the money strike price and the market price of the stock and they think that you could buy the call option and resell the call option back to the market for a quick profit or buy the call option, exercise your call option which would purchase stock at the strike price and then resell the stock back to the market at the current underlying stock price conceivably much higher than where you bought the in money call option. But in either of these cases, what they fail to recognize is the premium and the extrinsic value of 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, “Do I receive dividends when selling call options?” There’s two parts to this that I think we really have to dissect in order to understand if we are able to receive dividends when selling call options. The first thing is just to understand that when we are selling a call option, we have the obligation to sell stock at that strike price in the future to the call option buyer. We have to sell stock to them at that strike price which means that if they were to exercise that contract, as the short option contract seller, we would be in a position where we are actually short shares of the underlying security versus long shares of the underlying security. And so, therefore, if we are short underlying stock, we would, of course, not get paid the dividend. In fact, we might actually have to pay out the dividend to a potential call option buyer if they were to exercise that contract.

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we're going to answer the question, “What is the difference between speculating and hedging?” I often hear the terms, speculating and hedging thrown about in forums and in emails and people assume that both of these things are the same. And while they might perform potentially the same types of trades, the psychology of the investor going into a speculation trade versus a hedge trade could be completely different. For me, speculating is the assumption that you're getting into a trade with huge potential risk reward payoffs. And so, this speculation is built up by the trade that you're getting into in the sense that you’re building an option strategy or a stock strategy or a combined option stock strategy with the purpose of generating positive expected returns. Now, you assume that this is going to happen and that's the part of the speculating. You’re speculating that this is going to happen though you don't know f

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 the endowment effect and why it cripples investors. My understanding and belief in these different psychological effects or barriers that we have to our potential to be great traders is that we can't overcome these necessarily. But the more that we understand them, the greater the possibility that we have an opportunity to recognize when we are being manipulated by some degree to these different psychological barriers or effects that happen in our mind. And so, this is not to say that we can overcome these by any stretch because it’ll always potentially happen to us, but again, it’s the understanding and the recognition of them I think that will enable us to make potentially better decisions or smarter trades. The endowment effect is a really interesting one and I see this all the time and you’ve probably felt this before and now, retroactively, you might go back and think to your

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’s the difference between volume and volatility?” This is another member question. Somebody sent me a question and basically, it was this. It was, “Some places are saying that if a stock has high volume, then it might also have high volatility or I see that people are mentioning that a stock is moving really high in volume and volatility, but can it really be both? What's the difference between volume and volatility?” The simple answer to this is that volume tells you how much of something is being traded. Volume in the sense of either stocks or options tells you how much of that stock or option contract is being traded. If there's a lot of volume, that means that there's a lot of trading that's occurring, there's a spike in trading activity. Now, this doesn't always mean anything for direction. A high spike in volume for call options could be a hedge and doesn't necessar

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 the 80/20 rule, but applied to options trading. We all have heard the 80/20 rule in some form or fashion basically that 20% of your inputs is responsible for 80% of the output or 20% of the population holds 80% of the wealth. Whatever discipline or vertical it's applied to, we all know the general concept. Well, I want to put a little bit of a twist and spin on that and tell you that in trading, I think the 80/20 rule applies as following. 80% of trading is psychology, 20% is mechanics and that's the twist that I think you should really hone in on here today and think about over the next couple of days, is that trading is really a mental game. In fact, it's the most mental game that you could possibly be in because you have money, you have moving numbers and charts, you have geopolitical issues, you have consumer issues, global issues, country risk, company risk. There are so many

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 using multiple technical analysis indicators help or hurt?” Now, this is a question that we get often here at Option Alpha, especially since we did the long, long research, about 20 years of data on multiple technical analysis indicators, settings, parameters. You can find that all in our research report called Signals. But my assumption here is that it has to work in both cases and what I mean by both cases for technical indicators is that technical indicators should work like wheels on a bike or like wheels on a car. If you have a car that has four wheels, each of those wheels has to be strong enough to hold the car. You can't have a tire that's flat or else, the car really doesn't move down the road as well as it should or as effectively as it should. But when you have let’s say four wheels on this car and each of those wheels worked independently and then are p

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 to protect long call option profits?” There’s three ways to technically do this. I’ll go through them here on today’s podcast. Again, we generally don’t suggest that you trade long call options. It’s not really a trade that generates high expected overall returns. But if you find yourself in a position where you did for some reason feel a little bit lucky and you wanted to trade a long call option, you have some profits in place, how do you basically protect those positions? The first thing you could do is sell the position. This is pretty simple, actually and probably my most suggested option to do is just get rid of the position and take your money off the table. If the market gives you a favorable move and it happened in a short amount of time to where time decay is not ripping the value out of these long call options, then your best choice might be to just simply sell

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be talking about the wheel options trading strategy for beginners. Now, the wheel strategy is a really unique option strategy that you can use if you're just getting started in options trading and you’re not quite comfortable trading a lot of risk defined spreads or iron butterflies, iron condors, etcetera and you just want to kind of stick to some basic premise strategy that you can use. Now, the wheel strategy is something that we’ve talked about in-depth on one of our weekly podcast where we actually interviewed one of our long time members and fellow trader, MACDDaddy on show number 107, so if you want to jump over to the weekly show, you can hit up show number 107 and hear my interview with him. He’s been trading the wheel strategy for a really long time and put together some great resources for you that you can use. The basic premise of a wheel strategy is the following and it's made to sound

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, “Are there any advantages to letting options expire in the money?” And yes, we are talking about options that are in the money. This means you could have long options that you want to expire in the money or short option contracts that you're choosing to let expire in the money. And to me, really, the only advantage is stock ownership in one form or another. That would be the only advantage to me in letting contracts expire in the money. First, let's take the assumption that we are a long call option buyer or a long put option buyer and we want the stock to expire in the money. The only reason that we would want that to happen would be to convert our option position into short or long stock. Again, there's no real pricing advantage to it because at the end of expiration, the option contracts are going to trade basically in parity with the stock if there's any value left i

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 I close out of a bull call spread?” Closing out of a bull call spread also commonly referred to as a bull debit spread which is an option buying strategy is actually just as simple as reversing the trade. To understand how we reverse the trade, we first need to understand what the core position is of this bull call spread. This spread trade is created by buying one in the money option contract and selling one out of the money option contract both on the call side of the option pricing table. For example, if a stock is trading at $100, you might buy a 99 strike call option and sell a 101 strike call option. This creates a debit and that's why it’s an option buying strategy. Again, this is not necessarily the exact way you have to set them up. This is just how we would set them up if we were trading them here at Option Alpha. If you are long a 99 strike call and short a

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 I need a margin account to trade a covered call?” The short answer to this is no, you do not need a margin account to trade a covered call. The beauty of trading covered calls is that they are covered by existing stock positions in your account and that’s why most brokerages will allow you to trade covered calls because you’re selling options, but it's completely covered and therefore, no additional margin is necessary by the underlying stock that's in your account. Now, I would highly suggest, however that if you are serious about trading options and continuing to use options trading as a source of income either now or in retirement that you start to apply for margin accounts or start to open margin accounts that allow you to trade more complex strategies and tickers. In particular, what we found is that trading covered calls while could be profitable for many different m

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 using a protective put as a hedge for ETFs worth the cost?” Now, there's a lot to unpack here, so we’re going to try to do it in a couple of minutes. But the key points that we have to realize about using a protective put to hedge an existing ETF position is that using any sort of long option strategy requires an outlay of cash from our account. And so, the rub that I always have and the data confirms this across the board as well, is that when you outlay cash as means of buying insurance, that insurance is a net cost on the portfolio. This means that sometimes the insurance might kick in and it might help. Consistently buying a protective put as a hedge for an ETF position or a stock position that you have might work in some cases, meaning the market might go down at just the right time that you bought the protective put. But keeping and maintaining that constant insuranc

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 calculate options profit and loss as a percentage. And the reason I want to talk about this is because I’m seeing a lot of people who are confused on how to calculate the amount of money that they’re making on a trade as a percentage of the trade itself. Now, I’m not talking about calculating this as a percentage of the overall account. That should be actually pretty intuitive and pretty easy to calculate. Just figure out how much you make and divide that by the account balance that you have and you figure out how much you’re gaining on the whole account. But the end result here is that I do see a lot of people and also companies misrepresent what they're making because they’re calculating everything based off of the option profit for the individual strategy or contracts that they’re trading, not necessarily the whole account. There's only two ways that you can calculate… T

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 do option contracts offer multiple strike prices and expiration dates?” And the simple answer here is variety. I could’ve said options, but that would be too simple because we’re talking about options contracts, but the answer here is just variety. And I often relate this to either grocery stores or cars, but in our world, we see that there’s hundreds, if not, thousands of different kinds and models and trim packages of cars out there, so if you want to get a car, there's no one standard car you could buy. You could buy this brand or that brand. You could get a truck, an SUV, a sports car, a convertible, a not convertible, whatever. And so, this variety allows people to choose based on their preference of what they want. They can choose to pay a higher amount of money to get a car that moves faster. They can choose to pay more money to get a car that's more reliable. It c

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 the differences between selling to close and writing an option contract. Now, there's a very subtle distinction between these two terms or phrases that you have to understand and it just comes down to understanding who's on what side and what action is being performed. With regard to selling to close, this would imply that you are first closing a position. If you sell to close something, that means that you might have had something to begin with and therefore, you're removing the position or closing it. When you see sell to close, that means that the trader had a buy to open as the original position. They were long option contracts. If you're long option contracts and you performed a buy to open, that means that to reverse that trade, you would have to perform a sell to close order which is just a really fancy way of just saying you removed and closed the position. Now, when it co