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

Hey everyone. This is Kirk here again at Option Alpha. Welcome back to the daily call. Today, we’re going to answer the question, “What is capital appreciation?” This is more of a basic concept, but I thought it was interesting to just add it in here because we did get a question on this from a user who was just wondering like what's the difference between investing for income and investing for capital appreciation. Capital appreciation is nothing more than just the rise in price due to the market or the underlying factors of that security. This could mean that the general market is rising, so most stocks are rising with the market or that a particular company or ETF is doing well or something well is happening in that sector or industry and so, that causes a rise in price as well. That's one of the ways that you can obviously make money as an investor and stock and equities trader, is just to play the rise in capital appreciation. Now, conceivably, most people and most investors in the entire investing unive

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to discuss why money managers use options to buy insurance. I think this is an interesting discussion because like all places in the markets, we see that many money managers and many brokerage firms and portfolio managers use options to buy risk protection, hedge protection or insurance for their portfolio, but the question is – Why do they do this? If they generally know that option buying is a bad idea and generates negative expected returns over the long term, why do they still continue to buy this insurance which is a valid question? To me, I think it comes down to two possible things. The first is simply the fear of losing their job. And I say this with all honesty because I think most money managers or portfolio managers fear being cut by the board or the directors for that portfolio or that company if they find themselves in a situation where they took on too much risk. The idea here is that n

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we’re going to be answering the question, “What equipment or tools do you need to start options trading?” Now, we’re specifically talking about kind of physical equipment and tools that you need and I really think it just comes down to having some sort of internet connection via a computer, a tablet or a phone. Really, nothing else is required. You don't need any fancy screens or monitors or software or desktop setups, fancy desks or chairs. It really doesn't matter and ultimately, you can do this from anywhere in the world which is why I love the markets and I love options trading so much. Now, I see a lot of guys and a lot of companies out there showing pictures and ads online of desktop setups for traders that have 17 different screens and all these different chair setups and desk setups, so that you can optimize your trading. Ultimately, I think a lot of that stuff is an ego driver for whoever is ultimately goi

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to go through my ultimate quick guide to trading covered calls. Now, covered calls are a favorite option strategy for those who are bridging the gap between being a regular stock trader and starting to convert into an options trader. And this is why I like covered calls because they truly are the bridge between the gap in equity traders and options traders. Covered calls are simply the option strategy that is designed around stock ownership. It requires that you actually own underlying shares of stock and then what you would do is sell a call option out of the money and use the proceeds from that call option to reduce the cost basis on your stock ownership. Now, it’s called a covered call because the call option that you sell is covered by the underlying shares that you already own in your account and this is opposed to say a naked or a single leg call option, in which case, you would be uncovered if

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we’re going to be talking about computer-generated chart patterns for stock trading. The idea behind this is that there's a lot of services that are kind of springing up all over the place that have the ability to generate chart patterns on-the-fly for particular stocks. In fact, actually, the brokerage that we use which is TD Ameritrade and Thinkorswim has this functionality built into its charting software already, so you don't actually have to buy any other software technology out there. It's built into some of these broker platforms already and the idea is that based on some preset parameters and filters that the software is looking for, it can figure out if a particular chart pattern may or may not be present in the stock that you’re looking at, at the time. Now, many of you know my love-hate relationship with chart patterns. I love conceptually what they represent because I'm a visual learner, so I like the 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, “Does hedging a portfolio help or hurt?” Well, the answer to this question is it depends. It depends on what happens during the timeframe that you have the hedge in place for your portfolio. Now, of course, the idea of hedging a portfolio is the concept that we’re going to take a little bit of the portfolio’s account or income and purchase some sort of insurance or protection either in full or partial on the rest of the portfolio. The idea is that this hedge kicks into place when something bad happens. For example, in the insurance and housing business, this would be the homeowners insurance that you have on your house, so that if God forbid, the house were to burn down to the ground, the insurance would kick in and help repay to rebuild the house or relocate you and your family. It’s the same concept with options trading and with a stock portfolio. What most people do is they

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through my ultimate quick guide to paper trading. In particular, I want to walk through some of the benefits and drawbacks to paper trading. Now, paper trading is just this concept of simulated or basically, fake trading in the stock market as a means to understand how different broker platforms work, understand how the mechanics of a particular market might work and again, it's an idea that you can trade in this enclosed sandbox without putting real money at risk. Now, of course, this comes with some benefits and some drawbacks. Now, to me, the single biggest benefit to paper trading is that again, it helps you get familiar with the mechanics of how a trade works, how to place an order, how to associate different option contracts together, setup the pricing and then actually start to execute on that pricing. It gives you the ability also to enter a lot of trades at the same time which you might not

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 many shares of stock should you buy?” I’ll give you my honest opinion on this and I think the answer is zero. I do not think that you should generally use stock unless you're forced to use stock in your account. Now, this is my opinion on this and I think that stock is incredibly inefficient and also requires a lot of capital. What I think you should do instead is I think you should use options to trade stocks synthetically. And so, what I mean by this is that if you are absolutely bent on owning underlying shares of a particular company, why not just trade these synthetic equivalent of long stock which would be to buy an at the money call and sell an at the money put and by doing that, you basically trade the synthetic equivalent of what would be a long stock position, but the requirement for capital would be considerably less to do this. Now, if you’re in an IRA or a re

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 trading during premarket and afterhours sessions. Premarket and afterhours sessions are the times (directly like it suggests) right before the market opens regularly around 9:30 Eastern Time in New York and then directly after the market closes which is usually 4:00 PM Eastern Time in New York. Those are those premarket or afterhours sessions. Now, we typically see and hear about these premarket and afterhours sessions because of stock earnings or announcements and we hear one stock is trading higher afterhours or trading lower afterhours. This is why we typically see these environments happen. And so, what a lot of brokers are doing is now allowing many people to start trading the underlying stocks during these time periods. And so, we’re specifically talking about the actual stocks themselves, not the options contracts. During these time periods, it's a good opportunity to quick

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be going through the ultimate quick guide to a bull call spread strategy. Now, a bull call spread option strategy is a strategy that is defined risk where you are buying one option in the money conceivably and selling one option contract out of the money for a net debit. Now, this is like we said, a bullish strategy, so your directional assumption is that the underlying stock will make a move higher in order for this strategy to potentially profit. Now, where you place your bull call spread strikes is then reflective of how aggressive you want to trade the particular stock or how far you think the stock might move. Now, in our example, we suggest that you usually use these strategies by buying one option in the money and selling one option directly out of the money and trying to create a spread around where the stock is trading at the exact moment. Now, if you’re a little bit more aggressive and y

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to go through my ultimate quick guide to options trading strategies. Options trading strategies are nothing more than a combination of calls and puts, either short or long that allow you then to create a custom payoff scenario for various market conditions or expectations. Now, unlike stock which is a one-dimensional trading vehicle, you can only buy stock or sell stock, options have the beautiful advantage of being able to be crafted to your exact specifications. This is why I love options trading in general, is that whatever market expectation or whatever stock expectation you have, you can generally build an option strategy around that and that means that you don't always have to take directional bets. You don't always have to be long an underlying stock or be bullish on an underlying stock. You can be bearish. You can be bullish. You can even be neutral within a range. You can have the expectati

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to answer the question, “Can my covered call get assigned early?” The simple answer to this is yes, it can get assigned early. I want to walk through the possible scenarios in which case, you might be assigned early on your covered call option which would then take away the stock that's basically covering that call option. Now, there are probably a couple of scenarios, but the most likely scenarios that would happen include short dividend assignment. What we talk about with short dividend assignment is that if a stock is going to pay a dividend and if the stock has been rallying much higher or dramatically higher and is about to pay that dividend, that might be an instance where your short call option gets assigned early on your covered call position and the reason would be if the dividend payment is actually more than a corresponding put option to your short call option. And in those scenarios as w

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to discuss put/call parity and we’re finally going to explain it for you guys hopefully here very quickly. The idea behind put/call parity mainly resides with European-style option contracts. This is opposed to American-style option contracts which really don't ever reach put/call parity because they have the ability to be exercised ahead of expiration. But European-style options are only exercised at expiration, so you can find instances where the put/call parity actually exists in the contracts. Now, what happens is that in I guess, very simple terms, when you reach put/call parity, it's basically the point at which the option contracts that you’re trading are trading almost identical or identical to the underlying asset. What you typically see with an option contract say that has a Delta of 80, that means that the option contract is going to perform like 80 shares of stock. It’s not going to be l

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to try to answer the question, “Should you buy stocks near their 52-week low?” Again, this is another question that was submitted from somebody via email. You can always submit your questions via email to us or just leave us a question at optionalpha.com/ask. Either one works well. But basically, the person was just wondering – “Hey, look. If I’m going to get into a stock and I want to invest for long-term, should I actually buy stocks that are at their 52-week low or should I try something else?” My general opinion on this… And I haven't seen too much conclusive research out there, so if you have research and you want to send it over, please send them over to us. I want to take a look at it for sure. But the general research that I have seen out there is that when you generally buy stocks at their 52-week low, it's not as good as if you're actually buying them closer to their 52-week high. And so, t

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through our ultimate quick guide to day-trading rules or what's commonly referred to as pattern day-trading rules or PDT rules. The idea behind these rules are basically the way for an industry or a broker to put in place some sort of adopted principles that prohibit people from being pattern day-traders or day-traders without having enough capital to support that. Now, I think it's a little bit confusing because sometimes people think that if you make a bunch of trades on the same day that you’re automatically classified as a pattern day-trader, but that may not be the case. The actual rules may differ from broker to broker, but the general consensus is that if you are entering and exiting the same security four to five times in the next course of four to five business days, then that may trigger some alerts in your broker system that would tag you as a pattern day-trader. Now, the key here is that

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we’re going to be answering the question, “Do you want proof that Warren Buffett is an options trader?” I’ve often talked about at nausea, the fact that Warren Buffett, one of the biggest all-time investors is actually in secret, a very big options trader. In fact, he sells a lot of single option put leg contracts on equity indexes, etcetera. And what he states in a lot of his writings is that the implied volatility edge that’s present in option selling is very much the same as his insurance businesses that he owns. And so, I challenge people all the time to look this up yourself. I’m going to walk through today where you can actually find this information. It's very easy to get to. Not a lot of people actually do it which is what actually baffles me all the time, is they challenge me on this, but then they don't actually look it up, so I’m going to show you guys how you can get to it very easily here today on the

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we’re going to be answering the question, “How can support become resistance and vice versa?” In many classical options trading and stock trading programs, one of the first things that you may learn in a system is to read charts and to try to find levels of support and resistance. Now, many of you guys also know that I'm a big… I don’t know. I’d say skeptic of chart reading because I think chart reading leads to many different interpretations. I could show somebody a particular stock chart and they could draw support and resistance lines completely different than the next 10 people that I show that same chart to. There's a lot of interpretation here, a lot of I think perspective that get drawn into many chart patterns and support and resistance levels. But leaving all that beside, the concept behind support and resistance basically becoming floors and ceilings in stock charts I think is something that has more vali

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 minimize short exposure when trading. I think there's really two types of short exposure and I want to just clarify as we go through today's quick little podcast. The first type of short exposure is directionally short exposure, so the idea that you’re basically directionally trading bearish, most people call it shorting stock. Although we don't ever deal with stock directly here at Option Alpha unless we’re assigned, we can trade positions bearish or short, so hoping that the position goes down in value or the underlying asset goes down and we build a strategy around that. That's the first type of short exposure. The easy way to get around that or to minimize your short exposure is just to naturally trade things that are bearish as well in your portfolio or trade things that are more neutral in directional bias. And so, it doesn't mean that you can’t trade things with a be

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 unsystematic risk matter anymore?” First, let's read a description of unsystematic risk. Unsystematic risk is a unique specific risk to a company or industry. That’s also known as nonsystematic risk or specific, diversifiable or residual risk in the context of an investment portfolio. Unsystematic risk can be reduced through diversification. The idea around this is that if you have two different companies, say McDonald's and Apple, you can pretty much diversify most of the risk away from owning those companies by investing in other companies that are non-correlated to Apple and McDonald's, maybe a utility company, maybe an oil and gas company, a financial services company. There’s a lot of ways that you can diversify around it. The question that everyone is asking though is, “With the advent of indexes and a lot of these ETFs, should it matter what unsystematic ris

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 I believe that the cyclical end of index investing is near. In fact, I think it's probably pretty close. Maybe a couple of years out at the most, I think that this market is going to spell the top four index investing and something else will evolve and kind of transpire out of the markets, potentially more of an active automated thing as far as what the next big thing is in the market. Now, for one minute, just try to remove yourself from being overly-emotional when I say this because I know that immediately when you saw the title of this podcast or even started this podcast, you might think to yourself, “No way. No how. This guy is absolutely insane. He's crazy. Index investing is the only way to go. There's no way that you could do anything different.” But for one minute, just maybe take one step back and think about it from a different perspective and I’ll offer up this log