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

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why I believe options trading is seen as a dirty business. I use the word, dirty business because that is the word that somebody used when they were arguing with me and trying to tell me that options trading serves absolutely no purpose in the market, basically that it should be outlawed, it should not be something that people can do, there's should be no way that people could trade options. I was trying to explain to this person why options trading and the derivatives market in general serves a very important purpose and position and role in an efficient market and in a mature and growing economy or global market. The idea here is that with an options or derivatives market, you have the ability to transfer or remove risk and that's really what it comes down to. If you think about it like insurance because that's really the easiest way to do it, when you buy a house, you are a

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we’re going to be talking about how loss aversion and behavioral finance applies to options traders. What is loss aversion when it comes to behavioral finance? It’s this idea that we, as humans and investors, we value gains, but we only value gains a little bit compared to losses, meaning that the pain of a loss is significantly more than the pleasure or than the gratification that we get through having a gain. If you look at a simple concept of say – You are given $50. You might think to yourself, “Okay. That's awesome. I'm given $50.” But if I give you $100 and then I take $50 away from you, that pain of taking away that $50 after you had $100, even though you're left with the same $50… Instantly in the same moment, I just give you $100 and take $50 away, the pain of losing that $50 is way greater, sometimes two or three times greater than the pleasure that you got from getting the original $50, even though y

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we’re going to be talking about why being lazy ironically is a great trading strategy. Although we want to be active in entering new positions, once we get into new positions 6and we have a balanced portfolio, we’ve taken care of the position sizing issue that plagues a lot of investors, the reality is that being a lazy trader from that point on is actually not that bad of a strategy. Basically, don't touch it, don't mess with it. Stop fidgeting with your trades and trying to overcorrect them along the way. Let the numbers, the probabilities, the system work its magic, basically. Let the probabilities work themselves out over time. I find this a lot with new traders because we get into new positions and immediately, a stock starts to move because that's Murphy's Law. What's going to go bad ends up going bad, right? And so, as soon as the stock starts going against us just even by a small margin, you have one losing side or one po

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be talking about daycare and options trading risk. Yes, I know what you’re probably thinking. You’re probably thinking, “What on earth does daycare have to do with options trading and particularly, risk?” But I think you'll find this little analogy helpful because I think it does help as far as understanding conceptually what we try to do with our trades. The reason I say daycare is because when I first dropped off my daughter, my first daughter, Molly to daycare… And this is back when I was actually working. And so, we had Molly and I had a job and I was still working and I was doing Option Alpha in its infancy on the side and thinking about leaving, etcetera. And I remember dropping her off and literally crying the first day because this new lady that we know and we've interviewed necessarily, but we don't really know this person, we haven’t spent a lot of time with this person who's going to be now ma

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we are going to be talking about our TLT rolling trade that took three months to turn a profit. Now, if you want to get a copy of the video version of this which is sent out to our members, the one that was sent out to our pro and elite members when we actually completed the trade and did the analysis visually on a video, you can just search on our YouTube channel, TLT option assignment case study, $700 loser to $96 winner and again, you can get another version of this. But we’re going to be going over it here today in the daily call, the highlights of this trade that we did. The basis of the trade that we did it TLT was just a simple iron butterfly trade in TLT that we entered into back in the beginning, January of 2018. We ended up closing the full position finally for a win, a $96 win after all adjustments back on April 2nd. It was a long trade. It was more than three months basically of holding this position and having to rol

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about hidden mutual fund fees that are killing your portfolio growth curve. I assume actually, most people who are listening to this podcast probably don't have mutual funds just yet. But if you are listening or if you’re new to Option Alpha and you do have mutual funds, hopefully this will help out because undoubtedly, at least a couple of times a week, probably at least like five times a week, I get an email from somebody wanting me to review their mutual fund positions or their portfolio which I don't do. I don't do that generally unless you’re a coaching client of mine. I just don't have time to review everyone's portfolio, nor do I want to. But I get people who are always saying to me, “What about this mutual fund and what about that expense ratio?” And so, I wanted to do at least a quick chat about it because I think there are things that people don't really consider when it com

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about stock trading seminars and boot camps and answering the question, “Are they still worth going to?” For full disclosure, I do have a soft spot in my heart deep down inside for stock trading seminars and boot camps or any investing seminars and boot camps because the honesty is that I got really a good push in the right direction, I guess and pushed down the path of learning more about finance and investing and markets because my mother dragged me to a stock seminar back when I was in high school. I wouldn’t say she dragged me. It was actually something I wanted to do, but I wasn’t totally interested in it, I was kind of sort of interested in it. I was really looking to get a couple of days off the school and so, my mom took me out of the school and we went to this trading seminar together and I think it was a two or three-day event. I remember vividly and after walking away from that, I ha

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Can options volume spikes predict market tops and bottoms?” To be fair, I did a very long stint in researching online, trying to find a lot of articles, research, any publications on really, definitive back-testing and data scraping, I guess to see if option volume spikes actually have any correlation necessarily with market tops and bottoms. I think the data is really fuzzy in this area. I think there's a lot of subjective nature to it. So, what is a volume spike, how much more does it have to spike above the average or above a moving average of volume. And what I found is that generally, volume spike obviously come around binary type events where people are trying to hedge or position their portfolio for something that either may happen in the future or something that maybe just happened. You could take maybe say a presidential election or the vote on Brexit. You typically see a lo

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are answering the question, “Do you have to own stocks to trade options?” This is a very common question and a lot of newbies ask this question. Very realistic question and rational question to ask and the short answer to this is no, you do not have to own stocks to be able to trade options. In fact, many of the trades that we do, practically, all of the trades that we've done here at Option Alpha have no stock involved whatsoever. Now, that doesn’t mean that you won't end up owning stock through assignment or exercise and expiration, but you do not have to own stocks as a prerequisite for trading options. Options by their nature are derivative instruments, meaning you can trade them and they derive their value from the underlying stock. But you can easily buy and sell option contracts without ever touching or having to deal with the actual stock shares. In fact, we think that stock is incredibly inefficient

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we’re going to be answering a question that a member sent in which is basically, “What are my options when a trade goes against me?” I’ll read the question that somebody sent in and that way, it will help bring some context around it and then, we’ll talk high level about what choices you have or options (no pun intended) you have when a trade starts to move against you. They said, “Thanks, Kirk, for the quick reply. I could sure use the Theta right now because APC is hitting me real hard and I would appreciate your take on the situation. I originally sold a 52.5 put and last week, sold a 50 call to hedge, but my breakeven is around 49.25. I keep telling myself it can’t go down 4% to 5% per day every day, but apparently, it can. How do you handle this kind of situation? I was hoping to unload it before the FED talks later this week, but I'm afraid it will be at 40 by then and I’ll lose a couple of thousand. Than

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are answering the question, “Are options automatically assigned when the strike price is breached?” This is a huge topic and one that we get a lot of questions on naturally because people are scared that when they start selling options or if they start buying options that they’ll automatically get assigned on a short option contract whenever the stock breaches or reaches the strike price that you’re selling. To use a very basic example here, let's say a stock is trading at $100, you sell the 105 call options and now, the stock starts trading up to 105. The stock trades at 105 or above, say 105.01 and many people would assume that at that price point now, the option contract that you sold, the 105 calls would automatically be assigned in your account and it's just not the case. Option, exercise and assignment happens mostly at expiration, in fact, the last couple of weeks of expiration. Now, that’s not to say

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about the impact of time decay or Theta on credit spreads. Credit spreads, as many of you know, are option strategies where you are buying one contract and selling another contract. Typically, you’re doing a credit spread out of the money. If the stock is trading at $100, you might sell the 105 call options and buy the 106 call options, creating a call credit spread or a bear call spread. Now, the impact of time decay on credit spreads can vary. I say this because it has a lot to do with how far out you are selling options and also, the spread width between your buy and your sell of the option contracts. Now, the thing that people don't account for when they trade credit spreads is that you’ll typically have to hold credit spreads a little bit longer to see profits materialize and depending on how wide you make those spreads might also impact the holding time. We’ve seen this a lot in

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 little unconventional guide to trading options with $500. Everyone always ask and we get a lot of emails from people saying, “How much money do I need to trade options? Can I trade options with $100? Can I trade options with $500?” And the simple answer to this is of course, you can do it. If you have a brokerage account and you have the ability to trade options, it can be done. Now, we always suggest (for full disclosure) that you start with somewhere around $3,000 to $5,000. The more money that you start with, the wider the opportunities you’re going to have to trade more positions, diversify your portfolio, get into additional legs of underlyings and it’s going to be a dramatic improvement on your P&L with your ability to trade more contracts. But if you are starting with $500, here's what I suggest you do. I suggest you start trading options on stocks that are really low-pri

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are answering another question that was sent in from a user, so again, thanks for sending in your question. The question was, “Can you buy and sell the same option contract at the same time and then basically, generate a profit?” And so, the short answer to this is no. This is where the bid ask spread in most cases, comes into play and the reason why the bid ask spread is generally in place is so that there's no free arbitrage opportunity. An arbitrage opportunity in the market would be where you could buy a contract for say $10 and immediately sell it back for $11, effectively taking a minute’s time of risk. But in most liquid options and practically, all liquid options, this does not exist because of the bid ask spread. Let’s just use an example here because I think it might help out. But if we’re looking at say USO which is the oil ETF fund, you can look at the 15 strike call options on USO… And I'm just l

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to be talking about getting a basic understanding of a deep in the money call option strategy. There's a lot of jargon in there and so, we want to break this down for you guys if you're getting started with options or if you’re new to options trading. The term “deep in the money” basically refers generally to option contracts which are more than $10 in many cases in the money, meaning they have intrinsic value or a lot of baked in intrinsic value right now. For call options, this would be strike prices that are at least $10 lower than where the stock is trading right now. For put options, that would be strike prices that are at least $10 higher than where the stock is trading right now. In either case, the idea here is that options that are far in the money have this deep intrinsic or high intrinsic value because they're so far in the money that if they were to be exercised right now, they do hav

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be answering the question, “Can you exercise your long option contract at any time?” There’s two parts to this question. The first part here is that you have a long option contract. That’s the requirement, is that you’re a long call option buyer or a long put option buyer. And in either case, when you are actually an option buyer of contracts versus option sellers, you have the choice or the “option” to exercise your contract or not. The general answer to this is that if you have a long contract and you’re an option buyer, yes, you can exercise that contract at any time up until expiration. Now, obviously, you can't exercise the contract beyond the expiration date. If the expiration is next Friday and you try to exit the contract or exercise it the following Monday, it’s not going to work. You got to do it up to expiration date. Now, there’s also a couple of little tidbits in here that you should be awar

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why creativity is completely overrated as an options trader. I want to read you guys a quote from Ray Kroc. Now, I don't care if you guys agree necessarily with his, I guess business practices when it comes to how he basically manipulated and pushed out the original founders of McDonald's. There's a great movie about this. I forgot what the name is, but a great movie and story around this. I don’t care if you agree with this, but I agree with the quote that he said previously which is that creativity is completely overrated. He said, “Most business success comes from doing boring diligent work and from developing a system that produces consistent results and sticking to it.” And I could not agree more. I think what a lot of people do in this business in particular is that because options are so fluid and you can create so many different strategies and so many different payoff di

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be answering the question, “What are quarterly options and why should you care?” First of all, quarterly options are basically the same as every single option contract, except if they are present in an underlying security, typically, some of the bigger indexes and major market ETFs, what they are, are basically options that expire on the physical quarters of most years. That would be the March, June, September and then, December physical quarters. And so, all they are is just another avenue, another expiration date to pin if traders or investors or hedge funds, institutions want to have exposure up to a certain date. Maybe you have exposure for the first half of the year, so they might do quarterly option at June 30th or June 29th, whatever the last trading day is for June. And so, that's where the quarterlies come in. For you as a trader, for us as retail traders, should we care about this? Sur

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to give you some general guidelines on acceptable options liquidity. Now, look. Acceptable liquidity is definitely vague and it’s vague for one big reason and that is the underlying strike price or the underlying stock price of whatever you’re trading. If you look at a stock like a Google or a Netflix or an Apple which has a significantly higher notional price or underlying price, naturally, you don't need to trade as many contracts to get value out of those underlying options. The liquidity will generally be… Total volume and dollar wise might be lower as far as number of contracts needed to be traded versus if you are to trade something really, really small like a USO or something like that, that has a very low underlying price. Again, it's very much a fluid thing. Not to pun on the word, liquidity too much, but it’s very much a fluid thing. And so, what I want to give you is some general guideli

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be hopefully shedding some light on a new topic that maybe you haven’t heard before. Some of you might before. But this idea that some of the biggest up days actually happen in down markets. This is fascinating stuff and I've known this for a while now, but it's recently come back to the surface because we had now the third largest up day that the DOW has had point wise in basically like the last 15, 20 years or so and it just happened back in March of this year. This again resurfaced to me because I got a lot of emails that people said, “Oh, my God, the markets. This is the bottom.” This is it back in March of this year because the DOW had the biggest up days and I calmly described, “Hey, listen. When the markets are really volatile, the DOW and every other market can have some of its biggest up days not in the top of a market, but not even at the bottom of a market. We’re still in the middle o