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

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 when to take profits versus letting winners run. This topic basically came from a question that somebody submitted. I want to read the question here for you guys, so you guys understand the basis behind it. They said, “Kirk, given the research that you’ve done, I know there's been a change in when to close a position for a profit. The old guidance used to suggest taking straddles and iron butterflies off at 25% of a gain and strangles and iron condors at 50%. Now, I understand that the research shows leaving on particular straddles and iron butterflies a bit longer sometimes in the right direction and I, perhaps and others are interested in learning how you decide to take these positions off at 25% or 50% versus letting them ride a little bit longer and why the research suggest that we hold positions versus take them off. Again, learning through your thought process in these sit

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to answer an email that I got from a user which is basically, “What are the advantages of trading strangles versus iron condors?” The email from one of our members said, “My Thinkorswim platform doesn't allow me to write straddles and strangles because of the unlimited loss risk.” They get a message that says it's illegal to write these shares. They have an illegal negative one shares. However, I can do an iron condor because the risk is limited. When I see the iron condor diagram, it is the same as a strangle except for the defined risk. Again, they basically are asking what are the advantages of using a straddle or a strangle over an iron condor. The clear advantage of using straddles and strangles versus iron condors is a couple of different things. I don't think it's not just one thing. There's a couple of clear advantages to using them. The first is that in most cases, you end up generating mo

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 employee trading restrictions and trading compliance. I actually get a lot of questions about this. I get a lot of questions about how people want to try to get around these restrictions or compliance in their firm that they work for, company that they work for. The end result here is that you should not be trying to escape the system and get around some of these restrictions and trading compliance. If your firm or if the company that you work for has defined restrictions around trading or how you should notify people of your trading activities, you really want to follow those and not try to walk a very, very thin line. There is no room in this industry for people to be trying to manipulate the system. Now, in most cases, most companies… And you’ll have to check with your own company or your own firm for their particular regulations and laws. But most companies have restrictions

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 active traders can now take a passive approach to investing and particularly with options trading, take a passive approach. Right now, the big buzz in the industry and has been like this for many years now is this passive indexing style of trading and investing. Basically, this idea that you continue to buy the indexes regardless of the value or how high they are and everyone buys the indexes because that's what everyone should do and everyone should buy the indexes, so everyone does, etcetera, etcetera. Well, I definitely subscribed to the idea that long-term active traders are more profitable with less volatility in their account than passive index trading. I think one of the biggest flaws to index trading right now is that everyone is blindly buying the indexes regardless of the value of the underlying stocks. Because everyone's buying indexes, more people buy in. It’s jus

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to hopefully describe everything you need to know about margin calls and particularly, margin calls for options trading. Without going into too much nitty-gritty terminology because I think people get lost sometimes in the mud, like worrying about the specific price ranges and the specific percentages that are affected, I want to help you understand basically what happens with margin calls when you’re trading options. The first thing that we have to understand is that margin calls do not mean that you’re actually borrowing on margin. That usually happens when you invest in stocks. Somebody could borrow on margin, you could invest $50,000 into a stock and then borrow another $50,000, basically secured by that stock and that investment that you have and you can borrow on margin. Now, that cost money and there's margin interest that has to be charged by the brokers. That's not what we’re talking abo

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we are going to be talking about how you can test option strategies with automated paper trading. As we get closer to rolling out our new automated trading platform, one of the very cool features that we’ll have as part of this is the ability to paper trade with anybody who signs up for an account. And so, this is good because it allows you to not only test the framework of our automated trading and our bots, but also to test and forward walk some option strategies in the future. Now, inherently, there are some regular flaws that are present in any back-testing framework and although we strongly believe in back-testing strategies and as do many other professional traders, it's a very cool feature to have the ability to forward walk some of these testing option strategies with an automated paper account. What I will be doing just to give you a frame of reference is I’m going to be putting together a lot of automated strategies and

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to answer another member question which is, “Should you dollar cost average when trading options?” I think there's two key concepts that we have to describe, first of all. One is this concept of dollar cost averaging which is the idea that when you buy stock and if the stock goes down and you like the investment or presumably, you think there's value in the investment that you continue to buy in small increments all the way down. If a stock is trading at $100, you buy say 10 shares. Now, the stock is trading at $98, you buy another 10 shares. Your average blended investment is now $99 per share. You’re averaging down as the stock continues to move lower. Now, the concept is not easily applied in its I guess, regular form to options trading. This would assume that if we wanted to dollar cost average in options trading that if a particular strategy that we’re trading goes down in value that we would

Hey everyone. This is Kirk here again at optionalpha.com and in today's daily call, we’re going to answer the question, “What are contrarian investors?” I don't know who officially labeled the term contrarian investors, but it's basically the concept that people are taking the other side of a position. If everyone is bullish, you might be bearish. If everyone is bearish, you might be bullish. You could even say in most cases that some of the greatest investors of all time have been really good contrarian investors. Not that they weren't long-term bullish on say the broad US economy and the markets, but they were bullish during the right times and they were bearish during the right times and it’s usually some combination of looking at either charts or forward PEs or crowd or herd mentality to see where most people are and then taking the opposite view. The idea is really that most investors and most traders I guess are really dumb money and that smart money usually takes the opposite side which I think has bee

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 stock snapbacks and Fibonacci retracement. Both of these things commonly occur and we’ll talk about the differences between them or if there's any similarities and differences between them in today's quick little session. What typically happens is that stocks obviously don't move in one direction at one time all the time. There's no stock that goes vertically higher or significantly lower without having gyrations in between the stock move. Now, gyrations can happen and basically, just active trading in an efficient market can happen at any timeframe. It can happen on an intraday basis, on a one-minute, a five-minute, a 20-minute chart. It can happen on a daily, a weekly, an annualized chart, etcetera. These gyrations, people always try to find some sort of meaning that can be derived out of them. Now, I’m not saying today that there is or isn’t meaning to them. I’m just trying t

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 the herd mentality continues to prove itself as a valuable indicator of potentially market tops and market bottoms. Herd mentality is basically a very simple concept that describes why investors in general, move in herds or clusters around generally bad ideas. Once it's often said, “Once the herd gets involved, it's basically the end of the road for bull and bear markets.” What you see often is you see a market that is starting to rise and starting to move up and then it starts to reach critical mass where everybody starts to succumb to the market and starts to buy in, whether they believe in it or not because everyone is doing it. It's this idea or fear of missing out that eventually gets everyone sucked into the concept or the purchase of shares or the selling of securities because that's basically what everyone else is doing and they don't want to be left behind, they don

Hey everyone. This is Kirk here again and welcome back to the daily call. On today's call, we are going to be talking about the differences between systematic versus unsystematic risk in the market. I think this is an interesting discussion and it gets me back to my roots, I guess of old finance class in college. But it's a concept that I think all investors have to understand. It’s a very easy concept that can be a little bit overwhelming just by the terms and the names, but it's actually very, very simple to understand if you take just two minutes here today in our call and podcast to understand the differences between them. There's two types of risk broadly speaking in the market. The first type of risk is risk that is specific to whatever underlying security or industry you are investing in. To use the furthest end of the extreme spectrum, let's say that you're going to invest in Apple computers and Apple technology. Well, you have risk in just at investing in Apple. Apple has its own risk profile, basica

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, “Are breakaway gaps reliable indicators of trend changes?” Now, I always think it’s interesting to talk a little bit about chart patterns and market patterns because a lot of it is pretty subjective. I mean, there's a lot of things that can be left up to interpretation. Was that a shooting star or was that a pennant pattern? There's a lot of interpretation to it. But I do think there's some meaning behind it. I won’t totally discredit it. I don't think it’s something that you absolutely need to have and understand to be successful. We've clearly proven in our back-testing research and our own trading that you don't need to understand chart patterns or market dynamics to be successful. But having a decent understanding of them I don't think hurts either because if you see something on a chart and particularly on candlestick charting, it can be a good indication of when

Hey everyone, Kirk here again from optionalpha.com and welcome back to the daily call. Today, we’re going to be talking about covered calls and how you can automate this entire strategy now using our upcoming auto-trading software. I believe that covered calls are a great bridge between stock traders and options traders. It is in fact, probably one of the easiest bridges to cross as you start transitioning from just trading stock to potentially trading more options or eventually, just options and no stock. Covered calls are a very simple strategy whereby if you are long 100 shares of stock, you are able to then sell a call option at or above where the stock is trading right now, collect a little bit of income and reduce your cost basis on the way. We’ve done a lot of podcast, a lot of training on this, so you can just search our website at Option Alpha. Just search for covered calls. There's lots of examples and trainings and case studies and research that you can check out. But the idea behind doing this doe

Hey everyone, Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about short covering and dead cat bounces. And no, we do not harm animals on this podcast, nor in trading. But the dead cat bounce is a concept that's very, very often used in describing markets that selloff quickly and then rebound quickly. Let’s cover short covering first. Short covering just basically is the general concept of closing out a position where you’re short. You’re covering your short by buying back the stock. And so, this would generally happen if you’re trading stock and you sell stock to begin with. You can do that, by the way. Most people actually don't know that that can be an entry position. You can sell something you don't own. But you have the obligation obviously to cover that position by buying back the stock later hopefully at a lower price. If you think that a stock is going to go lower, you might sell stock at $100 hoping to cover or buy the stock back at say $90 an

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 I think broker approval levels are causing more traders to actually lose money. I’ll go a little bit against the grain here on this because I understand in theory why brokers have trading approval levels and I get the concept behind why they have it. They have it in place, so that they basically don't give you access to something that you can't handle. But I think that it's been something that hasn't been changed in so long that they don't even have a good understanding of what access is. Most broker approval levels will go through a very simple process where your first or second level of approval will allow you to trade options, but only single options and then usually covered calls. I think this is where the problem lies. The problem lies with just that first or second level, depending on what broker you’re at, in allowing you to trade covered calls and then allowing you j

Hey everyone, Kirk here again and welcome back to the daily call. On today's daily call, we’re going to talk about probably the three reasons why I think people are attracted to the stock market for the wrong reasons. I’ve scripted out here three particular, I guess paradigms or things that we want to compare and contrast. When I boil this down, I was thinking about this before I started recording the show. I think there's a difference between what people actually are going after and what is potentially required of them to be successful and therein lies the difference between why people are invested or attracted to the stock market for the wrong reasons. The first one here is I think people are naturally attracted. There's no overstating this or overshadowing the reason why people get into the market and that's because they’re on a get-rich-quick. And while I don't condone on any level, get-rich-quick, what I do think people are attracted to is the allure of potentially making a lot of money in a very short t

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 LEAP options?” Yes, L-E-A-P options. Very quickly, leap options are commonly referred to as long-term equity anticipation securities. I know that's a mouthful, I know that's a lot, but that's basically what they are. They are option contract with expiration dates that are usually longer than one year. And so, their allure for many investors and the reason why a lot of people start trading LEAPs is probably a couple of things. One is the ability to get long-term exposure into an underlying with very minimal capital actually outlaid from your account. For example, if you wanted to buy the S&P 500 or the ticker symbol SPY which is the ETF that basically trades that, you could buy the SPY. But right now, it’s trading about 260 ish based on the time I’m recording this podcast, so you have to outlay that much capital times 100 contracts and so, it cost a lot of

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, “Is 5% per month trading options even possible?” Once and for all, I think that the answer to this question is unequivocally, “No. It is not possible to do that on a consistent basis.” I’m actually floored that there are still sites out there… I won’t even name the names, but it's probably some part of the title of this podcast that promote and suggest that 5% returns per month on a whole portfolio basis is consistently possible. If you really think about this rationally, you would be looking at 60% annualized returns every single year and that would put you in not only the top category for every single hedge fund, every single mutual fund, but very quickly, you would own the entire world. You would have at that point, compounded growth at 60% per year which you would own the entire world of investable assets. Therefore, it is not possible to do 5% per month trading op

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, I wanted to offer maybe some options trading advice for teenagers. Now, where this came from is actually from my nephew who came to me and started asking questions about what I did and why I always looked at these funky charts and all this stuff. And so, it was kind of an interesting conversation, nothing that I actually thought would actually happen, but it did. He came to me and said, “What do you do? What are all these charts?” I tried to explain it to him a little bit, but I thought to myself, “Okay. There’s probably a need for a little bit of advice maybe from the parenting side to teenagers or to their kids or friends or mentors (whatever you do) that would help out.” And so, I wanted to offer some of that now. In all fairness, my nephew is a self-described preteen, he says because he is not yet 13, he is 12, so he describes himself as a preteen. But this advice is more for people who are kids, who are teena

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 the implied volatility edge pays dividends through delayed gratification. I will continue to talk about this concept at nausea until I basically can’t speak anymore. I feel that people still are missing the concept here and I'm trying as many times and as many ways as I can to explain why the implied volatility edge plays out over time. And so, I will take the onus and say if it's my fault that I haven’t explained this well enough, I’m going to try a million different ways because I think it's a really key, really critical aspect to options trading and to trading in the market that you have to understand. I still get people who miss this concept, miss this point. Here's the deal. Markets are efficiently priced at the time of execution. That's the thing that people always (I don’t know) miss, but they don't really understand. Markets are efficient at the time of execution, me