The "Daily Call" From Option Alpha

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 makes a stock volatile?” The simple answer to this question is just changes in expectation and when changes and expectation are not in alignment with what people had thought previously, that’s what causes stocks to become volatile. If you really think about how stocks get really volatile particularly around earnings events, it’s only driven by the fact that we have new information that changes our future expectation of where the stock is going to go. And so, if that new information is really good for example for a stock and people have assumed that the stock was going to have a bad year and it turns out, the stock might have a good year, then we see a dramatic change in the stock’s price. We have lots of volatility as market participants re-price the stock into a new territory. The same thing happens in reverse. If a stock’s having a really good year and then we have this new information that comes in, it could be earnings, it could be something else related in the industry, a breaking new story that’s really bad for the security and changes the outlook or the expectation, then the market participants dramatically re-price the stock into a lower territory and that’s where we see really big volatile stock moves.

Again, what makes a stock really volatile? It’s just the expectation in the market. And so, if you have a company that’s new or just started up or that’s starting to gain market share or lose market share and all of this is happening very fast and the company is changing dynamically very fast, the stock naturally is going to be more volatile. The one right now that I think of all the time is Tesla because Tesla recently went through almost a 50% drawdown this summer and almost a 30% rebound since then and the company is really volatile because the company is still very much a new company. It’s very much a startup company that’s developing its brand and starting to get exposure and mass-market appeal and so, as a result, its earnings are fluctuating pretty quickly and so, as expectations in Tesla change, so does the stock price pretty violently. Compare this to something more stable like the S&P or IWM which is the Russell 2000, it’s not going to change that much because all of the components are not really that heavily weighted, so as a result, small changes in the components really don’t change the major indexes that much as far as expectations go. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 you cannot start trading options with $100. Now, I know that there’s a lot of people out there online who suggest that you can start trading options with a little bit of money. And while that’s true, we actually suggest that you start with somewhere around $3,000 to $5,000. Hopefully on the upper end of that range, around $5,000 is really where you start to get the benefits of diversifying positions and adding more ticker symbols and spreading your risk across more underlying asset classes.

The real reason why you can’t start trading options with $100 is although you can buy some option contracts with $100 and you can do a very simple, very narrow $1 wide spread, it really doesn’t leave you open to doing much more than that. And so, theoretically, yes, you could trade options with $100. Is it really going to give you the best opportunity to start developing the skills and the strategies required to be successful on options trading? Probably not. Our suggestion is always to save up a little bit more money before you start. It’s better to start with a nice portfolio size, at the very minimum, around a $5,000 portfolio size, so give yourself the best opportunity to be successful. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 you should trade on desktop and manage on mobile. I’ve said this a number of times, but actually, I think it’s a really good technique to use because as the brokerage industry continues to evolve and move towards more of a mobile friendly style and platform, I think it’s really important that you still make a lot of your trades on desktop especially if you’re a new trader. I don’t make that many trades on mobile. I like to manage a lot of my trades on my mobile phone using the Thinkorswim app or if you’re using a different broker, you can use their app. I think that managing on mobile is very, very easy. I can watch and monitor positions, enter and reenter GTC or closing orders.

But when it comes to actually making trades that are added to the portfolio, I still prefer to do that on desktop and I think that in many cases, desktop allows you to get a better sense of what’s going on broadly speaking with the whole portfolio. This doesn’t mean you can’t do it on mobile. I think that sometimes we just get lost in where the mobile layout is compared to a desktop layout which can give us more real estate if you will, more screen space to look at more numbers very, very quickly. In my opinion, I think when you’re moving forward, it’s probably a pretty good idea if you can, to trade your positions on desktop, enter your orders for opening positions, adjusting positions, etcetera and then manage any existing positions on mobile. Use mobile as a means to get away from your desktop during the day and just to monitor positions as needed. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 is a good amount of money to start investing?” I think that honestly, you should start investing with whatever you have, so as much money as you can possibly sock away into an investing account or a retirement account, you should start doing that right away. In fact, it’s often been said that the best time to plant a tree is 100 years ago or today. And so, if you haven’t already started investing, then the next best time to start is today, right now. Literally today, start transferring money into a brokerage account, into a retirement account and start putting your money to work because we know that the power of compounding works in our favor the longer that we have that money invested in compounding.

When it comes to trading and specifically, trading options, we do believe that you should have at least $5,000 to start. And we say $5,000 not because we just pulled randomly this number out of thin air, but because if you were to start with less than $5,000, theoretically, you could start trading options. You could buy an option strategy. You could sell an option strategy for less than $5,000. But at $5,000 of account size, it starts to magically convert into the appropriate risk size and position sizing that we would need or we suggest here at Option Alpha to appropriately manage risk in the future. At $5,000, it leaves you ample room to leave some cash in reserve and also take whatever is left out of that cash reserve for trading and have enough cash available to diversify into an uncorrelated basket of tickers and all into an option selling strategy that’s overall market neutral.

And so, that really starts to happen on a much better level where the numbers really start to work out, around $5,000. Could you do it with $3,000? Yeah, but then you start to get into position sizes that are more than 5% of your account and that really leaves you exposed to a lot of additional risk and a lot of sequencing risk that might otherwise derail your probability of success moving forward. Again, a good amount of money to start in my opinion is around $5,000 for options trading. If you’re starting with less than that, you can start buying into indexes or into short-term bond funds, basically anything that helps generate a little bit of extra return in revenue in your account as you start to save up and start to fund your investing account to get to that $5,000 level. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 fear comes from a loss of control. This is actually really interesting if you think about it, but we have this really strong primitive desire to control everything in our environment and really, the people and the things that we interact with. We see this all the time in markets because people will pay thousands of dollars for indicator signals and for forecast, for glimmers of hope into what the future might bring. This is why actually, analysts just really hang on this idea of future casting earnings or future pacing growth because everyone wants to know what’s going to happen in the future. If they know what’s going to happen in future or they have a good idea of it, then maybe they can control it or take advantage of it some way. We actually do this in our personal lives all the time in the sense that we always check the weather, right? You will always have an idea of what the weather is going to be maybe five days out or seven days out and this gives you a sense of control because if you can predict potentially what the weather’s going to be, you have this desire to control the situation and make sure that you’re all ready and available in case it snows or rains or there’s a tornado or a hurricane or whatever the case is. But in both the markets and in the weather, we know that even though we might have an idea, maybe an inkling of where things are going to go, we still don’t know exactly how it’s going to work out. The best forecast in the market have turned out to be in many cases, sometimes completely wrong. The best weather forecast as to where a storm or a hurricane or a snowstorm might hit turns out to be completely wrong as well. And so, we know that we can’t control these situations which creates a lot of anxiety and so, what we fear is this loss of control and it’s actually nothing mental.

If you really think about it, fear has nothing to do with anything mental that manifest in your body. It’s all physical. We know that if we slow down that the weather changing and going from snow to rain or rain to snow really doesn’t change you. It doesn’t really impact your life really one way or another. Does it change maybe what you wear one day or where you drive or how long it takes to you to get to work? Sure, but is it really going to impact your life? But for some reason, we fear this anxiety that we have physical harm that’s going to come to us from having a loss of control and the physical harm doesn’t have to be that you’re going to die or get hit or be in a car crash. It could be just losing a family member. It could be losing relationships because of some event that happened. Oftentimes actually, people are really fearful in trading because they’re quiet and they’re very subdued in their trading activities. They don’t really share it with anybody. They don’t really talk about it because what they fear is not necessarily that people will ask some questions or that they will be inquisitive, but they fear is they fear a loss of relationships, that if they look and act like something different out of the norm that they might lose relationships that they really care about. And so, it’s this loss of control that develops fear around trading. “I don’t want to look stupid. I don’t want to look dumb. I don’t want to look like I did something and lost money and now, I look like an idiot and I lose my relationship with my wife or friends or family or kids or whatever the case is.”

The key message today is just to understand that fear has nothing to do with anything that manifests mentally. It’s all actually just a physical reaction to this loss of control that we are feeling in our body. We’re losing control. We’re developing anxiety. We’re developing an awareness that we might be disconnected from other people or other situations or relationships or things that we enjoy. And so, this is really where it comes from. If you can learn to overcome this and learn to control this, then the sky is the limit for you because you can basically take fear out of the equation and you can live more freely, trade more freely, invest more freely. One of the ways that I’ve been doing it in my life and trying to work around this as well is I’ve been not checking the weather. I don’t check the weather now moving forward. In fact, I often hear from somebody, “Hey, it’s supposed to rain today.” And I just learn through the fact that other people are telling me. But I don’t check the weather. I know what season it is. I know what time of year it is. We’re getting into the holidays obviously. It’s getting colder in Pennsylvania. We’ve had some snow. I’m aware of that, but I’m not checking the weather anymore. I don’t know if tomorrow’s going to be a blizzard snowstorm. I don’t know if it’s going to come in a week. And so, this is a way for me to control this fear that I have of understanding what the weather is going to be even as small as this and I can then now dovetail this into other areas of my life. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 you should trade without technical analysis first. I’m a big proponent of using technical analysis, but I think that technical analysis is a secondary type of analysis that you should do when you’re trading. I do not think it’s a primary source of analysis. And what I mean by this is that a lot of people when they start trading, they get into technical analysis and it’s very easy to do because it’s visual, it makes sense, it’s intuitive, you use all these technical indicators, they tell you when to buy and when to sell and this is all great, but what we found in our research is that technical analysis is not as successful as just a high probability options trade. What I would rather see people do is I would rather see people use technical analysis as a secondary level of analysis and the primary level of analysis is going to be the probability of the option strategy winning, the balance of the portfolio, the position size, the distribution of tickers in their portfolio. You do those things first and you should be well on your way to a successful trading system.

You can then layer in technical analysis to help tilt and skew your portfolio and positions as needed, but in my opinion, too many people lean on technical analysis completely and what we found is that some of the best indicators might be just 60%, 65% accurate versus an options trading strategy could easily be created with a 70%, 75% probability of success. Although people love technical analysis, (and I like to use technical analysis myself as a means to tilt and skew positions) it should not be the primary source of analysis for your positions. You should use technical analysis as a secondary confirming metric potentially when you start to analyze trades and positions. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 much do you need to start trading.” I think this is a two-part answer. I think the first part of this answer is if you’re going to start trading and just learning the mechanics, learning how brokers work, how order entry and position flow works, then you don’t need any money to do that. You can use a paper trading account at many of the brokerages that are out there and start to get a feel for the mechanics and the way that the markets work, how pricing works, how positions react to different news environments. That is all something that you can do for free. Now, we do suggest that people start paper trading and use paper trading for what it’s meant to be which is this mechanism by which to practice a lot of different repetitions in order entry and trade management and rolling, etcetera. When you start gravitating towards actually really trading, so starting to actually put some money at work, I think you do need a little bit of starting capital to really make a good go with this.

Do I think that $1,000 is enough? No. I think that something around $5,000 is probably a good starting point. Could you do it with $3,000? Sure, but you’re not going to have enough capital available at $3,000 to really leverage the power of distributing your trades across different uncorrelated tickers and keeping your position size low. I think it’s really in your best interest if you are going to start trading, that you try save up at least $5,000 to start. I think you could do it with $1,000, I think you could do it with $3,000, but you really put yourself into a hole with those types of starting account balances because it’s going to force you to trade larger position sizes as a percentage of your account and that, by virtue of the fact that we’re trading a high probability system, will lead you into making decisions that you might not have otherwise made had you had a little bit more starting capital and a cushion. Hopefully this helps out. As always, if you guys have any questions, let us know and until next time, happy trading.

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 stop feeling impatient when trading options?” Now, look. I think this is a really important topic because a lot of traders feel like when they start trading options, they have this sense of anxiety that starts to swell up in their body where they get impatient waiting for trades to come around or for positions to come in after they’ve been waiting for weeks and weeks for something to happen and still nothing happens. But I think that we have to first understand two things first about impatience before we can move forward and start to conquer it in our trading. The first thing we have to understand is that impatience is not a lack of patience. It’s completely different. Impatience is basically a reaction to something happening and it gets triggered under very certain circumstances. It’s not that you are either patient or impatient. It’s that you can be patient, but you can be triggered into this state of being impatient because you’re triggered to go after something that happened or some special set of circumstances that motivates you differently.

Now, the second thing you have to understand is that impatience then is triggered mostly when we have a goal and then we realize that we’re not going to reach it or it’s going to cost us more potentially to reach that goal. And so, that’s where things get triggered. For a trader, what happens is that they start to convert over to options trading or they start trading options and they become impatient and it’s because they have a goal potentially to make a lot of money very quickly and they realize that maybe it’s going to cost more or it’s going to take longer to reach that goal. I think it’s actually probably a very typical scenario. A lot of people transition from stocks to options because they see that they can make more money with options potentially, but they don’t realize the time and effort and the patience that’s required in order to be able to reach that level of success. And so, because they’re triggered to have this goal, make more money in a faster period of time or increase their returns, have no drawdowns, that’s the goal and then when they realize, “Oh my, gosh. This is a high probability system. It’s not a 100% system. This means I got to hold contracts for 30 days and wait for this trade to come all the way in after 30 days. This means that I might have to hold a couple of losers during the process and I might have to trade through those losers.” they become impatient and their impatience is not that they’re impatient people. It’s just that they were triggered because their goal was out of alignment with how much it would cost or how much time it would take to reach that level of success.

And so, I think the way to cure impatience if you are a trader, is to realign your priorities. Get your goals and get your expectations set up correctly and when you do, you’ll find that you become less impatient and you become more patient with trading. You don’t worry about a trade that goes against you because you know it’s part of the process. You don’t worry that you have 10 trades that are starting to lose halfway through the month because you know potentially five of those are going to come all the way back around. And so, if you have the right expectations, you have readjusted your goals, I think you’ll start to feel yourself becoming more and more patient and less and less stressful when trading. Again, to me, somebody who’s impatient with trading just has a misalignment in goals and expectations. They think that their goals are going to be achieved potentially in the near future or very quickly. I say a lot of people look for overnight success and they tell me no, but the reality is that many do. And so, when they realize that options trading is not that, then they start to become impatient, they start to become irritable, irrational, they do things in order to try to cut steps and try to hack their way through the process, all long the while, they’re basically thrashing and throbbing, keeps them contained right where they are. And so, hopefully this helps out. Again, if you are feeling impatient about it, just try to look at your goals and try to look at your expectations a little bit differently first and that might help realign yourself into a less stressful trading environment. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 why you should go beyond outcomes and focus on the process. This is something that I talk about often with coaching clients and especially with our Pro and Elite members here at Option Alpha and it’s this idea of focusing really, really hard on the process and not so much the outcome. Now, this doesn’t mean that you totally reject the outcome of what you’re doing. It just means that the entire weight of what you’re looking at when you analyze your trading and your strategies, your mentality in trading should be more focused 80% I would say on the process of trading versus the outcome of what you see and this is true in pretty much every other discipline. I’ll use an example here which I think will help out, but if you’re looking to lose weight or be physically fit and healthy in the New Year, then you should focus on the process of eating right, of reducing the amount of processed foods and sugars in your body. You should focus on the process of going to the gym and having a strict workout regimen and a system or workout plan that you follow, right? Those are all process oriented things. Now, you are not going to feel amazing the first couple of days that you get on the treadmill and run again. I don’t think anybody would say that it feels great and the pounds just fly off their body their first 30 minutes on the treadmill, but it’s the process that you focus on because you know if you work the process and you work the system correctly that the outcome will come, right? That’s why we all go to school anyway because we know that we don’t have all the knowledge that we need, so we go to high school, then we go to college, then we go maybe even to a secondary school after that and get some specialized knowledge because we believe that if we go through the process of getting an education, then the outcome, i.e. a higher job and better salary, better benefits, better pay will come in the end, right?

We do this intuitively all over the place in our entire life, but for some reason, when it comes to trading, what we do is we do the opposite. We focus on the outcome of any individual trade or string of trades rather than the process of trading itself. And so, what I see traders do all the time and it drives me insane is this relentless focus on the outcome of any one particular trade that month. Any one particular trade that month has no bearing on the process by which you are using to trade because if your process is good and if you have a great strategy that you’re starting to deploy, then at random, you could just have a string of bad sequencing trades here or there that really start to throw you off track if you focus on them way too much. If you hone in on the process and you stay true to your rules and risk management techniques, the strategy that you’re using, the outcome will eventually come. It might take three months, four months, six months, two years potentially to come down the road, but it will eventually come because the outcome of working out and going to the gym is that you’re going to be physically fit and lose weight. The outcome of going to school and getting an education is that you’re going to have potentially a better job opportunity. And so, those outcomes will come, but with time and so, if you focus on the outcomes now, you start to derail yourself into this bad sense of mentality where you are demeaning yourself, belittling yourself, self-sabotaging yourself because you didn’t get the outcome you desired immediately. If you start focusing on the process, the outcome will take care of itself. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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 think about.

But I also think that their technology is pretty good. They acquire Thinkorswim which I daresay I was one of the first customers or first handful of customers of Thinkorswim way back in the day before it was acquired and I still love the platform today, but one of the downsides to TD Ameritrade is they really haven’t done a lot of technology innovation in the last say 15 years. Thinkorswim was probably the biggest acquisition that they made and it was a great acquisition, but they really haven’t evolved the platform dramatically beyond that stage. It’s still very much the same platform that it was back in the day as it is today. Does this mean that it’s a bad broker? No. Not at all. I think they’re a great broker. I’ve always had good customer service with them. They’re very reliable. They’re always there. They’re always fixing problems if bugs come up. And so, I think it’s definitely worth a shot looking into. Are they perfect? No. I think that there’s ever a broker who can improve and there’s obviously cheaper brokers out there, but you pay for what you get in my opinion with the commissions in cheap brokers. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.