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 are absolute returns?" I think there's a lot of confusion out there when people talk about returns and performance and oftentimes, you'll hear people boast about their returns on a particular trade or even asset or portfolio and what they're usually referring to is absolute returns. Absolute returns basically just look at the return or the appreciation expressed as a percentage over any given period of time. This could be over a year. It could be over two years. It could be over five years. For example, if somebody invested say $1,000 and over the course of five years, they made $300, then they would say, "Oh, I was up 30% on my investment." But that's over the course of five years. Did they make 30%? Sure, no doubt. No disputing the fact that they generated 30%, but over what timeline? Then you actually get more true representation of what maybe say like an annualized return might have been during that time period.

Oftentimes… And I actually see this a lot actually with investing prospectuses lately. I don't know why, but I feel like people are starting to send me their investing prospectuses for private equity which I have no interest in doing and I see people say, "Oh, well, I invest in this portfolio or this fund because it's returned 292%, but it's been over 25 years." And so, that really isn't that great of a return over 25 years. It's actually kind of subpar what the industry should be. I think it's important that you understand the difference between absolute annualized-adjusted, cyclically-adjusted, inflation-adjusted returns and just have an awareness of them, so that when you see something, you just double check and know what that return number actually means. Hopefully this helps out. Again, as always, if you 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 describe what the American Association of Individual Investors is, also commonly referred to as AAII and basically, what their purpose is and why I think they're missing one critical ingredient to their entire system. Again, the American Association of Individual Investors, commonly referred to as AAII which you can get to by going to aaii.com I think is actually a great resource for people just getting started. It's a nonprofit organization that's basically trying to help people figure out their own financial assets, portfolio allocation, portfolio modeling, guides to mutual funds versus ETFs. They basically offer a lot of programs, a lot of education. I think they've got almost two million members as part of their whole community and their whole platform.

I think what's great about AAII if you read any articles from them and you go through some of the chapters and some of the coursework I guess you could say and journals that they have, is that they do bring in a lot of really good experts, guys like John Bogle and Ben Carson and Carl Richards, Jeremy Siegle, Thomas Howard. They've done a lot of good stuff and kind of pulling from the best of the breeds in the industry. I think what they are tremendously missing out on or like a big missing piece to this is that they don't cover options for some reason. To me, it's actually the most kind of bizarre thing, is that they barely cover… I think they maybe have three articles on options trading of all the stuff and it's just briefly mentioned. But to me, it's such a disservice to most individual investors not to at least cover options trading. Whether they agree with it or not should not be the determining factor anyway because they're not here to tell you what to do. They're here to help you make decisions and kind of lay out the facts and say, "This is the risk and this is the potential upside." or "This is the drawdowns. Here are the benefits." But for me, the fact that they don't give any real guidance on options trading I think is a huge miss, so for that reason, when people always ask me, I think it's a good starting point for people who don't know anything about investing, it's a great tool to use as a stepping block in your journey and in your path, but ultimately, it's something that I think is really missing from their program.

The other thing that I think is good from them (so, I'll kind of end it on a high note) is they always do this sentiment survey. That's always a cool little reading to see where investor sentiment is. They basically survey their audience weekly. They've been doing this for years. This is a great contrarian indicator basically. We see all the time that when investor sentiment is really high and everyone's bullish, it ends up usually being a pretty bad time for the markets and vice versa. When everyone's uber-bearish and they're very fearful, it ends up being a pretty good time for stocks in general. If you want to, you can subscribe to that. It's totally free to get that sentiment email survey and again, it's just another tool in your toolbox moving forward. Hopefully this helps out. As always, if you have any more 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 go through our ultimate quick guide to trading stocks. I think this is actually going to be fairly short because what I want to talk about with regard to stock trading is only just a couple of key bullet points, but if you're new to trading or you're new to investing, likely, the path that you're going to take when you start is you're going to start looking at trading stocks. In fact, this is the most typical or usual path that options traders eventually get down, is they start trading stocks and then they do potentially covered calls and then they just fully commit to options trading or some sort of derivative product trading. But trading stocks is actually pretty simple, pretty easy to do because all you're trying to do is take advantage of different price points. There's no time aspect of it, there's no volatility aspect, there's no Theta decay, there's no Gamma risk. It's actually very simple on the outside. The problem is that stock trading in and of itself is very inefficient because it requires a lot of capital and it requires you to be right in your directional assumption which is by default, inherently very risky and practically unable to do on a consistent basis. We see this time and time again in research that pops up across the board, not only research that we've done, but also research that other firms and other people have done that stock trading in and of itself is incredibly unprofitable for most people because of the capital requirement that is required to purchase stock or to short stock and then of the directional risk that comes out of trying to pick where stock is going to top or bottom or if a stock is going to trade in a range or break out. It's very hard to do.

Now, this doesn't mean that there aren't people who have done it before or consistently do it now, but I think they're the exception rather than the rule. And so, my advice would be is that if you're trying to get started and you want a quick guide to trading stocks, I would say the quickest way to make money in stock trading is to actually not trade stocks and skip right over it and start going into options trading. Options trading allows you to use strategies that create high probability risk defined payouts and give you an opportunity to make money in ranges or in zones versus trying to plant your flag in the sand and saying, "Okay. This is where I need the stock to trade above and I'm going to risk a ton of capital to purchase shares in this stock and hope that it works out for the best." Because ultimately, it is really a recipe for disaster and most people are not good stock traders. I know that I originally started out trying to day trade, realized very quickly 10 plus years ago when I started doing this that I'm not a good day trader, I have no idea how to predict the market and that's okay. You don't need to be good at day trading. You don't need to be good at predicting where stocks are going to go. You just need to play the numbers, the high probability options trading system like the one that we teach at Option Alpha and use the numbers to your advantage. Hopefully this helps out. As always, if you 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 making the decision between closing for a small profit or rolling for small credits. This is again, a question that came out of our Facebook community, so if you have questions and you want to send in there, you can do that. You can also submit them at optionalpha.com/ask. But someone said, "Let's say you're a week or two out from expiration and you are nowhere near your profit target, but you are showing a small profit. Is it better to close the trade and take the profit or roll the trade for a small credit and try for a full profit in the next month?" This one's on the wire. This is an interesting question because it's ultimately a judgment call of what you want to do. Here's how I would think about it though. I think obviously, you could close for a profit and remove the position and bank a win. That seems like the default answer and obviously, in this case, if you're not at your profit target, but you're showing a profit, that's easy to do.

The question on deciding to roll for a credit actually comes up when I think about this as asking myself where my position is next month for next month's portfolio. If I have a position now that's kind of iffy and maybe it's a bearish position, do I want to roll another bearish position into next month's portfolio? Let's say that next month's portfolio was already super bearish and tilt. We already have 45 different bearish positions. Not that that would be the case. I'm just trying to use an exaggerated example, so it proves the point. But let's say next month's portfolio already has 45 bearish positions. Do I really want to roll this position to the next month just so that I have an opportunity to take more profit off of the trade when that would create more unbalance in the next expiration period for me? Now, if this was a bullish trade that I had, maybe a put credit spread and I'm looking towards the next month and I've got too many bearish trades on, I need some bullish trades, well, then yeah, in this case, maybe rolling to the next month (because it's a bullish position that helps balance the next month's portfolio) is maybe ultimately a better decision to make, so in that case, maybe I do roll for a credit and try to maintain the position.

Another thing I would think about is what other positions do I have in that same ticker for the next month. If I've got two positions in the current expiration month and I've got three in the next expiration month, do I really want to have five positions when I roll my existing two to the next month? Is that something that would take me over-allocated for that ticker? Would I allocate too much money? Is that too much risk for that type of position? I think some of these little ancillary things, you have to think about and consider. Ultimately, it's not a bad situation that you're in. It's either take profit now or hope to take a potentially bigger profit later. I think it's a function of what the portfolio looks like the next month. Hopefully this helps out. As always, if you 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 mind your pennies. This is something I say to myself personally, so yes, I do have lots of conversations with myself. I banter back and forth with myself and my alter ego and one of the things I always say to myself is that I've got to watch the pennies and this is something I've done forever and it's definitely a product of how I was raised and the environment I was raised in, how my parents thought about money, how people around me thought about money, but I know that now, looking back on it, it all shaped kind of who I am today with regard to money, but I am definitely somebody who is watchful of the pennies that can add up and ultimately become thousands and thousands of dollars in either potential investment income or lost investment income and what I'm talking about is just little things all the time.

And so, I don't mean that you should scrimp and save and that you should cut your cable because you just want to save every dollar and penny. There's obviously a point to which you should enjoy the things that you work for, but what I'm talking about is just paying attention to everything that you are spending money on, to broker commissions, to little surcharges that you see on your credit card or your billing statement or little transaction fees or even things like we went recently. My wife and I took our kids to see one of the shows at the University arena for kids. They had a group come in that was a kid's show and when you would go online, you could go online and you could pay for the tickets online, but there was a $10 surcharge for paying for the tickets online which I thought was kind of crazy. So then, I called them up and I said, "Hey. Do I have to pay the surcharge?" And they said, "Oh. You only have to pay it if you pay online. If you just buy the tickets at the box office when you walk in, you don't have to pay the $10."

Well, that little thing, if I do that 100 times over my lifetime, I mean, that's thousands of dollars that I end up saving and while it doesn't seem like much and I think many people might pay the $10 for convenience in some cases and maybe in some cases, I would pay the $10 depending on the circumstance, but it's those little things that I think you really have to take care of that ultimately add up. I know for me, I know that. I know at the end of the day, in 10, 20, 30 years from now, because I've saved $5 here and saved $10 there that it's going to make sense. It's going to add up and it's going to be thousands of dollars that I otherwise wouldn't have had. A lesson for today I guess is – Mind your pennies. Watch the pennies. The dollars will take care of themselves. Hopefully this helps out. As always, if you 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 talk about why we cannot recognize the difference between positive and negative experiences. This is something I heard recently and I thought it was really insightful. I was reading another book and I heard somebody say this, the author who said this and he basically said this exact line which was – "We can't recognize the difference between positive and negative experiences." And the context of this was that we have no idea if whatever experience we are currently going through right now is going to ultimately turn out to be a positive or negative outcome for us. To use I guess maybe a really simple example, if you had a really bad experience somehow in your childhood, well, that undoubtedly shaped you into the person you are today and hopefully you had a chance to learn or grow or reflect or develop from that point forward and that potentially negative experience that you had somewhere in your childhood has now created a positive outcome for you and kind of moved you in the right direction. Maybe you're more determined, maybe you work harder, maybe you are more cautious in some areas, whatever that ends up being, but we don't know that at the time. Looking back, I think many people would always say like "I wouldn't change a lot of things." But it's made them who they are today.

I think the same thing could be said in trading, is that when you go through a trade and it's a good trade, you don't know necessarily if that ultimately is going to lead you down the path to more good trades or potentially actually leads you down the path to making dumb decisions and stupid trades. I've seen this all the time where I think people get into a false sense of positive trade security where they make a trade and it was a dumb entry, but then they have this false positive where they actually make money on it. You could look at potentially bitcoin or pot stocks or potentially IPO stocks, long call options, long puts. People know they shouldn't be doing most of this stuff and then ultimately when they make a trade, they have this false sense of positive outcome that comes about from this entry or position and that leads them down a path to actually having more negative consequences in the future. They think – "Okay. Well, this homerun worked or this position worked, so I'm going to keep doing more of that." And ultimately, the numbers and the math come back to bite them in the end.

I think it's really interesting, this idea that we just don't know what is positive or negative experience and so, I think as you're trading, try to remove yourself from the emotion of the market and of the moment. It may feel like you really have this big drawdown that's really kind of weighing on you and making you have lose sleep at night, but maybe that's exactly the type of market situation that ultimately teaches you that you have no control over the market and that you don't know where stocks are going to go and that things are unpredictable to some degree and so, maybe that negative experience is going to set you up for success later on, you just don't know it yet. Because you're so caught up in the moment, you haven't removed yourself from that experience. Hopefully this helps out. Again, just kind of [Unintelligible] on this day. I would love to hear your guys' comments and thoughts. Let us know. Shoot us an email. Add a comment to the post or on social media, whatever works best for you and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. On today's call, we're going to answer the question – "Why I enter trades that I hope to lose money on." First, many of you guys who might be long-time listeners might've recognized this, but I'm actually back in my office finally and able to record on my nice microphone and setup as I've been travelling the last couple of weeks and so, a couple of the daily podcast were not necessarily the best audio. I think it still kind of gets the point across, but I don't know. I just like to kind of be here and get the recordings done in my office with a better microphone, so hopefully it's a little bit better audio moving forward for you guys.

The topic from today actually comes from a question that somebody had emailed in after we made an adjustment the last month or so in our DIA and QQQ positions. And so, what happened was, is that our portfolio was kind of centered a little bit bearish where the market was at the time and we adjusted the positions that we had in DIA and the Qs and converted them from credit spreads where they were call credit spreads into iron butterflies or iron condors. And what I had said in the trade commentary at the time was I hope that we lose on these positions and the idea with that comment being, that because our overall portfolio was bearish, the adjustments that we made to those positions were bullish in nature, meaning that they would've made money if the stock stayed higher, so the adjustments to add put credit spreads were naturally bullish. In that single position, if we zoomed in on that and we didn't pay any attention to the rest of the portfolio, yes, I would want DIA and Q to remain higher because then, those individual positions would've won money, but it would've totally lost the whole concept or the whole perspective of the rest of the portfolio because everything else would've lost money and those little tiny positions would've made a little bit of money.

The reason I say sometimes I enter trades that I hope I lose on is because I'm entering trades that are trying to help adjust or hedge existing positions and that's not a bad thing. It's actually a good thing for overall portfolio stability and to reduce drawdowns long-term. We don't want to have these huge ups and downs in our portfolio. Sometimes when we add positions, it's not because I'm really excited about the position, nor do I really think the stock is going to go whatever direction we're trading, but it's more of a hedge play and I really hope that I lose on the hedge because that means that things turn around and they kind of come back our way and we win on the bulk of the positions that we have versus win on that individual position.

Hopefully this kind of helps out and kind of helped clear the air. Again, I think a lot of people right now are just missing the concept of trading during these… I think of this like V-shaped bottom that we've had where it's been one directional for so long, then when the market made a bottom, now, it's one directional for again, another couple of months and I think people are missing the concept of high probability trading and assume wrongly that options trading is 100% probability trading, but it's not. I think you should have positions on in every direction at all times across different time horizons and that means by default, you're going to have some losing positions every month, but that's okay. So long as you consistently win on more positions than you lose, that's the name of the game. Hopefully this helps out. As always, if you 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 talk about adding low IV trades when rebalancing your portfolio. This is a topic that I've been wanting to discuss now, again, for another couple of months because I see people doing this incorrectly or at least having the wrong thought process heading into building out a portfolio for a given expiration month and the misconception that people have is that we should only be trading high implied volatility ticker symbols. And while we've debunked this a number of times on both the research and the weekly podcast, even here on the daily podcast over the last four or five years as new research has come out, it still seems to be an issue that people are not willing to add low implied volatility trades to their portfolio. But the reality is that low implied volatility trades still generate a positive expected outcome. Now, granted, they don't make as much money as an option trade would when implied volatility is high, so because of that, we just want to allocate a little bit less money to ticker symbols when implied volatility is low and when implied volatility is high, we want to beef up or increase our position size to take advantage of the higher premium in the market. But what I see a lot of people doing is just totally skipping low implied volatility trades and the benefit to having them in the portfolio is that they add a factor of diversification to your underlying symbols that you otherwise wouldn't have gotten had you not added the low IV trades.

Case in point could be if the market is really moving in one particular sector or area, say oil or emerging markets, you could easily find yourself if you're only trading high IV trades, focusing on just two sectors of the market and placing all of your trades in oil and emerging markets. Now, this is okay in general because you have exposure to high implied volatility and that should work out, but at the same time, you have a highly concentrated amount of capital exposed to broad markets. And so, what if those markets continue to move aggressively in one direction or another or they completely reverse in opposite directions? What happens during those time periods and what do you have in your portfolio that can help buffer the impact of that type of event? What we've found in research is that when you build out portfolios not only that have high implied volatility trades in them, but also have a bunch of low implied volatility trades in a diverse set of tickers, an uncorrelated set of tickers, it helps in rebalancing and making sure that your portfolio finds and receives stable income over the long run. You do have this factor of diversification that you have to contend with as an options trader and you should be looking at as you're building out your portfolio every month. You should not be focusing on one or two sectors of the economy in the market. You should be focusing on things that have high implied volatility and then filling in the gaps with other diverse sets of tickers or ETFs even if they're low implied volatility just for the diversification benefit that you get. Hopefully this helps out. As always, if you 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 – "When should you stop laddering into a trade?" Someone asked, again, in our Facebook community and they said, "Kirk. Have you ever had the stats change enough on a trade you were laddering into that made you change your outlook on the trade and stop adding to it? If so, what happened and how often has this generally happen?"

I think there's only three cases or three reasons why you should stop laddering into a trade and actually, it's pretty simple when you think about it and we go through it here. The first one is you shouldn't really ladder into a trade if it's not moving. We actually do see this fairly commonly. More recently, we've seen this in some of our TLT positions where we execute the first laddered entry or the first set of contracts and the stock just trades dead sideways and in those cases where the stock doesn't move, that's actually a good thing. That's what we ultimately intended for the stock to do and if it happens early in the cycle, that's great. We don't need to add more positions, what I call hamburgering positions on top of one another. We don't need to stack another trade right on top of the existing strikes. If the original entry which was maybe one set of laddered contracts is doing well and the stock is moving sideways, why mess with it? In those cases, we'll just hold that one position, take money off the table and move onto the next expiration month if needed.

The second way that you would stop laddering into positions is if the stock made a huge move and it was outside of your long strikes on a defined risk strategy or it was just far enough away from your short strikes on an undefined risk strategy that it didn't make sense adding a laddered position. Again, sometimes, if a stock after you execute the first set of laddered contracts just makes a huge astronomical move and many times, we're trading risk defined strategies, so if a stock moves beyond our long strike, it doesn't make sense for us to add another laddered contract because it's already kind of breached some of those levels very quickly. Again, this is where laddering into positions helps reduce risk overall because had we got into the original position with say a full set of contracts versus just a mini set of contracts, we would've had a much larger loss on our hands. When the stock makes a huge move, laddering is there as kind of a backstop to protection to help make sure that you don't have a huge position on at the beginning and it actually stops you from increasing your position size when the stock is moving against you.

The third way that you would stop laddering into a new trade is if you've reached your portfolio allocation threshold. Many times, people who are new that come to Option Alpha, if they have a smaller account or it's on the smaller side, they'll add one or two laddered entries into a ticker symbol and that will basically max out their 5% allocation. And so, although I might add a third position to an underlying ticker, I always suggest that you never go above your threshold for risk and allocation. If you've gotten to the point at which you have enough laddered entries in an underlying ticker that you actually are at your 4% or 5% risk threshold, at that point, stop and wait for the positions to come off. It's just going to mean that you're going to enter less contracts overall during the course of a year or a couple of years. The probabilities still should work themselves out over time. It just may take a little bit more time because you can't enter as many trades as quickly. It's not a detriment. It's not a downside. It's just the reality. You should control your position sizing and not increase it beyond the 4% or 5% threshold that we talk about. Hopefully this helps out. As always, if you 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 – "Are weekly options a better alternative than monthly options?" I don't think the answer to this question is that it's one or the other. I think there are certain instances where weekly options contracts might offer a better return in the long run versus a certain monthly contract. But overall, we generally like to trade monthly contracts and what we've seen in back-testing is that the tradeoff that you get when you start trading monthly contracts versus weekly is you get a little bit more stability in your portfolio and you have dramatically lower drawdowns. What we've seen in research… And I encourage you to go use our toolbox software and use our research on Option Alpha and look at this for yourself.

But what we've seen in back-testing millions and millions of trades and strategies and tickers over the last 20 years is weekly options contracts do have high return numbers. You generate a high ROI because you have a very quick trade that turns around in a simple time period and it makes sense. People understand that the contract expires next week and you either make it or you don't. But when you start increasing the frequency of those trades, meaning you have to do a weekly contract every week just to make up the same premium as doing one monthly contract, what we see is we see the Gamma risk start to reveal itself in a weekly strategy. Gamma risk is basically the risk that the stock makes a very small move and your option contract position makes a huge move in either P&L. What we commonly see with weekly contracts is that it doesn't take much of a move in the underlying stock to create a massive drawdown and this is the downside of weekly contracts, is that if you can hold through sometimes these really large drawdowns over the course of say 10 years or 20 years, then you end up potentially making more money than trading monthly contracts. Personally, I don't want to go through that. I would rather sacrifice a little bit of my return, so give up a little bit of upside potential for the ability to reduce dramatically the amount of volatility in my account. Some of the weekly strategies that we've seen that work best (and this is literally the best strategies that we've seen in our research) have sometimes a 50% or 60% drawdown over the course of 20 years. Now, I don't know how many people could actually or realistically work through a 50% or 60% drawdown. When I tell people – "Do you want to make the most money or do you want to have the most stable account?" Sometimes people will say, "I want to make the most money." But are you willing to hold through a 50% or 60% drawdown? And I think most people whether they say it or not, are not going to hold through that drawdown. They're going to get to that drawdown period whenever it happens and they're never going to keep up with the strategy. They're just going to bail on it and totally throw in the towel.

As opposed to say a monthly option strategy, many of the monthly option strategies that end up performing just as well though do not beat the weekly strategies, but again, their returns that are slightly lower end up seeing drawdown somewhere in the 20% to 25% range. And so, to me, this is a little bit more realistic. This is a little bit more rational to think that we could have a little bit of a drawdown, a bad sequence of returns in trades and I'm more than willing to hold through that type of drawdown than I am a 50% or 60% drawdown which to me, just seems like a massive hole to dig yourself out of. Again, the question is – "Are weekly options better than monthly?" I think in some cases, they could be a better alternative for certain scenarios. I generally think though that monthly contracts should be the core of what you do and then you can kind of feather in or sprinkle in weekly contracts as you see fit. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.