Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be discussing why great parents don't give up on children who struggle to read. Now, I know you're probably wondering to yourself what in the world does this have to do with options trading and investing, but I will link up the two topics for you guys here together in one second. In our family, my oldest child is still learning how to read and still struggling a little bit with understanding and kind of like following along with words and sight words. And so, we've been practicing with sight word cards and trying to have her read very simple words and try to string them together, but she's really struggling in the sense that she's giving up on it too quickly. And she tries to read a word or a couple of words and she just throws up her hands and gives up very quickly and in my opinion, I think it's our responsibility as the parent to continue to teach her how to learn to fail and how to be good about repetition and the mechanics. As much as she is pushing us off and not wanting to read, on the outside, though subconsciously, she of course wants to learn how to read and have this own kind of defined power of reading in her piggybank, she is having a hard time learning how to be repetition and mechanical driven when it comes to reading. And so, she's just got to practice more and more and it doesn't mean that she's always going to get it and it definitely means that she's going to slip up and she's going to mispronounce a word or not know what a word means or not know how to pronounce a certain string of words or letters, but it's going to come with practice and repetition. It's really a byproduct of hard work. And so, the more that she works at it… And this is what I've been trying to tell her, is that the more works at it and the more I push her to work at it as a parent, the better off she's going to become because she has to understand that it's just a byproduct of her hard work. If she keeps at it, it will come. She will learn to read. It's not a matter of if, but when.

And so, the same thing can be applied then to trading and investing. If you're trading and investing and if you're learning how to trade options, there's going to be a point at which you fail. There's going to be a point at which you enter an order incorrectly or that you use the wrong strategy or you didn't calculate your position size and that's okay. It's about repetition and mechanics and if you keep increasing the repetition and keep honing in on your mechanics of trading and investing, results will come. You will become a profitable trader. It's a byproduct of hard work. The more and more you focus on it, the better and better you're going to become. And so, as a trader, as an investor, this is what you should take away from it today. It's just this idea that trading and becoming successful is just a byproduct of consistency and persistence, being consistent in doing the right things over and over again even if you slip up here and there, just continuing to hone your skill and your craft and being persistent enough to keep going with it even when it feels like you shouldn't.

Now, in our own opinion or in my own opinion, I guess, we went through during the middle of summer, I guess this year, 2018, so this podcast going up the end of 2018. But during the middle of 2018, kind of in like the summer-ish months, we went through a drawdown of about 7%-ish. It depends on what day you actually picked the drawdown and paper drawdown versus real drawdown. But we went through a pretty decent drawdown right before the market started to top and roll over and so, for me, I knew that at that point and in that period when we were going through a little bit of a drawdown that nothing was wrong in what we were doing. It's just we had a bad string of trades. We had actually a lot of bad strings of trades and just this sequencing risk that we know was present in the market kind of hit us at the wrong time and right in the middle of the year. But I kept on trading and kept on trading a lot of the products that we have been losing on previously and had two months of losses and a couple of different products like TLT or XOP or USO, etcetera, but just knew I should keep trading and keep the mechanics going and eventually, what we ended up doing is ended up turning that back around and ended up generating enough profit on the year which is great. And so, for me, it's again, another reconfirmation of what I know to be true and that's – I just have to stick with the mechanics, that the profits, the results, the byproduct of all of the hard work, of all the mechanics and repetition will come if I just stick with it and keep my head down and kind of keep my nose to the grindstone, if you will. 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 the turnaround in our EWZ short straddles. And actually, what I want to do is I want to try to point you to new podcast that we have coming out very shortly which is show 151 on the weekly podcast. If you're already subscribed to the weekly podcast, you'll get the show. If not, go ahead and subscribe to the weekly podcast from Option Alpha because we walk through in basically 45 minutes to an hour, the entire case study in EWZ.

But the quick highlights here are really interesting. We started trading EWZ many, many months ago back in I think early September or even early August when we start first selling premium and short straddles in EWZ mainly around the 33 and 35 strike prices. Then we saw EWZ have a massive move up to around $42 at its peak and at that point, we just continued to use some of the basic risk adjustment and rolling techniques that we teach here at Option Alpha, rolling for credits, rolling for duration. Ultimately, we ended up holding the position for about three and a half months and the position came back around and ended up being profitable by the time we closed out the position. Again, it's a really cool case study about how we took a position which was a multi-hundred dollar loser and just with some very simple risk adjustment techniques, keeping our position size in check, not letting things get too crazy and out of hand with multiple entries and huge position sizes, we were able to take these straddles, these "undefined risk trades" and turn it into a profitable position after making some simple, simple adjustments.

Hopefully that helps out. Again, I encourage you to go over and listen to show 151 on the weekly podcast. We walk through the entire case study of how we turned this thing around and not only turned it into a profitable trade, but also a $540 profit after it was a multi-hundred dollar paper loss. 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's call, we're going to answer the question, "Should you trade options while in college?" And I know this can be a little bit of a hot topic, but here's my honest opinion on it. I think you should absolutely start trading options in college. I think there's no reason to wait to trade options later on. In fact, I think you can deploy some very simple, very controlled risk strategies and you can start trading in college because ultimately, what is on your side or what's in your favor when you start trading earlier is just frankly, time, time to make more positions, time to let the probabilities work themselves out, time to go through many different market scenarios and increase your trade count over long periods of time, decades even.

When you start trading later on, even five or 10 years later, you really kind of start cutting down your timeline and you start potentially doing things that might be a little bit more risky because you don't have enough time and we see this all the time with people who are getting close to retirement or starting to think about retirement and they start doing things that are maybe a little bit risky and it pays off initially and then they do it again and it pays off again and then they get hit or slammed with a black swan event or a huge drawdown and they basically reset themselves another 20 years. But when you start trading earlier, I think you have the opportunity to do it right from the beginning, knowing that you have so much time on your side and so much time in front of you to let the probabilities work out, increase your trade count, all of that stuff that we talk about here at Option Alpha. Should you start trading in college? Sure, but you have to do it the right way. I think you've got to control your risk. I think you've got to do risk defined strategies. You should not be looking to make $1 million overnight. I mean, all the stuff that we generally talk about as good financial practice should definitely apply to those who start trading in college.

And if I was in your shoes right now or if you're listening to this and you're in college or if you have a kid that's in college, please get them on this podcast, going through our training. Help them understand how they can use options to generate income and generate income in a more stable fashion because what I hate seeing is I hate seeing people who come to us after say 10 years or 20 years of investing in the market and they just don't know anything else besides buy and hold or buy and pray and that's really, really not what we're here for. We're here to help educate people, help show people how to do it a little bit differently and I think you can help out too if you've got kids in college or if you're listening and you're in college right now. Take the time to invest in this. It's worth it in the long run. 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 dividends fulfill this core human need. I think this is actually kind of interesting because I generally talk a lot with people about what their needs are and what they think about finance. As many of you guys know, I'm insanely interested and I geek out on just the psychology behind finance and what people want to do with wealth generation and what I consistently find is that the need for income fulfills a core human need which is why dividends and dividend paying stocks are really, really popular. In fact, just recently as we were celebrating the holidays and we were sitting around with family, we got on this discussion about dividends and somebody brought up – "Oh, this dividend stock pays this." And "Oh, well, my dividend stock pays this and my dividend stock pays this." And what I ultimately ended up learning from just watching and just kind of overseeing this conversation and not participating in it because I don't want to participate in dividend stock conversations at all, but just watching and overseeing this was the need to have certainty and that's a core human need. A core human need that we all have is this need for certainty. That's why we always look for things that are guaranteed. That's why we always look for things that are certain. They're predictable. They're understandable because it fulfills this need for certainty and dividend paying stocks fulfill a core fundamental human need for certainty. Now, you can look at a high dividend paying stock and make so many arguments for why that stock is a bad investment. In fact, some high dividend paying stocks right now that pay 12% or 15% are probably terrible investments because the risk is adjusted for the fact that the stock is not great or the company's fundamentals are not great. And so, it's just a function of math that they end up paying a high dividend related to the stock price, but the company maybe is going to cut the dividend or is going to eliminate the dividend altogether. But it's so fascinating to me that people are so drawn to dividend paying stocks or dividend paying companies because of the need for certainty.

Now, I don't know who it was, so you can please let me know if you do find this, but I did try to look online. I couldn't find out where this research was originated or I would've pointed you, but I know there's research out there that actually shows that over long periods of time, dividend paying companies actually perform less or actually underperform companies that don't pay dividends over time. And that's why you see even some of the biggest companies like Berkshire Hathaway still does not pay dividends because of the need to reinvest and recycle capital as opposed to paying it out to shareholders. Now, that doesn't mean that dividends are a bad thing and companies shouldn't pay out investment to their shareholders, but there's probably other ways to do that, maybe stock buybacks, etcetera. But it's really interesting. I think there was a really good research report that I read a long time ago and I couldn't find it that definitely show that dividend paying stocks actually underperformed non-dividend paying stocks. It's pretty fascinating again, just trying to open up the dialogue here. I think it's interesting that dividends again, fulfill this core human need for certainty, but don't necessarily turn out to be the best investment vehicle long-term in some cases. 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 for options traders, this one thing is the gift that keeps on giving. And so, again, welcome back and happy holidays for those of you guys who are celebrating the holidays during this time. And so, I want to talk about gifts because it's around that kind of Christmas season. And so, for options traders, I was wondering what is the gift that options trading gives us and I the gift that options trading gives us that nobody can ever take away from us is the future and what I mean by that is not some mushy stuff about – "Oh, the future's bright, the future's this." I'm talking about the expectation of the future and the fact that the future is unknowable. And so, for options traders and particularly option sellers, the fact that the future is unknowable is truly the best gift for an options trading system, especially an option selling system because we know and we can prove that implied volatility or the expectation of future movement is always overstated compared to the actual movement or historical movement of an underlying over time. This future edge and this idea that we are really bad at predicting the future gives us a huge opportunity to consistently maintain an edge trading in every market environment long-term.

Now, this obviously means that some market environments, we're not going to have that edge or that edge will be as prevalent. Sometimes, the markets behave more irrationally than we thought. Maybe the markets move down faster than we thought or the markets move up faster than we thought. But long-term, the implied volatility edge is proven not only by us, but also by many other places, many other research sites, CBOE, ICC, all of these other places as well and this is the gift that keeps on giving because the thing that everyone always says about options trading and particularly option selling is that at some point, there's going to be an edge that's going to disappear. But the problem with that is that when you have a future that is unknown or unknowable, then it's very hard to predict that future and so long as the future is unknown or unknowable, it's going to be insanely hard to predict the future. And so, until the point at which the future is perfectly predictable, then the options trading edge for selling premium is going to be in place and this is the gift that keeps on giving because guess what? The future is always unknowable and we will always have black swan events. Black swan events keep people on their toes. They keep people guessing as to what might happen. And that extra little premium that's built-in, that extra little insurance that's priced into option contracts because of some unknowable event in the future allows option sellers to consistently make money long-term.

Hopefully this helps out. Again, this is just my kind of take and spin on gifts, but I think if you really listen to this podcast, you'll understand why the edge in options trading will always be here for a long time until the point at which we can predict the future and at that point, then we don't even need to worry about options trading. We can just predict where things are going to go. It'd be much easier anyway. 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 answering the question, "Is there any validity to "The trend is your friend"? If you've probably heard the term or the saying, "The trend is your friend" and the idea behind it is that we generally want to trade or move our positions in the direction of the overall or prevailing trend. The question of the day is – "Is there any validity to this trend is your friend talk?" And I think in many respects, there probably is a lot of validity to it when it comes to maybe longer-term trends as opposed to shorter-term trends. We all know that it's incredibly hard to predict where the market's going to be in an afternoon or a day or even a couple of weeks, but the further we go out in time, there's definitely trends that start to form. We have bullish trends, we have bearish trends, we have cyclical trends in markets and I think that those are something that you should definitely be aware of and you can definitely trade with and hopefully not against. I know a lot of people have actually put out some pretty good research on this as well. Meb Faber, some of these guys that run funds have put out some pretty good research on trend investing and how trends can actually improve investment returns if you just use some simple trend indicators.

As options traders, here's what I can tell you, is that I think about it a little bit differently. I think about it not necessarily as trading with the trend, but just having an awareness or an understanding of where the overall or prevailing trend is and the way that I actually refer to it oftentimes in coaching and on videos with other members is I talk about thinking about the markets as – Where is the market have the least resistance to move? So, where is the path of least resistance right now in the markets? Yes, there could be some economic news that's bad. Yes, there could be this thing that's bad and the trade war and this war and exports are bad or GDP is bad. There could be a lot of things, but is the path of least resistance lower or is it higher? And so, you could say that that's trend. I don't necessarily think it's trend. I think it's just an understanding of market dynamics. If things are known and there's no unknown or uncertain things coming up on the horizon or in the future, I generally think that markets rally. Even if bad news is known, we tend to see that markets rally or shake things off because it's now known information and we've talked about this in prior podcast. So, for me, it's just an awareness or an understanding of where we are kind of cyclically in some of these market movements and that's just again, whatever indicators you want to use, go ahead and use. If you want to use moving averages, you can use moving averages. I don't use moving averages, so you can use whatever you want, but just having the awareness of where maybe the market has the path of least resistance I think definitely helps out.

And we definitely want to keep our duration short enough that if the market does continue to move higher or continue to move lower, it doesn't really impact us. Now, remember, as options traders, because we're not holding onto these positions for a really long period of time, most of the time, our duration in holding positions is 20, 25-ish days depending on the strategy we're using, so not much is going to happen in 20 or 25 days that I can't readjust to in the next 20 or 25 days. As we continuously add new positions and slowly start to build portfolios, if the market's going higher, so are all of our strike prices and we're just naturally ebbing and flowing with the market and adjusting higher or lower. 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, "Which options have the fastest time decay?" This podcast comes on the heel of yesterday's podcast where we were talking about options with different maturities and why they were priced differently. Now, the question is – Okay. If there's options that are priced differently because of their time until expiration, which option contracts have the fastest time decay? And naturally, the options with the fastest time decay would be the options that theoretically are closing or expiring the soonest. That could be today if you're trading options during the week of expiration or during the day of options expiration. Those contracts would theoretically have the most possible time decay because there's only one day left or zero days left. They basically expire at the end of the day. Or if you're trading option contracts that are a week out, if those are the closest to expiration, they would have the fastest time decay, etcetera, etcetera as you keep moving out the time horizon.

Now, as a reminder, when we start talking about time decay, time decay is visual that happens with option premium. Option premium is generally higher as you go out further in time and as you start to get closer and closer to expiration, the value of options or as a factor of time, so the Theta value of contracts starts to slowly decay in that contract. Until you get to around the 40, 45-day ish point, at which point, it starts to really accelerate and what I mean is that the time decay or the value of time starts to quickly erode in the option contract around the 40 to 45-day period at a much faster pace and that's because basically, the contract is running out of time. At that point now, time decay is starting to accelerate at a faster and faster pace and it just continues to accelerate up until the point at which we reach expiration. When you think about the fastest time decay, of course, it's the option contracts that are the closest to expiring, but also remember that option contracts that are 40 to 45 days are now starting to reach the point that their Theta decay and their time decay is accelerating in a much more rapid pace which means that the underlying stock has to make a greater or bigger move to compensate for the time decay that it lost. Hopefully this helps out. As always, if you 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, "Why are options with different maturities priced differently?" The reason that options with different maturities are priced in really is simply because of time. All other things being equal, when you have more time until expiration, you generally get more value in option contracts and the reason is simply because there's more time for the position to move in a favorable direction or a direction that you want it to move. For that reason, there's an added time premium the further and further you go out in time. Now, this has a little bit of a diminishing effect when you go say two years out versus three years out. There's not that much of a difference compared if you were say five weeks out versus two years out. As you get closer and closer to expiration, the time value of option contracts starts to diminish at a much more quick pace and so, that's reflected in the price of different option contracts at different maturities.

But again, options with different maturities, say 30 days from 60 days would have different prices all other things being equal simply because the 30-day contract has less time until expiration compared to the 60-day contract. If you're trading an option contract with 30 days, there's only 30 days for the stock or underlying security to move in the direction that you need it to move to make a profit. If you're trading options 60 days out from expiration, you get another 30 days potentially of favorable or possible favorable movement in the underlying security which means that you have to pay some sort of additional time premium for that extra duration that you get in those contracts. That's it. That's the only reason why different contracts have different maturities and as a result, priced differently. As always, if you 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 be talking about Beta neutral versus Delta neutral options trading portfolios. And I think this is really important because I think that a lot of people actually do not understand the difference between a Delta neutral portfolio and a Beta neutral portfolio. And while they sound very similar, there's actually a big difference between the two. Let's start with a Delta neutral portfolio. When we look at a Delta neutral portfolio, what we're talking about is we're talking about the net Deltas of the underlying options positions that we're trading. If we've got some iron butterflies and credit spreads and strangles, maybe naked options, basically just totaling up all of those Deltas and then trying to figure out – Okay. What are the total Deltas in my portfolio? Now, many times, people will say, "Oh. Well, I want to be Delta neutral which means that I want to have a portfolio that has an equal balance of positive Deltas and negative Deltas." And what that will do is that means that that portfolio generally will make money in any market direction because the Deltas are balanced. If the market goes down, it's completely offset by positions that make money when the market goes up and then you just capture time decay and volatility decay as the kind of edge or premium. And that works to a certain degree, but the problem is that not all Deltas are created equal because what we find is that we find if we trade products that have either high correlations to one another or high inverse correlations to one another, a Delta on one product is not the exact equivalent as the Delta on another product.

So, to use pretty much the standard case study for this, we could look at TLT and SPY which S&P is the broad S&P 500 index ETF and then TLT is the bond market 20-year bond ETF. The bond market ETF, TLT is not the same as the stock market. Bonds are not the same as stocks which means that when the stock market goes up, that does not always mean that the bond market goes up the same exact amount. If you have a positive Delta portfolio and your positive Deltas or Delta neutral on your portfolio of stocks and bonds, that doesn't really mean much. That doesn't mean that you're actually neutral to the market because TLT has a Beta, a Beta that tracks how likely TLT is to move for every dollar or $1 move up in the market. It has a negative Beta of .17 right now and that's that the time I'm actually recording this. It has a –.17 Beta which means that if the market goes up, TLT is likely to go down. If you've got positive Deltas or neutral Deltas in both of these positions, that doesn't necessarily mean that you're neutral to market movements. It means that you could be tilted one direction or the other.

Introducing now Beta weighted Deltas which is how we Beta weight our portfolio, now we take our portfolio and we say, "Okay. Let's Beta weight, use these Beta metrics like the –.17 in TLT and all the other different Beta metrics that we can calculate and figure out and let's Beta weight our portfolio to some broad based index like the S&P and we use SPY." Now, what it does is it runs the analysis and it says, "Look. If your portfolio was hypothetically one big position in SPY, then how would the portfolio curve look? How would your P&L diagram look if everything was Beta weighted and then adjusted for a position in SPY?" That means that negative Betas and super high positive Betas would be adjusted to their SPY kind of correlation and coefficient. And so, now what we see is we see a much better representation. When you use Beta neutral or Beta weighted Delta neutral trading, we see a much better representation of what your portfolio is actually going to do, all positions included, negative Beta stocks, high Beta stocks, negative Beta ETFs, high Beta ETFs, what the whole portfolio is going to do, including all the positions and the likelihood of their correlation to the overall market that you're using. This is a really fascinating area. Again, it's really different. If you're going to trade Delta neutral, it really only works if you're trading in one particular product. Like you could trade Delta neutral in SPY as long as you have nothing else because there's no need to Beta weight SPY to itself, but as soon as you introduce just one other ticker symbol, you had better switch over to a Beta weighted or Beta Delta waiting type of approach for your portfolio, so you have a better understanding of how things are going to react and what the correlations are between those different products.

Hopefully this helps out. I know this is a little bit more high level, but it's super, super important you know the difference between these. 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 the best way to use protective put options. And the best way to use protective put options is actually not to use them at all. How about that? That's actually a little bit of a reversal from the title. But look. The reality is that when we go back through and back-test put buying strategies and specifically like single long put buying strategies, there is no put buying strategy that actually is better than just not using a put buying strategy. Yes, there's probably certain time periods during a market crash where using protective put options works for a very small zoomed in time of reference, but the problem with that is that we never actually go through a market situation where you know exactly when you need to use that put protection buying strategy and when not to use it. The one microscopic time that a put buying strategy would actually work and help the portfolio is almost impossible to pinpoint and to time as an actual trader going through real market scenarios.

When we actually went back and said okay, like back-testing wise, let's assume that we knew when the top was going to be in the US equity markets in 2007, 2008. We knew that that exact top was going to be there. Great. At that time, start executing different put buying strategies. And we put this all on the weekly podcast, so you can search for it and go back and listen to the research, but the end result is that even though we knew or told the system we knew when the top was in and to start buying puts right before the market crash, we actually still were left with a strategy that was less productive, less efficient, made less money than actually just holding through the market crash and not buying protective puts. Again, what we see here is that buying options on a continuous basis is not a good strategy for success and in fact, it actually leads to lower performance and returns than doing nothing at all.

Here is one alternative to doing it. I promise I won't leave you hanging and just say don't do anything at all. The alternative here is to use a collar. And so, a collar strategy is where you would sell a call option to finance most, if not, all of the put option that you purchased. Now, this is a good strategy to use because if you can do this for no cost or even a little credit, it does not create a draw or a drawdown on your portfolio and cash balance. And so, it doesn't offer as much protection as a flat-out regular long put option, but you can slowly start to chisel away or hedge your portfolio on the way down by using collars and it could be costless in many cases. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.