Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer a question, "Why did an option order get rejected?" And here are five possible reasons why that might have happened. We often get questions from our members and they're frustrated because sometimes they place an option order and their broker might reject the order for some reason and they don't know why. Here are five possible reasons why your broker might reject your option order.

The first is not enough money. It might sound intuitive, but sometimes people do not understand the risk that's associated with the trade that they're making and they think they're making a defined risk trade when it turns out they're making an undefined risk trade or they're just toggling in too many contracts and they didn't recognize it. But many times, the first line of defense is just the fact that you don't have enough money or enough trading capital in your account to make the trade. Double check that you're position sizing accordingly and you have enough cash in your account. Number two is not the right approval level. This is probably the second most common thing that happens with brokers, is that you try to make a trade and you just don't have the right approval level to make that trade in the market. Again, you want to make sure that you've got the highest options trading approval level possible even if you don't plan on making undefined risk naked option selling strategies part of your portfolio. You still want to have the ability to do those types of trades, so that you can adjust and hedge and manage your portfolio as needed. Number three is trading naked contracts in an IRA. If you are trading in an IRA retirement account, ROTH account, SEP IRA, 401K, etcetera and you have the ability to trade options, you most likely have to trade those options in a risk defined manner which means no short call option selling, no short put option selling, no straddles, no strangles. You can do all of these synthetics of these positions, iron butterflies, iron condors, credit spreads, etcetera, but you have to be trading risk defined position. Sometimes if you place an order in an IRA and it creates or is going to result in a naked position of some kind, then the order will get rejected.

Number four is inaccurate price. I see this a lot actually when people send me screenshots of their orders that get rejected and they just have inaccurate prices. Sometimes they are putting in extra numbers in their pricing and they're not just using the regular standard pricing of two decimal points in many option contracts. I've seen people that place an order instead of for $.15, $15.1 and that's just an inaccurate price. Again, it's little things like this that can kind of throw it off, but usually, if you double check your order before you send it in, you should be okay. Number five is pattern day trading. If you did place a lot of orders in the same day and you repeatedly get into and out of the same option contract on the same day, you might be tagged as a pattern day trader which just means that you need to have a little bit more capital in your account before you can continue to do those day trading activities. And so, if you get tagged as a pattern day trader and you just didn't know it, that might be another reason why your order gets rejected. The brokers want to make sure that you have the ability and have the capital in your account to handle pattern day trading or day trading activities, so they might reject an order until we let those trades clear for a day and then the next day, you have the ability to start making new trades. Again, these are five possible reasons, I think the five most common reasons why your order might get rejected. 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 talk about the impact of fees and taxes on investing performance. The impact of fees and taxes on your investing performance is so great that I don't think people really take the time to understand how much control you have in many cases, over fees and taxes and how cutting these and reducing fees and taxes before you do anything else can make some of the biggest differences in your returns over time. Now, we've all seen the charts of the investor's portfolio that grew for 30 years with an advisor fee or without an advisor fee or with a hedge fund fee or without a hedge fund fee and we know the impact of fees over time. But we don't still understand how much we're paying in fees because many times as we've said before, fees are hidden in products that we are trading or products that we're investing in. In particular, the mutual fund space is very good about hiding the fees that they're charging and these fees can come in many forms. They can come in front end fees when you get into a security. They can come in fees when you are selling or relinquishing shares of the mutual fund. They can come in the form of trading fees as the fund rebalances for your best interest over time, but incurs a lot of trading fees along the way. And so, you have to understand where the fees are being charged in every investment that you get yourself into and I think that if you understand where the fees are, you can understand where you can control your risk and reduce your fees as much as possible. Now, we've talked about in previous podcast how right now, the entire industry is going towards a model of low to no fees and most of the biggest ETFs that are out there that can track global performance of practically every market have almost no fees. We did a podcast called, "You can basically own the world for five basis points." And that's the reality that you can own the market portfolio if you're just going to invest in stocks and trade that way and own the world of trading and investing for basically five basis points much cheaper than any advisor, than any mutual fund or than most ETFs. And again, just doing this one thing can put you light years ahead of everybody else even if your performance in that underlying is not as great as somebody else. Because of the fees and the drag that fees might have on your performance, you might be in a better position with lower fees and less of a drag.

Now, the other thing is obviously taxes. Now, when we talk about taxes, we're talking not only about federal taxes if you live in the United States, but we're also talking about State and local taxes and you have a big impact on this. Even though you don't think you do, you can move if you choose to do so. You can move from a high tax State to a low tax State and in some cases, that will dramatically change the outcome of your financial and personal financial picture. Moving from a State say like California which has really high personal income taxes to a State like Texas or Florida with no personal income tax can have a dramatic impact on your financial security in the future and not only that, but people think they're going to potentially take a job cut or a pay cut by moving to some of these States, but if you factor in the fact that you'll be paying dramatically less in taxes, it might actually be after adjusted taxes, a pay stabilization or a pay increase by not paying as much in taxes. Same thing goes for investment accounts. As much as possible, we want to still fund all of our money into ROTH IRA, SEP IRA, any tax favorable account first. If you are trading and you do have the ability to do it at the end of the year, you want to cram as much money into these tax favorable accounts as humanly possible. Now, unfortunately… And I truly say this unfortunately because it's an unfortunate thing that the government limits the amount of money that people can contribute to a ROTH or to an IRA or a 401K. But if you hit those limits, you've done your civic duty to yourself to protect yourself in the future for retirement income and give yourself the best possible way to grow your account tax advantage and then from there, you start trading your account in a regular taxable or margin account at a brokerage. But again, you should be focusing first on how much you can fill up in those tax advantage accounts moving forward.

The other thing that you can reduce as far as fees when it comes to options trading is obviously commissions. Now, again, this is a little bit of a sticking point for me because I think not going with the cheapest broker is sometimes the best choice because you do pay commissions at some brokers, but in many cases, the commissions that you pay to go with a broker might also translate to insanely better technology and better fills, better order pricing, better screening software, better analytics, automated orders, things like that that actually could more than overcome the fees that are charged. But again, you should negotiate with your broker. You should try to move your fees down. We've consistently done this with our broker over the years. I know a lot of people have done this as well. I do think that over time, all brokers are going to be commission free. It's just a matter of when that happens. But the industry is going that direction, so everyone will be commission free I think in the next couple of years and the differentiator is going to be technology and resources and access to the market which is going to be a huge advantage for those people who have kind of the inside scoop. 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 selling in the money or out of the money options safer?" And so, what do we mean by in the money or out of the money? Well, if you're selling option contracts, we're talking about the relationship between the strike price and the current stock price or current ETF price of the underlying. For example, if a stock is trading at $100, you could sell an out of the money call option at $105 or an out of the money put option at $95. Both of these strike prices would be out of the money on their respective ends. In the money contracts would be if you reverse the calls and puts. And so, if a stock is trading at $100, you might sell an in the money put option at $101 and you could sell an in the money call option at $99. Again, that's if the stock is trading at $100.

So, to get back to the question, "Is it safer to sell in the money or out of the money?" Well, it's all relative based on the credit and the premium that you took in from selling those option contracts. Sometimes we do sell option contracts at the money and in that case, we are selling strikes that are very close or maybe even slightly in the money compared to where the stock price is. But in exchange for doing this, we collect a massive premium for selling those option contracts which then moves our breakeven point far away from where the stock is trading at the current time. If we are selling options near at the money or slightly in the money, that doesn't necessarily mean we're taking on more risk and in some cases, it could actually mean that we are taking in higher credits and could see potential profits come in a little bit sooner. Generally, people like to sell options out of the money, but there is a distance so far out of the money that it doesn't make sense to sell options, typically around the five Deltas on either end of an option contract spread. It's probably too far out of the money to generate reliable consistent returns over time because you're selling premium that's too cheap. You do have to come closer to at the money or start selling options at the money or near at the money strikes and collecting bigger credits. 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 a question which is, "Why do we use multiple savings accounts?" What I want to start to do is I want to start to (as we progress towards the end of the year) include every now and again, some of these personal-finance style podcast and the reason I want to do this is because I get a lot of questions from members in the community about how I manage my personal finances, how I think about or what I think about credit card debt versus auto loan debt versus mortgage or real estate debt, how I manage savings, investing, expenses, types of accounts that we have, budgets that we do, so I want to start doing some more of these types of shows. Again, this is going to be potentially the first of many of these styles, so if you have questions on like how I manage my personal finances and you want to add those to the potential roster for the daily calls, please shoot me an email, send me a tweet, go over to optionalpha.com/ask, leave us a message. Any way that you can get that question to me would be really helpful because I want to answer as many of these as I possibly can and we have lots of days moving forward, so we have plenty of room to add these in.

This question here today comes from a member and they were basically just asking and wondering… I've mentioned before that my wife and I use multiple savings accounts for our managing of personal finances. I think it's a very simple strategy, very effective strategy and actually, I don't think a lot of people do this. In fact, I think I've seen research that says that many people have one savings account, but they don't have multiple, so why would you have multiple savings accounts? Well, my wife and I basically have about 10 different savings accounts and we basically use one as kind of like a little bit of like everything else goes in that bucket type savings account. But we have 10 different savings accounts and the reason that we use multiple savings accounts is because when we do our budget every month, we earmark certain things for major items during the year or for major things that we want to save for and we immediately transfer that money to those respective savings accounts, so that we have the money there and it's basically quarantined from our use and our ability to spend it every time that we do our budget. For example, we know that we will always have a need for a car. We have three kids. We will always have a need for a car. And I've never had a car payment in my life because what I've started doing from day one was saving up and buying only the car I could afford. Shocking revelation, right? Because a lot of people don't do this and I'm shocked that people don't do this. But I bought originally a car that was $2,000 and it was a piece of junk when I originally got out of school, but the reason I bought it for $2,000 was because that's what I had to spend. I had to buy a car that was $2,000 because that's all the money I had to spend and I never wanted a car payment. I did not care and I still don't care about looking flashy or buying a Lamborghini or a Maserati. I have a minivan and truck. I'm about as boring and regular as you could possibly get in that department.

And so, once I bought that first car for $2,000 though, I knew that I never wanted a car payment and so, what I did is I said, "Okay. If I could afford a car payment, what might that car payment be?" Maybe $200, maybe $300. People get approved all the time for $200 to $300 or more in car payment. What I decided to do was set aside every month from what I was making to put aside $200 to $300 in an account that would then save up for a potential new car and when I got to the point that I needed a new car, well, whatever I had in that savings account at that time could then go towards the purchase of the new car. Now, we've done this now multiple times and that's how we run that particular savings account to save up for a new car. Every month, we contribute about $200 to a savings account that just saves up $200 at a time until the point at which we need a new car. When we need a new car, we trade in our old vehicle or sell our old vehicle, get whatever value we can out of it and then we combine that or try to do it actually less than that most of the time, combine that with what we've saved out in that savings account to now purchase a new car with no financing, no monthly payments, no interest, nothing. Now, again, this is different than how many people do it and I know that there's zero interest or no interest payments on cars. I've just never been a fan of having car payments. I don't think that people should have car payments. That's how I believe in personal-finance. Like one of the things I believe is that if you don't have a car payment, you're not beholden to somebody for that. And so, that's how we use one of our savings accounts.

Another one that we would have, for example, is we have savings accounts for insurance. We have insurance on our house, we have insurance on cars, we have life insurance, all these things and we put money aside every month for insurance and then insurance payments come out of that account. We save for gifts, we save for holidays, we save for vacations, we save for… I think the other one is like house repairs we save for. A lot of these different accounts that we have are again, just like earmarked for the major items that you know you're going to have moving forward every single year. You know you want to take a vacation? Start saving for it now. You know you're going to have insurance? It should never be a surprise. Take your annual premiums of all your insurance, break it down into a monthly amount and start saving that monthly. That's why we use the multiple savings account kind of method. I know it sometimes can be confusing and a lot of people get really confused with having multiple accounts at one time, but again, we find it to be really, really easy and again, it's a great way to know where you stand financially and how much you need to save and just having that piece of mind that the money is there when you need it for different life events. 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 try to answer the question, "Should you consider trading pot stocks with options?" I think that the rise in popularity of pot stocks or marijuana companies I think is very interesting to watch. Now, whether you are on one side of for legalization or not for legalization of marijuana is not something obviously we discuss in this podcast because we don't get into the politics or to the legislation side of any of this, but it does present potentially an opportunity in the future to trade some of these companies with option contracts.

Now, the one caveat that I have to this is that as we start to see the rise of both recreational and of medical marijuana in this country and we're starting to see this not only just recently in the last couple of months with more country or more States legalizing marijuana in one form or another, medical or recreation like Oklahoma did earlier this year in 2018, but also as we start to see it rise globally like Canada legalizing it on October 17th, 2018, we are starting to see more and more company start to pop-up. Now, while there are a few companies that are already starting to trade options, my biggest caveat with this is that we don't yet know what the history or the liquidity of these types of option contracts or even companies that they're based on is moving forward. And so, while we have a lot of companies that are starting to trade and starting to trade a lot of option contracts like Tilray, we don't yet have a solid foundation of understanding how the company reacts to different market news, we don't have a solid understanding of how the option contracts are really being priced based on implied volatility and expectation and therefore, I think as an option seller, it may not be a good opportunity to trade in these. Now, does this mean that you should be an option buyer in these contracts because of such huge potential swings in volatility? Maybe if you wanted to. Just again, always allocate a little bit of your account towards these types of trades because what I saw a lot of people do especially with the rise and collapse of say Tilray, was that a lot of people allocated a lot of money towards call option contracts at the height of the market with implied volatility very high and super spiked up and a lot of people got burned and crushed when Tilray basically collapsed in a matter of two weeks.

And so, that type of movement is what I would expect is going to happen going forward in the future, a lot of run-ups and a lot of collapses based on news and expectation and legislation as this entire market continues to evolve and develop. And this is really like an emerging market basically for US industry. We do not yet have great data to understand how well these things perform during different market environments, during recessions, during expansion periods, during high interest rates or low interest rates, during all the things that might impact potentially trading pot stocks and therefore, trading their underlying option contracts. Again, not necessarily saying that I agree with pot stock trading or not, so the underlying fundamentals of whether we should have legalization or not. When it comes to option contracts, what I'm concerned about is history and liquidity and what we haven't seen yet in this market is either of those things. It's so new. It's so fresh. It's so infancy in its stage that we have not yet seen enough liquidity and enough history to know if we are actually in a relatively high or low implied volatility market, so for that case or for that matter, I'm going to be sticking away from trading these things until we get a lot more data on this. As always, hopefully this helps out. 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, "Are covered calls safe for investors to trade?" Now, covered calls being safe for investors to trade is a relative question. Safe compared to what? Say at not trading at all? Safe compared to a credit spread, compared to an iron condor? What are we basing this off of? I want to start this podcast by saying that I think we should base this particular question off of just trading regular long stock. Should we trade a covered call or should we trade regular stock and not include the option contract? What we know from a lot of research that using covered calls is a great way to reduce the cost basis of stock ownership. You've often seen this in CBOE studies, as well as the studies that we've put out here at Option Alpha and we do have some new research that shows that in some cases, using covered calls actually might not be the best use of your capital and you might (using a covered call) give yourself an opportunity to actually reduce the overall returns from the underlying security, basically choking or strangling the security from potentially making a nice run higher. Now, of course, we've been in a huge cyclical bull market for a long time, so this could be potentially part of the reason why we see covered calls not being as effective or productive as they have been in the past, but our research has gone back more than 15 years, so we do have a lot of data that can show that potentially, covered calls do not work as well as people think they do in some particular markets.

Now, as far as the alternative which is just trading regular long stock, I think that for many investors, using a covered call is something that could help curb some of the risk in the position by reducing cost basis. However, the biggest risk to a covered call position is the underlying stock itself. My biggest drawback with trading covered calls and one of the reasons why I do not trade covered calls is because of the underlying risk that the stock or the underlying ETF itself goes down in value. Covered calls are not going to curb that potential black swan one-sided risk in the underlying security. As either a covered call trader or as a regular stock trader, you still are carrying the full position and capital investment of that underlying security and you carry the full risk that that security goes down in value and that to me is too much risk to potentially hold in my portfolio for a small position in a single ticker symbol. What we like to do is trade more spread type trades and spread the risk across multiple tickers and smaller positions. Are covered calls safe for investors to trade against the alternative which could be stock? Potentially. Potentially could be good alternatives in certain market situations. Otherwise, we suggest not trading the underlying stock because stock is inefficient and capital-intensive and we would prefer that people start gravitating more towards spread style trading with just option contracts. 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, "How to manage options spreads?" The root of this question in managing options spreads comes from the assumption that in order to be profitable trading, we need to be very active or super active in managing options spreads, either managing potential profitable positions or on the other hand, managing potential losing positions. I take maybe an alternative approach to managing spreads in that if you are trading a spread option strategy which would include credit spreads, iron butterflies, iron condors, etcetera, you are defining your risk on that trade by the width of the spreads that you're trading. When you enter a credit spread or an iron condor trade, you can define how wide that options spread trade is going to be and therefore, you are defining whether you know it or not, the amount of risk that you are willing to take on that position.

Now, since we know from our research and back-testing data that using stop-loss orders is never the best strategy overall, we are definitely fans of letting options spreads go all the way to expiration unless they hit our profit targets first. If a potential spread trade hits our profit target, say at 25% or 50% of the credit received, then we will take off the trade, but if it does not hit that profit target, we are fans of letting the trade go all the way to expiration. Yes, that means no stop-loss for the trading that we're doing because we know research wise and back-testing wise, this ends up generating higher expected returns than using a stop-loss order. While many people want to manage option spreads by using stops and by using orders that would potentially limit risk or so-called risk in the position, we have found that managing spreads actually is much more of a game of patience and letting the position run all the way to expiration unless it hits its profit target first. 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 difference between fundamental analysis versus technical analysis. Whatever analysis camp you come from, you do have to understand the difference between fundamental versus technical analysis and hopefully what we can do here is just quickly go over the highlights of these different types of analysis when it comes to stock and ETF and index trading. Fundamental analysis is the understanding or the analysis of the company itself, the industry, the macro or microeconomics of the market and how it relates to the value of the stock at the current price. A lot of fundamental analysis investors or fundamental investors will look at the difference between where the stock is priced now and maybe some projections on where the fundamental value of the company is moving forward in the future and they try to buy based on these fundamentals. If the stock is basically underpriced and has an intrinsic value that they perceive as potentially higher than where the stock is trading, there's an opportunity to make some money.

On the other hand, you have technical analysis which is basically just the understanding and the research around the price history and the momentum and the charting of the stock itself. With technical analysis, many traders look to use technical indicators, things like moving average, stochastics, MACD, Bollinger bands, etcetera to give them an estimation or an assumption of where the stock is trading in a relative range based on its historical patterns going back in the past. Technical analysis investors have no regard officially for where a stock is valued fundamentally, nor do they care about the stock's expectations of earnings, the sales growth, the EPS growth, the price to earnings ratio, nothing. What a technical analysis trader's solely focused on is just the charting and the technical indicators that are showing for that particular stock. Now, in either camp, no matter which one you kind of lean towards, there's obviously benefits and drawbacks to each and my opinion is that I think that there's value to maybe using a little bit of both of these in understanding a potential setup or a trade that you're getting into especially if you're going to be allocating a significant portion of your account to that type of position. 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, "Can you generate an instant profit buying in the money call options?" Many new traders and many experienced traders as well wrongly assume that you can generate an instant profit buying in the money call options. The reason that they assume this is they attribute most of the value to these call options as just the difference between the strike price or the in the money strike price and the market price of the stock and they think that you could buy the call option and resell the call option back to the market for a quick profit or buy the call option, exercise your call option which would purchase stock at the strike price and then resell the stock back to the market at the current underlying stock price conceivably much higher than where you bought the in money call option. But in either of these cases, what they fail to recognize is the premium and the extrinsic value of the option contract. For example, if we have a stock that's trading at $100, we might assume that we could buy the 95 call option which is in the money by $5 and make a quick instant profit exercising our call option at 95, so effectively, buying stock at $95 and selling it back to the market at the $100 price that it's currently trading at.

But the assumption here would be wrong because the value of that option contract might be $5.10. The value of the option contract at $5.10 accounts for the intrinsic value, the value of exercising the contract right now which is $5, so that's the $5 difference between the stock price and the strike price and then it has a little bit of extrinsic value baked in which is about $.10 or so, so that potentially, there's some time value left in the contracts, there's some volatility value left in the contracts and so, therefore, you could not immediately generate an instant profit by buying these in the money call options. Now, this extrinsic value could be very small like our example right now, if you're close to expiration or it could be very large. Sometimes the extrinsic value could be double what the intrinsic value or more of the contracts are. Again, it's a wrong assumption to assume that there's a free opportunity or an arbitrage opportunity just buying in the money call options. Hopefully we've clearly explained it. 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, "Do I receive dividends when selling call options?" There's two parts to this that I think we really have to dissect in order to understand if we are able to receive dividends when selling call options. The first thing is just to understand that when we are selling a call option, we have the obligation to sell stock at that strike price in the future to the call option buyer. We have to sell stock to them at that strike price which means that if they were to exercise that contract, as the short option contract seller, we would be in a position where we are actually short shares of the underlying security versus long shares of the underlying security. And so, therefore, if we are short underlying stock, we would, of course, not get paid the dividend. In fact, we might actually have to pay out the dividend to a potential call option buyer if they were to exercise that contract.

This is where we often see people get really confused when we talk about short call dividend assignment risk, this risk that is present when a short call option goes in the money and the corresponding put option is worth less than the dividend being paid. When this happens, you are at risk of having your short call option assigned. The call option buyer would then buy stock from you at the strike price and then collect the dividend. The only way to collect a dividend then would be to be an owner of stock. And so, you can be an owner of a stock if you have a short put and you assign the short put and then you go through a dividend scenario where you collect the dividend or if you're a call option buyer and then you exercise your call option and again, take delivery of the stock and then as a stock owner, you can receive the dividend. Again, there's two parts here, one is being a short call option seller and then two is if you're a short call option seller, do you get any chance at the dividend and the answer is no because you'd be short stock. You'd actually have to pay out the dividend if you went through that scenario. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.