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, "Should you buy near-dated weekly options as a hedge?" Now, the answer to this question is not a simple black and white, yes or no answer. What you have to understand about buying near-dated weekly options specifically buying them as a hedge is that they are a tradeoff of risk and reward. To me, I always try to help you guys understand what are you giving up and what might you potentially get in reward by entering a hedge that's a weekly contract. Now, specifically, a lot of traders like to use weekly contracts because they want to hedge a very particular time period. Maybe there's a special FDA announcement, a legal proceeding, an earnings announcement, a merger announcement potentially coming, all of these things that could happen in a very defined window of time. And so, for that just one week, they choose to buy weekly options or sell weekly options, whatever they're trying to do with their strategy just to protect themselves for that exact moment, that one time period when there could be a lot of volatility in the stock. Now, the other side of that you have to understand is that if that's the case, if there's say an FDA announcement coming for a stock and you want to hedge your long stock position, then what you have to understand is that everybody else might be doing that as well. And so, the price of these weekly options gets bid up, so that now, we're paying a huge premium for the perceived protection that we might get from this option contract. Now, if you want to use an analogy to prove this point, it would be like us knowing that a hurricane is going to hit our house and we try to buy insurance the week before the hurricane hits. Now, we don't know exactly what the damage is going to be. We're still a week out from the hurricane hitting our house. Well, we know it's going to come real close or hit our house directly. How much would that insurance be? If everyone else knows that the hurricane is there as well, the premiums to buy insurance to protect yourself are going to go up dramatically. Here's the thing. It's a tradeoff of risk and reward. You are giving up some premium and potentially some high premium in exchange for protecting yourself against the catastrophic or huge loss you might have in your account. Now, with most things that I think about in trading and that we've researched on our research team, what is sometimes the perception is not necessarily always the reality of the market. We see this time and time again in earnings trades specifically which is where people like to use weekly options as a hedge, is that people will assume that a company is going to have great earnings and maybe the company even does have great earnings, but then the stock falls or the opposite happens where everyone assumes that the stock is going to have terrible earnings and the stock does have terrible earnings, but somehow, it magically rallies because people are now expecting better quarters in the future. What you think may happen that would cause you to create a hedge type situation may not actually play out in reality. My suggestion would be is that if you are going to buy near-dated weekly options as a hedge, you keep it very, very small and you focus more on your position size, of your core position in that security, ETF, stock, whatever it is and the diversity of the rest of your positions in your portfolio than trying to pay a bunch of money to protect against what may or may not happen. It's like trying to buy insurance and hoping that your house is going to burn down. You really don't want it to happen, but you keep shelling out all this money for insurance. It's going to start to reduce the total returns of your account after the insurance or hedge is calculated. As always, hopefully this helps out. If you guys have any questions, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to help you understand the difference between an odd lot versus a round lot with some examples. I've seen a lot of definitions out there of the differences when orders go through with regard to stocks or futures or options contracts and the differences between odd and round lot orders. And so, there's no one definition of it, but here's generally the concept around these. Round lot orders are orders that are easily disseminated across multiple parties in the market. Order types for stocks would be orders of 100 shares, 200 shares, 250, 500, 1000 shares, something that is a generally round number of orders kind of rounded to a nearest grouping of trades that can easily be exchanged with another party in the market. If you're trading 100 shares and someone else is trading 100 shares, it's very easy to make those two parties come together and create a filled order. An odd lot might be something like 97 shares. Instead of just rounding up to 100 shares, you buy exactly 97 shares. It's a little bit harder to fill those orders because now, the market has to split that order into possible multiple fills across different parties. They might take 90 shares from one person and seven shares from another person to complete this order for you which means that it might take a little bit more time for your order actually to get filled. We see this a lot actually in options trading as well. Typically, people end up doing groupings of contracts, sometimes five, 10, 15, 20, etcetera contracts at a time, so I would consider those generally to be round lot orders. If you do an option contract order with say seven contracts or nine contracts, you might see your order get split among different exchanges or even within the same exchange, have partial fills with your order. You might get five contracts filled initially and then you have to wait for the other four or three contracts to get filled later on maybe at different pricing, at a different exchange, so sometimes a little bit harder to fill these odd lots. Now, all of this being said, I don't think this should make a big difference in your trading. I think you should still go with whatever contract size or premium size you need to go with to keep your risk in control. A lot of times when I make trades, I will base my contracts purely on amount of risk or the percentage of risk that I can take in my account. I won't really factor in these like odd versus round lots in my decision-making because I don't really care about filling trades exactly when I make the order. I have the patience that if a trade doesn't fill, I can try it the next day or the next day or the next day and I can adjust my strike prices as needed. Hopefully it helps out in at least understanding potentially why maybe some of your orders are taking a little bit longer to fill than some others and 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 how the option experts short volatility. There's really two main ways to short volatility in a portfolio. The first way is to choose a volatility product. That's probably the easiest way that most institutions as well as many personal traders or many portfolio traders choose to gain exposure to shorting volatility and they do it through these volatility products. Now, it could be things like VIX, VXX, UVXY, etcetera and each of these products have their own differences which we've covered actually in a couple of episodes just previously to this. With these volatility products, it's an easy way for institutions to gain broad-based exposure to volatility in general. And so, they can easily move in and out of these products as needed. They can add volatility exposure or they can reduce volatility exposure. The second way to add short volatility exposure is to short option premium. Now, this is I would say a not necessarily preferred way to go about it with large institutions because they have to allocate a lot of money to different positions, but as retail traders or semi-retail traders if you're even trading a large portfolio or a portfolio with clients in it, this is a great way to gain exposure to short volatility because you can spread your risk across many different asset classes and industries and you're not pigeonholed into the volatility products themselves which are usually tied to the broad-based markets. My opinion is that short option premium is one of the best ways that you can short volatility because you have the advantage of spreading your risk across these different industries and sectors. What they would typically do is they would sell short premium via option strategies like straddles and strangles, iron butterflies and iron condors and credit spreads as well as short single leg option contracts. 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, I want to go through our quick guide on the differences between calls and puts and I want to do this using a very simple mind matrix, I guess. The idea behind this is when I think about call options and put options and when I teach calls and puts and the basics of options trading for beginners, I think about things in the form of a matrix and the reason I do this is because I just compartmentalize a lot of things when I learn and I think that this is often useful for those who are getting started. When you think about the differences between calls and put options, you have to understand that there's two sides to every trade. You can be a buyer of calls and puts or you can be a seller of calls and puts and for every buyer, there's a seller and for every seller, there's got to be a buyer. When we go through this matrix, you'll understand that each opposing side to the position has the opposing force on the other side. If I am a call buyer, that means that whatever my rights and obligations are might be different or are the exact opposite of what they might be for a call seller. Let's start off with a very simple buy call option or long call option which basically gives you the right, but not the obligation to buy stock in the future at a specific strike price. With a call option, you are hopefully deliberately bullish on the position and you have a limited amount of cash outflow with an unlimited upside potential in the position. You pay an option premium for the right, again, but not the obligation (it's your choice) to buy stock in the future at a specific strike price. Now, if we think about the other side to this trade which would be the option seller, somebody who's selling you a call option, that option seller collects the option premium that you paid them and they have now an obligation, not a right, but an obligation to sell their stock at that strike price if the call option buyer chooses to do so. You can see how there's got to be a balancing act. The premium that is paid by the option buyer goes to the option seller, the option buyer has limited risk, the option seller has limited profit potential, the call option buyer has unlimited profit potential and the call option seller has unlimited risk to the upside. It's very much a balancing act that happens in the markets. It's a fair trade because people are exchanging risk and reward on different aspects. Now, when we go and start talking about put options, put options work very much the same way as far as buyers and sellers except now, the difference is that with a put option, specifically a long or a buy of a put option, you are buying the right to sell stock in the future at a specific price. A put option buyer is going to be deliberately bearish on the position, they assume that the stock is going to go potentially down in value and they basically want to pre-buy the right to sell stock at a higher strike price than where they think the market value will be in the future. And so, when they do this, they pay again, a premium just like a call option buyer pays a premium and they have unlimited profit potential until the stock reaches zero. With the other side of a put option buy, you have the put option seller and the put option seller is now obligated, does not have the right, but is now obligated to buy stock at that strike price from the put option seller. Again, it happens in the same fashion. There's the same rights and obligations except the only change between calls and puts and this is the really quick thing that you have to understand and learn, is the differences between a call and a put, is that a call option is the right to buy stock and a put option is the right to sell stock. And so, when you are the option buyer of those, you have the right to buy stock with a call and you have the right to sell stock with a put. As an option seller, with a call option, you're obligated to sell stock and with a single sell of a put option, as the option seller, you're obligated to buy stock at the strike price. Hopefully this helps out. I know we went back and forth a lot through this matrix, but it's really important that you understand these differences not only between calls and puts and how they interact in the market, but also the differences between buyers and sellers and how they balance each other out in the options market. 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 answer the question, "Should you always have a GTC profit-taking order working in your account?" If you don't know what a GTC profit-taking order is, GTC stands for good till canceled and it's basically an order type that you can put into the market in your brokerage account that basically stays in place every single day going forward in the future until the options either expire or until the contract is executed at your price. For example, if you sold a straddle for $500, you might have a GTC profit-taking order to buy back that straddle at say $300. Whenever the straddle price goes down to $300, it would automatically execute that order and take profits out of the position. My thought process on – Should you always have one? is that I don't think you should always have a GTC order working. I think they work for different accounts and different scenarios in your life and how you trade and how much access you have to the markets. If you don't have that much access to the markets and you have a regular day job and you don't have the ability to monitor or check positions, then yes, 100%, a GTC profit-taking order can definitely help you out. And I don't want to look like I don't agree with these orders. I think the vast majority of people should and can use them in their account. Where I think that a GTC order sometimes fails is when you have a trade that's perfectly neutral and centered and you reach your profit target very early in the expiration cycle. Sometimes what we've seen and we don't use them all the time, though I do use them a lot, is that when we have a GTC order working and the stock is trading right in the middle of our range, it might be a little bit more advantageous for us to remove that GTC order and to potentially let the position increase in value just a little bit more. For example, if we sold a 110 call and a 90 strike put and the stock is trading at $100, there's really no reason for us to execute a GTC profit-taking order because the stock is trading literally in the middle of our short strike range. We might be better off to let that position decay in value and collect a little bit more profit, just slightly more, maybe another 5% or 10% more in profit over the next day or two as it gets closer to expiration.

What we've seen is that with our positions, we usually try to let them go a little bit longer. If they are in the middle of our range, not being challenged on either side, let them go a little bit longer and potentially take a little bit more money off the table. Now, why do we do this? Now, the reason that we do this is because a lot of our research specifically through the profit matrix research that we did last year shows that when we let positions stay on a little bit longer, potentially take a bigger profit target or hold them to expiration in some cases, we end up generating higher returns on average. Now, this doesn't come as a freebie. We have an expense to this, meaning that we generally see maybe a little bit more volatility in our account, potentially less winners over the long run. We're comfortable doing this though because we know that the end result is higher total returns at the end of the day. And so, again, it's not that we're going to take these GTC profit-taking orders off and not use them. I use them in many, many different trades. But if the trade is middle of the road, not really being challenged, I might move that GTC order. I might move it down to maybe a potentially bigger profit target. If I'm initially targeting a 50% win, I might move it to a 60% or a 65% win because the stock is trading in the middle of the range. Hopefully this helps out. Again, it's never just a total black and white scenario. Again, I think that there's times where you can remove these and kind of let the position go a little bit more because it's going favorably. I'm still generally a fan of taking orders off. I rarely let things go all the way to expiration. It's just something that we've seen in research that ends up working really well, is to take positions off, but if we can squeeze out a little bit more premium from some of these trades, if they're trading in the middle of the range, I will typically end up doing that. 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 JP Morgan's You Invest brokerage now offers 100 free trades, but answering the question, "What's the catch?" If you haven't heard, recently, JP Morgan decided that it was going to get into the personal retail investing space with brokerage accounts through a new company called You Invest. And so, what they're doing is they're offering 100 free trades a year to all of the Chase customers and unlimited free trades to customers who maintain large account balances in their account. Now, obviously, this is insanely important and a huge pivotal shift in this industry that I called literally three months ago. I will definitely say I called this one out. I knew this was going to happen. We talked about it in my live stream which I called "the world is flat" and this idea that in the future, all brokerages are going to move to commission free trading. It's not a matter of if. It's just when. And so, for me, this is very reassuring because now, it's telling me that things big brokerages like JP Morgan are now starting to make this shift and are now starting to chase each other to the bottom and that's really what it's going to become. Every brokerage in the future… And I don't know when in the future this will all happen, but every brokerage in the future will offer commission free trading and it will be across the board. It will be stocks. It will be ETFs. It will be options. It will be everything. And I talk about this because when you have the likes of Robinhood who's been so popular and has performed so well, has gained so much exposure and stole clients from many different brokerages, it's only natural that everyone else chase them and what we have now is we have literally a race to the bottom and it's very similar to what has already happened in ETF commissions and ETF expense ratios and fees and that compression that we've already seen happen and we've talked about previously on this podcast is now starting to play out in the brokerage space.

What's interesting to me is that they're all starting very slow and the idea is they're trying to figure out if they can actually still maintain some sort of commission income or revenue source, but eventually, all this stuff is going to be wiped out. In the case of JP Morgan, there is a catch, right? The catch is you have to be a Chase client first and then to get free unlimited trades, you have to have this huge, large account balance. That's the catch. You have to move all your money over there and then you can trade commission free. Now, the downside to that is – Well, what's the platform? What's the technology? What's the underlying resources that you can use if you move all your accounts over to JP Morgan? Now, what they also say is they say users who exceed that amount, so 100 trades a year or have the smaller account balances will then execute their transactions at a $2.95 per trade fee which they note is lower than the $6.95 publicly noted fee for TD Ameritrade and other E-Trade assets. Again, what they're trying to do is they're trying to literally dip their toe into this pool. They're trying to see – Okay, look. If we offer free trades to some people and not all people, but start with Chase customers, try to get people back over to Chase, how does that impact what we're doing? And they recognized that they are going to have to go deeper and I will definitely bet that in the future, it will be 500 free trades, then it will be 1000 free trades or the commission charge will go down as a result of this. We are going to see across the board, a lot of other brokers join this bandwagon and offer a lot more free trading, unlimited free trading as the compression in this industry gets more condensed in the next couple of years. I think this is insanely important. I think it's very cool to see this happening. You're literally seeing a pivotal shift in the brokerage industry happen right before your own eyes. I would definitely pay attention to this because in the future, people are going to laugh at us that we used to actually pay commissions to trade online. 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, "Should you withdraw money from your investment account to pay monthly expenses?" In this case, I wanted to read actually a member email that I got. And as you guys know, I get a lot of these emails which serves as the basis for a lot of the questions and topics that come up on the daily call. If you want to get your question answered or if you have some topics that you haven't heard us cover yet, please go ahead and shoot me an email, send me a tweet, Facebook message or submit your question at optionalpha.com/ask which is the best place to go. This person said, "Well, what are your thoughts on withdrawing money from your account to pay for expenses? I know that you prefer to take a standard monthly draw, but what percentage of your account is too high where you risk having to constantly decrease your account size? Obviously, in an ideal world, your monthly expenses would be low enough that if you were very small percentage of your account size, you can handle it. But what do you consider to be a safe level where you can continue to grow your account? Have you ever considered withdrawing a percentage of the monthly profits for smaller accounts where you have a strict monthly amount that might cause too much of drawdown in total account size?"

The idea here is just trying to find this wiggle room of where is the perfect amount of money or how do you calculate the perfect amount of money to withdraw from your account. Now, there's a lot of talk on the 4% rule or the 5% rule as far as like an annual draw from your portfolio and although it has a good merit as far as basis for guideline post that we can potentially use, it doesn't always serve as the principal amount that you should necessarily take from your account. What I mean by this is that when people talk about say the 4% rule for finance and withdraws, that takes into account a lot of different things that could happen based on when you start actually taking a 4% drop. In many respects, that 4% rule was done on research that was in the bottom of a market and started to have this huge bullish uptrend throughout the end of the research. What this means is that if we start drawing money on our account based on a percentage, maybe we want to allocate a little bit less of a percentage during the top of a market and potentially more of a percentage during the bottom of the market. To put number to paper, I guess, if we were at the top of a market which I think we are right now or at the top of a cyclical cycle, you maybe want to start withdrawing less than 4% from your account because there's a good chance that if you're holding a big stock portfolio or if you're holding too much long equity exposure, you could lose some of that value. If you're holding something at the bottom of the market, so say we were at the bottom of the market in 2008, 2009 and you wanted to start withdrawing money, maybe you could do something at or a little bit above 4%, so maybe 4% or 5% from your account per year.

I'm not a fan of doing the percentage basis. My thought process on withdrawing money from your account is to figure out what your monthly expenses are, do all of the personal finance stuff that we don't even have time to get into, but things like pay down non-preferred dept, get rid of all your student loans, all your credit card debt, any lines of credit that you have, reduce your monthly expenses as much as possible. What me and my wife did is we ended up moving from outside of DC to Pennsylvania. We had a drastic change in living expenses. It was about five years ago when we actually made that move and ended up reducing our expenses dramatically. We don't have any ancillary stuff. We've done all the right personal finance stuff that you need to do and I truly say you have to do that stuff first. Pay down all that stuff first. Try to allocate some of your resources towards non-preferred debt or high interest rate stuff that you have. Once you do that, figure out what your minimum monthly expenses are going to be, the minimum amount that you truly need to live off of after you've cut everything else out and I suggest if you have enough money in your account to do this and if you're at the point in your life in which you feel like you can retire from doing this, then I suggest just taking a monthly draw or salary. Now, me and my wife calculated this figure for ourselves and we've literally lived within this same figure now for almost eight years. We've done the same monthly draw, month in, month out, every month, no matter where our portfolio goes. We take the same monthly draw and that forces us to keep our expenses low even in the face of rising prices like fruit prices now with kids and diapers. We've forced ourselves to cut back on other things to keep our budget within the monthly draw that we take.

And I think that you should do this because when you start allocating for percentages, what you end up doing is psychologically start changing and you start maybe wiggling and shifting a little bit more than you should. And so, one month, you say, "I'll take 10% of my profits." Well, the next month if you don't have profits, do you still take 10% or do you take 8%? And now, you've started to immediately start wiggling and shifting your number until the point at which I think it doesn't serve its purpose of being an automatic safety net or income source for your family and for your future. That's my opinion on it. I think if you are at the level that you can start taking money and you would know if you are or not, then I think you should start taking a little bit out and slowly start increasing that to a minimum monthly standard. And again, I think that everyone should know if they're at that level or not. You would just have a gut check. Feel comfortable enough retiring off of your trading account and the money that it's generating and if not, you're probably not at that level. If your gut is telling you right now, "I don't know if I could do that." it's probably not the best thing to start taking money out of the account. You want to leave money in the account to let it grow. 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 talk about how Theta decay impacts straddles versus iron butterflies. It's important to understand as we talk about the differences between Theta decay as it relates to different option strategies, what the basic building blocks or core elements of each strategy are. In this case, straddles and iron butterflies are effectively one in the same strategy. They are synthetic equivalents of each other, so long as you're buying options far out on iron butterflies. Iron butterflies core strategy is a short straddle at the money, selling the at the money call and the at the money put. It's the same strategy that you would use if you were doing a short straddle. Now, the difference is that with iron butterflies, you end up going far out of the money on either end and buying cheap protection. Now, the idea behind Theta decay would impact iron butterflies a little bit differently than straddles depending on how far out you buy those long options. Now, if you buy options a little bit out of the money on iron butterflies, say one or two strikes out of the money on either end, then generally, you're going to pay a little bit more money for those long option contracts and therefore, the impact of Theta decay is going to be much more slow than it would be on a wider iron butterfly or naturally on a straddle.

On straddles, we have very quick Theta decay because you're selling pure premium and it's at the money. With iron butterflies, you still have that core straddle position on the inside strikes, but the outside strikes because you are buying options have a muted effect on Theta decay for the position. Now, if you end up buying along outside strikes on the iron butterfly and it's far out of the money or say $5 or $10 away from where you sold the inside strikes and you pay a very cheap premium for these… In our case, we usually like to pay around $8 to $10 or so for these long option contracts. If you'd pay a cheap premium for them, then naturally, they're going to have a little bit less of a time decay suck on your core position. And so, when that happens, you actually see that these iron butterflies actually perform in very similar fashion, though slower in pace than a short straddle, but in very similar fashion as far as how quickly time decay erode the value of the position. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, "What is option buying power?" In its most simple terms, option buying power is the amount of money or funds that is available for you to actually go out and start trading options. Now, I think this terminology should be switched and it should no longer be called option buying power, but actually be called option trading power because it's not just limited to the buying and purchasing of option contracts. Your option buying power just tells you how much funds you have available in your account for the purposes of options trading and this means that you can also sell option contracts and put option contracts on margin or sell spreads, buy spreads, you can sell complex strategies. You could do everything you want with options trading with this amount of capital.

What typically happens is that when you have an account say $100,000, if you start investing that account and you start either getting into option strategies or purchasing stock, you might use say $50,000 of your account to get into other strategies. Let's just say we're going to purchase stock and that stock purchase is $50,000. What's left over is about $50,000 which is typically associated with your option buying power. You have that amount of money generally to then go out and execute new options trading strategies, whether you're buying or selling contracts until you reach the point at which you dwindle that amount of money down to zero. Now, we typically suggest that you keep this buying power available of around 50% of your account. You don't need to actually invest all of your account to generate higher returns than the market on average long-term. In fact, you can generate higher returns on the market on average just investing 30% to 40% of your account and keeping the vast majority in cash. I typically like to follow this strategy because it leaves a lot of wiggle room for margin expansion and for volatility in the market and always leaves enough cash available to enter new trades or better opportunities whenever those opportunities present themselves. As always, hopefully this helps out. If you have any questions about option buying power, just 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, "What happens when you buy a put option contract?" I want to talk about the logistics of what actually happens when you buy a put option contract and the first thing to understand is that when you are an option buyer in this case of a single put option, you do have to pay money to get into that contract. Logistically, what happens is that the money that you paid for the contract or the option premium gets transferred over to the option seller and in this case, if you're a put option seller, you would then receive that option premium or that option contract value as income in your account.

Now, when this happens now, you have this put option contract that you've now purchased from the option seller and it's in your account valued at the value that you priced it at and it's immediately going to start changing in value based on time until expiration, volatility, the underlying stock movement, etcetera. And so, when this happens, you just basically are going to hold onto this put option contract assuming that you're trading in the right way and you're hoping that the stock goes down, you want to see an increase in the value of this put option contract. But that's it. That's all that really happens. Money gets transferred from your account to the option seller's account. You now have this put option contract which you can decide what to do with. You have the right, but not the obligation to choose to trade that contract away or to exercise your right for shares and you can do that any time typically before expiration or at expiration. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.