Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through my ultimate quick guide to paper trading. In particular, I want to walk through some of the benefits and drawbacks to paper trading. Now, paper trading is just this concept of simulated or basically, fake trading in the stock market as a means to understand how different broker platforms work, understand how the mechanics of a particular market might work and again, it's an idea that you can trade in this enclosed sandbox without putting real money at risk. Now, of course, this comes with some benefits and some drawbacks.

Now, to me, the single biggest benefit to paper trading is that again, it helps you get familiar with the mechanics of how a trade works, how to place an order, how to associate different option contracts together, setup the pricing and then actually start to execute on that pricing. It gives you the ability also to enter a lot of trades at the same time which you might not do in a real trading account. For me, it's like practice and you should treat it like practice, meaning you should take a lot of shots, you should make a lot of trades in paper trading, see what works, see what doesn't work and really hone in your skills before you have to narrow your focus to a real trading account. Now, again, you also have the ability to start and consider generating a portfolio that is now balanced and then managing the portfolio and ultimately adjusting the portfolio over the course of a couple of months and this all can happen in a paper trading account. It's a great learning tool, like I said. It really helps you understand how the markets work, how trades work and gets you going and gets the pedals moving if you will on your trading journey.

Now, some of the drawbacks to paper trading, in my opinion is that with paper trading, you're not using your own money, so for me, you don't have skin in the game. And trading with real money emotionally connects you to the market and causes you to create and generate different decisions, different than you would otherwise in a paper trading account. Now, we all know this to be true and although we can try as much as we want to believe that the paper trading account is real money, the reality is that we know subconsciously or consciously it's not real money, so we act and we behave a little bit different. Without real money in the game, you're not forced to make decisions about generating income. Your money is really at risk when you are trading real money and again, it forces you to start making serious decisions versus if you're paper trading, you might make decisions you might otherwise not make with a real account.

Now, in my opinion, I think paper trading fills and technology is a lot faster which actually generates this fake façade that the markets are very quick to fill and that doesn't actually happen in the real market. A big drawback is that when you start paper trading, you'll start entering contracts and they'll get filled very quickly, but in the real world, it might take a little bit of time to actually see that pricing filled especially if there's a lot of volatility. Now, the last drawback to paper trading in my opinion is that when people start paper trading, they often open up an account or readjust their paper trading balance to an account size that's much larger and not representative of what their true account size is. My suggestion is you should always adjust your paper trading account to the exact amount that you will be trading in the future and try to start with that level. Don't assume that you're going to make or have more money available. If you can't learn to win with a small account, having more money in your account is not necessarily going to be a quick and easy fix for generating more income.

As always, if you guys want to learn more about paper trading, just check out our post and podcast on the regular website. We did have a very nice long podcast where we talked about a lot of these different topics in-depth on show number 66 of the weekly podcast which you can get to by just going to optionalpha.com/show66. As always, hopefully you guys enjoy these. If you need anything else, 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 many shares of stock should you buy?" I'll give you my honest opinion on this and I think the answer is zero. I do not think that you should generally use stock unless you're forced to use stock in your account. Now, this is my opinion on this and I think that stock is incredibly inefficient and also requires a lot of capital. What I think you should do instead is I think you should use options to trade stocks synthetically. And so, what I mean by this is that if you are absolutely bent on owning underlying shares of a particular company, why not just trade these synthetic equivalent of long stock which would be to buy an at the money call and sell an at the money put and by doing that, you basically trade the synthetic equivalent of what would be a long stock position, but the requirement for capital would be considerably less to do this.

Now, if you're in an IRA or a retirement account, you can also replicate very similar, a stock position by buying a deep in the money call option with maybe an 80 or 90 Delta and that would again, require much less capital and be a little bit more efficient in not only replicating the upside potential of a stock, but also protecting you in case the stock actually moves lower. I think unless you are forced to do it or unless you have some underlying assumption that requires you to own stock, actually owning shares of stock is incredibly inefficient and also leaves you open and vulnerable to a lot of risk. Now, if you do decide to buy stock, the number of shares would be equivalent to the amount of risk that you're allowed to take for that position. Since we openly suggest that people should never invest more than 1% to 5% of their account in risk per ticker symbol, I would suggest that you keep the allocation really low. If you buy shares of a particular stock like Amazon or Google or Netflix or Tesla which are all higher-priced stocks, you would want to keep your share account low, so that the capital that you have at risk and in the market exposed is less than 5% of your total account balance. As always, hopefully this helps out. 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 trading during premarket and afterhours sessions. Premarket and afterhours sessions are the times (directly like it suggests) right before the market opens regularly around 9:30 Eastern Time in New York and then directly after the market closes which is usually 4:00 PM Eastern Time in New York. Those are those premarket or afterhours sessions. Now, we typically see and hear about these premarket and afterhours sessions because of stock earnings or announcements and we hear one stock is trading higher afterhours or trading lower afterhours. This is why we typically see these environments happen. And so, what a lot of brokers are doing is now allowing many people to start trading the underlying stocks during these time periods. And so, we're specifically talking about the actual stocks themselves, not the options contracts. During these time periods, it's a good opportunity to quickly adjust a position or get in or out of a position when the regular market hours are not in session. Now, the caveat to this is that because it is premarket and afterhours, the liquidity is much lower, the spreads are much wider and it's much harder to get filled in these times. Not that you can't do it, but it's a little bit harder to do it.

Now, TD Ameritrade is the first one to really open this up and they open this up with what they call 24/7 contracts that can be traded all the time or stocks that can be traded all the time and this usually runs from Sunday at 8:00 PM Eastern Time to Friday at 8:00 PM Eastern Time. During this time period throughout the week, you have the ability to trade a lot of these highly liquid big-name securities, things like FXI, SPY, EEM, GLD, SLV, DIA, UNG, TLT, IWM, QQQ and USO. I think those are the ones that were initially rolled out. And so, with those tickers in particular, you have the ability to trade pretty much the entire time that there are available sessions for that during the week. Now, Robinhood on the other hand also opened this up for most tickers as well and extended this across a lot of other securities and individual stock names and with extended hours trading with Robinhood, what they allow you to do is trade basically the 30 minutes before the market opens and then the 120 minutes after the market closes, so about two hours after the market closes until 6:00 PM Eastern Time. Again, a very similar type of framework. It's a little bit different for each, whether you're at Robinhood or TD Ameritrade or other brokers might start rolling this out in the future, but I think this is good. I think that ultimately, more access to the markets for traders and investors like me and you is a really good thing in this market. I think it shows that we're starting to level the playing field and we're starting to open up the gates if you will to regular people. And so, we don't want just institutions and just major banks having the ability to move the market without some sort of influence from potential retail traders or the masses. I like the idea of doing. Hopefully it starts rolling out to other securities as well and definitely rolling out to options contracts in the future. As always, if you guys enjoy this, 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 going through the ultimate quick guide to a bull call spread strategy. Now, a bull call spread option strategy is a strategy that is defined risk where you are buying one option in the money conceivably and selling one option contract out of the money for a net debit. Now, this is like we said, a bullish strategy, so your directional assumption is that the underlying stock will make a move higher in order for this strategy to potentially profit. Now, where you place your bull call spread strikes is then reflective of how aggressive you want to trade the particular stock or how far you think the stock might move. Now, in our example, we suggest that you usually use these strategies by buying one option in the money and selling one option directly out of the money and trying to create a spread around where the stock is trading at the exact moment. Now, if you're a little bit more aggressive and you're trying to take on a little bit more risk, you think the stock might rally quickly and you want to capture a bigger profit, you would then buy one option contract out of the money and then sell another option contract out of the money as well at a higher strike price on the call side. Now, in either case, this is a net option buying strategy, so it's not a strategy that we typically suggest people use all the time. You would try to use this strategy in a low implied volatility market after a stock has made a significant move lower and there's a higher likelihood of a bounce or a rally up. As always, hopefully this helps out. 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 are going to go through my ultimate quick guide to options trading strategies. Options trading strategies are nothing more than a combination of calls and puts, either short or long that allow you then to create a custom payoff scenario for various market conditions or expectations. Now, unlike stock which is a one-dimensional trading vehicle, you can only buy stock or sell stock, options have the beautiful advantage of being able to be crafted to your exact specifications. This is why I love options trading in general, is that whatever market expectation or whatever stock expectation you have, you can generally build an option strategy around that and that means that you don't always have to take directional bets. You don't always have to be long an underlying stock or be bullish on an underlying stock. You can be bearish. You can be bullish. You can even be neutral within a range. You can have the expectation that volatility will generally contract or expand. There's a lot of different ways that you can profit with option strategies as opposed to just trading regular stock.

Now, like I said, there's probably a couple of main categories of option strategies. There's two types that I classify them as. There's simple strategies and then complex strategies. Simple strategies would be things like long calls and long puts, short calls and short puts, covered calls and covered puts. Complex strategies would be things like credit spreads, debit spreads, calendar spreads, diagonal spreads, iron butterflies, iron condors, straddles and strangles and the reason that they're a little bit more complex is because they require multiple option contracts in many cases to create the specific payoff diagram that you're looking for. Now, option strategies are also further divided into two broad categories of risk, risk defined strategies and undefined risk strategies. Again, one of the great things about options trading is that you have the ability (if you choose) to define your risk on a particular trade. If you want to make a trade on a particular stock and you want to know for sure how much money you could make or lose, you can create a defined risk spread trade and control your position size. Likewise, you can also create undefined risk strategies that allow you the opportunity to potentially generate higher levels of income on a more consistent basis, but you will take on a little bit more risk. These strategies would include things like straddles and strangles or short calls and short puts.

Now, as always, we suggest that you back-test all of your option strategies to make sure that whatever strategy you ultimately end up choosing generates enough income for your account or performs the way you want it to. You can do this right through our software here at Option Alpha. If you just search the back-testing software on our toolbox, we can give you the ability to back-test any option strategy that you want out there and again, test out the strategy before you actually put your hard-earned money at risk. 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 are going to answer the question, "Can my covered call get assigned early?" The simple answer to this is yes, it can get assigned early. I want to walk through the possible scenarios in which case, you might be assigned early on your covered call option which would then take away the stock that's basically covering that call option. Now, there are probably a couple of scenarios, but the most likely scenarios that would happen include short dividend assignment. What we talk about with short dividend assignment is that if a stock is going to pay a dividend and if the stock has been rallying much higher or dramatically higher and is about to pay that dividend, that might be an instance where your short call option gets assigned early on your covered call position and the reason would be if the dividend payment is actually more than a corresponding put option to your short call option. And in those scenarios as we've discussed in other examples on the website, what would happen is that the long option buyer would exercise their contracts, collect the dividend and then use that dividend payment to then immediately buy put option protection which basically gets them back into the same synthetic long call option position that they had originally. Again, one of the instances where you could be assigned on your covered call is if your call option is in the money and the corresponding put option to your call option is worth less than the dividend being paid.

Now, another instance where you could be assigned early on covered calls is just generally when the call option starts approaching expiration and it's in the money. Now, what you'll want to watch out for is the extrinsic value that's left in the covered call. If you have an option contract that's in the money, but you're far out from expiration, there's probably a very little chance, almost no chance that that call option is assigned and it's because the contract that you have still has a lot of extrinsic or time and volatility value baked in. As you approach expiration, most of that time value or that volatility value starts to decay away and the option starts trading more in line with the underlying stock. And so, for that reason, as we get closer to expiration, if you notice that the extrinsic value of your option contract starts to whittle away and is down say under $.5 or so, you're probably more at risk of assignment. Again, it doesn't mean that initially, if your call option goes in the money, you'll be assigned automatically. It's more likely to be assigned closer to expiration if the option is still in the money. Hopefully this helps out. As always, if you guys have any questions, please 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 are going to discuss put/call parity and we're finally going to explain it for you guys hopefully here very quickly. The idea behind put/call parity mainly resides with European-style option contracts. This is opposed to American-style option contracts which really don't ever reach put/call parity because they have the ability to be exercised ahead of expiration. But European-style options are only exercised at expiration, so you can find instances where the put/call parity actually exists in the contracts.

Now, what happens is that in I guess, very simple terms, when you reach put/call parity, it's basically the point at which the option contracts that you're trading are trading almost identical or identical to the underlying asset. What you typically see with an option contract say that has a Delta of 80, that means that the option contract is going to perform like 80 shares of stock. It's not going to be like 100 shares of stock which is ideally what the option contract controls, but it's not going to perform like that. If the option contract starts to move its Deltas closer to one and negative one, then it basically starts acting like you would already have long or short of the underlying asset or futures contract or index. And so, that's what happens, is that the put and the call options become in parity with the underlying asset and so, one is basically the same as the other. There's no real difference. Now, if there was a difference to be gained, maybe the put contracts had a differential between the calls and the stock or the call options and the stock was different than the actual put contracts, you could probably entertain some arbitrage strategies, but those are probably far and few between.

I wanted to explain this, so you guys understand it. In our case for a lot of the American-style options that we trade here at Option Alpha, when you see an option contract go really far into the money, I'll start even mentioning that it's trading closer to parity. It's trading closer to what the actual underlying asset would be. Although some people get really I guess, nervous when they get assigned stock, in many respects, if they have a deep in the money option, it's basically acting like stock already, it's just now they actually have the physical stock in their control. Hopefully this helps out. As always, if you guys have any questions, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to try to answer the question, "Should you buy stocks near their 52-week low?" Again, this is another question that was submitted from somebody via email. You can always submit your questions via email to us or just leave us a question at optionalpha.com/ask. Either one works well. But basically, the person was just wondering – "Hey, look. If I'm going to get into a stock and I want to invest for long-term, should I actually buy stocks that are at their 52-week low or should I try something else?" My general opinion on this… And I haven't seen too much conclusive research out there, so if you have research and you want to send it over, please send them over to us. I want to take a look at it for sure. But the general research that I have seen out there is that when you generally buy stocks at their 52-week low, it's not as good as if you're actually buying them closer to their 52-week high. And so, this might be a little bit counterintuitive, but when you buy stocks near the upper end of the trend or a breakout, it's actually more likely that the stock may actually continue to rise in price.

Now, stocks that are at their 52-week low doesn't mean that they can't be a bargain in some cases. But generally, what we see is that when you buy say ETFs or funds that are near their lows or have poor performance, those end up working out better in the long run. Now, that's a combination of different securities. It's not one individual security in and of itself. It's a basket of securities or an index or an ETF put together. Most of those funds when you see them fall out of favor end up outperforming the funds that are in favor during that same time period. When it comes to stocks versus a fund or an ETF or an index, the rules might be a little bit changed. Again, if you're buying stocks in and of themselves, individual equity names, then you might be better off buying at maybe say closer to the 52-week highs or something that's on an uptrend versus something that could be falling off the table and dropping dramatically. Hopefully this helps out. As always, if you guys have any questions, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through our ultimate quick guide to day-trading rules or what's commonly referred to as pattern day-trading rules or PDT rules. The idea behind these rules are basically the way for an industry or a broker to put in place some sort of adopted principles that prohibit people from being pattern day-traders or day-traders without having enough capital to support that. Now, I think it's a little bit confusing because sometimes people think that if you make a bunch of trades on the same day that you're automatically classified as a pattern day-trader, but that may not be the case. The actual rules may differ from broker to broker, but the general consensus is that if you are entering and exiting the same security four to five times in the next course of four to five business days, then that may trigger some alerts in your broker system that would tag you as a pattern day-trader.

Now, the key here is that you are buying and selling the same security in the same day. You would have to buy stock and then immediately sell stock that same day and you'd have to do that type of activity multiple times over the course of a business week for you to really be tagged as a pattern day-trader. Now, this also means that if you are entering a lot of trades on one day, but you are not necessarily closing out of those trades the same day, then that won't trigger any pattern day-trading rules or requirements. Now, what happens is when you are triggered or tagged as a pattern day-trader, you then must have a minimum equity balance of in many cases, $25,000 on the day that you actually establish those day-trades. What the industry is trying to do is again, make sure that people who are trading very quickly in the market have enough equity and enough capacity or collateral to cover a lot of their trades or their activity.

Now, as options traders, what we do here at Option Alpha is we do have a lot of activity every single day, but we are not day-traders, nor are we pattern day-traders. We enter a lot of trades, but our trades are 40 to 60 days out which means that although we might have five or six opening orders in one day, we will not immediately go back around and close those orders the exact same day. We'll wait a couple of weeks to close trades or we'll let our auto-trading software close trades for us. Hopefully this helps out. As always, if you have any questions on this, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha. Welcome back to the daily call. Today, we're going to be answering the question, "Do you want proof that Warren Buffett is an options trader?" I've often talked about at nausea, the fact that Warren Buffett, one of the biggest all-time investors is actually in secret, a very big options trader. In fact, he sells a lot of single option put leg contracts on equity indexes, etcetera. And what he states in a lot of his writings is that the implied volatility edge that's present in option selling is very much the same as his insurance businesses that he owns. And so, I challenge people all the time to look this up yourself. I'm going to walk through today where you can actually find this information. It's very easy to get to. Not a lot of people actually do it which is what actually baffles me all the time, is they challenge me on this, but then they don't actually look it up, so I'm going to show you guys how you can get to it very easily here today on the podcast. Now, before I do that, what I want to do is try to get your help also. I've been trying for years now to get Warren Buffett either on the podcast or in person to do an interview on how he does options trading. And I know it's going to be an uphill challenge, but what I want to see is if you guys can tweet or send messages or emails to him or his company for us to get him on the podcast and just simply talk about how he thinks about options trading. Most people in the media, when they talk to Warren Buffett, it's always about the new long-term buy and hold investments that he has, but they rarely if ever, talk about short option contracts that he's selling. In fact, he's selling billions and billions of dollars of them. And so, I want to be the first. I would encourage you or ask you to help out, please, in trying to get him on the podcast. You can tweet at him. You can send a message, write him a letter. Do whatever you need to do. We've been trying for years now to get him on and I think it would be awesome.

The first thing to do to find out where proof is of Warren Buffett's options trading is just to go to Berkshire Hathaway's website and from there, you can click on the annual reports and then from there, you can click on the quarter that you want to look at. Now, it's filed since they have continues short option contract exposure, it's basically any of the last like eight or so years. I think it actually goes back almost 10 years now that you can see a lot of these and you can just click on any one of these quarterly reports. The one I'm using today is the second quarter report for 2018 because the third quarter report is not quite out yet. Now, when you open up this PDF, what you can do is hit CTRL and F on your keyboard and then just search the words, put options and that will then go through all of the different documents and all of the different pages and find the first and a couple of instances where he actually mentions index put option contracts and you can read those sections. In the 2018 second quarter report, it's under note 13 for derivatives contracts and what he says is he says that "We are parted to derivative contracts primary through our finance and financial products and these equity index put options were written with a total basis in the notional millions as follows. And so, he list out where the liabilities are in the equity index put options and where the notional values of these contracts are. In many cases, the liabilities on these contracts and the values are obviously much different than where he sold these options at because the markets have gone up and that's good, so good for him. But an interesting note is that actually in the second quarter of 2017, he actually lost money in equity index put options. That's at least how they calculate in determining their fair value because they're a little bit illiquid for the size that he's trading. But in many respects, he's made a lot of money selling put options. In the second quarter of 2018, he made $372 million for Berkshire Hathaway selling put options. Like I said, he's one of the largest index option sellers out there and still, nobody talks to him about it, nobody asks him about it. I think it's crazy that one of the biggest investors of all time who's running out of timeline here, for us to be able to interview him is actually one of the biggest option sellers.

Hopefully this helps out. Like I said, I encourage you to go through and start investigating some of these traders that are out there. What we're doing here at Option Alpha is nothing different than what some of the largest, smartest investors of all time are doing as well. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.