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 impact of Interactive Brokers, Charles Schwab and TD Ameritrade now all going commission-free. If you have been living under a rock for the last two weeks or so in the options trading industry, the big news that you may not have seen is that pretty much all of the major brokers have capitulated and have now gone to a commission-free pricing structure. And this is something that we predicted here many years ago at Option Alpha. In fact, a lot of people have already messaged me and said, “Hey. You guys said that this was going to happen.” But I don’t think it’s actually done. I think what is happening right now is just literally the very beginnings of a true commission-free structure for all of these major broker platforms. Actually, a lot of these broker platforms capitulated within a 36-hour window. We had Interactive Brokers and their new IV edge program or edge trading software basically said, “Hey, look. If you want to be commission-free, you’re going to have reduced fills and maybe not the best pricing, but you’ll be commission-free.” Well, then quickly after that, we had Charles Schwab and then TD Ameritrade and now, Etrade and now Ally even since then have all gone commission-free. But for options traders, many of these platforms still are charging a very small per contract commission, $.65, $.60. Whatever the per contract fee is, it’s still a small fee that they’re still charging. To me, a lot of these brokers are hanging on by a thread to any sort of commission structure that they could have in place. Now, the reality is that many brokers don’t make a lot of money from commissions. I think in fact, Schwab or Fidelity, one of the ones, they make less than 5% of their revenue from commissions. What they make most of their money on, including brokerages like Robinhood which has always been commission-free, is they make money on interest, on margin lending, on custodial fees, on management fees, advisory fees, other services that they have. By no stretch will these brokers necessarily disappear based on the fact that they don’t charge commissions, but yeah, their revenue is going to be heard and all their brokerage stock prices have been adjusted accordingly to this new commission-free structure.

The real story here though is what’s going to happen in the future moving forward and what the impact is for regular people like me and you. The true impact for this is great for us because less commissions, less fees means that our returns and our strategies can perform better after all those are factored in. We’ve been doing this for a long time now at Option Alpha and all of our strategies that we do for back-testing, we never assume any commissions because I’ve said for years, commissions are no longer going to be a thing in the future and now that it’s starting to come to fruition, it’s starting to become a reality. But this just means more money in our pockets ultimately as retail traders. That’s great. The second thing it means is that now, the brokers are going to get back to what they were doing literally five or six years ago where they were now competing and nickel and diming each other on the per option trade fee. We’ve already seen this with the likes of Ally. Ally, when they came out and said they’re going to be commission-free as well, they said, “Hey. We’re not going to be $.65 per contract. We’re going to be…” I think it was $.60 per contract or $.55. Whatever the difference is, it doesn’t really matter. But that now is going to be the battle line between all these brokers. “You’re going to move to me because I’m $.55.” “No, I’m $.50.” “No, I’m $.48 per contract.” Whatever the case is, they will all eventually go to zero. Mark my words. Every single broker in the future will have absolutely zero commission for stock which most of them already do now. All brokers will have zero commission whatsoever for any option trading. No per contract fees, no ticket charges, no assignment fees. They will all be zero. It’s just a matter of time. They’re all going to race to the bottom. The problem is when they get to the bottom, what do you do? And this is where I think it’s really important that you pay attention to who has the better technology and platform moving forward because when the playing field is level as it is now, basically entirely flat and level, who’s the best broker’s platform? It doesn’t matter who you go to because all execution is basically the same, all of the trading fees are the same, they’re all practically zero or close to zero, so now, what differentiates one broker from another? And it’s going to be service and technology. Who has the best service which is mostly technology because not a lot of people call in anymore? But who has the best service and who has the best technology platform? Who has the best trading applications, the best trading systems, the best research? Who has that? And that will be the place where everyone gravitates towards.

This has been a focus of Option Alpha for many years. We never wanted to be, nor will we ever become really a brokerage because all the brokerages are just racing and competing on fees right now. But what they’re all missing at this point in time in my opinion is they’re all missing a really big play on technology because many of them haven’t updated their technology in a long time. In fact, they’re still trading, like Thinkorswim, a very old archaic technology which is great and everyone’s used to it, but it really hasn’t evolved. It really hasn’t matured necessarily beyond what it was say five or six years ago and so, that I think is the real big opportunity for a lot of these brokers, so pay attention. It’ll be very interesting to see how this all plays out. I think we’ll start to see maybe some more consolidation in the future as people start to pair up some of their resources and some of their technology stacks and their services, but ultimately, the playing field is level now and they have to compete differently than just on price. Price is now all the same for everybody. It’s all basically commission-free, near zero. Everyone else has to do something completely different if they want to stand out. Hopefully this helps out. As always, if you guys want to keep track of this, just keep following along here at Option Alpha. If you guys do have any questions or feedback, 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, “How do I avoid paying taxes on stock gains?” Well, the first way that you can avoid paying taxes or really, the only way that you can avoid paying taxes on stock gains is to never sell the stock position in the first place. This would then not trigger a long-term or short-term capital gain and therefore, would not actually trigger the capital gains tax. I know that Warren Buffett’s favorite holding period he has famously said is in many cases, forever. This is because he tries to avoid paying tax on these stock gains on a long-term maturity basis. That would be the only way to really do it. I know there’s a lot of other little nuance ways to do it that are probably out there. We probably won’t get into these in all the podcast, but things like opportunity zones, etcetera could be ways to avoid tax gains, but it’s going to be very localized, very specific and in many cases, you’re just rolling them over to another investment vehicle, so you’re not just liquidating the position and walking away from it. 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, “Can you buy shares in a company that you work for?” Well, the simple answer to this question is yes, you can buy shares in a company that you work for, but you have to check with your compliance department and see how you go about doing that. If the company is publicly traded and if it’s privately traded, how can you possibly invest in the company or buy equity shares in the company from someone else or from sort of pool or fund that they have for employee, stock, purchase plans, etcetera. My suggestion to anybody who would be looking to buy shares in a company that they work for is to really understand the rules and requirements around doing so. In many cases, there’s a long vesting period or there’s different prices at which you could buy. You could buy it at discount which sounds really good unless the company stock continues to fall. But you really want to understand the rules around this, particularly how you buy shares in the company, how long you have to hold them, if there’s any lockout periods. You want to make sure that your investment is obviously safe and secure, but is also liquid enough in case you need to get to it.

I really don’t think that (having done this before in the past with other employers) I would continue to buy shares in a company I work for, not necessarily because I don’t believe in the company, but because my job (if I was at a company in the past) would be too tied heavily to that company and therefore, not only is my job tied to the company, but also my investment and retirement tied to the company. To me, you really have to love what the company is doing and where they are kind of market wise in order to invest in the company. I think it’s just too much very highly concentrated and focused risk if you have a job at a company and you also have your life savings invested in the company shares. I would just caution people at doing that and just make sure you understand what you’re doing before you put your money at risk. 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, “How much does it cost to start trading options?” Well, the good news is that it doesn’t cost anything to start trading options and that’s because you can start trading options with a paper account or a virtual trading account in almost any of the major brokerages. And in fact, even if you do have money to start trading options and you want to actually start putting money at risk, we highly suggest that you start by paper trading for a little bit before you actually do that. This gets you familiar with the broker platforms, how order executions flow, how market pricing reacts to different news environments and just gets you aware of the mechanics before you actually start placing your hard-earned money at risk. Now, once you feel like you’re comfortable enough with the mechanics and the broker platforms, how order entries are created, how to build strategies, then when you start to go trading, we highly suggest that you start with around $5,000 to begin with as a starting account balance.

Now, we understand that you can start trading options with less than $5,000. In fact, some people suggest start trading with $1,000 or $3,000, but we do not follow that same suggestion. We believe that $5,000 is a good account size that you can start with because it gives you enough flexibility to make position sizing small enough, but manageable enough to handle in your account. It also gives you the benefit of allowing your positions to be diversified for different ticker symbols and expiration dates which is really important. I think also mentally, starting with a little bit more money means that you have a little bit more skin in the game. I’ve often found that people who start with $1,000 or $2,000 or $3,000 trading options really just don’t have the right mentality heading into it. They feel like that money is gambling or play money and they end up breaking a lot of very simple rules and losing all the money to the market, never to return again to the world of options trading. Again, we highly suggest that you start with at least $5,000 as a bare minimum. Now, again, you’re not going to quit your job overnight on that. You’re not going to make millions of dollars on $5,000 as a starting account balance, but it will give you enough of a good push ahead to really make a good go at this thing and to make position sizing work in your favor. 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, “What does long and short mean in trading?” Long and short are often terms used all the time in options trading in just general stock or regular equity investing and you might often heard me say it here on this podcast or on some of our video updates that I would be long an out of the money call option or short an in the money put option or short an out of the money put option. And so, a lot of people get confused on the meaning of long and short, but it’s actually pretty straightforward and pretty simple. Long basically means that you have a positive number of contracts in your account, typically that you’ve purchased contracts into your account. You bought a call option, bought a put option. It doesn’t matter where they are in the option chain. They could be in the money, out of the money, different expiration dates. But basically, long means that you own option contracts in your account. The same thing can be held true with stock. If you’re long 100 shares, it means that you own 100 shares of whatever stock you’re trading. On the inverse, if you’re short something, it means that you have to buy it back or cover the position in order to get out of it. That’s what I think about with being short a contract. It’s like owing money to a friend. If you owe $10 to your friend, well, you’ve got to find a way to get $10 and pay him back in order to make the investment complete and basically cover your friend, get him back to zero.

With regard to short, it means that you have a negative balance in your account of those contracts that you’ve sold those contracts and in order for the trade to reverse, you have to buy back those contracts or buy back the underlying shares of stock. If you are short 100 shares of stock, that means that you borrowed 100 shares of stock from someone, you sold it in the open market and now, you owe 100 shares of stock at some point in the future. You have to buy them back to close the trading loop. Same thing can be said about option contracts. If you’re short an out of the money call option, it means that you sold an out of the money call option to somebody and in order to complete the trading loop, you have to buy it back in the future to remove the position. Hopefully this helps out. Again, long and short is not really that complicated. If you’re overthinking it, try to re-listen to this. Again, long just means that you own shares or you own stock. Short just means that you’re short or you’re negative balance. You’ve sold stock without having to repurchase it back yet which you have to do at some point. Hopefully that 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, “Why sell a put instead of buy a call?” And I think the answer to this question is actually relatively straightforward, though I’m going to be making a lot of generalities in this podcast. There’s a lot of differences and nuances in different option expiration timelines and strike prices that you would use for the selling of a put or the buying of a call, so again, I’m just talking in generalities here, but the reason that you would sell a put option instead of a call option, number one, is that the put option as an option selling position has an implied volatility premium edge already baked into the contract. It’s this idea that we continue to talk about here at Option Alpha which is that implied volatility at the time that you enter a contract is typically overstated long-term. And so, when you’re selling options, you immediately have a pricing advantage compared to an option buying strategy. Even if they are relatively the same payoff diagram, but one is buying options, one is selling options, you would have a little bit more of an edge to the option selling side.

When it comes to buying a call option, I think the biggest downside to buying a call option is that you have to get both the direction of the stock right and the magnitude of the move or the magnitude of the move in implied volatility right in order to profit and I think that’s really, really hard to do. When you setup a put option and you’re selling a put option especially one that’s close to at the money or out of the money, you have a high probability trade in your favor, you don’t have to get the direction totally right. In fact, you can be wrong in the direction and the stock can actually fall. As long it doesn’t fall below your strike price, then you still could make money on the trade. I think to me, it comes down to this idea that when we reduce our upside potential as we would do if we sold a put option, we immediately get a higher probability of success, more likely outcome of a profitable trade and this is hard for people to sometimes grasp because what they look for is they look for these trades that have low risk and high reward, but what they don’t factor in is the low probability of success that those trades have on an ongoing basis. Again, just talking in generalities here, but 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, “Can you sell and buy a stock the same day?” The simple answer to this question is yes. You can sell and buy a stock in the same day. That would be what’s referred to as a day trade. Day trades happen in the exact same day. A lot of people actually think that day trades happen over the course of a couple of days, but that’s not actually the real definition of a day trade as it relates to how brokers are going to see you. When you actually buy and sell stock the same day, you make a day trade. You just have to be aware of the different pattern day trading rules that many brokers have and pattern day trading rules are basically rules setup in place to make sure that people who are day trading, who are making trades in and out of a security the same day have enough capital to withstand the fluctuations in the market and the liquidity to cover positions if they go bad. Again, the answer to this question is yes. You can buy and sell stock the same day, but that might flag you as a pattern day trader. That’s not necessarily a bad thing. It’s just something that lets the brokers know that you are a day trader and that you should have enough capital usually around $25,000 in your account to continue day trading on an ongoing basis. 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 talk about why I’ve been lately referring to myself as a volatility spread trader because I do think that option sellers are volatility spread traders and this actually comes about because I’ve said this time and time again, but I have a really, really tough time trying to explain to people what I do when they ask. I’m not a teacher. I don’t work for the government. I’m not a police officer, right? It’s very easy for people to usually explain what they do to people, but when people ask me around town or if I’m in some social setting and people ask me what I do, it’s very hard for me to explain what I do. I just trade options. But lately, I’ve kind of thrown them through a loop and I talk about being a volatility spread trader and I thought this was interesting because I was trying to explain to somebody the other day outside of a wedding what we try to do at Option Alpha, like what is our edge, what are we trying to do and ultimately, it’s just this. It’s just trying to capture a spread between different volatility prices basically, the implied volatility price and then the realized volatility that happens closer to expiration.

I think as option sellers, that’s really what we do. That could be our title if you will, is volatility spread traders. We’re trying to trade the spread between two opposing price structures and trying to make a profit with the differential between them or the margin between them. This would be no different than a house flipper who buys a house at a low price and fixes it up and sells it at a higher price or would be different than any other business that buys something and their cost of goods and cost of input is lower than what they can sell it for at a profit. It’s just a margin. It’s just the spread that we’re trying to capture and in this case, I think as option sellers, we have to realize that our true and real edge still lies in volatility, the pricing of volatility and the differential between what’s implied, what people think is going to happen right now and what actually happens when we get closer to expiration and the markets kind of play out their situation. I think it’s interesting, so let me know if you guys like this or not. Anyways, until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “When can you sell a long straddle?” The basis for this question comes from a member who basically asked, “If I have a long straddle position that’s already on where they bought a call option and a put option at the same strike price, same expiration date, when can I sell out of that position, remove the position from my account, take profits or take losses or basically just exit the position altogether?” And the answer to this question is you can sell it back at anytime. You can sell a long straddle back to the market at any time up until the day that it stops trading which is basically right at the expiration date.

Now, again, a lot of people get confused here because they’re trading both a European or American-style option contracts which only deal with the actual settlement of the option contract, but it has nothing to do with the fact that you can trade those contracts in the open market. Since all those contracts are tradable, you can just simply sell back your long straddle. If you have a profit or if you have a loss or you just want to exit the position, you can sell it back in the open market and remove the position by just simply reversing the original entry trade. And so, in this case, what you would do is you would sell the call option and sell the put option that you have at the same strike, at the same expiration date and close 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 from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What are the types of options?” Option contracts come in a couple of different types. It’s actually really not that complicated to understand once you get down into the terminology. But there’s basically two main types of option contracts and then there’s two varieties on top of that. That’s what I would call them, is notorieties within those two option contracts. The two main types are call options and put options. Call options give the option buyer the right, but of course, never the obligation to purchase the underlying shares or asset at a predetermined strike price in the future by a specified day which is usually referred to as the expiration date. This is as opposed to put option contracts which gives the option buyer the right, but not the obligation to sell the underlying asset or shares at a predetermined price, the strike price by a specified date in the future, again, the expiration date. The only difference here between call options and put options is what they’re actually doing at expiration. If you buy a call option, you have the right, but not the obligation to buy stock. If you buy a put option, you have the right, but not the obligation to sell stock. And again, this is both at a predetermined price often referred to as the strike price at which you strike a deal with the other party and a specified date which again, is the expiration date of these contracts.

Now, within just these two contracts, you have two kind of varieties if you will and those are European-style and American-style option contracts. Now, most of the contracts that you’ll be trading especially if you trade equity index or equity contracts, are going to be American-style options which means that they can be exercised at any time before expiration. This is important to understand because it doesn’t necessarily mean that you will be exercised if your option contract goes in the money. It just means that the option contracts can be exercised if you so choose as the option buyer or you should understand this on the other side if you’re an option seller, that the buyer on the other side could if they so choose, exercise their option contract which basically means they’re converting the option from a contract into physical shares. They’re choosing to make the conversion before expiration. That’s what happens in what’s called American-style option contracts. Those are going to be your ETF, your stocks, basically most of your traditional options trading. The other side of it is what’s called European-style. European-style option contracts can only be exercised at expiration and this means that the conversion of actually physically converting an option contract into underlying stock whether it’s long or short, can only happen at the expiration date. Now, this is usually going to happen with index style options or in many cases, futures style options or commodity style options where that conversion actually just happens at expiration. The risk of assignment is basically none until you get to the actual expiration date. Now, again, this is all just regards to conversion of the option contract.

What is more important is to understand that at any point, both European and American-style options can be traded and sold and bought in the open market. If you feel like you're running a position that has a high risk of assignment or if you’re worried about assignment, then you can just simply buy back or sell back your position to the open market and close the position. Again, what I’m talking about here with European versus American-style settlement is just what actually happens when somebody decides to convert the option contract into underlying shares. Hopefully this is a good little overview. Hopefully we did it well in less than four minutes basically. But again, there’s two types of options, calls and puts and then two kind of varieties on top of that which are European and American-style settlement options. It’s a good idea to understand the basics of all of these. Again, you can dive deeper into these in our options basic course right here on Option Alpha and until next time, happy trading.