Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, "Is margin required when trading option spreads?" The simple answer to this is yes and no. When it's typically thought about margin when it comes to investing, people think about borrowing on margin and then buying stock. But when it comes to options trading, you do have to have margin or put up margin to trade option spreads. Now, that doesn't necessarily mean you need a margin account. In fact, you can trade options spreads in your IRA or retirement account with your broker just as easily as you can trade option spreads in a regular margin account. Now, what brokers do is that when you're trading spreads, they put up or set aside money in your account to cover the risk in that spread position. Let's say you're trading a $1 wide spread credit spread, either call spread or put spread and you take in a $30 credit which means you have about $70 of risk in a very simple spread. That $70 of risk, they're going to set aside it. They may call it margin or they just may call it buying power production, but in either case, they're setting aside this risk money to cover the position in case it goes bad.

Now, again, even though they may call it margin, they're not necessarily borrowing that money. You're not going into the margin account of the broker and borrowing money for the sake of making this trade. You're just allocating a certain percentage of your account, that $70, whatever percent that is of your account to cover that position in case it goes bad. The broker just sets it aside in your account and you can't trade with that $70 in your account anymore. You can trade with everything else that's left, but that amount of money is set aside to cover it. That's why I say it's kind of a little bit tricky sometimes in the sense that they call it margin, but it's not really borrowing on margin. Same thing is done in your IRA accounts. It doesn't matter if you have a margin account, IRA, retirement account. They just set aside the money when trading spreads. 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, I'm going to share my top five things I love about options trading. This was actually hard for me to whittle down into five things, but I think I can really do it in five really good, very solid categories as reasons or benefits as to why I absolutely love the options trading business.

Number one is the numbers. I've always been the type of person who thrives on understanding the numbers, the math behind something. And so, for me, options trading leaves very little subjectivity to the business. The numbers are what they are. We know what position size is. We know what the probability of success can be on a trade when you enter it. We know a lot of these numbers. And with most of the back-testing that we've done and will continue to do in the future, that gives us much more confidence in understanding how we can put together high probability income generation machines with options and it's purely based on the numbers. There's no fashion trends that we have to worry about or subjectivity. It's really easy business for me in that sense.

Number two is the freedom. Obviously as a parent of three kids now and having a beautiful wife, I want the freedom to be able to do this from anywhere in the world. I want to be able to travel to see family across the country and still have the ability and flexibility to trade. That freedom is a really big one for me. It's something I've always wanted. I just naturally gravitate towards not being chained to a desk or chained to an area. If I want to move or if I want to travel, I have the ability to do that and I don't lose my business as I go.

Number three is scalability. What's really interesting about the options market is that you can scale quickly. Scaling is just a matter of a couple of mouse clicks and increasing your number of contracts that you're trading or changing out a credit spread for a naked option strategy. It's really that quick to scale and scaling is immediate. You can easily get a bunch of contracts into the market if you need to and scale up your position or not and you can't say that about many other businesses. Try scaling a restaurant business where you have to open up another restaurant. It just takes a lot of time. If you wanted to open up 10 new restaurants tomorrow, how quickly is that going to happen? It's not. The options trading business is really unique in that it can scale very, very quickly.

Number four is agility. This is a big one for me and I took a long time to kind of figure out what the right word was for this. But the ability to move quickly from one area to another I think is huge. Options trading, again, like nothing else on earth, gives you the ability to invest in or not, different areas, sectors, markets, companies quickly. I mean, we're talking days or even hours at a time, you can reposition your entire portfolio based on new information. If there's a great trading opportunity in a bunch of oil and gas ETFs, you can quickly move capital over there and then once that opportunity is done, you're out. You can move capital someplace else. The agility that options trading gives you, the ability to quickly reposition capital and be a good steward of your capital I think is something that you can't find any place else. Again, try closing down your restaurant to open up a Laundromat or open up a retail clothing store. It just doesn't happen as quickly as you could do something in the options market.

And number five is undoubtedly the edge. The edge that we have in implied volatility's over-expectation of actual volatility is one of the coolest things that we've ever run across in the financial markets and this edge is never going away because we are always bad at predicting the future. The implied volatility edge is based on forward-looking future predictions. And so long as there will be a future and that future will be full of Black Swan events at different times in the future, I know that this edge will stick around. It will stick around through more automation, through more robotic trading, through whatever market changes we have in the future because the future is very hard to predict and until the point at which we can accurately predict the future, we will always have an edge as an option seller.

Those are it. Those are my five things, the numbers, the freedom, the scalability, the agility and the edge. Hopefully you guys enjoyed this. I'd love to hear what your top five things are. Send me a Tweet. Shoot me a Facebook message. Post somewhere on the website. 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 are going to hopefully teach you guys a lesson from the Apollo 13 movie and it's a lesson for massive wealth generation. Let me go back and tell you a little bit about that story if you haven't watched the Apollo 13 movie or you don't know the history of it. But basically, what happened is one of the missions to the moon ended up in catastrophic failure. There was the CO2 or CO ring that busted during takeoff and so, it created this huge nightmare where the astronauts were basically stuck in the capsule and the modules with a declining amount of air. They had to figure out a way to convert basically carbon monoxide into carbon dioxide or into breathable oxygen. And so, the real mission was how do we convert and basically build this machine, this thing that could filter and remove the harmful chemicals in the air and turn it into breathable oxygen. During the movie, one of my favorite scenes is when the mission control guy comes into the room with all of the scientists and all the engineers and he basically dumps out a bunch of stuff on the table and everything spreads out and he says, "Listen. This is what they have up there and this is what you guys have right now. Let's build a filter, boys." And he just basically says, "Look. Let's get to work. This is what we have to work with." Everyone's trying to come up with these grand schemes, but the reality was is that they couldn't send some more supplies back up to space. I mean, they're halfway between here and the moon and you just can't send stuff right up there, so they basically had to deal with what they had at the time.

I think this is a really critical lesson if you're really serious about building a lot of wealth over your life and that is to watch every single dollar and take advantage of everything that you have right now, watching over just what you have, not worrying about what could come in the future or what you might have down the road, but literally watching over every $100 like it's $1 million because you'll never get the chance to babysit $1 million until you've actually figured out how to watch like a hawk every $100, $1,000, $1 that you have. You'll never have a fortune if you don't first control your budget in spending. Oftentimes what I tell people in coaching is that you can't ride a motorcycle without first learning how to ride a bike. It's impossible to do. You could never tell someone who's never ridden a bike before in their life, has no idea or semblance of balance. You could never just stick them on a motorcycle because it's more expensive and it's worth more and so, they should just naturally take over. It doesn't work like that and the same thing happens in the wealth generation money business, I think. You can't just give somebody a lot of money then expect all of the right pieces to come into place. That habit, that foundation has to be built over time. And so, you have to learn to deal with what you have right now and make what you have right now work. And yes, that means that sometimes it might be a little bit difficult and yes, that means that sometimes commissions cut into your profits a little bit more because you've got to do spread trades right now. But you got to work with what you have right now and then start building up from there.

I think it's a really critical lesson. I think it's hopefully important. Again, if you just remember the analogy of the bicycle and the motorcycle, I think it makes it really, really easy. You've got to progress because it's the struggle, it's the challenge, it's really setting that foundation up that allows you then to scale up in the future. As always, hopefully this helps out. If you guys have any questions, let me know. Until next time, happy trading.

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about how you could actually buy options with a 70% chance of success. Now, everyone always talks about option selling and that's mainly what we focus on as well, is option selling with a high probability of success. But oftentimes, I get questions around option buying and can you buy options with a high probability of success. And so, the answer to that question is yes, you can definitely buy options with a high probability of success. That means that you're buying options that are deep in the money or in the money option contracts and when you do this, you're paying a really high price for those contracts because they have the inherent possibility of generating some money.

Now, the problem with buying options even when you buy them in the money is that you often give up a lot of your premium early on to volatility and time decay just like you would get a lot of that premium if you were an option seller on the other side. Even though you can setup a trade with a 70% chance of success as an option buyer, remember that implied volatility works to your disadvantage as an option buyer which means that you actually might win less than 70% of the time if you actually let the numbers play out in the future. Because of this disparity, this edge that goes to the option seller because of IVs over-expectation, you really have to make sure that the position that you're in is something that you really feel confident about, that you're really confident that the stock is going to move the direction you want or the stock is going to fall in the manner or time period that you want.

It's not something that I obviously advise. It's something that we 100% advise against, but I think it's something you could do. You could buy options with a high probability of success. Well, see if you actually end up making money after implied volatility sets in and after the expiration period is complete. But chances are, you're going to have to outlay a significant portion of capital to get that trade on and your probability of winning a lot of money is going to be dramatically lower. With option buying in deep in the money contracts like this, you start replicating more and more stock position which means you're outlaying more and more capital for a lower and lower probability of return on capital. As always, if you guys have any questions, let me know. Until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today is a very special daily call because it is our 300th episode. That's right. We have done nonstop every single day from start to finish, 300 daily call episodes in a row which is actually pretty crazy and I feel like we've gotten to show number 300 here pretty quick. It seemed like 100 came quick, 200 came quicker and now, 300 is here really fast. But I got a couple of things that I want to talk about as we maybe outline and think forward here on the next couple of hundred episodes that we've got coming in the future for the podcast roadmap. Obviously, we'll be dissecting more options trading topics, more topics around psychology and mindset and building habits, etcetera. There's a couple of things that I want to go through with you guys here, so it's definitely one that you want to listen to at least briefly because it is really important to kind of set the foundation for where we go from here.

There are four things we're going to cover. First, I have a bone to pick with you. Yes, you heard me right. I actually have a bone to pick with each and every person on here except for 91 of you that have not yet left a rating and a review for the podcast. In fact, we've got more than 25,000 people who downloaded the podcast every single day and yet, we only have 91 reviews. I get all the emails. I get all the people who message me on Facebook and Twitter and say they love the daily podcast, they listen to it in their car. If you're listening to it right now or if you've been a listener to the daily call podcast, please do me a favor. This is how we help reach other people. This is how people know and get to find us here at Option Alpha, is because people like you post reviews and share what you're doing in your spare time or while you're at work. You're sharing Option Alpha with your friends. Please get out there and spread the word. Post a review if you haven't already in iTunes or Stitcher or SoundCloud or wherever you're listening. That would really, really help us out.

Number two is I need to hear more questions and comments and topics. Now, we've obviously gone through very quickly, 300 episodes and we've gotten to a lot of content areas, a lot of different topics that people have sent in, but I am never at I guess I'd say a full capacity of questions that I want to hear from you guys. I always want to hear more. I want to understand what topics you want covered. The best thing you can do is either shoot me an email through our support tab and just list it out in bullet point format or just in a list format, the topics or questions that you have or better yet, head on over to optionalpha.com/ask and leave me a voicemail. You can just leave a voicemail with one question that you have today, like your burning question you have right now. Head on over to optionalpha.com/ask, click the big red button, leave me a private voicemail. That way, we can get it answered in one of the next daily calls.

The third thing is I want you to scroll back through the last 300 episodes and listen to a couple of episodes again. In fact, I think many of you have probably not listened to every single episode and that's okay. Scroll back through the last 300 here or as far back as you can on whatever podcast app you're using to listen to the show and try to listen to a couple of these past episodes that we've done. If it's a topic that you really struggled with initially, listen to an episode again and again just so it really reinforces that topic in your mind. And number four is obviously, thank you. For those of you who have been with me the entire journey, all 300 episodes which is kind of crazy, thank you so much for spending your time with me. I do not take that lightly. I am truly humbled to be part of your journey here in investing in options trading. Until next time, happy investing.

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we're going to be talking about broker commissions and in particular, the difference between ticket charges and per contract charges. When many people sign up with a brokerage, they are usually looking at the per contract charge. In fact, that's what I've generally seen over the past couple of years, is that brokers actually show their per contract fees. Their per contract charge might be $.65 or $.30 or $.50 and that's what people see. I'm not downing the brokers or faulting them for doing it. It's just that's the way that they promote their services on a per contract basis. But what many brokers actually have is what's called a ticket charge and so, when they have a ticket charge, what they will do is they will charge you a fee per trade that you do in addition to the per contract fees that they charge you. Let's say you are trading any option contract, it doesn't really matter, but you're going to trade two contracts. Well, those two contracts might be $.50 each, so that's $1 in commissions just for the two contracts, but just because you actually made a trade, the broker will charge you a per trade or a ticket charge of say $1. Now, you're paying $2 for that trade, $1 for the ticket charge and $.50 for each of the two contracts that you're trading. Now, that means that if you're trading a lot of contracts, then that ticket charge is very minimal. If you're trading 500 contracts, the extra dollar for the ticket charge is not that bad. But many people don't have 500 contracts or the account size to deal with 500 contracts and the way that we trade at Option Alpha is we suggest that you ladder into positions over time. In fact, you actually break down your trades into smaller and smaller denominations. Instead of doing 10 contracts at a time, you do two, two, two, and then three or whatever the case is, however you want to split it up and slice it and dice it.

We always suggest that you negotiate with your broker and get a per contract commission structure in place. Get rid of the ticket charge and negotiate down to the smallest denomination per contract that you can. Now, we recently renegotiated ours down at Thinkorswim to $.75 per contract and we know that that's higher than some of the other brokers out there, but we have the ability to connect our auto-trading platform with Thinkorswim which gives us more potential value than the commissions that we pay. We're well aware of that. But you can reduce your commissions that low. A lot of people see many brokers out there charging much higher commissions, not aware that you can actually negotiate with them and try to get your commissions much lower. You can also go with some of the lower-priced brokers out there like Tastyworks. It has very cheap commissions in the pennies with no ticket charges. Robinhood has no charges whatsoever for commissions. But again, in both of those platforms, you get what you pay for to some degree. In Robinhood, very, very cheap, zero cost platform. They don't cost you anything for trading fees or any of the fees that they have associated with it, nothing to you as the investor, but what you get is you get a platform where you can't do technical analysis and you can't do auto-trading on their platform yet. There are a lot of things that you can't do there and that is reflective of the value that it cost in commissions. Don't ever look at commissions always as a bad thing. Yes, it's good to pay as cheap as possible. I'm not saying that. You always want to negotiate it down. But also look at the technology and the platform and the system that you get and what you could potentially make using those tools versus just getting the cheapest possible thing out there.

Hopefully that helps out. Hopefully it gives you some more ammunition to go out and negotiate with your broker. Again, there are a lot of different brokers out there. There are a lot of different commission structures. You just have to understand the differences between these and then you can start negotiating with them a little bit better. As always, hopefully you guys enjoy this. Until next time, happy trading.

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about why new habits are lost after only three days. And you heard me right. It only takes three days to lose a new habit which is incredible. Most research suggests that it takes maybe even a little bit less than that, but I'm being generous in saying – Look. It takes probably about three days for you to lose a new habit which means that you really have to fight, like you have to deliberately fight against a habit that you currently have that you want to change and remove the routine that you have and replace it with a new routine before that habit will start to become automatic. And the problem is that your brain has no idea how to differentiate between good and bad habits and that's really the most challenging part about the psychology of developing habits and even changing habits, is that your brain is not hardwired to make rational decisions like that. Your brain is put in place to streamline the cognitive load that it has. If you have a bad habit, but you're doing it and you're continuously doing it, like smoking, like drinking, like doing drugs, your brain has no way of knowing that that's actually bad for you. It's just used to something. You get stressed out, so immediately, you trigger a cigarette. Like that's how people start smoking maybe. I don't know. I don't smoke. I don't do any of that stuff. Maybe they get stressed and that triggers their brain to say, "Look. This is my trigger." The new routine is light up a cigarette and then the reward is "I feel better because I have nicotine." That habit loop has to be replaced by something else and you've got to deliberately fight it more than three days. In some cases, research has shown 45 days, 60, 90 days. It takes a long time, a lot of willpower to fight that habit.

And one of the great things that you can do is if you identify this loop and routine and reward cycle that you go through, you can actually change, change what the routine is in the middle and that's where you start to develop new habits. Again, let's say you get stressed out and your current routine is to light up a cigarette. Well, maybe when you get stressed out, you start to tie your shoes and go for a walk. And so, now, your new routine is not light up a cigarette. It's when I'm stressed, the brain knows that I need to tie up my shoes and I need to go for a walk which then gives you endorphins and again, gives you that reward, that stimulus in your brain that you want. That's a really easy way to just switch out and swap that routine that you have to then develop another habit. But look. It's going to be hard because you're going to want to light up a cigarette or do something else and that's not what you should be doing. When it comes to trading, I see this all the time. A very, very simple trading habit that people get into is "When I'm losing, I close." The trigger is losing trade. The routine is close the losing trade and then the end result, the reward is "I feel better because I don't have that trade on, like it's kind of off my plate." But that's the wrong thing to do. That's totally the wrong mentality to have. We all know from research that when you close losing trades and you use stop losses, whether they're automatic on your broker platform or whether you become your own stop loss because you close out a trade too early that it ends up leading to poor returns and definitely leading to sub performance compare to the market and other strategies. It's the same thing with I guess, cigarettes, like we all know cigarettes are bad, but still, people smoke them all the time. When it comes to trading, the new trigger is losing trade. You've got to replace the routine of trying to close the position with maybe re-watching our videos or our training or listening to a podcast on why stop losses are bad. Maybe that's the routine. And you listen to that 15 or 20 times and the reward becomes, "Hey, I know in the end, I'm actually making a smarter decision. I'm actually doing something that improves my long-term performance versus hurts it." And so, again, it's going to be hard because we're predisposed, we're prewired to want to avoid losses, to want to avoid a trade that's maybe challenging us initially, but we've got to replace that with a new habit look. It's got to replace it with a new routine that gets to the same reward which is feeling good and feeling like you've made a smart decision. Ultimately, I think your bank account will reward you in not using stop losses, so definitely check out the training that we've got on that.

Again, the key of talking about this today is I was reading this again just the other night and it's just totally what you're used to and when it comes to these habits, I mean, it's really, really hard. One more quick example which I think would help out is like a couple of months ago and I think I mentioned this on a podcast, I started to really notice that literally every night or every other night, like I was having some sort of sweet, like I'm definitely a sweet dude. And so, whether it was like some piece of candy or a chocolate or an ice cream, it was actually pretty bad, like I even think about it now, it sounds terrible to even say it and I'm just disgusted with myself that I kept doing that, but that was my habit at night. It was like at night, I wanted a sweet object. That was my routine, was to have something sweet and my reward was I felt great because I had something sweet, I had sugar. And so, now, I've replaced that with protein shakes at night. I have a protein shake that I make at night which has things that I like, like bananas and peanut butter and yogurt and a little bit of honey, so it satisfies that sweet thing that I'm going after, that's sweet tooth that I'm going after. And so, now, I don't even think and I don't even think it's been like maybe months and weeks and months that I've had it, but I literally have a protein shake every night. And so, like now at night when I have a craving for something sweet, I go make my protein shake which ends up getting me to the same goal. I've just replaced the routine in the middle that I wanted to change. It's really, really powerful. Like I geek out on this stuff so much because I think it's so important and whether it's trading or health or relationships, it's all just the same stuff, but it's really kind of fighting back against these habits. Do this. Let's do this. If you are listening to this right now and if you have a habit that you don't want to do anymore, you want to change, just let me know. Shoot me a tweet. Shoot me an email. Let me know. I'll try to help out and replace routines and try to figure it out with you. I definitely want to help you guys out and help us all develop better and more important habits that can really kind of move us forward. As always, if you guys have any questions, let us know. Until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question, "How do you convert an iron condor into an iron butterfly?" Let's start off with the basics of the iron condor. An iron condor is when you're selling two credit spreads, one on either side, the call spread and the put spread to create this iron condor payoff diagram. For example, if a stock was trading at $100, you might sell the 105/110 call option spread and you might sell the 95/90 put option spread. On either side, you're doing a $5 wide spread, about $5 from the market, very simple concept that we can use for our purposes here today.

When you start converting an iron condor into an iron butterfly, what we want to get to is we want to get to that iron butterfly payoff diagram which looks more like a pyramid type shape on your P&L graph and that's where you have your short strikes at the exact same strike on the call and the put side. With an iron butterfly, you would be looking to adjust by rolling up or rolling down whatever side is the unchallenged side to the point at which the short strikes are exactly the same on one side or the other. Again, using our example, let's say that the stock is trading at $100. We sold the 105/110 call option spread and we sold the 95/90 put option spread. If the stock starts to move higher, then we would roll up our put spread side to something like the 105/100 put spread. If we did that, that would give us short strikes at 105 for both the calls and the puts and that's what creates the base of this iron butterfly payoff diagram. Now, if the stock were to start to fall, we would not adjust the put side. We would actually roll down the unchallenged or untested side which is the call spread side and we might roll down that side to the 95 calls and the 100 strike calls. Again, now in this example, we have the 95 strike put acting as the same strike for the calls and the puts, so it gives us our payoff diagram with that kind of rising peak or pyramid type shape at the 95 strike.

Again, the mechanics of these are really easy. If you are trading the original iron condor, you would just simply close whatever spread you're adjusting and reopen a new one at the closer strike prices. If you're rolling up the puts, you close your put spread, take basically both side and then reopen a new put spread, same number of contracts, same width of the strikes at the much higher strikes that we talked about earlier. Same thing on the call side. You would just simply close the call side if you're rolling it down, close it out physically, exit the position on that side of the trade and then reopen your new strikes. It does take a little bit of time to get it right and it's not the easiest adjustment in the world by any stretch, but it is very logical why we do this to increase our position credit that we take in, also take advantage of the market direction. Wherever the market's going, we're going to fade and play the market by adjusting the unchallenged or untested side and we also take in additional credit which reduces risk. There's a lot of rationale behind why we do it this way. I think once you actually start to adjust these just one or two times, you'll understand kind of the concept and really get it. It's like riding a bike. You start pedaling and balancing. It really kind of comes naturally.

If you guys want to learn more about these, again, we have training and video courses on adjustments not only for iron condors, but also for iron butterflies. We've also done a lot of these live trading videos that you can all find in the education dropdown on optionalpha.com. Until next time, happy trading.

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be answering the question, "Are continuation gaps and exhaustion gaps really reliable indicators for charting and trading?" A lot of the information that we get here today is really coming from thepatternsite.com and in particular, a lot of the research that Thomas Bulkowski has done before on patterns. He's got a book on patterns called "Encyclopedia of Chart Patterns." There's a first edition, second, I think there's even a third edition, but you can go out and check it out. But again, a lot of these results are coming from his continuational research and back-testing of gaps and trying to understand what gaps actually do in markets, do they actually work in markets or not and I think it's pretty interesting. Really, what gaps are and in many cases, these two examples, we'll go over here in a second, but gaps are really just these breakaways that happen in chart patterns. It's where the high, the low, everything for a new day is much higher or much lower than the previous day. It creates a gap or a disconnect in the actual chart when you're looking at the candlestick charts on your broker platform.

Now, there are two types that we're going to talk about here. There's continuation gaps and exhaustion gaps. Now, obviously, the names suggest what they are. Continuation gaps would suggest that it's in the middle or the beginning of a trend where the stock now gaps higher on really good news or stock gaps lower on initial bad news that comes out and that really starts the process of a new trend or continues the process of the existing trend that's in place. The key with those is that they have to be at the beginning of a trend or very close to the beginning of a trend. It can't be after it's had this huge long parabolic run-up. When you get that where you get a stock that's had a huge run maybe for a couple of months or even a couple of years and then you see another gap, that's where some of these exhaustion gaps start to happen, this kind of blow off top that we start to see or blow off bottom that we see in charting. The question becomes, "Are these reliable?" Well, here's the numbers that he found. Again, this is all on thepatternsite.com which you can check out as you wish. But continuation gaps, whether it's in a bull or a bear market usually close about 4% to 9% of the time. What I mean by that is that if you see a gap that happens at the beginning of a trend or towards the very bottom or start of a trend, it's unlikely to close because there's probably new information that's causing that. Maybe there's a potential buyout on the company or there's new information about the industry. It's causing investors to be overly-optimistic or overly-pessimistic and that's just the beginning. When you see exhaustion gaps which happen at literally the end of very long trends with a lot of volume, those are usually closed which means that it predicts around the top or some sort of rounding top that ends up happening between 61% and 64% of the time.

The key with all of this is just finding out where you are in the cycle and trying to really understand, "Okay. Is this a gap that's happening at the beginning of a trend starting to move higher or is it happening at the end of a long cyclical trend?" I think two examples that you can probably look at are things like RSX which is the Russian ETF and then you can also look at EWZ. Both of these have had before in the past, a lot of exhaustion gaps where they've had huge move downs in both cases and they've been gapped on these huge big days with lots of volume just to see it actually turn around and completely reverse in many cases. Those are two really good examples you can look at. Again, RSX which is a Russian ETF and EWZ which is a Brazil ETF. Those have recently had in the past two years or so, a couple of examples of really good exhaustion gaps that you can look at. I mean, look. Ultimately, this is not something that I generally trade a lot off of. I recognize it, I have awareness of gaps. If I see a gap, I'll say, "Okay. That's interesting." It doesn't change the dynamic, necessarily of what we're trying to do. We still might make a neutral trade if we see a continuation gap. We still might make a neutral trade if we see an exhaustion gap. But I think having some awareness around these might help out and again, it's really hard to identify them because unlike options which have very distinct Deltas that you sell at, very distinct timelines that you trade, a lot of charting is very subjective and that's probably my always biggest concern with charting, is that what you see might be totally different than what somebody else sees and you both could potentially be right, so how do we discern from that, how do we learn what's actually good or bad. Ultimately, I still like my probability of success selling options 60% or 70% plus which is where we're at which is better than the exhaustion gaps which end up being 61% to 64% probability of success. I'll take the options trading any day, but again, I want to go over this today because I get a lot of questions on chart patterns and figured this was a really good one backed with a little bit more research to help out. As always, if you guys have any questions, let me know. Until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be answering the question that has to do with short selling basics and how you can sell stock that you don't even own. When people start trading options and start trading stocks, they undoubtedly run across the concept of going short or short selling. And so, it's really confusing at first because the idea is, "Well, how do I sell something that I don't even own?" And that'd be like selling a car without even having a car. How do you do this? Well, the concept is actually really easy and I'll try to explain it very simply for you guys here today on the show because I want you to understand just the basics of it. We're not going to get into the nitty-gritty and the actual behind the scenes of who's doing what, but just the basic concept of how short selling works is actually really easy.

If you think about option buying or stock buying just to use the other side of it here real quickly, you would buy shares in the open market and then to complete your trade, to close the trading loop, you have to sell those shares at some point. If you buy shares and then you outlay money, you have to then sell those shares in the open market to get back the money that you had invested or money you invested with profits. There's no other way to do it. To complete the entire trading loop and close the position, you've got to sell what you bought originally. Well, in short selling, it works in the total inverse. When you sell something short, you're basically borrowing shares from the broker or the market and selling them in the open market to somebody else. The idea is that when you sell those shares, you're hoping that they go down in value, so that when you close the trading loop and you buy back those shares, you buy them back for a lower price than what you sold them to somebody else. It's the same concept. It's just taken from the other side. Now, the difficulty in selling stock short is just having the availability of shares to borrow from the brokerage or from the company to be able to sell short stock because you have to borrow shares and sell them to somebody else, hopefully closing the trading loop by buying back the actual stock at a later date for a cheaper price. This is a way that you can actually speculate or hedge against a potential stock going down. That's what some people do a lot. In fact, you hear a lot of these terms called short squeezes and short interest on the stock and we'll talk about all of those in future shows. But just this idea is actually very easy, is that you don't own the stock, you're kind of borrowing it and you do have to complete the trading loop. You have to at some point, buy back the stock, hopefully at a lower price, but it could potentially be at a higher price.

Here's a really good analogy that I've used before in coaching and some of our trading which I think might help even drive home this point even more and that's the idea of a homebuilder. See, a homebuilder is actually somebody who is selling the home short. That's really what they're doing. They're a short seller of housing. When a homebuilder comes up to you and you contract with them to build a home for say $100,000, well, that homebuilder has now sold you something that they don't even own yet or they don't even have to give you. You've written an agreement and you say, "You know what, Mr. Homebuilder? I will pay you $100,000 to build my home." Well, the homebuilder hasn't done anything. They haven't built a home. They haven't laid the foundation or built the walls yet. They're selling short. They're borrowing, basically future time in your agreement in money hoping that they can actually build the home for less than $100,000 because then, that's how they make their money. They are contracted to only get $100,000. If it cost them $110,000, he's got to go hire his own people, he's got to spend time and gas and buy wood and roofing and everything. If it cost him $110,000, well, he loses $10,000 on that. Now, that doesn't make him a bad guy for being a short seller of homes. It's just a really kind of life example of how this works in the regular market. This happens all the time all over the place. It's not that short selling happens just in the stock or the options market. Again, a homebuilder is a short seller of housing. They're selling you a house for $100,000 and if he can build it for $90,000 and you're happy with it, then he makes his $10,000 profit. He's hoping he can build it for less than the cost that he sold it to you for.

Hopefully it helps out. As always, if you guys have questions even as simple as the ones that we got here today from one of our members in an email, please let me know. Shoot me an email, send us a tweet. Post it on Facebook, whatever you have to do to get your question in here to the daily call. Until next time, happy trading.