Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to answer the question, "What is opportunistic options trading?" I've started talking about a little bit more of it the last couple of months and I figured I'd do a daily call podcast on it because I think it's really important. I've used the word, opportunistic a lot because that's what I think it is. I think it's taking advantage of opportunities when they present themselves, not necessarily when it's best for you to get into a position. I think honestly about people who were in the car business… I know this probably doesn't make sense initially and you're thinking to yourself, "What in the world does the car business have to do with options trading?" But if I was running a car business just theoretically… I think about just different business concepts all the time, but we can apply it to whatever. But if I was running a car business and say I was running like a used car business for some reason, then I would look to buy cars when I potentially could buy the car cheaper that what I thought I could sell a car for and that might mean that in some months, I might buy 50 or 100 cars and other months, I might buy two cars and if I buy say 100 cars and I only sell two the next month, then some people will look at that and say, "Well, you bought too many cars." But if you're buying cars below their fair value, you get them for a deal because somebody has to dump it or you can improve the car for some reason and you know that they're worth more than what you bought it for, you have to be opportunistic in buying at the times or selling at the times where it's profitable for you.

And so, I think this concept is really related to options trading because what people try to do is they try to trade when it's convenient for them and I understand the idea behind that. We have limited time and that's why we build out our auto-trading platform, so we could help you out with the time aspect. But when it's convenient for you, doesn't mean that that's necessarily the best opportunity. You could have a convenient market that also ends up being a really good opportunity, but it's not likely going to happen, meaning every time that you come in to trade the markets, pricing is going to be amazing, liquidity is going to be all over the place, you're going to be able to get in and out at the snap of a finger. That's never going to happen all the time. We have to be opportunistic in getting into positions when the opportunities are there. It might be tough to hold through some of those market ups and downs during those environments. When implied volatility is really high and maybe stocks are falling, that's probably one of the better times to be an option seller because you get compensated for the additional risk that you take on by selling a bunch of premium and selling options all over the market, but that may not be the best opportunity or time for you. You may have something going on that week or that day and so, you miss that opportunity. Likewise on the other end, we have to be opportunistic in getting out when we're presented with a winning trade. This still baffles me all the time. You just have to be patient enough to wait for your exit.

I think about it as driving down the highway. If people want to get off the road and many people do want to get off the road all the time, you don't just drive over the median and crash your car through the barriers. You wait for your exit. Your exit could be a mile down the road or it could be four or five different exits and you can pick your exit. But if you need to get off, you take the first exit you see. Options trading is very much the same thing. If we're looking for a 50% profit on a trade, if we get a 50% profit, we're taking the trade off. We're not assuming that we're going to have another opportunity later on. We're going to be opportunistic and take that trade off when presented with an opportunity to exit. If we don't have an opportunity to exit, then we'll sit back and we'll patiently keep driving down the road, waiting for out exit point. I think being opportunistic in trading really hits on a lot of different things and hopefully this helps out. But try not to be so forceful with your trades. I think that's really what it comes down to. Put a lot of positions on, increase your trade frequency and then be really opportunistic about how you leverage either new positions, bigger positions and get out of positions. Take things off and make decisions when you're in the best environment for that. That might mean sometimes waiting for some of those environments to come around. It might mean waiting two months or three months for a trade to come back around before you have an opportunity to take it off. But that's what I think really good traders do. I think really good traders are patient and wait for their exits and then take them. 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 optionalpha.com and welcome back to the daily call. Today, we're going to run through the basics very quickly of how to setup a short strangle. A short strangle is an option selling strategy. It's one of the core strategies that we actually trade here at Option Alpha. I really believe in this strategy as the basic building blocks of a lot of different strategies that you can start to setup. But a short strangle is effectively created by selling an out of the money short put option and an out of the money short call option. Now, how far out you go, how many strikes out you go is up to determining the position that you are in and how often you want to win, what probability of success you want to see and also, how far out you go into expiration. There are a lot of factors and moving parts here. There's no one right answer. There's no unicorn strangle that always works in every market environment, so we encourage you to back-test your strangles and your setups and try to optimize for the best setup for whatever market environment you're in right now.

But the idea with the short strangle is that you sell options that are far out of the money and you take in a premium, but you still remain neutral to the overall move. For example, let's say a stock is trading at $100. You might sell the 110 call and the 90 strike put option. And so, the stock has to trade basically within a $20 range. It can go sideways, it can go up, it can go down, but as long as it stays between your short strikes at 110 on the call side and 90 on the put side, you'll keep all of the premium that you sold in selling those option contracts together. Now, again, how far out you go with your short strangle determines your win rate, but it also determines how much money you take in. Remember, there's no free lunch in the market. If you sell options even further out, you probably have a higher probability of success because now, the stock has to make an even bigger move than say a $20 range that we talked about earlier. Say you sell options at the 120 calls and the 80 strike puts. Well, you have now a $40 range that the stock can trade in and you can make money, but because the markets are efficient and fair, that means the amount of money that you make if the stock does land in that range is going to be dramatically lower.

We start to see that option premium starts to tail off or starts to decline the further and further you get out of the money. There's got to be some sort of sweet spot in many cases and in many market environments. We think there is based on back-testing where the sweet spot is in setting up these short strangles, how close or how far you set them up and how far out in expiration time you set them up. Do you sell options 30 days out or 60 days out? Is there a breakeven point that ends up working better right now versus in another market environment? Again, what we wanted to do is just present basically a quick guide of the basics here on how to set these up and hopefully, this at least gets the ball rolling if you're new to options trading, if you're new to option selling on how to use options to profit from a range and sell options for monthly income. As always, if you guys have any questions or any additional comments on these, let us know. Just shoot us a message on Facebook, Twitter, Periscope, YouTube, LinkedIn, etcetera and we'll be able to help you out and point you in the right direction. As always, we have additional free courses and training on all of these strategies on our website for free, so you just have to sign up at 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, I'm going to try to hopefully help you completely avoid pump and dump scams because I think they are still running rampant in the market and I can't believe these are still around. I can't believe people are still getting sucked into these. Let's first describe what pump and dump is. I think actually, Timothy Sykes actually probably has been the best at making money from these in the opposite direction. I'm not saying he's pump and dump. I'm saying he's probably totally the opposite of that. He's trying to make money in the penny stock space by identifying which ones are pump and dump and then trying to trade the opposite side.

But pump and dump is just this idea that you get a potential penny stock and it usually happens in penny stocks (not that it can't necessarily happen in regular stocks, but it's much easier to manipulate in penny stocks) where you get this huge run-up in the price because these promoters or newsletters or investment houses are pumping up this potential penny stock company and you'll see an email or an ad or something along the lines of this potential company is primed to take off and it's got this whatever thing, this widget that is going to solve world hunger and cure cancer, whatever the thought process is around how they're going to pump this thing up and what the spin they're going to have on it is. But they send it out to a lot of people, they spam the crap out of people and in fact, I still get these in my email inbox. I try to unsubscribe from all of them. I don't know what's going on, but one day when I have much more time, I'll start actually going after these guys legally because I do unsubscribe and I still get emails which is crazy. But anyway, so they send out these emails and they try to pump it up and they try to get a lot of people to start buying into it. And so, after a couple of people start buying into it, then you start to see more emails like, "We told you that it was going to go up 40%. It already did and it's still going to move another 100%." It's just this self-fulfilling prophecy of people buying into the hysteria of the stock or penny stock going higher.

Actually, very similar to what happened in bitcoin in late 2017. Everyone was buying in and then it just kept going higher and higher and people were tripping over themselves to get in. And then what happens is those people who are promoting were originally buyers probably at some point down in the low pennies of those penny stocks and then they start dumping it when the stock goes higher. All they were doing is they would buy something, they basically promote it to everybody that they can find, they get a bunch of people to buy into it and buy up the penny stock and then they dump it and then the stock goes down and they sell all their shares and people are left with basically nothing. It happens all the time and it's totally ridiculous that happens. But look. Investor, beware. Your own worst enemy if you read into all this stuff and you think that something really is going to double, trouble, quadruple, 1000% overnight or potentially, over the course of a couple of days, that's not a legitimate company or a legitimate business. Now, I'm not saying that these companies aren't legitimate. There's lots of penny stock companies that are real companies and they're really doing something or trying to do something, but I just don't believe in that type of mass hysteria around it. How I would avoid it is don't trade any penny stocks.

We say at Option Alpha like anything under $5, totally avoidable, don't even mess with it. And really, you could say under $20 or so, you want to avoid. But there are some ETFs that are fine, that are $22, $23. You can still trade those. SLV is a very popular, very liquid ETF that's $16, $17. You could trade those. But really, anything lower than that, you just want to completely avoid. Anything with low liquidity, low float, low volume, totally want to avoid and you won't find yourself in these situations. 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 at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why the weekly close for stocks is always revealing for this one reason. The one reason for me is who's holding all the cards. I say this because when you get towards the end of the week and the global markets generally close down, people are left with the decision of what positions they want to hold through the weekend. Look. The weekends are not what they used to be. The weekends used to be calm and quiet and people used to go out to the park or fishing or whatever people do on the weekends now. But now, in this global economy, things still happen over the weekends. Businesses don't shut down, Amazon is still up, Facebook is still up and things can go really crazy over the weekend. People tend to not want to hold positions or take on undue risk in a potential situation where they can't get out of a trade or unwind a trade over the course of the weekends. And so, for me, getting towards the end of a trading week is always revealing because I want to know how are people holding positions into the close this week. Are they dumping their stocks? Are they holding stocks? Are they buying more up because they're really optimistic?

I think what we see is we see a lot of continuation of potential moves that started maybe a week or two ago where people started buying into stocks or dumping stocks as you got into a weekend type of event. I think it's interesting. It always adds another layer of complexity for sure. But when I go back and we start doing the strategy calls with elite members every Sunday night, that's something that we always look at. We always look at it and say, "Okay. What happened last week? How did the market closed? Did it close on the lows of the week? Did it close on the highs?" And if it did, then maybe we change our assumption about what's going to happen the next week or start planning out what would happen in our portfolio or new positions we might add or adjust based on the expectation that stocks continue higher or continue lower or whatever happened last week. But it's always interesting for me to see who's holding the cards at the end of the weekend and I think you see a lot of activity towards the end of the week and particularly, Friday's close because people don't want to hold things over the weekend that they are not 100% confident. And so, if they don't, they start dumping them over the weekend. It could be revealing and just maybe help adds a little bit more to your analysis plate, I guess. Well, hopefully this helps out. As always, 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 why the unicorn option strategy theory destroys many portfolios. The unicorn option strategy is just this concept that there is one overarching strategy in the market, the best strategy, the ultimate strategy, whatever you want to label it as. There's one option strategy that is the perfect strategy in every market environment. And so, if you could only find that one perfect option strategy or that one perfect indicator, then you wouldn't need anything else. And the reality is that destroys a lot of portfolios because what people end up doing is they're treating all market situations as exactly the same which is what we shouldn't be doing. We should be more dynamic in our approach. We should change and adapt our strategy somewhat to different market situations.

And so, I'll use an analogy because I thought this… And this is really what sparked this idea today for the call, is I was reading a book on parenting and a line in the book said, "If you want to treat all of your kids equal, treat them differently." And so, it's this concept that all of our kids… And I say this as a parent because I've got three kids now. All of our kids are different. They're all unique individuals. They're born at different times and they learn and they develop at different trajectories and they learn different things and they have different experiences. And so, if I want to be a great dad and a great father and if I want to teach them and treat them the same, I have to actually treat them differently. I have to adapt and change to their particular needs and their requirements and what they need to grow for me. Like our first two daughters, they have totally different needs. I mean, we've raised them the same, basically. They came in at the same household, same mother, same father, same family, but they're totally different people and so, we have to adapt and change to their needs.

It's the same concept that you should use for trading and investing, is that you can't use one unicorn strategy that always works in every situation. You have to change and adapt to the market environment. If implied volatility is high, that means that maybe you should do something a little bit different. If implied volatility is high and you're 60 days out versus 10 days out from expiration, maybe you should do something a little bit different. Now, the core concepts of what you should do don't really have to change. The principles of what you do don't have to change. It's like kids. Like we have the same rules, we have the same requirements for them. They have the same chores. It doesn't matter if you were born five years ago or three years ago. We have the same standards, but how we go about teaching and learning that is a little bit different for our children. And so, the same thing applies I think in the options market. You have the same core principle of option selling, small positions, increasing your frequency, but how you go about it, the strike prices, the contract months that you select might be a little bit different from time to time.

I thought this concept was really important and hopefully, it helps out because I know a lot of people are always looking for the quick fix, the magic pill that's going to solve all their issues. We all know. I mean, look. We're adults. We all know that there's no magic pill. There's no one strategy that always performs best in every market environment and so, what we're trying to do is trying to find what strategies perform better in some situations versus others and try to be more dynamic in our approach and I think that's really the gist of what we're trying to do here today in this podcast. Hopefully that helps out. Hopefully the concept resonates with you. I'm sure it will if you do have children. If you don't and you plan to have children in the future, you will definitely going to lean this potentially the hard way as you try to raise multiple kids and you try to do it the same. The kids are all just different anyway, so they just come out totally different and that's something you just lean as a parent, I guess. Hopefully this helps out. Until next time, happy trading.

Hey everyone. This is Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why I believe options trading is seen as a dirty business. I use the word, dirty business because that is the word that somebody used when they were arguing with me and trying to tell me that options trading serves absolutely no purpose in the market, basically that it should be outlawed, it should not be something that people can do, there's should be no way that people could trade options. I was trying to explain to this person why options trading and the derivatives market in general serves a very important purpose and position and role in an efficient market and in a mature and growing economy or global market. The idea here is that with an options or derivatives market, you have the ability to transfer or remove risk and that's really what it comes down to.

If you think about it like insurance because that's really the easiest way to do it, when you buy a house, you are able to take a little bit of capital from the amount of money that you used to buy the house or what you have in your annual income and you're able to buy insurance on that house, so that if that house burns down or floods or gets hit by a hurricane or a tornado, then the insurance company is taking on the risk of replacing your asset, your thing that you want to protect. And so, if that's true that options trading serves no purpose in the market, then it would also be true that we should never have insurance companies and we should never have health insurance because it's all about transferring risk. If people are willing… And this is the key here. It's got to be both parties who are willing to do this. We don't hold a gun to anybody's head and say, "You have to trade options. You've got to buy these option contracts." People are doing this because they want to transfer risk. Whether they want to do this to hedge a position or they're just speculating on the transfer of risk, they want to transfer risk by buying and selling option contracts and it's like insurance. People want to buy insurance on a house, so that if the house burns to the ground and they don't have hundreds of thousands of dollars to replace the house, then that small contract, that small investment for buying insurance on that house pays huge dividends because they don't have any risk if the house burns to the ground.

That's where an options or a derivative market comes into play. That's why it's so valuable because it allows people to transfer and mitigate risk. And so, when somebody is trading say a particular stock, if they want to hedge that position, they can buy a put option on that and that put option, that premium that they pay goes to the put option seller, probably in this case, potentially Option Alpha members because we're willing to take on that risk. And if the stock tanks, then we have to pay out on that put option contract. It's either black or white. Like we either pay out or we don't. That's the same thing with insurance. We're taking on the risk that they don't want to take and for that, we charge a premium or insurance companies and option sellers have to get paid a premium. We got to get paid something to take on risk that potentially won't happen and in many cases, won't happen, but if it does, we have to take on that risk. That's why I think that people see options trading as a dirty business because they see it and they just don't really understand what's going on.

Now, again, a lot of people are not really hedging. I mean, many people are speculating. Believe me. I see it all the time on all these Facebook groups and forums and people emailing me all the time with crazy ideas and speculations. But the core of what they're still doing is they're transferring risk from one party to another. When you buy an option contract assuming that the stock is going to make a huge run-up or a huge move down, you're basically saying, "Hey. I want to participate in that, so I'm going to transfer the risk to you, assuming that it's going to happen, that this event is going to happen and I'm going to get paid this huge windfall." It'd be like buying insurance on a house and then deliberately hoping that it burns to the ground. That's what people are trying to do. It doesn't mean that they'll do anything wrong or bad. It's just what their thought process is in trading. And so, I think the options market is really important. The derivatives market is insanely important. If you think about futures contracts for people who invest or trade and deal in commodities like corn and weed and oil and soybeans, I mean, those markets are insanely important to help spread and manage risk. If you have a company who has a huge stake and one of the inputs to their system is oil and gas, then trading in the futures market is a way to stabilize their business, so they don't have to go through all the ups and downs of the oil market. If they know what their profit margins are and can sell or buy futures contracts to control and maintain their exposure to the oil markets, that helps and without that, you'd see a lot more companies going into and out of business probably a lot quicker and not having the ability to control their risk.

Hopefully this helps out. If you want to really help us out by sending this podcast or sharing this episode with somebody who you think you've had a little bit of a discussion on with options trading and they don't really understand it, they don't see what the purpose is, hopefully this helps clear it out a little bit more and shed some light on this topic which is my goal in doing this. 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 optionalpha.com and welcome back to the daily call. Today, we're going to be talking about how loss aversion and behavioral finance applies to options traders. What is loss aversion when it comes to behavioral finance? It's this idea that we, as humans and investors, we value gains, but we only value gains a little bit compared to losses, meaning that the pain of a loss is significantly more than the pleasure or than the gratification that we get through having a gain. If you look at a simple concept of say – You are given $50. You might think to yourself, "Okay. That's awesome. I'm given $50." But if I give you $100 and then I take $50 away from you, that pain of taking away that $50 after you had $100, even though you're left with the same $50… Instantly in the same moment, I just give you $100 and take $50 away, the pain of losing that $50 is way greater, sometimes two or three times greater than the pleasure that you got from getting the original $50, even though you ended up at the same place. It's this fear of loss that we have, this loss aversion and we'll do anything, basically to avoid a loss and squeak out a small gain. In some cases, we'll take on massive risk to be able to do this.

This is why I think that many people when they get started options trading and I definitely know this because I see it all the time in forums and Facebook groups, etcetera. There's a ton of people right now who are trading on Robinhood because it's free and all they're doing is buying options and they think it's amazing because they take an option contract and they buy it on a penny stock and they buy it for $.2 and it's worth $.4 and so, they have a 100% gain. It's crazy what people are doing right now, but our fear of loss is so great that we are willing to take on undue risk to potentially make money. In the case of buying options, people will buy options contracts because they have defined risk because you can only lose the $50 premium that you put into it, so why not? There's all this upside potential. It's like a lottery ticket. People know they lose money on lottery tickets, but yet, every single month, it seems like the jackpot or the Powerball or whatever it is always goes up in value. It's the biggest it's ever been this month and then next month, it gets eclipsed. Why do people do that when they know that they're going to lose money on this? And it's because we have this fear of loss. If we can invest a little bit of money with all of this upside potential, then that's better than doing the opposite. But the reality is that when you do that, your probability of success, your probability of actually making money is dramatically lower, so you're taking on all of this undue risk just because you have this fear of actually taking a loss.

This also means that people start getting into trades on the option side where they start letting positions go, trying to make as much money as possible because they fear a loss. If they have a position and if I send out a trading order that says, "Hey. We're closing this position at 25% or 50% profit target." A lot of people will still leave the trade on even though statistically, it's better to close these things out. We know this from back-testing, closing them out at profit targets and recycling the capital a little bit faster. People leave those trades on because they fear losing money that they try to stretch for these outsized gains, these huge gains potentially in the market and what they end up doing is crippling themselves in the process. They're reaching higher, but at the same time, they're cutting themselves off at the kneecaps. We see this a lot. The same thing happens on the other side with losses. People fear a loss so much they'll do anything to adjust out of it. And sometimes, you just can't adjust. Sometimes, you're going to take a loss which is why position size becomes super, super important when you're trading options because we know we're going to take a loss on trades, we know we're never going to have trades that go 100% our way. Stop fearing the loss. Stop looking for that loss aversion max potential pill that could turn things around and not create a loss and you'll do anything to do it. You end up digging yourself deeper into a hole.

I was actually on a call with a coaching client who has a significant amount of capital. We're not talking about $10,000 or even $100,000. We're talking about multiple million dollars of trading. And they were looking to roll a position to the next month and while rolling, they were going to increase the position size and double up on the number of contracts that they had because they felt that that would be the only way that they could turn the position around, is to increase the credit and potentially hope it works out. I was trying to teach them and coach them and say, "Look. This is a trade that just didn't go well. This is one trade of a basket that was okay this month. This is a trade that didn't go well. Why are you trying to increase your position size and double up on the contracts? You're basically digging yourself into a hole, hoping that there's a little bit of light at the end of the tunnel, so that you don't have to deal with the reality of a losing trade. But it's much better to deal with the reality of a loss now and just move onto the next trade than to try to avert the loss or avoid the loss by doing something you wouldn't normally do." Hopefully this helps out. I think it's a really interesting concept. I love just how people behave and how they act around money and finances. It's totally interesting to me. I geek out on the subject completely. If you have any questions or thoughts around this, let me know. Until next time, happy trading.

Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we're going to be talking about why being lazy ironically is a great trading strategy. Although we want to be active in entering new positions, once we get into new positions 6and we have a balanced portfolio, we've taken care of the position sizing issue that plagues a lot of investors, the reality is that being a lazy trader from that point on is actually not that bad of a strategy. Basically, don't touch it, don't mess with it. Stop fidgeting with your trades and trying to overcorrect them along the way. Let the numbers, the probabilities, the system work its magic, basically. Let the probabilities work themselves out over time. I find this a lot with new traders because we get into new positions and immediately, a stock starts to move because that's Murphy's Law. What's going to go bad ends up going bad, right?

And so, as soon as the stock starts going against us just even by a small margin, you have one losing side or one position starts losing and immediately, the thought is, "Well, I have to adjust. I have to tweak this. I have to correct this." But you just have to let it go. You have to be diligent and mechanical enough to say, "You know what? I've got this profit target. I've controlled what I can control (like what we talked about just in the last episode yesterday) and from here on out, I just have to be patient and let the system work because patience actually pays a lot." That's where our implied volatility edge comes from. It comes from the patience in seeing volatility mature into pricing that is favorable for option sellers. Being lazy is not a bad thing when it comes to managing positions. Let them go. Control what you can control. Let the position go mostly towards expiration and then at expiration or the last couple of weeks of expiration, if you need to adjust and start hedging or managing the position, okay, do it at that point. But for the most part, just don't touch it, don't mess with it. Let the numbers do what they're supposed to do.

One of the things that we found in our back-testing research for the profit matrix which you can look up on our website is we found that many strategies that really had no discernible management of any kind when it came to losses, whether that was stop-losses, no rolling, obviously, actually performed the best. When you just let the trade go, took profits when you're supposed to take profits which can be an automatic thing… You can set that up and then be totally lazy and let the automatic closing orders do what they need to do. But as far as managing trades that go against you, we had many, many strategies that when you actually let the trade go, no stop-loss, if it was not profitable, it went to expiration as a loss and it was closed out, that actually outperformed many strategies that had stop-losses or really aggressive adjustment strategies because sometimes when you mess with something way too much, you actually reduce the value that that initial strategy created because you're just tweaking it and messing with it so much, you just basically beat it up with analysis paralysis and tweaks, it cripples the foundation of what it was meant to do.

I think this will be an interesting case study generally when we start doing more of the auto-trading and doing more of that publicly because for me, I've said a couple of times now what I'm going to be doing is setting up a lot of automated bots that trade very simple strategies and then letting them run and being pretty much hands-off with them. There's going to be not too much adjustment, they're not going to be overly-complicated bots that we're setting up and I think it's going to be interesting to see how that plays out over the next couple of months and years because I think what people look back on is they'll look back on some of these and say, "That really wasn't too complicated. Why did it do so well?" And it's because it wasn't complicated and I didn't mess with it too much. I'm really interested in building out some more of those and obviously, sharing what we're doing here with you guys. If you think this has been helpful, let us know. Leave us a rating and a review on iTunes. As always, if you have any questions about trading or want to get your topic answered here on the daily call, please leave us a message at optionalpha.com/ask and until next time, happy trading.

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be talking about daycare and options trading risk. Yes, I know what you're probably thinking. You're probably thinking, "What on earth does daycare have to do with options trading and particularly, risk?" But I think you'll find this little analogy helpful because I think it does help as far as understanding conceptually what we try to do with our trades.

The reason I say daycare is because when I first dropped off my daughter, my first daughter, Molly to daycare… And this is back when I was actually working. And so, we had Molly and I had a job and I was still working and I was doing Option Alpha in its infancy on the side and thinking about leaving, etcetera. And I remember dropping her off and literally crying the first day because this new lady that we know and we've interviewed necessarily, but we don't really know this person, we haven't spent a lot of time with this person who's going to be now managing my whole world, managing my child and I'm placing all of my confidence in this lady when I dropped off my daughter, Molly for the first time and then left. I assumed that I dropped my kid off at daycare and everything is going to be okay. But look. The reality is that you assume some sort of risk for their safety and well-being. I mean, there's only so much you can do to manage the risk of that person that's taking care of her. You can check references, you can look them up online and make sure they've got all the right credentials and they have a business that's registered and they're supposed to be a childcare provider. You can do everything that possibly you can do. You just can't control that person just paying attention to your kid. I mean, there's a possibility that you drop off your kid and the kid just basically sits there all day. I don't know. That's the stuff that I was really grappling with, is really making sure that this person was taking care of my child and really forgetting all the other kids that were there, like focus on Molly, don't do anything else.

But this concept applies really to options trading as well because there's only so much that we can control. And so, you have to realize with trading in the markets and investing, you only control what you can manage. I can't control the markets and I know that and people don't learn that initially. It's not intuitive, but people try. They hope and they wish and they'd fight back against the market and they say things like, "If only it'll come back up." or "If only it'll go back down." But we can't control the markets. And so, we have to learn what things we can control, like position size and what underlyings we trade and what strategies we use because after that, you can't do anything else. With an option trade, you can only do as much as you can do and I think this concept is really important. It's like daycare. You can only control so much and after that, you basically have to say, "You know what? I can't control this and there's a risk all around this." But we have to manage what we can manage and I think that's really the key to this daily call today, is just managing what you can manage and understanding and accepting that everything else is a risk that you can't manage and you can't change it. I can't change what Trump tweets or what this company does or that sector does. I can't change any of that stuff, so I have to be willing to work and manage around it as best as I can. And so, 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 and welcome back to the daily call. Today, we are going to be talking about our TLT rolling trade that took three months to turn a profit. Now, if you want to get a copy of the video version of this which is sent out to our members, the one that was sent out to our pro and elite members when we actually completed the trade and did the analysis visually on a video, you can just search on our YouTube channel, TLT option assignment case study, $700 loser to $96 winner and again, you can get another version of this. But we're going to be going over it here today in the daily call, the highlights of this trade that we did. The basis of the trade that we did it TLT was just a simple iron butterfly trade in TLT that we entered into back in the beginning, January of 2018. We ended up closing the full position finally for a win, a $96 win after all adjustments back on April 2nd. It was a long trade. It was more than three months basically of holding this position and having to roll it twice through two different expiration cycles before we were able to finally turn a profit.

The point of doing this and talking about it and nausea, not only on the YouTube video that we linked up here, but also on the daily call podcast is the concept of rolling for duration and extending the timeline of a trade when possible. This TLT trade, literally from the first day that we entered into it went totally sideways on us. If you go pull up a chart of TLT from January of 2018 to basically April of 2018, you can see in January and then in February, TLT basically tanked and it went down significantly and blew through our strike prices. We really didn't even have a chance in the first expiration month. But as soon as we started reaching that first expiration month at the end of February, we knew that we were able to roll for a total credit, for a net credit because TLT tanked and implied volatility went higher. That's something that a lot of people don't do. They usually just take the loss and move onto the next trade. They don't look at adjust. They figure your first loss is your best loss. It's a common thing that we hear all the time. But I really don't subscribe to that. I think there are a lot of things that you can do with a trade, to roll and extend duration and turn something around from potentially a crappy situation into either a less crappy situation or potentially, a profitable trade.

As we got to February expiration, obviously, our position was way in the money, but we were able to roll for a total credit. The reason that that's important is because if we can roll for a credit and not increase our position size, we never added more contracts, we never made our spread width wider, (you can see that on the video when you search it on YouTube) we never did any of that. We basically kept our position size small and all we did was roll for a credit. When you roll for a credit, you reduce risk because if your position size doesn't increase and you're taking in more money, that means you have less risk if the trade continues to go sideways. My thought on that is always that if I can roll for a credit and reduce risk, why not also give myself another 30 days or so to potentially see the trade turn around because if it doesn't turn around in another 30 days, at least I've reduced risk in the process. If TLT stays lower, then at least I've reduced the amount of money that I would potentially lose.

Well, fast forward to March expiration now, so we rolled the contracts from February to March, we got to March expiration and sure enough, TLT did not move. Again, you pull up a chart of TLT, you saw basically between February and March expiration, TLT traded dead sideways and for us, that was terrible. We still wanted TLT to rally back up to where we had originally sold our first iron butterfly position and it never really did in March. Again, we were able to though, roll our contracts to the April expiration and rolling those contracts again, gave us a net credit. We didn't increase our position size, didn't increase the spread width. We just simply rolled the contracts from one month to the next and took in a credit, again, reducing risk along the way and giving ourselves another 30 days to potentially see some sort of market cyclicality play out. And sure enough, after we rolled those contracts, about two weeks after we've rolled those, the market did rally for bonds shortly before it started tanking again, but we were able to get the position off on a quick rally up in TLT and we closed the whole thing for a net $96 win after all adjustments.

The key here with this type of case study and the reason I again, want to talk it about so much is because a lot of people just give in and throw in the towel with trades and that's really the worst thing you can do. You want to be able to roll trades for a credit, extend the duration on trades and have a little bit more patience that market cyclicality is going to come back around. Now, some people said and people always say this every time we post a video like this. "Oh, we just got lucky. Oh, it was just a one-off scenario." I think I've counted before, there are probably 35 different cases, at least 35 different cases where this has happened before to us in the past, most recently in IWM. It happened in OIH. It happened in XLU and XRT and EWZ. It happens all the time. Markets are cyclical. And so, as long as you can give yourself enough time for some sort of cyclicality to come into play and up-and-down movements to happen over time, if you can extend your trading duration and reduce risk in the process, I think you'll be a better trader overall.

In this case, this took one of those huge potential losses and actually turned it around into a winner, so it was another good example of how extending trades and rolling for duration helps break the zero-sum game that most people assume happens with trading. Yes, if we would've just let the position expire and took the full loss the first month, that would've been totally what happens in a typical zero-sum game. You win a couple of small winners, but then you have a really big loser. But we took this potentially big bad trade and by extending and rolling, we're able to turn it around into a winning trade. It's a really cool little case study. Again, you can search for it on YouTube. Just search TLT option assignment case study and you should be able to pull it up. As always, hopefully you guys enjoy these. Until next time, happy trading.