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 hidden mutual fund fees that are killing your portfolio growth curve. I assume actually, most people who are listening to this podcast probably don't have mutual funds just yet. But if you are listening or if you're new to Option Alpha and you do have mutual funds, hopefully this will help out because undoubtedly, at least a couple of times a week, probably at least like five times a week, I get an email from somebody wanting me to review their mutual fund positions or their portfolio which I don't do. I don't do that generally unless you're a coaching client of mine. I just don't have time to review everyone's portfolio, nor do I want to. But I get people who are always saying to me, "What about this mutual fund and what about that expense ratio?" And so, I wanted to do at least a quick chat about it because I think there are things that people don't really consider when it comes to mutual funds that might help out.

First things first, I don't think that I'm actually totally shocked that people still invest in mutual funds because we know most mutual funds have higher expense ratios than say an ETF or an index fund. I think the average expense ratio is at least over 1% still for most mutual funds. At least that's according to Morningstar right now. And that expense ratio can actually trim a lot of your nest egg. If you think about how money compounds and how just even a 1% difference, even though it doesn't sound like a lot, actually can really dramatically trim how much money you have after 30 years of investing. In many cases, it could trim hundreds of thousands of dollars and you don't even really realize it. But there's another kicker that's really not seen. Most people can see what the expense ratio is. That's easy. But there are some things that are not seen or kind of subsurface fees that we don't even think about. One is the cost of owning a mutual fund and having money sit in cash. Actually, a lot of mutual funds have some sort of cash balance or they'll probably always have cash because of redemptions and rollovers and what they invest in. And so, that cash balance actually sits in cash in the mutual fund, but you still pay an expense ratio because it applies to the whole fund. That's really again, trimming some of the fees. It's really bloating some of the fees that you see inside of your account. You don't really feel that necessarily, but you don't get paid for money sitting there. You get paid for money that's actually at risk in the market. In this case with many mutual funds, you're actually paying money in an expense ratio for money that's sitting there.

The big one for me though is transactions. Transactions are not something that's typically in an expense ratio. In fact, it takes a lot of work to go back through a mutual fund's history and the prospectus and see how many transactions or how frequently they rebalance. But let's take one of those target date funds because that's always fun and interesting. People always look to invest in a target date fund. If you're going to retire at 50, invest in this. If you're going to retire at 60, invest in this and we'll automatically allocate your portfolio as you get closer. Well, all of those transactions cost money. There was a study done by Edelyn Evans and Cadillac(?) which found that the average transaction cost for mutual fund, just the buy and sell of everything was on average, 1.44% per year. Now, that's not included in the expense ratio. You have your regular expense ratio for just basically running the fund in the expense of getting into the mutual fund, then you have these transaction cost and depending on how frequently they "rebalance" your portfolio, then you have all of these expenses that basically start adding up. The more often they rebalance, the more expenses that you see and then on top of that, if you rebalance within the same year, now you start throwing in taxable gains, short-term capital gains versus long-term capital gains. It really becomes something that… It's no wonder why actually a lot of people are still financially unsecure and are not retired even at older ages now. Even at 50s and 60s and 70 years old, people are still working because some of these things are just not seen and not really felt in your account necessarily.

I think most mutual funds now really, if you add up all the expenses and the transaction cost and money sitting in cash which is unutilized, money at work right now, I think you could easily make a case to say that most mutual funds are probably in the 3% plus total cost, everything rolled in and that's insane. I think that's crazy. You're already at such a disadvantage by just having that right there that it's really, really hard to make money because you have to make that much more money on top of just the total cost, plus inflation. It really, really becomes difficult. I actually am just shocked why people still invest in mutual funds. I don't know if this industry will last. I think it's basically dying, but it seems like it's taking a while to completely go away. Anyways, hopefully this helps out. If you thought this was helpful, please send it to somebody else that you think invest in mutual funds and would love to hear this. I think it's just worth a conversation at least with yourself or your financial advisor or whoever else manages your money in your account to really take a hard look at these and see what you're paying and what it all adds up to. As always, hopefully this helps and until next time, happy trading.

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be talking about stock trading seminars and boot camps and answering the question, "Are they still worth going to?" For full disclosure, I do have a soft spot in my heart deep down inside for stock trading seminars and boot camps or any investing seminars and boot camps because the honesty is that I got really a good push in the right direction, I guess and pushed down the path of learning more about finance and investing and markets because my mother dragged me to a stock seminar back when I was in high school. I wouldn't say she dragged me. It was actually something I wanted to do, but I wasn't totally interested in it, I was kind of sort of interested in it. I was really looking to get a couple of days off the school and so, my mom took me out of the school and we went to this trading seminar together and I think it was a two or three-day event.

I remember vividly and after walking away from that, I had much more clarity about finances in general and where I just wanted to go. It really ignited a little bit of a passion inside for me and led me down the path of everything I've done since then. That's my soft spot. The other side of that is that I do remember getting pitched to death at that seminar and I was probably 16, 15 or so in high school and was getting pitched to death. I remember the whole thing. "You can do this and we'll have coaches for this." And I think that's the downside to a lot of these now, is that they've become basically a big pitch fest and I've heard from a lot of people actually that even some of the more prominent events like Rich Dad, Poor Dad and some of these other ones out there are basically asking astronomical amounts of money to sign up for coaching with people who get trained to be coaches which is insane to me. I just can't even believe that that still happens. But I understand the business model and what they're trying to do. I just don't think it's relevant for most people like me or you.

So, do I think it's worth going to a lot of these events? I think you have to picky and choosy. I think you really have to selectively choose which events you go to, which ones you don't go to, what you're going to get out of that event when you go there. I would have really a good framework in place to understand what the contents going to be taught. Do you really need this? Is it really something you can get more handholding and more application or motivation towards doing something? I think that's really what it comes down to. I think the people at these events are great. For me, it always comes down to the people who are putting it on and the people that you meet at these events. I go to a few conferences every year. I'm very selective and picky and choosy as to which ones I go to and who I meet with and where I spend my time and I think everyone should be. I think they're still worth going if you're picky and choosy about which ones you go to.

I'd love to know which ones you guys have thought have been really helpful and which ones do you think have not been helpful. You can share that in the community on Facebook, Twitter, YouTube, etcetera. Let everyone else know and share your experience if you've been to some of these seminars or boot camps or workshops, whatever they've been and let us know what you think has worked and what you think didn't work and that would be really helpful, I think for everybody. So, until next time, happy trading.

Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer the question, "Can options volume spikes predict market tops and bottoms?" To be fair, I did a very long stint in researching online, trying to find a lot of articles, research, any publications on really, definitive back-testing and data scraping, I guess to see if option volume spikes actually have any correlation necessarily with market tops and bottoms. I think the data is really fuzzy in this area. I think there's a lot of subjective nature to it. So, what is a volume spike, how much more does it have to spike above the average or above a moving average of volume. And what I found is that generally, volume spike obviously come around binary type events where people are trying to hedge or position their portfolio for something that either may happen in the future or something that maybe just happened. You could take maybe say a presidential election or the vote on Brexit. You typically see a lot of option volume spikes around those, but it's two-sided. People are making bets and hedging on both sides. Say if you're short the pound or you're short UK markets, you might hedge with options one way versus if you're not short UK markets and the pound. There could be a totally different scenario, but still cause both option volume spikes to happen on both sides, calls and puts because we're going into a binary event where we don't know what's going to happen. What is the Brexit vote? Who's going to win the election? All of those types of things.

I don't think that they necessarily precede market tops and bottoms. I think there's some validity to the fact that their increasing volume could signal some sort of either trend change or a new paradigm in the market. That's I think pretty evident that we see huge volume spikes around the same time that the markets are going through some sort of change in trend and that could be a continuation and move lower. We saw this I think really in the oil and gold markets. A lot of volume spikes happened after the top in the gold and oil markets a couple of years ago and that really just signaled a continuation of the move down. It wasn't necessarily the bottom. It was just really the next leg lower with a signal by some option volume spike. For me, it's not something I check all the time. I'm being totally honest with you guys. I don't check option volume and liquidity on a chart. I don't look for spikes. Really, for me, it's just about liquidity at the strike prices I'm trading and open interest at the strike prices I'm trading. I'm not using options volume as a predictor of market tops and bottoms. I could honestly care less. That's now what we're trying to do. We're not trying to pick tops and bottoms in markets. We're trying to trade around a range and basically play our implied volatility edge. But hopefully this helps out. As always, if you have any comments or 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 answering the question, "Do you have to own stocks to trade options?" This is a very common question and a lot of newbies ask this question. Very realistic question and rational question to ask and the short answer to this is no, you do not have to own stocks to be able to trade options. In fact, many of the trades that we do, practically, all of the trades that we've done here at Option Alpha have no stock involved whatsoever.

Now, that doesn't mean that you won't end up owning stock through assignment or exercise and expiration, but you do not have to own stocks as a prerequisite for trading options. Options by their nature are derivative instruments, meaning you can trade them and they derive their value from the underlying stock. But you can easily buy and sell option contracts without ever touching or having to deal with the actual stock shares. In fact, we think that stock is incredibly inefficient which is why we actually don't prefer to even deal with the stock at all unless we're assigned it and we have to reverse the trade out or we're assigned short stock and we have to buy the stock back to close the trade.

That's one of the big myths about options trading, is that you actually have to own the stock, but you don't. It's all about the contracts that you're trading. You can buy a call option, sell a call option, buy a put option, sell a put option and all you have to do to close out the position is simply reverse the trade. You sell back what you bought or you buyback what you sold and close out the position. It's really no more complicated than that. As always, if you guys have any questions, let us 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 answering a question that a member sent in which is basically, "What are my options when a trade goes against me?" I'll read the question that somebody sent in and that way, it will help bring some context around it and then, we'll talk high level about what choices you have or options (no pun intended) you have when a trade starts to move against you. They said, "Thanks, Kirk, for the quick reply. I could sure use the Theta right now because APC is hitting me real hard and I would appreciate your take on the situation. I originally sold a 52.5 put and last week, sold a 50 call to hedge, but my breakeven is around 49.25. I keep telling myself it can't go down 4% to 5% per day every day, but apparently, it can. How do you handle this kind of situation? I was hoping to unload it before the FED talks later this week, but I'm afraid it will be at 40 by then and I'll lose a couple of thousand. Thanks as always for your help. This is so much easier when things go right."

Now, full disclosure, this is not a trade that we made. We don't make trades in APC. I don't think we traded APC for a long time. But it was a coaching client that I had that was sending in a question and wanted my help on it, so I figured it would be a good also use and case study here for the daily call. But the end result here is that the first thing I noticed in doing all this and we'll say as a blanket statement is that when you're afraid of trades going against you, it's going to happen. Trading is a two-sided coin, meaning you're going to have losing trades and you're going to have winning trades, so prepare for that in advance. You prepare for that by having your position size in check ahead of trade entry. I know I harp on this so much and many of you who have probably heard this here are like, "Yes, Kirk, I get it, I get it." But it's so important that you have position size in check because in this case and what I didn't show in most of the email that was going back and forth, the correspondence going back and forth was that this person was really freaking out and it was mainly because their position size was too big and they were trying to fix a trade that was going bad, but the problem at the core was that the position was too big and they were losing sleep over it. If you have a position on and it could potentially go bad and you have analyzed the trade and see that the risk in the trade is more than 1% to 5% of your account, you need to cut back on the position size. Even if that means closing right now for a loss, you don't want to hold it till expiration.

Now, when a trade goes against you, you do have a couple of choices. One, you can do nothing which is a choice. You can start to hedge the trade or you can exit the trade. Those are really the three main choices that you have. Let's work a little bit backwards on this. Exiting the trade completely is something I don't necessarily suggest. When I say exiting the trade, that really means executing some sort of stop-loss, whether it's a mental stop-loss or a physical stop-loss. A point, 100%, 200% increase in premium, whatever it is, we generally don't see that stop-losses generate more winning trades and reduce risk in your account. We've done numerous case studies on this not only in our profit matrix research, but also on the weekly podcast. You can check them out. Just search stop-loss on the website. I don't suggest stopping out of the trade. Hedging the trade can be a good decision if you are in a position where you're getting closer to expiration. One of the things that I use as a benchmark and it's a general guidepost is that if we are in the month of expiration that you have those contracts, you should probably start hedging the contract. You sell the opposing spread, you roll contracts closer, you reduce the width of the spread. There's a number of different things you can do to hedge positions, but I don't usually do it until we're in the month of expiration.

In this person's case, when they sent me this email awhile back, they were trading December contracts and it was November and at that point, I would say don't do anything because it's too far out. If you're right now, like right now is May, if we're trading contracts in June and something happens right now in May, I probably wouldn't do anything until we get into June expiration. Until we start physically trading in the month of June, then I would start telling myself, "Okay. Maybe we need to start hedging this." That brings me back up to my first one which is do nothing. In many cases, actually doing nothing and letting the probabilities work themselves out is probably one of the better things that you can do. This is assuming that everything else is taken care of, like position size, balance, all the stuff that we harp on at nausea all the time. As long as you take care of those, sometimes doing nothing is actually the best. Let the market have a little bit of wiggle room to move. We know markets aren't going to move exactly where we want, when we want. There's going to be an ebb and a flow to how stocks and ETFs move. Give yourself a little bit of wiggle room and give yourself a little bit of cushion that you can withstand positions that go maybe in the money a little bit or go underwater on a paper loss and then come back around.

My assumption is always to do nothing first. Can I do nothing? Am I okay doing nothing? And that gets back down to position size and neutrality, the question. And from there, am I at expiration or getting closer to expiration, so that I need to start hedging because I'm running out of time. And if that doesn't work, then we go to the last step which is – Okay, if it didn't work and now, we're at expiration or the last week of expiration, now we need to close or roll the position. That's the thought process behind it. Hopefully this helps out. Hopefully it answers the question. As always, if you guys have questions, you can get them in. It's always first-come, first-serve for the questions that are submitted at optionalpha.com/ask. 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 answering the question, "Are options automatically assigned when the strike price is breached?" This is a huge topic and one that we get a lot of questions on naturally because people are scared that when they start selling options or if they start buying options that they'll automatically get assigned on a short option contract whenever the stock breaches or reaches the strike price that you're selling. To use a very basic example here, let's say a stock is trading at $100, you sell the 105 call options and now, the stock starts trading up to 105. The stock trades at 105 or above, say 105.01 and many people would assume that at that price point now, the option contract that you sold, the 105 calls would automatically be assigned in your account and it's just not the case.

Option, exercise and assignment happens mostly at expiration, in fact, the last couple of weeks of expiration. Now, that's not to say that it can't happen, but it's very rare, almost insanely rare that options would be assigned immediately because the stock reaches a strike price. The reason behind that is, the reason why that's the case is because even though the stock may have reached or breached your strike prices, there's still a lot of extrinsic value that is left in option contracts between now and expiration. And so, if an option buyer were to assign you that contract, they would be forfeiting their extrinsic value of that contract. They'd be giving up the implied value for time decay and volatility that is still apparent in that contract. And so, for that reason, they won't do it. What they'll do instead if they want to get out of the position is just simply sell back or buyback the contract from somebody else. They'll just reverse their trade in the open market. But rarely will they actually go through the actual assignment process unless we're very, very close to expiration and I'm literally talking the last two to three days of expiration.

Hopefully this helps out. Hopefully it calms a little bit of the nerves. Again, we see a lot of our option contracts go in the money and then out and in the money and out and we're rarely assigned on contracts. I think when we went back last time and checked, it's less than 1% of the time where we're actually assigned on contracts that would go to expiration. It's a very rare thing to happen. It does happen, so don't assume that it's not going to happen, but it's more likely to happen in the last couple of days of expiration than it is as soon as the stock strike price is breached. As always, hopefully this helps out. If you guys have any questions, let us know. It's first come, first serve for questions on the daily call which we're doing here, our weekly podcast and Facebook Live when you leave me a voicemail over at optionalpha.com/ask. 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 the impact of time decay or Theta on credit spreads. Credit spreads, as many of you know, are option strategies where you are buying one contract and selling another contract. Typically, you're doing a credit spread out of the money. If the stock is trading at $100, you might sell the 105 call options and buy the 106 call options, creating a call credit spread or a bear call spread. Now, the impact of time decay on credit spreads can vary. I say this because it has a lot to do with how far out you are selling options and also, the spread width between your buy and your sell of the option contracts.

Now, the thing that people don't account for when they trade credit spreads is that you'll typically have to hold credit spreads a little bit longer to see profits materialize and depending on how wide you make those spreads might also impact the holding time. We've seen this a lot in some of the back-testing research that we've done and then published on our profit matrix report. But what you don't factor in or what many people don't factor in is that when you are buying one contract and selling another, you're basically negating the impact of time decay or Theta decay on those contracts down to a very, very small differential between the contracts. For example, if you have a $4 time decay or Theta decay on your short call options, that's great. But when you buy the long 106 call options in the example I gave before, you might also be paying $4 in change time decay impact on those long options.

What you gain on one option contract could be basically canceled out or zeroed out by what you pay on the other option contract. This is why I say that it has a lot to do with how wide you make your spreads because if we are selling an option close to the money or at the money and then buying options much further out to give ourselves protection like you would in an iron butterfly situation, in that case, you actually would be collecting hopefully some positive or more positive Theta decay overall because your options at the money have really high intrinsic Theta decay and the options further out of the money have very low Theta decay. In that case, you'd be collecting a higher net differential, but you have to make those spreads very wide and therefore, take on a little bit more margin and risk to make that trade.

Again, it's not something I'd necessarily check all the time. It's something you should know intuitively in the back of your mind. If you're trading a spread and you're doing a $1 or $2 wide spread, you're probably not going to get a huge impact on the option price in just pure Theta decay. Those options will decay in value, but you're going to get more bang for your buck by seeing implied volatility drop or by seeing the stock price drop or the stock price go up, however you want the stock price to go in that particular trade. That's where you're going to get a lot of that impact. It's just going to take a little bit longer for profits to materialize, not that they can't or they won't because we've seen in many cases in back-testing that still selling spreads is very, very profitable. It just means you might have to hold them a little bit longer. Hopefully this helps out. As always, if you have any questions, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to go through my little unconventional guide to trading options with $500. Everyone always ask and we get a lot of emails from people saying, "How much money do I need to trade options? Can I trade options with $100? Can I trade options with $500?" And the simple answer to this is of course, you can do it. If you have a brokerage account and you have the ability to trade options, it can be done. Now, we always suggest (for full disclosure) that you start with somewhere around $3,000 to $5,000. The more money that you start with, the wider the opportunities you're going to have to trade more positions, diversify your portfolio, get into additional legs of underlyings and it's going to be a dramatic improvement on your P&L with your ability to trade more contracts.

But if you are starting with $500, here's what I suggest you do. I suggest you start trading options on stocks that are really low-priced ETFs. When I actually go into my list here at the toolbox and I vertically sort it by lowest stock price, I can see that there's a couple of ETFs that jump out as lower-priced ETFs. Now, why do I say lower-priced ETFs and not stocks? Because I think that when you're trading with $500, you want to be really careful about what you're trading and you want to get into a good framework of trading consistency and trading mechanics and that's going to be done a lot better on underlying ETFs than it is on stocks which could have huge moves in either direction. ETFs are going to be a little bit more stable generally, have a little bit less volatility than stocks and so, it's going to be better as you start to get your numbers up quickly.

The ones that you want to focus on are ticker symbols like USO, SLV, UNG, GDX, OIH, XLF, XOP, etcetera, all lower-priced ETFs. And the reason that you're going to focus on those is because in many cases, they offer $1 wide strikes and in some cases, they offer half-dollar wide strikes. USO is commonly a half-dollar wide strike ETF which means that you can trade say the 14 call options and the 14.5 strike call options. And so, the reason that this works is because as you're starting trading with just $500, you want to trade as small of a spread width as humanly possible because your goal is just to start to get more trades on, start to increase your trade frequency. And so, although it might be tempting to trade really wide and really big positions, you actually want to start insanely small.

In the case of USO, you could at this point, sell the 14 call options and buy the 14.5 call options and if you were to do that, you'd take in about a $.10 credit and since it's just a half-dollar wide strike, your risk is about $40. That's not including commissions, obviously, so you got to factor in your own commissions. But your risk is $40 and your potential profit is $10. Now, again, you're not going to quit our job on this. You're only trading with $500. But it really starts the process and gets the wheels in motion of how you can start trading with just $500 because $40 although is probably higher than what we would typically like for your overall allocation at 5%, it's about 8% allocation. It's about as close as you can get with $500 to start trading. That's why I say it's my unconventional guide because I think most people would say, "You know what? Go. Shoot for the moon. Buy a bunch of options. Start trading all over the place."

I see this all over the place on Facebook and YouTube and Twitter right now with Robinhood. A lot of people are opening up these small accounts, $200, buying some call options, trying to get lucky. A lot of people are blowing up their accounts and starting and they'll never come back. Do it the right way. Trade it very, very small, very tight spreads. Keep your risk contained and you should be okay and start adding more capital to your account when you get a chance. As always, hopefully you guys enjoyed this. If you 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 are answering another question that was sent in from a user, so again, thanks for sending in your question. The question was, "Can you buy and sell the same option contract at the same time and then basically, generate a profit?" And so, the short answer to this is no. This is where the bid ask spread in most cases, comes into play and the reason why the bid ask spread is generally in place is so that there's no free arbitrage opportunity. An arbitrage opportunity in the market would be where you could buy a contract for say $10 and immediately sell it back for $11, effectively taking a minute's time of risk. But in most liquid options and practically, all liquid options, this does not exist because of the bid ask spread.

Let's just use an example here because I think it might help out. But if we're looking at say USO which is the oil ETF fund, you can look at the 15 strike call options on USO… And I'm just looking at the 15 strike call options for the next month out. The bid ask spread is about $.2, so $.2 out is the bid ask spread for the 15 call options. You can buy the call options for $.7 and if you wanted to sell them, you would sell them for $.5. That $.2 wide difference means that neither side really can have an opportunity to create an arbitrage opportunity to immediately buy and then sell right back. Now, of course, we always try to trade at the mid-price or at the midpoint and try to get something negotiated between there. But even if you come up with something between $.5 and $.7, say $.6 as your ability to sell at $.6, you may not have the ability then to go right back into the market and buy or sell back that contract and create a profit. You'll still lose a little bit to slippage.

There's no real opportunity to then, in the market, buy and quickly sell an option contract. You have to be holding it for at least a couple of minutes, I guess at the very short end of the spectrum and see the market price change for those contracts based on implied volatility or the underlying price actually moving. There's got to be some sort of risk involved and you can't just arbitrarily buy and sell contracts and then assume that you're going to make this quick arbitrage profit. Hopefully that helps out. As always, if you guys have any questions or you want to submit your question, feel free to email it in or also, the best ones and the first ones that we take are also from our voicemails that we get at optionalpha.com/ask. 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 getting a basic understanding of a deep in the money call option strategy. There's a lot of jargon in there and so, we want to break this down for you guys if you're getting started with options or if you're new to options trading. The term "deep in the money" basically refers generally to option contracts which are more than $10 in many cases in the money, meaning they have intrinsic value or a lot of baked in intrinsic value right now. For call options, this would be strike prices that are at least $10 lower than where the stock is trading right now. For put options, that would be strike prices that are at least $10 higher than where the stock is trading right now. In either case, the idea here is that options that are far in the money have this deep intrinsic or high intrinsic value because they're so far in the money that if they were to be exercised right now, they do have value to exercise and get rid of the stock or buy the stock and dump it in the market.

Now, the call option strategy side of this is this idea that you are much better off to buy deep in the money call options than you are to outright, buy long stock in an underlying security. Now, on the general premise, I agree with the general analysis in most cases that it is much better for you to synthetically go long a stock using options than it is to go long the underlying stock itself. I feel like in most cases, stock can be insanely inefficient and can cost a lot of capital and can tie up a lot of capital in your account. And so, I want to use an example here today just to prove this point. Now, again, there's a lot of moving pieces here. There's no one way to do it. There's many contract months, there's how deep in the money do you go, how far out do you go in expiration, etcetera. I want to try to touch on as many of these as we can in the daily call and just to kind of again, get the discussion going and the dialogue going on this. But generally, I agree with the premise that you are much better off to synthetically go long a stock than you are to buy the actual underlying shares.

Let's take an example of Netflix. Netflix is a popular one. Right now, it's trading around 340. And so, to buy stock in Netflix, if you were to buy 100 shares of Netflix, it will cost you $34,000. Now, for most people, that would tie up all of their account and then some. They probably don't even have enough money to do that. But if you have enough money to actually buy Netflix which is a big hurdle in and of itself, it would tie up $34,000 to buy 100 shares. And so, one of the ways that you can trade Netflix and go long Netflix synthetically using options is to potentially buy a deep in the money call option. Now, here's where you start to have some analysis and you have to do this. It's nothing that we've done before, so it's up to you to determine how far out you want to go in expiration time. But you can buy deep in the money calls for 30 days out, 60, 90, 120 and in some cases, you can buy them very far out. With Netflix, we're looking at the January 2019 contracts which are over 250 days out from expiration.

Let's say you're really bullish on Netflix for whatever reason and you want to get a long position, long exposure and you're willing to hold that position for a long time. January 2019 contracts, so many, many, many months of holding these contracts. If you were to buy the 270 strike call options, again, which are more than $10 in the money, so they're very deep in the money as it's commonly referred to, the 270 strike call options when the stock is trading at around 340 would cost you $8,800. You could replicate a position in Netflix for about $8,800. Now, this is obviously significantly lower than the $34,000 it would cost to actually buy the stock. That's why options become so efficient because you can leverage option contracts and replicate a stock-like position without having to outlay all the money.

Now, here's where you'll also have to make decisions on how deep do you go in the money. In this case, you want to use Delta as your approximate for how many shares that option contract will replicate or will basically mimic. In this case, the 270 call options have a Delta of 80 and so, what that means is that that call option is going to replicate about the profit and loss of 80 contracts as the stock is moving. If Netflix goes up by $1, you should assume that you're going to make about 80% of that move, really. You're only going to participate in 80% of that move versus if you had say 100 shares, you'd participate in a $100 move. With a Delta of 80, if Netflix goes up by $1, you're only going to get $80. You want to use Delta to be your approximate representation of how many shares that deep in the money contract is really trying to mimic.

Just to give you guys another opinion on this or another look at this, the 225 call options which are now even further in the money cost about $12,000, so still significantly lower than buying Netflix outright. But those call options now have a Delta of 90, so they're going to replicate a 90 share type position in Netflix. It's going to mimic Netflix like you will have 90 shares in your account or like you're trading 90 shares of stock. As you can see, the further you go in the money, it costs more money, obviously. As you go in the money, it cost more money, but you also start to replicate more and more of the stock position. Ultimately, like I said, it's up to you to decide how you want to do this if you're super bullish on Netflix and if you want to use this type of strategy.

For full disclosure, I don't use this ever. I do not ever go into a position where I'm super bullish on anything. I prefer to just trade options the way that we teach at Option Alpha and how we trade around the market in a 30 to 60-day time period. I think it's much more effective to do that. But again, if you have some underlying major bullish assumption and you don't want to buy the stock or you can't afford to buy the stock, I think some sort of deep in the money call option strategy is a good alternative. I don't think it's the best strategy to use compared to other things, but if you're dead set on doing this, if you have it set in your mind that you want to go long a stock, then this is a good way to do it using options synthetically. It's much cheaper and offers a little bit more pinpoint accuracy as to how far you think it might go and how long you want to hold the contracts, etcetera. Hopefully this helps out. I know it's a little bit longer than our usual daily calls. But as always, if you guys have any questions, let me know and until next time, happy trading.