Hey everyone, Kirk here again from Option Alpha and welcome back to the daily call. Today, we are going to be answering the question, "Can you exercise your long option contract at any time?" There's two parts to this question. The first part here is that you have a long option contract. That's the requirement, is that you're a long call option buyer or a long put option buyer. And in either case, when you are actually an option buyer of contracts versus option sellers, you have the choice or the "option" to exercise your contract or not. The general answer to this is that if you have a long contract and you're an option buyer, yes, you can exercise that contract at any time up until expiration. Now, obviously, you can't exercise the contract beyond the expiration date. If the expiration is next Friday and you try to exit the contract or exercise it the following Monday, it's not going to work. You got to do it up to expiration date.

Now, there's also a couple of little tidbits in here that you should be aware of. The other thing is that it's got to be a regular American-style contract. That's most contracts that you're going to be trading. Most stocks, most ETFs are what's called American-style which means that you can exercise them any time up until expiration. Very frequently or infrequently, depending on what you trade, you might run into what are called European-style option contracts which are mainly index ETFs like SPX, RUT, NBX, etcetera where you can only exercise those contracts at expiration and it's mainly because those are settled in cash, so there's no real benefit to exercising them early. All exercising basically happens at expiration because they settle into cash.

Again, you should just know generally, the differences between those two versions, American-style and European-style. But in the broad strokes, yes, you have the ability to exercise your contract at any time if you choose. You just have to be careful of the pricing to make sure that it's worth exercising and you're not going to lose a ton of premium and time decay by letting go of your option contract. More often than not, as you get closer to expiration, that's when more exercise and assignments happen because now, premium for time decay and volatility are now basically out of the contracts and the contracts start trading in more parity with the underlying stock. Hopefully this helps out. As always, if you guys have other questions, let us know. Shoot us a voicemail over at optionalpha.com/ask 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 creativity is completely overrated as an options trader. I want to read you guys a quote from Ray Kroc. Now, I don't care if you guys agree necessarily with his, I guess business practices when it comes to how he basically manipulated and pushed out the original founders of McDonald's. There's a great movie about this. I forgot what the name is, but a great movie and story around this. I don't care if you agree with this, but I agree with the quote that he said previously which is that creativity is completely overrated. He said, "Most business success comes from doing boring diligent work and from developing a system that produces consistent results and sticking to it." And I could not agree more. I think what a lot of people do in this business in particular is that because options are so fluid and you can create so many different strategies and so many different payoff diagrams, what a lot of people tend to default to is that they need to be overly creative, overly ambitious with how they develop these strategies and they miss the core concepts that really make some of these things very successful.

When we went back through and did our research using the profit matrix and we published our report on that, all of the back-testing option strategies that we did, what I took out of that and what I will now start to apply towards our auto-trading software is just a very simplistic framework for trading. Now, there's a lot of nuance in all of trading. There's no one strategy that works best. There's no one framework that always works best in every market. But using the most simple strategies in the most effective way is probably what is going to produce consistent results for me, continue to produce consistent results for me going forward in the future. In fact, in some cases, we might even pair down what we're doing in the sake of efficiency or in the sense of efficiency and scalability, is trade even more simplistic than maybe what we're doing right now. Because we have the ability now to auto-trade and use automation and bots, what we're going to try to do is create a very simple, but very consistent framework that we can apply to many, many different accounts and many different strikes and tickers and ETFs, etcetera and hopefully stick with that, use the bots and the technology as a means to sticking with it versus right now, what a lot of people do is they try to overly analysis paralysis every single situation that they're in and they basically don't do anything and they cripple themselves. They don't just stick with the system.

I couldn't agree more with the quote that Ray had said about again, just doing the boring diligent work. In fact, this is why I continue to run Option Alpha because I like the people, I like the business, but more so than anything else as I've mentioned a bunch of times, it keeps me consistent in trading. If I didn't have to come back to you guys every single day and do these daily calls or every week and do the podcast or every night and do the video updates, I probably would not be as successful of a trader as I am right now. I've got a lot of growing still to do, I've got a lot of room to improve, but one of the things that makes me successful is having the accountability of almost 100,000 people now as part of our community because I have to come back and do the same thing over and over and explain it the same way over and over to hundreds of people every single day. But it allows me to be consistent because I have to stick to what I know works, I have to stick to the research, to the numbers and that's made me more successful.

Hopefully you take a little bit away from this. Just don't over-think things. Really, it's what it comes down to. Try to be very simplistic. Try to be straight-line about this. Don't try to get too crazy and creative with strategies and hypotheses. The things that work now are going to be the things that conceptually work in the future. Option selling that works now is going to work in the future. There might be little nuances and little differences that we might find out as we continue to do more research, but that, we can tweak and maybe self-correct the path that we're on. But we still should be on that same road to eventual success trading. It's just that we might move the steering wheel back and forth a little bit to course-correct around some curves. That's the way I see it. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be answering the question, "What are quarterly options and why should you care?" First of all, quarterly options are basically the same as every single option contract, except if they are present in an underlying security, typically, some of the bigger indexes and major market ETFs, what they are, are basically options that expire on the physical quarters of most years. That would be the March, June, September and then, December physical quarters. And so, all they are is just another avenue, another expiration date to pin if traders or investors or hedge funds, institutions want to have exposure up to a certain date. Maybe you have exposure for the first half of the year, so they might do quarterly option at June 30th or June 29th, whatever the last trading day is for June. And so, that's where the quarterlies come in.

For you as a trader, for us as retail traders, should we care about this? Sure. We should know that it's there. We should know that it's another way that you can trade options, it's another contract month. Typically, fairly liquid as we get closer to that contract month, but ultimately, it doesn't have too much of an impact or bearing on what we're doing. You shouldn't need to trip over yourself and always check the quarterlies or not or always trade the quarterlies or not. In fact, many times, the quarterlies can be less liquid when we get into the actual month of expiration than the regular monthly contracts which expire the third Friday versus the actual end of the quarter. You just want to double-check liquidity. We've traded them before in the past. It's not a standard course of business that we do, is trading the quarterlies because they're typically too far out by the time that we actually need them. But yeah, it's something that you should take a look at and you should know that it's available in the market for you to trade. As always, if you 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 are going to give you some general guidelines on acceptable options liquidity. Now, look. Acceptable liquidity is definitely vague and it's vague for one big reason and that is the underlying strike price or the underlying stock price of whatever you're trading. If you look at a stock like a Google or a Netflix or an Apple which has a significantly higher notional price or underlying price, naturally, you don't need to trade as many contracts to get value out of those underlying options. The liquidity will generally be… Total volume and dollar wise might be lower as far as number of contracts needed to be traded versus if you are to trade something really, really small like a USO or something like that, that has a very low underlying price. Again, it's very much a fluid thing. Not to pun on the word, liquidity too much, but it's very much a fluid thing. And so, what I want to give you is some general guidelines for what to look for with regard to options liquidity.

Now, when I talk about options liquidity in coaching sessions, what I usually refer to are markets that are both deep and wide. We want markets that are deep and wide when it comes to options liquidity. For example, when you look at the S&P 500 ETF which is SPY, you'll notice on the option chain that the underlying contracts for the SPY are both deep and wide, meaning that there is basically liquidity at every single strike price in the entire option chain. There's lots and lots of contracts both in volume and open interest at every $1, even half-dollar strikes across the entire chain. You can scroll up or down and you'll see liquidity across every single strike price. Now, this gives us an idea of markets being wide, meaning how many strike prices have liquidity versus how many strike prices don't. And in the SPY case, you should definitely look at this as the shining example. It's probably one of the most liquid underlyings out there for options because in some cases, you have strike prices that are $10 or $15 out of the money still having 33,000, 43,000 contracts being traded in a single day. There's a lot of liquidity there. That's the width of the markets.

Now, when I talk about the depth of the markets, what we want to see is we want to see not only a lot of option contracts at many different strike prices up and down the option chain, but we want to see huge, huge numbers of contracts both in volume and open interest for each individual strike price. If you look at let's say another particular ETF like EWY, EWY has a very wide market, meaning that there are a lot of option strikes that are being traded, but they're just not deep, meaning that in some cases, say the 69 puts, there's three contracts traded today and only 10 contracts of open interest. Yes, the markets are wide enough that people are trading at these further extremes and right now, at the time I'm doing this, EWY is around $74, so people are trading options a couple of dollars out of the money, but there's just not a lot of activity. The markets are pretty shallow there, so there's not a lot of depth in the open interest and the volume. And so, what you want to do is you want to find something that's both deep and wide. You want lots and lots of open interest, lots of volume and you want lots of strike prices being engaged in this.

Another shining example of this on the other end compared to SPY is the ticker symbol GOOD, this poor stock I use all the time as the guinea pig for illiquid options markets and it's a good basis for looking at illiquidity. Because when you type in the ticker symbol, GOOD and you look at any of the strike prices, you'll notice that there's only a handful of strike prices that people are actually trading. You'll mostly see a lot of goose eggs across the option chain. There's probably the at the money strikes that people are trading. But even in the case of today when I'm looking at this and this is basically about 4:00 o'clock in the afternoon right now when I'm recording this for tomorrow, the market is zero for the entire day's volume on GOOD options. Nobody, absolutely nobody has traded options for Gladstone Commercial which is this REIT. Nobody has traded options for this thing all day. It's the end of the day, literally, not one person has traded it. Even though the stock chart may be great and even though you might get some shining technical signal, what I always tell people is that there's no liquidity. If nobody's playing in the sandbox, you don't want to be the only person playing there by yourself. You need markets that are both deep and wide when it comes to liquidity.

Again, it's a very fluid thing. You got to look at the prices. Different ETFs are going to have obviously different liquidity, SPY being probably one of the most liquid ones out there as far as ETFs and then everything else will go back from there. But when you look across an option chain, just take a step back and look at it, you'll see if there's a lot of liquidity or not. If there's lots of gaps, there's lots of zeros everywhere, single contracts, 10 here, 10 there, it's just probably not worth it for you to work in that ETF or underlying. Thankfully, one of the things that we do, do at Option Alpha is we help you with this with our prescreened and pre-filtered watch list which is part of our toolbox light software. This is something that we consistently screen for, is liquidity. We try to pick some of the biggest liquid ETFs and stocks out there and continuously update this list. It happens on an ongoing basis. Usually about every quarter or semiannually, we update this list with liquidity numbers and we pull data from the different exchanges to see how liquid some of the options contracts were for these tickers. If you want a pretty good working list of things that you should trade, definitely check out our toolbox software at optionalpha.com/toolbox. 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 hopefully shedding some light on a new topic that maybe you haven't heard before. Some of you might before. But this idea that some of the biggest up days actually happen in down markets. This is fascinating stuff and I've known this for a while now, but it's recently come back to the surface because we had now the third largest up day that the DOW has had point wise in basically like the last 15, 20 years or so and it just happened back in March of this year. This again resurfaced to me because I got a lot of emails that people said, "Oh, my God, the markets. This is the bottom." This is it back in March of this year because the DOW had the biggest up days and I calmly described, "Hey, listen. When the markets are really volatile, the DOW and every other market can have some of its biggest up days not in the top of a market, but not even at the bottom of a market. We're still in the middle of a range in a downward trending market."

So, to add some picture or light to this, I guess some color to this, let's go through literally the top three largest point gain days for the DOW in the last basically 20 years. And so, the first two came in October 13th and October 28th of 2008, gains on the DOW of 936 and 888 points respectively, almost 10% changes on those two days back in 2008. It's actually crazy when you think back to 2008 for any of you guys who were trading through that time period as we were. That is a wild, wild… Like that was a wild time. I mean, literally, when you blink your eye, the market was either 10% higher or 10% lower. But if you go back to the charts, October 13th and October 28th, the DOW still had not made a bottom at that point. In fact, it was still 25% off of the bottom. It still had to fall another 20% to 25% before it actually reached a bottom at that point. Just to show you, the largest up days in that time period actually corresponded not to the bottom of a market, but actually maybe a significant fall that the market might have.

Now, we recently just went through the third largest up day that the DOW has had point wise and the DOW was up back on March 26th of 2018. It was up 669 points. So, a huge day, about 3% gain, so not as big as when the market was obviously lower, but the DOW is much higher now to 24,000 versus it was back around 10,000 or so in 2008. And so, again, it just goes to show you that the largest point gains that we've had, even the largest percentage gains that we've had do not necessarily correspond with a market top, but might actually correspond with a bear market or a downward market. We actually had in 2018 another large update, number five that ranks on the point list back in February, February 6th of 2018. Again, just a couple of ranks below the number three day was another day in 2018. We're starting to get all these flashing signs that maybe the market that we're in right now is actually going to be a very cyclical bear market given that some of the largest up days actually happen in down markets or as stocks are starting to fall apart.

Again, it's no surprise really to me that this happens. We see this all the time where stocks are all obviously very calm and regular trending bull markets, they go up by a quarter of a percent, a tenth of a percent per day. But then, when things get more volatile, we can have volatile gyrations on both sides. That's why I always encourage people actually not to even really do a lot of adjustments during periods like this because a stock that may be 6% down today might be 7% up tomorrow. It can snap back so quickly in these periods. That's why having cash and just being more patient is usually the best course of action. Hopefully this helps out. If this was something new that you didn't know, let me know or share it online. Help us spread the word about what we're trying to do here at Option Alpha 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 when to take profits versus letting winners run. This topic basically came from a question that somebody submitted. I want to read the question here for you guys, so you guys understand the basis behind it. They said, "Kirk, given the research that you've done, I know there's been a change in when to close a position for a profit. The old guidance used to suggest taking straddles and iron butterflies off at 25% of a gain and strangles and iron condors at 50%. Now, I understand that the research shows leaving on particular straddles and iron butterflies a bit longer sometimes in the right direction and I, perhaps and others are interested in learning how you decide to take these positions off at 25% or 50% versus letting them ride a little bit longer and why the research suggest that we hold positions versus take them off. Again, learning through your thought process in these situations would be very helpful." First of all, thank you for submitting the question and as always, if you guys have questions, I want to hear them. We want to read them if you're okay with that or play it in an audio podcast on the weekly podcast if you want to submit them at optionalpha.com/ask. In any case, I'm trying to answer as many of these questions as humanly possible, so please get your questions in and don't be shy about it.

There's two things we have to talk about. One is what does the research now suggest. The old way of doing it… I don't say old way like it was a bad way. It's just we didn't have all the data that we have now on strategies. We were kind of handcuffed to a certain degree many years ago because we didn't have the ability to buy data, to build out a back-testing framework, software, technology around that. Now that we have that, we have to be realistic in that our expectations or what we're doing have now shifted a little bit. The good stuff that came out of a lot of the back-testing that we did and when we released our huge back-testing report called the profit matrix which you can get to at optionalpha.com/profit is that a lot of the key concepts that we have been preaching about from basically 10 years remains true and evident, basically that option selling works, it's the most effective strategy, taking profits early works, extending duration works, a lot of these key concepts. Now, what we have as part of that research since we subdivided each of the strategies and all the test into different buckets around implied volatility and when the trade was entered and when it was exited, where IV was, how far out it was, the frequency of the trading, whether you're doing trading weekly or daily or sequentially, now we have a lot more data around where particular profit targets need to be for situations in different markets. Although it's a good benchmark to say 25% gain or 50% gain on general strategies, we now know that in many cases, there is a more optimal exit in some market situations versus others.

Now, this doesn't mean that we now throw that completely out the window. That's still a good general benchmark. If you don't want to go through the process of buying and reading our research, no problem. You can use those benchmarks and they probably do well. But there's probably a lot better performance that you could get for many of your option strategies by using more optimized framework and data around it. That's in fact why we built the trade optimizer, to use all of this data in conjunction with current market dynamics, so that you can go in and basically say, "Okay. If the market's 40 days out till expiration and IV is here, what are the best strategies that I should be trading?" In all of that research, what we did find as an underlying thread is that generally, when you hold trades a little bit longer towards expiration, not to say you have to hold them all the way to expiration in every case, but when you hold trades a little bit longer, you get compensated by having higher returns than if you were to take them off early. Now, look. We do have to play this dance between win rate, drawdowns and total returns, but if your sole focus on trading is to generate as much money as humanly possible, then in many cases, you might need to hold past our traditional 25% and 50% levels. Now, that's going to come at a sacrifice. You can't get everything for free. You're going to give up your win rate. Your win rate is going to be a little bit lower. You're going to give up on your drawdowns. You might see a little bit higher drawdown on average. But if you're willing to withstand those fluctuations with the end in mind, you might generate some higher expected returns.

Just to shed some light on this before we get into the second part of that question which was, "How do you know when to hold it or not?" In this case, when we look at a short strangle using out heat maps that we have in the profit matrix, what we see is that in one particular series of trades that we did where you were basically testing the difference between letting a trade go all the way to expiration versus taking the trade off at 50% or 75% profit target even, we saw on average that the sharp ratio of these trades were significantly higher when you let the trade go all the way to expiration. We're looking at about an 11 sharp ratio, .11 on some trades that went all the way to expiration, so you really had no profit target in some cases. When you had a 75% profit target, you had a .7 sharp ratio and when you had a 50% profit target, you had a .05 sharp ratio. As you actually took money off the table at earlier and earlier increments, 50% versus 75% versus letting it go to expiration, you actually crippled yourself a little bit in this scenario for the ability to generate outside returns and outside gains. Now, in this case, as you took money earlier, you did have higher win rates. When you took money at 50%, you won at 69% of the time. When you took money at 75%, you won 63% of the time. It went down a little bit. When you let trades go all the way to expiration, you won 62% of the time. You can see, you are sacrificing a little bit of your win rate on the path to generating higher returns. Look. This seems very normal. The way that I read this is not some like huge revelation. Maybe you do, but I don't. It's that when you take on more risk, you should be compensated for the risk that you're taking on. When you hold trades a little bit longer towards expiration, you should be compensated for the risk that you're taking on. In my case, when I decide to get back to the second part of this question, when do we decide to let trades on maybe a little bit longer than usual, most of my decision-making is now out of my hands because I use the trade optimizer. A lot of the "decisions" that I have to make are now out of my hands. Because I optimized all of our trades, I can see exactly where I should be taking trades off at any given point before I even get into the trade. I already have those levels pre-populated in my system.

If we get to the situation where trades are now starting to hit those profit targets, then another thing that you can look at is portfolio balance or position balance. Oftentimes, if we have a trade that say at our 50% or 75% profit target early and the trade is literally in the middle of our expected range, the stock is trading at $100 and we want it to trade between $95 and $105, if the stock is trading right in the middle of our range or very close to the middle of our range, I'm probably more likely to hold the trade a little bit longer because I really don't have much to gain or lose versus if the stock is trading at one end of the extreme or not. It does come down a lot to balance too. I think that that's the second layer that you have to understand, is what does my portfolio need right now or are all my positions generally balanced. "I'm well-balanced. I don't really care where the market goes." Okay, maybe we can afford to hold another day or two or a couple of days and try to get a little bit more out of it. In most cases, we will not take trades all the way to expiration. I think taking it all the way to expiration might be an over-exaggeration because if at five or 10 days out from expiration, let's say your short strangle is worth $5, there's no reason to carry it all the way to expiration for $5. You got to be a little bit rational with your thinking around this, but hopefully this generally helped. I think that there is a lot to be learned from digging into a lot of this research. It's not going to be easy. It's not a one page report by any stretch. But it is worth its weight in gold just to understand the different nuances between different time periods and IV levels, etcetera. Again, if you guys want to learn more about that, just search profit matrix on the website 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 answer an email that I got from a user which is basically, "What are the advantages of trading strangles versus iron condors?" The email from one of our members said, "My Thinkorswim platform doesn't allow me to write straddles and strangles because of the unlimited loss risk." They get a message that says it's illegal to write these shares. They have an illegal negative one shares. However, I can do an iron condor because the risk is limited. When I see the iron condor diagram, it is the same as a strangle except for the defined risk. Again, they basically are asking what are the advantages of using a straddle or a strangle over an iron condor.

The clear advantage of using straddles and strangles versus iron condors is a couple of different things. I don't think it's not just one thing. There's a couple of clear advantages to using them. The first is that in most cases, you end up generating more total dollar profits. When we go back and back-test lots and lots of strategies, we're talking hundreds of thousands of strategies, strangles and straddles end up generating more dollar profits overall. When you look at a $100,000 account, which account grew by the most total dollars, had the biggest total return? It's probably the accounts that have straddles and strangles. Now, that said, the downside to that basic advantage is that you probably have more fluctuations in your account. We saw more gyrations, maybe a little bit more volatility in the P&L curve, so bigger rises and falls. But if you're willing to hold through that, you generally get higher expected returns.

Now, the other advantage to trading strangles versus iron condors is that they generally hit their profit targets much faster which also means that you're holding the trades for much shorter time period. When you're trading just pure naked options or option selling, you'll see that those options tend to decay very quickly in value and they hit their profit targets much faster which means you don't have to hold them as long. Now, compare this to trading iron condors. With an iron condor, you are able to control risk a little bit better, so you don't have the gyrations in your P&L profit statement as much as you do with a straddle or a strangle. But with iron condors, since you are buying options and using spreads on either side of your short strikes, you generally see those trades decay at a much slower pace. You don't hit your profit targets as quickly. Not to say you don't them at all because you probably will, but it just might take more time. It might take an extra week or an extra two weeks which generally means you're holding trades a little bit longer than we would ideally like to do.

I think those are really the clear distinctions between those two strategies. In either case, I think generally, one's good for one particular type of trader, one's good for another type of trader, so I wouldn't throw my hands up and say I would only do one versus the other. I think there's a lot of factors that have to go into it. We use iron condors and iron butterflies a lot here at Option Alpha mainly because during low implied volatility markets, those out of the money options that we can buy to create defined risk are really cheap. If we're selling a straddle and we can collect $300 of premium and then convert that into an iron butterfly and basically give up $5 of the $300, so if it only cost us $5 to buy those far outside wings, but we create defined risk, we give ourselves protection, then it's worth it. We're still collecting $295 of premium. What's another $5 that we can pay for risk protection and management on the further ends of the extreme?

Hopefully this helps out. As always, if you guys have any questions like the one that we just went over today, please let me know. We're always looking for new content here for the daily call and for our website, so the more, the merrier. I love getting questions. We just basically add these to the list here and we'll just continue to create this huge working list of questions that you guys have around options trading. 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 employee trading restrictions and trading compliance. I actually get a lot of questions about this. I get a lot of questions about how people want to try to get around these restrictions or compliance in their firm that they work for, company that they work for. The end result here is that you should not be trying to escape the system and get around some of these restrictions and trading compliance. If your firm or if the company that you work for has defined restrictions around trading or how you should notify people of your trading activities, you really want to follow those and not try to walk a very, very thin line. There is no room in this industry for people to be trying to manipulate the system.

Now, in most cases, most companies… And you'll have to check with your own company or your own firm for their particular regulations and laws. But most companies have restrictions around trading in companies or in products that have a clear sense of conflict of interest. If your company is let's say a broker dealer or you're an investment bank, you probably have trading restrictions around trading any of the companies that you cover, any of the industries that you cover, any particular sectors that you cover or even trading your own firm's stock or underlying options without predefined approval. And in many cases, there are also restrictions on how quickly you can buy or sell underlying securities. You have either 30 or 60 or in some cases, 90-day windows that you have to maintain the position before you get out of it and this is really to discourage this idea of quickly buying or selling on some sort of insider potential information or some sort of hunch that you might have about what a company or whatever company you're at might be doing in the future.

I think all this stuff is really actually good. I think look, people should not be allowed to trade based on insider information. Whether it's hearsay or not, they shouldn't be allowed to do something where there's a clear conflict of interest and I think that's actually good stuff for the industry. It makes everyone a little bit more regulated. It's one of the things though that I think does hold people back and I get that it holds you back. My suggestion is that if you do work for a company that has a very strict policy on what you trade and how you trade, is to talk to either the compliance officer or the HR manager and find out how you can streamline that process of approval. If you want to make trades, if you want to actively trade options, figure out who you need to talk to, make sure you talk to that person, be totally open and clear about what you want to do and get a framework in place. Maybe they will grant you approval to trade in certain products versus other products without having to go through a bunch of hoops and legal process and paperwork before you make those trades and those transactions. I think it's actually worth it just to really sit down with somebody maybe 10 or 15 minutes. I'm sure that they would want to do this. They probably appreciate people coming to them first before asking for forgiveness later and trying to make trades.

It's also noted that many employee trading restrictions and trading compliance agreements have in place restrictions on other people who are part of your family or stand to gain financial interest for many of the knowledge that you have. This would also include any of your spouses, significant others, people who are living at your house that may not even be related family members. I know that people try to do that. They try to skirt the system and say, "Well, that's my friend who's living here and he's not really a family member." But if he's around you and stands to gain financially from what you're doing in any way, shape or form, whether it's through monetary means or otherwise, then it's probably restricted. You're probably better off just knowing what you've gotten yourself into. If anything, making sure that you walk a very, very straight and narrow line with regard to compliance. Hopefully this helps out. If you guys have any questions, let me know and until next time, happy trading!

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we're going to be talking about how active traders can now take a passive approach to investing and particularly with options trading, take a passive approach. Right now, the big buzz in the industry and has been like this for many years now is this passive indexing style of trading and investing. Basically, this idea that you continue to buy the indexes regardless of the value or how high they are and everyone buys the indexes because that's what everyone should do and everyone should buy the indexes, so everyone does, etcetera, etcetera. Well, I definitely subscribed to the idea that long-term active traders are more profitable with less volatility in their account than passive index trading. I think one of the biggest flaws to index trading right now is that everyone is blindly buying the indexes regardless of the value of the underlying stocks. Because everyone's buying indexes, more people buy in. It's just this self-fulfilling prophecy that they just continue to go higher until they reach bubble territory which maybe we've already gotten through now in February time period of 2018. But what we're trying to do with Option Alpha and with our new auto-trading platform is actually create a series of indexable option strategies. Now, they won't work in the traditional sense that you can buy in the next and hold it, but it can work in the auto-trading sense that we will have indexable strategies that both include stocks and some that don't include stocks where you can basically setup and clone the strategy and then go through all the approval processes to have it auto-traded in your account.

One of the research reports that we did many months back, even probably a couple of years back now on our regular weekly show was this idea that a simple covered call on the S&P 500 actually beats the market performance. It actually beats the S&P 500 just adding in one simple covered call every single month. Well, now, with our auto-trading system, we're going to able to create an index covered call strategy where you can just plug in whatever stock you want and it will automatically not only buy the stock, but it will also manage and trade a simple covered call, so that you can sit back and replicate a more active approach to options trading and investing without having to go through the physical activity of clicking and selling options every single month. The system would in this case, sell a covered call at whatever predefined Delta you want. It would manage that covered call, it would roll it. If it was assigned stock, it would repurchase stock and then sell another covered call. It's truly a robotic trading system that does what active traders wanted to do with a more passive approach. You don't have to do anything. It's all done by computers and algorithms and robots. It's a very cool way to trade. It's one thing that I think we're super excited about, is creating a bunch of these different indexable option strategies, some around iron butterflies, some around short strangles and straddles, credit spreads, volatility trading, earnings trading. There's going to be a lot of these that we're going to create. They're all going to be in this new marketplace that we have or template place that we have that we're creating on the website where you can just go in, use some quick filters and create some of these literally in a couple of clicks of your mouse and then just sit back and monitor these things as they go. Hopefully this helps out. As always, if you guys have any questions or want to learn more, just let us know and 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 hopefully describe everything you need to know about margin calls and particularly, margin calls for options trading. Without going into too much nitty-gritty terminology because I think people get lost sometimes in the mud, like worrying about the specific price ranges and the specific percentages that are affected, I want to help you understand basically what happens with margin calls when you're trading options. The first thing that we have to understand is that margin calls do not mean that you're actually borrowing on margin. That usually happens when you invest in stocks. Somebody could borrow on margin, you could invest $50,000 into a stock and then borrow another $50,000, basically secured by that stock and that investment that you have and you can borrow on margin. Now, that cost money and there's margin interest that has to be charged by the brokers. That's not what we're talking about necessarily with options trading. With options trading, margin usually refers to putting up some capital in your account as collateral for a short option strategy that you might be entering into. Now, it doesn't mean that you're borrowing that money. It just means that you're basically setting that money aside and the broker is saying, "Hey. You can't trade with this side money here because that money is to cover the short option contract or short spread that you're trading to make sure that you're good and we can perform the contract on all parties sides if things go bad and your trade doesn't work out the way that you think it's going to work out." In the options trading side, that margin is not necessarily put aside. You're not borrowing that. It's not interest-bearing. It's just money that you can't trade as part of your account. They call it basically margin or collateral. Brokers use different terms.

The other thing that we have to understand is that margin does not apply to any option strategies in which you pay a net debit or let's say most option strategies in which you pay a net debit. If you're paying to get into an option strategy, either you're buying a call option, buying a put option, buying a debit spread, buying a butterfly, anything where you're paying money and that ends up being your maximum possible risk, well, you've already put up the money that you could potentially lose, so you don't have the ability to lose more than that unless you change the structure of the trade later on, but in that case, you are putting up the money and that's the amount of money that you're at risk, so you really wouldn't have a margin call per se because there's nothing you're putting up in margin. Now, what happens is that let's say you're doing a short strangle or a short straddle trade. You take in a couple of hundred dollars of premium, but you have to put up aside in the account a couple of thousand dollars in margin to cover the position in case it goes bad. That would be a general setup that we're talking about here. And now, let's say that Murphy's Law takes hold and when things that could go bad do go bad and they happen to you, then the stock goes dramatically down or dramatically higher, causing you to lose a lot of money on paper. Now, at that point, the stock has made a huge move, so the brokers are going to basically recalculate the risk of the trade making these huge moves after the current move. And so, now, that means that your margin that's required to hold that position or to maintain that position might go up. Maybe implied volatility has spiked, maybe there are some news event that's causing the stock to go dramatically higher or dramatically lower. Whatever the case, even if the stock doesn't move, but implied volatility goes up, your margin that's required to hold that position might go up dramatically. In some cases, we've seen in huge black swan type events margin go up by 2X, 3X, 5X what the initial margin is. If your initial margin on a position was $1,000, it could go up to as high as $5,000 on that position just during these really weird one-off black swan events. But in that case, you would run into a margin call if you don't have enough capital in your account to now cover that position. That's when your broker would come to you or they'd alert you through a message or email or text or phone or maybe multitude of ways to let you know, "Hey. You don't have enough cash in your account to cover the risk that is maybe inherent in this position."

Now, I stop here and I pause and I say – Because you don't have enough cash in your account to maybe cover this position, you have one of two major ways to get your position or your account back underneath of that margin call situation. The first way is to transfer money over to your account. Now, what I always tell people is that if you have money in other accounts, you better have a good idea of how quickly that money needs to get there or how quickly it can get there. I've seen people who say, "Well, I've got money in stocks or I've got money in this and that means that I can liquidate the stocks and then transfer it over." Well, liquidating the stocks and then clearing that liquidation to be able to then transfer money over might take two days or might take 24 hours. In most cases, when you get a margin call, you have to satisfy that call very, very quickly. If you can transfer money over, just make sure that wherever that money is, it can be sent to your brokerage account literally the same day if needed or at the very latest, 24 hours later. Some brokers do have requirements that has to be there that day. Some brokers are 24 hours. You want to check with your broker and make sure you know what the requirements are. Again, the first way that you can basically get your account back under the margin call is to transfer over money. The second way that you can get back under the margin call is to simply close the position or close a number of positions that would reduce the risk in your account. Even though the particular position that we're talking about earlier might have $5,000 of "potential loss" if the stock continues to move lower or higher, it might only be losing $200 right now from your initial credit to where the stock is trading. You close the thing, you take a $200 loss, but you reduce or basically eliminate this $5,000 margin risk that you have or basically, holding risk in your account. That's the second way that you can cover these margin call positions or get your account back under the margin call threshold. Either one is appropriate. I generally prefer to usually trade with about 50% of my account in cash anyway at the bare minimum. I usually have plenty of money to withstand these margin fluctuations.

What I do see people doing all the time is they trade very, very close to their threshold of their account limit particularly with option strategies that are undefined risk and they don't have enough of capital to hold those strategies and then the market has some crazy gyrations. Maybe your stocks that you're trading don't even move, but implied volatility moves on those stocks which causes margin to go up. Your broker at the end of the day, if you don't satisfy your margin requirement by transferring money or closing the positions, your broker is going to close those positions for you and remove the risk of your account. They're not dummies. They're not going to stand by and just let you blow up your account and have too much risk than you can handle or that you can cover with cash. They will go into your account at the end of the day if you haven't done anything. Assuming that you're maybe off the planet, off grid, can't get a hold of you, etcetera, they will close out those positions for you at probably worse possible pricing. When usually we have these huge black swan events, what kills people in these events is not the actual move of the underlying security, not how the options are then priced. It's the margin to hold the position because if you have the margin to hold through some of these gyrations, you usually end up very, very well off. And so, that's really the key lesson for today, is keep a lot of cash, keep your margin available, huge cushion because you don't know at any point, it can really blow up and there's margin calls that go up all over the place. You don't want to be caught in that situation and frankly, you don't need to invest all of your account to generate above average, above market expected returns. You can do it in many cases with 30%, 35% of your account and most of your account sitting in cash. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading!