Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How is premium of an option calculated?” The premium of an option contract is the price at which the option contract trades for and this is the price at which people will either buy or sell the contract to one another in the open market. Now, option contract’s premiums are basically comprised of two underlying pricing components and I’ll just talk about these two because we dive deeper into these inside of our free training and tracks on Option Alpha, so if you want to deep dive on this, you can definitely check those out. But the two components of an options price are intrinsic value and extrinsic value and these are basically the easiest way that you can understand how the option price is derived or how it’s calculated. The intrinsic value basically answers the question, “How much value does the contract have if it were to be exercised immediately?” For a call option contract, it would have intrinsic value if the strike price is below where the stock is trading right now and for a put option contract, it would have intrinsic value if the strike price is above where the stock is trading right now. And so, these contracts have intrinsic value. They have in the money value right now because if it was to be exercised immediately, you could generate a profit by converting the option contract to shares and then selling or buying the shares in the open market at the current price.

The second component of an option’s price is what’s called extrinsic value. It’s all of the things that happen beyond today, all the way to expiration. I think of intrinsic value as things that are happening in the money right now and extrinsic value is all external things that are happening in the future. Extrinsic value is comprised of things like time decay, volatility, interest rate exposure, etcetera, etcetera. And so, these are all things that have a variable degree of fluctuation on the option contract’s price depending on how the market moves, how implied volatility moves up or down, how close we are to expiration and how fast we’re approaching expiration, how volatile interest rates are in the future, etcetera, etcetera. And so, as a result, these two components brought together create the option premium. Naturally, you can see that as option prices change, it’s potentially the result of many different things moving at the same time, the underlying stock price changing, volatility expectations for implied volatility changing, the days until expiration shortening or interest rate changes on the very long end of the pricing model starting to change in future. All of those things can have an impact on how an option price fluctuates during the day. Again, if you want to dive deep into this, we do have a course on it right here at Option Alpha. It’s our options pricing course and we really kind of dive deep into each of these components, so you understand it, but on the broad base, broad scale, that’s really how an option premium is calculated with the intrinsic plus the extrinsic value smashed together. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How do you write a put option?” Writing or selling a put option contract is actually pretty easy. The first thing you have to do is you have to make sure that you’re with a broker that allows for this to be done in your account. Typically, that means that you have to be doing it in a margin account. You can’t sell a naked put option or write a naked put option in an IRA or a retirement account. But if you are in a regular margin trading account and you wanted to sell a put option, all you simply need to do is find the expiration period that you want to sell the option in and choose the strike price of the put option that you want to sell and after that, it’s basically very simple. You create the order to actually sell that option contract and collect the additional premium that comes in from selling that contract. In exchange, you’re going to be putting up what’s called margin. And so, margin is just basically a way to start to cover some of the risk associated with the account and with that trade that you’re making and that’s a way for the broker to know that you have enough capital to back up this trade in case things do move against you, in this case with a put option, in case the stock actually moves down against your position. Put options are a great way to trade stock. It’s a wonderful stock replacement strategy for many people. It’s a very easy one that they can use as they start transitioning over to options trading, but again, it’s actually very easy to do in your account if you have the right broker approval level and you’re trading in the right account type. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Is investing in options a good idea?” And so, this kind of dovetails on yesterday’s podcast, but of course, investing in options is a really good idea. In fact, that’s why we’re here. That’s the whole mission of Option Alpha, is to help more people understand not only what options trading is, but how they can invest in options trading. Not just day trade options because that’s not what we’re about. We’re about investing in options as a business, as a source of income moving forward, as a source of capital and wealth preservation and capital appreciation for your portfolio because options trading is a very profitable way to invest in the market and it’s definitely more profitable than using stocks from a capital perspective, from a return perspective, from a volatility perspective as long as you know how to use option contracts appropriately and to control the risk. I think one of the key things for me about options trading that I always try to tell people right out of the gate when I talk about what I do or what we do here at Option Alpha is that options trading gives you a lot more flexibility in when you can make money in the market environment. You see, most people are always just assuming that you can only make money if stocks or positions, whatever they have, bonds, real estate, REITs, whenever goes up in price. That’s what they’re accustomed to. That’s what they’re conditioned to understand. They have to buy at a low priced and they have to sell at a high price and there’s basically nothing in between. Bull markets are good. Bear markets are absolutely terrible because you can’t make money in those environments.

What we try to teach people obviously is that in options trading, you can create an option payoff diagram that makes money in whatever environment you think might be coming next. Do you think that the market’s going to go up? Do you think it’s going to go down? Do you think it’s going to stay range bound? Do you not even know where it’s going to go, but you think it’s going to go really high or really low very quickly? You can build option strategies that basically allow you to profit from these market environment expectations in multiple directions, not just in a one-directional move higher in the underlying shares. That is very powerful because what it could do for many people is take a potential 50% drawdown that they would’ve had in stocks and reduce it to a 20% drawdown. Now, they still might lose money in a strategy, but taking a 20% haircut versus a 50% haircut is something I would do any day of the week because it would allow you to then re-grow your capital from a much higher level and that’s some of the stuff that I think options trading can do for people. I think it can help both with higher returns when things are really good and I think it can help with lowering drawdowns when things get really hairy and things get very volatile in the markets. That to me is really what this thing is all about. It’s not free risk. It doesn’t come without a little bit of pain and a little bit of volatility and drawdowns in your account. There’s no free lunch here, but it will give you I think a lot more choices, a lot more options (no pun intended) on how you can invest your money. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Are options more profitable than stocks?” The answer to this question is of course, 100% yes. Options trading is more profitable than stock trading if and only if you know how to manage the risk that’s associated with options trading. Where most people completely fail in options trading is that they don’t understand or they don’t know how to manage the risk associated with a leveraged contract like an option contract. Remember, options contracts are leveraged derivatives on the underlying shares of stock. That means that they might seem very cheap and very small in price, but the leverage that they carry means that they have a massive amount of risk if you do not position size and spread your account out appropriately. And this is what we try to do here at Option Alpha, is make sure that people understand the risk that are associated with options trading, not just all the upside benefits because what we find in back-testing and what other people have found, the CBOE, AQR and a hundred other different resources out there, is that options trading when used effectively is way more profitable, reduces volatility, reduces drawdowns, moves our P&Ls compared to underlying stock trading. The problem is always just how do you manage the leverage and the risk associated with contracts.

What we try to tell people to do is generally do a couple of things. You keep your position sizes really small, you have a lot of uncorrelated liquid ticker symbols and then you keep a lot of cash on hand or you use some sort of hedging strategy. You do those general things as well as using an option selling strategy, you’ll probably be okay. There’s obviously a little bit more to it than that and that’s where our free courses come in, but I think that’s really the gist of what you should do. When you see people typically blow up their account, it’s probably because they over-allocated, they were trading one or a few symbols or they didn’t have enough cash on hand, so every position that they had was maxed out and they had no cash to basically fall back on. Hopefully this helps out. Again, this is an easy one for us because obviously, we’re big time into options trading. If options were not as profitable as stocks, maybe our name would be Stock Alpha, but it’s not. It’s Option Alpha because options are way more profitable than stocks if you know how to use them right. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What is the best options trading strategy?” Well, surprise, surprise, there is no best options trading strategy. If you clicked on this or if you thought you’re going to listen to this and we were going to tell you that there’s a unicorn option strategy that works in all environments, in all time periods, in all market situations, then you would be dead wrong because there isn’t, because option strategies are dynamic by nature. They are a trade-off between risk and reward and that means that not all people are willing to accept the same risk in order to achieve the same reward. Right there, we know that there’s a lot of different strategies that are going to work differently for different folks just based on the risk profile and how the option strategy might work moving forward. What we can tell you though is that what you should look for in options trading strategy is a broad perimeter stability with the results. You should not be looking for things that are the absolute best in one particular testing period because that randomly could’ve been just the best by the time that you end that back-testing period. This is why we often tell people especially inside the Option Alpha community that we never necessarily go after the strategy that made the most money or had the highest return because that particular data point, that particular time period when we ended the strategy testing could’ve just been a fluke that one strategy rose to the top for that microsecond of a time period.

What we are generally looking for is broad-based perimeter stability. We are looking for things that generally work across lots of time periods, lots of different underlying tickers, lots of different market scenarios. What we find is that generally, selling options works across many different time periods, many different environments and that goes for selling credit spreads, selling single options, selling straddles and strangles and iron butterflies. We find that generally, it works to be an option seller. We also find generally that it works to have wider wings or to take on more risk as an options trader when you can control it with position size. That generally works out better than if you were to trade strategies that had more narrow wings or had smaller spreads. Again, that doesn’t mean that one or the other is necessarily good or bad. They both generally make money, but we’ve generally found in testing and back-testing that wider spreads, wider wings returns higher values, more consistent cash flow, more stable P&Ls and so, that’s what we go after. Now, in every environment, there’s going to be something that works a little bit better. When implied volatility is high versus low, there might be a strategy that works just a little bit better than in other and this is where you start to tilt what you do, but you don’t do a 360. Maybe in some environments, you sell the 30 Delta options and in some environments, you sell the 50 Delta options. But you’re still selling options. You’re still building the same general strategy. You’re just tweaking or tilting how you go about using that strategy based on the market fundamentals or the market underlying environment.

Again, the answer here is that there is no unicorn strategy for trading. What everyone should be looking for is broad-based perimeter stability with option trades. You should not be looking for something that works right now in this environment or even over the past 10 or five years of a back-testing period because it could be that that top strategy just randomly fell to the top or that a strategy that was top two randomly fell to the top two during that perfect environment when you ended the strategy testing. You should be looking for stuff that has broad-based stability, that has great P&Ls, great metrics over a long period of time in different asset classes and ticker symbols. That I think you will find is a much easier way to trade and definitely much less stressful moving forward. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “When should you exit an option trade?” I think this answer to the question is not necessarily so straightforward because when I think about exiting a trade, I think about two components. I think about exiting the trade when it’s good for the portfolio as a whole and if that is the case, then also, when it’s good for that individual trade or strategy that I’m trading. It’s both components, not one or the other because you have to start with the understanding that your portfolio is more important than one particular trade that you’re making right now. And this can be difficult for some people because they look at a trade that might be losing or that might be down, but that trade might be the trade that is holding everything else together. Maybe it’s the only bullish exposure trade that you have and if the market were to reverse, that trade is the only one that would then profit from that reversal. You cannot look at trades in a vacuum. You have to look at them in the context of a whole portfolio because that’s where they live, that’s where they sit.

And so, the first answer that you have to get over, the first hurdle you have to cross is – If I exit this position, does it dramatically shift my portfolio’s payoff diagram or my portfolio curve? And if it does, then you may have to reevaluate whether you exit the position or not. In many cases, if the market’s moving down and we start adding bearish positions to start to hedge the portfolio and basically play the move that the market’s going to have to the lower side, we might reach our traditional profit target on that strategy very early, but we may not remove the position because we need the additional downside exposure. In fact, this happened a number of times over the last couple of months where the market starts moving down, we start adding bearish positions, we reached a traditional 50% or a 25% profit target and we do not remove the position because we need the additional bearish exposure, because we actually need the continued exposure and potential premium if the market is to continue to move lower. That is a great example of when we would not adhere to traditional profit target or exit targets because the portfolio was more important.

Now, assuming that all of that stuff makes sense and your portfolio is actually good and balanced at the time that you are going to start exiting positions, then you start with the next concept which is – Is it the right time for that strategy? And in many cases, just a simple back-testing or research can lead a lot of results or yield a lot of results into the more optimal time to exit positions. Do you exit at 25%, 50%, 75%? Do you let it go all the way to expiration? Do you exit at a 3x or 4x or 5x profit taking? There’s a lot of nuance that goes into that, but generally, you’ll find if you do some back testing and research on different strategies that there are sweet spots to some strategies. Not pinpoints, but generally, clusters of performance that do well when you take profits at 25% versus 50% or holding to expiration. Then and only then do you start looking at those types of metrics as to when you should exit a position once you have first crossed over the hurdle of understanding where your portfolio sits from a balanced perspective and risk perspective, so that you can start really looking at removing the position.

Hopefully this helps out. I know it was a little bit more in-depth than maybe you thought I would do on answering this question, but as always, trying to give you guys as much value as humanly possibly here. If this helped out, let us know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Is it better to exercise an option or sell it?” This is a very good question because I think naturally, a lot of people, especially newbie traders immediately default to the idea of just letting an option contract be exercised at expiration. Now, this could be an option contract that’s in the money, this could be dealing with an option spread where both contracts are in the money and they will cancel each other out, but many people just don’t go through the hassle of closing out the option contract or selling it back. But the reality is that for most brokers and you’ll have to check with your broker just to make sure. For most brokers, they’re going to charge you a very high fee to go through the exercise and assignment process and they will generally charge you on a per contract basis or on a per trade basis and it will almost always be higher than the cost of just buying back the option contracts or selling back the option contracts and paying the per contract or ticket charge commission because it’s a big ordeal for the brokers to go through this. Generally, they don’t want to go through a bunch of assignments and exercising and process everything through the OCC and have all this random assignment, deal with margin issues, phone calls from people who have margin explosions because of an assignment. They would rather not go through that process and that’s why we generally see these commissions be much higher because it’s more involved to go through the delivery of underlying stock shares.

My suggestion is always to people, unless you have an overwhelming reason why you want to be delivered the underlying shares, you want to own long stock, you want to own short stock, then the best choice is always to reverse the option trade that you have before expiration. When you get close to expiration, you want to buy back anything that’s short and you want to sell out of anything that’s long, again, only things that are in the money and being challenged. If you get to expiration and you have a bunch of contracts that are out of the money, they’re not going to go through assignment or exercise, you can let those expire and save the commissions. We’re talking just the option contracts that are at risk of assignment or exercise. You do want to go ahead and go through the process of reversing those trades. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How much should I invest a month?” This is a really good question and honestly, I think it comes down to probably just using a very basic guideline for your investing. But I would say that at a bare minimum, you want to be investing 10% of your take-home pay per month into long-term investments, retirement, whatever buckets you want to distribute that. I think 10% is probably the baseline case. Could you do more than that? Of course. Could you do less than that? You can, but you probably won’t be at the place you want to be financially as quickly if you did less than 10%. If you are let’s say bringing home $50,000 a year and that’s your income, then over the course of the entire year, you probably want to save at least $5,000 or figure out how to save $5,000 which is $416, $417 per month. That would be a really, really good target. I would start there and then I would start to scale up from that point. We’ve talked about on the daily podcast before and on the weekly podcast a number of times, this idea that many investors, especially new investors starting out, are really fixated on the return of their investments. But when you start, what’s more important is actually, your savings rate.

Your savings rate is more of a dictator of how well your investments will perform over the first say 15 years of a 30-year period and after that first 15 years, then and only then do the tables turn and now, investment returns become more important than savings rate. But a lot of people haven’t even gotten to that point yet where they have enough saved up that the compounding effect of an extra marginal 1% or 2% on their investments actually really is noticeable and works for them. What’s more important right now, especially if you’re just starting to build your nest egg and your net worth, is actually increasing your savings amount. A 1% or 2% increase in how much you save per year can go dramatically further than if you were to invest a little bit less money and earn 1% or 2% more on that money. That’s not going to go as far just yet. It’s both savings and investing and earlier on in your investing cycle, again, like the first half of it really of your usable timeline of investing, the first half of it is really geared towards savings. The back half is where investment returns matter more. Not that they don’t matter in the beginning, but they matter more at the back half. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Why buy in the money calls?” When you are trading stock and you’re looking to make a position with an option contract, in particular, a call option contract, many times, people will suggest or you’ll see online that people suggest buying call options that are in the money. And basically, in the money means that the strike price on the long call option you’re buying is at or below where the stock is trading at the time. If a stock is trading for $100 right now, you might buy a call option with the strike price of $99 or $98 or $95 or even as low as $80 or $70. Some option contracts go very, very deep into the money. And the reason that many people suggest buying these and we don’t know exactly necessarily if these are perfect opportunities or not… We’re actually doing some research on this right now, so I don’t know exactly where that sweet spot is with long call options, but I think the reason that most people suggest in the money options is because of the intrinsic value that’s already baked into the contract and that intrinsic value or just the value that’s reflected in the option premium, because the option contract is already in the money, though more expensive when you get into the position, it cost more to buy that contract, does add value to you as a trader because the position starts acting more and more like long stock right from the initial start of the trade or the transaction.

When you buy an out of the money option, you’re really fighting extrinsic value until the point at which the option goes in the money. And so, not only do you need a really, really large move in the underlying shares, but you need volatility to be in your favor or move in the right direction before you start really making money just based on where the stock is relative to the strike price. You’re kind of fighting an uphill battle to some degree with out of the money options. This is why even out of the money options are better off being sold as options traders as opposed to being bought. I think the reverse would be generally true. Again, though, we’re testing it to see what actually works, that in the money options, if they are to be bought, work out better than if they were to be sold necessarily from a trading standpoint. I think that’s probably the main reason, like I said, the intrinsic value of the contract, the fact that it’s going to act more like stock right from the get-go or start performing more like the stock as it starts to move up. It is probably the most likely reason why you would buy in the money call options. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “How soon can you sell options before expiration?” I think this question that was submitted online is basically like a two-part question. One part is with regard to entry of options trading. The second part is probably with regard to exiting a position. I’ll take them both just in case the context might have been a little bit different. But in the case of option trades, how soon can you actually sell an option contract before expiration? You could sell them hundreds of days before the actual contract expires. You can start a position seemingly hundreds and hundreds of days out from expiration. Actually, right now, the furthest out contracts that I see for the SPY is 850 days out, so basically January of 2020. That’s how far out you can do it. You can sell the contract right now and you can wait 850 days until you reach expiration. I probably don’t suggest going out that far, but if you wanted to, you could trade those further out contracts.

The second context part of this question might be how soon can you sell an option before reaching expiration in the context of how can you get out of the position and how soon do you have to do that. With most equity option positions that you’re going to be trading, especially the ones on large ETFs and stocks, you can choose to reverse the option contract itself well before expiration, basically at any time before expiration up including the day that it stops trading. The last trading day that that contract has in a particular month, you can remove that option contract, sell it back to the market, buy back to close your position, basically just reverse the option trade itself before expiration. The only time that you have this difference in how things expire and how you can trade contracts is when it comes to exercising contracts like index options or European-styled settlement options. Those contracts can only be exercised and converted at expiration into stock, but that doesn’t mean that you can’t trade out of those contracts in advance. The only part on the European contracts or most index options which are cash settled is the conversion of that option contract to underlying shares or cash and that conversion only happens at expiration, but it has nothing to do with the fact that you can actually close that position or buy back a position to close the contract in the open market before expiration including the last trading day.

Hopefully that helps out. As always, if you guys have any questions you want to submit in, send them over to us. Shoot us an email with a question. Hit us up on Facebook, Twitter, Instagram, all different places and everywhere @optionalpha. Until next time, happy trading.