Hey everyone. This is Kirk here again and welcome back to the daily call. Today, we are going to be talking about how you can test option strategies with automated paper trading. As we get closer to rolling out our new automated trading platform, one of the very cool features that we'll have as part of this is the ability to paper trade with anybody who signs up for an account. And so, this is good because it allows you to not only test the framework of our automated trading and our bots, but also to test and forward walk some option strategies in the future. Now, inherently, there are some regular flaws that are present in any back-testing framework and although we strongly believe in back-testing strategies and as do many other professional traders, it's a very cool feature to have the ability to forward walk some of these testing option strategies with an automated paper account.

What I will be doing just to give you a frame of reference is I'm going to be putting together a lot of automated strategies and then using them in the paper trading account that I'll have and then I'll publicly share all these once they get started and everyone can watch and monitor them as they go. But I'll be testing out different hypotheses and different ideas around trading and we'll create a lot of these automated bots and strategies in the paper trading account and then basically, let them loose for a couple of months and come back and see how they performed, which ones did well, which ones didn't do as well or which ones performed and we never even thought that they would perform that well. And of course, it's all just going to be a lot of testing and data that's going to go into it. We know that when you forward test option strategies with an automated paper trading account, we have to make some assumptions about fills and liquidity and strike price selection, etcetera. That will all be included in some of the bots that we create and within the paper trading account, you can make adjustments for commissions and make assumptions for commissions that make it very easy to have the account trade like it was realistically trading in the market.

But we also know that once we start doing a lot of this automated paper trading, we're going to have to collect a lot of data in the future and we'll need to see a lot of trades get executed before we'll probably get comfortable trading some of these strategies. Now, again, what we're going to try to do is try to test out some new strategies, new ideas that we might have or new ideas that come from the community and start creating automated paper trading around that, so it's kind of like live or real-time back-testing of strategies to see what works. It's a very cool feature and we're really, really excited to release it to you guys. As always, if you guys have any questions or comments, 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 answer another member question which is, "Should you dollar cost average when trading options?" I think there's two key concepts that we have to describe, first of all. One is this concept of dollar cost averaging which is the idea that when you buy stock and if the stock goes down and you like the investment or presumably, you think there's value in the investment that you continue to buy in small increments all the way down. If a stock is trading at $100, you buy say 10 shares. Now, the stock is trading at $98, you buy another 10 shares. Your average blended investment is now $99 per share. You're averaging down as the stock continues to move lower.

Now, the concept is not easily applied in its I guess, regular form to options trading. This would assume that if we wanted to dollar cost average in options trading that if a particular strategy that we're trading goes down in value that we would then trade more of that strategy or add more of that strategy. Now, I'm not a fan of just generally doing this. I don't think that that's the right way to look at it. The other way that we can look at dollar cost averaging is actually just spreading your trade entry out over time and averaging strike prices. This is a way I really consider this concept being applied to options trading, is with this laddering technique that we talk about where if a stock is trading and we have a strangle at the 15 Delta, let's say instead of doing 10 contracts at one time, we want to do just maybe two or three contracts. Then if the stock moves, we move our entire next entry of a strangle, the next say three or two contracts, we move that maybe a couple of strikes higher or a couple of strikes lower wherever the stock ends up going.

Now, this is different than dollar cost averaging because when you dollar cost average, you're moving down always with the stock or moving up always with the stock if you're shorting the stock. In the case of options trading, we're just maintaining the same range or the same perimeter around the stock as it moves. If the stock continues to move higher, each additional laddered or sequential trade that we make in that particular stock or ETF is at higher and higher strike prices. Say we're targeting the 15 Delta on either side. We'll continue trading the 15 Delta on either side even if the stock makes a $5 move. We'll just stair-step and ladder our trade up or ladder our trade down. That's why we call it laddering because on the pricing table, it looks like all of our positions are spread out in an equal distance or generally equal distance as the stock continues to move.

Now, I think this concept really works well with options trading to ladder trades because we basically move with the market. Whenever the stock moves higher, our new positions are now centered a little bit higher. If the stock moves lower, our new positions are now centered a little bit lower. In fact, just this past month in April, we had an EWY position that we had entered three laddered iron butterflies into and we got out of all three of those with profits at different times. They weren't all exited at the same time. We just were very opportunistic about taking profits whenever the stock came into the range of those particular strikes. I do agree conceptually with the idea of dollar cost averaging, but I think we just have to apply it a little bit different to options trading. As always, hopefully this helps out. If you guys enjoy these, let us know or shoot me a message over on optionalpha.com/ask and leave me a voicemail with your guys' questions for upcoming episodes. Until next time, happy trading!

Hey everyone. This is Kirk here again at optionalpha.com and in today's daily call, we're going to answer the question, "What are contrarian investors?" I don't know who officially labeled the term contrarian investors, but it's basically the concept that people are taking the other side of a position. If everyone is bullish, you might be bearish. If everyone is bearish, you might be bullish. You could even say in most cases that some of the greatest investors of all time have been really good contrarian investors. Not that they weren't long-term bullish on say the broad US economy and the markets, but they were bullish during the right times and they were bearish during the right times and it's usually some combination of looking at either charts or forward PEs or crowd or herd mentality to see where most people are and then taking the opposite view. The idea is really that most investors and most traders I guess are really dumb money and that smart money usually takes the opposite side which I think has been proven many, many times before. I do consider myself to be a little bit of a contrarian investor. I usually tend to see the bearish side in things. I usually believe that stock charts always look overbought and always look like they're going to come down. I think that bearishness has subsided the last couple of years and we've talked about it in a podcast on the daily call awhile back about why I'll probably be more tilted bullish after the next drop. Not that I don't think it's coming because I do. I think that a huge market reversal is always in store for us. It's just when and resets the parameters for everything. But when that happens, I think I'll be a little bit more bullish than maybe I was before.

I do though see most investors not being contrarian in the sense of options trading when you get huge moves up or down in particular stocks in a very short period of time. One thing I have 100% learned and I'm trying to display not only through a podcast like this, but blog post, video tutorials, my trades that I post all the time on YouTube or on Facebook. I'm trying to show you guys that the market is cyclical and does not move in one direction forever. And so, when we do see a stock that has a huge run-up, I usually tend to be more of a contrarian to think that that move might reverse or turn around and same thing in the down move. When a stock has a huge down move, I tend to think that I'm a contrarian in the sense that the stock might have a huge reversal and at least retrace some of that movement and move back up. This has proven to be pretty right. When you look at most stock charts, you don't see that stocks act in a directional vacuum, meaning that they only move in one direction, never any gyrations or zigzags, whatever you want to call them. I think it tends to be right that over time, the markets are pretty cyclical, they're pretty random, it's much harder to predict where the markets are going than just basically assuming that we don't know where they're going to go and then build a strategy around a particular range. I think you'd probably do yourself some service if you're not already, to be more of a contrarian when you see a stock making a huge move higher or a huge move lower. Yes, there might be fundamentals in place, but that doesn't mean that that necessarily, that initial move is going to be the one and only and it's going to continue at that pace. Usually, when we see things go parabolic, it ends very quickly and very abruptly. 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 talking about stock snapbacks and Fibonacci retracement. Both of these things commonly occur and we'll talk about the differences between them or if there's any similarities and differences between them in today's quick little session. What typically happens is that stocks obviously don't move in one direction at one time all the time. There's no stock that goes vertically higher or significantly lower without having gyrations in between the stock move. Now, gyrations can happen and basically, just active trading in an efficient market can happen at any timeframe. It can happen on an intraday basis, on a one-minute, a five-minute, a 20-minute chart. It can happen on a daily, a weekly, an annualized chart, etcetera. These gyrations, people always try to find some sort of meaning that can be derived out of them. Now, I'm not saying today that there is or isn't meaning to them. I'm just trying to help explain the sequence or thought process behind them.

Typically with stock snapbacks, what I see happen all the time is definitely on charts where you see a stock having a huge run-up or even a huge rundown, is we get some sort of hard or aggressive snapback in that stock. Let's say a stock is at $10 and it falls quickly to $5. Well, it might rebound very quickly to $7 and that might be the snapback that the stock has. I do see this all over the place, so I would definitely say that this happens a lot and I just call it, I don't know, market cyclicality, you can call it randomness, you can call it white noise. Whatever you want to call it or label it, the reality is that things don't move in one direction too long without having some sort of gyration or pullback or retracement, whatever you want to call it. We see this a lot in the broad equity markets and a lot of ETFs where I'll talk about on a video update or on a podcast update how a stock is moving and it seems to go parabolic. That's when I think that those snapbacks or retracements happen more often because that move is just not sustainable. In fact, it's what we saw back in the early part of 2017 where the equity markets were just going literally parabolic in some cases for the S&P and for the NASDAQ and we just knew that that type of move was not sustainable without some sort of either consolidation and/or pullback.

Now, one of the favorite ways that traders like to label this and like to see if they can find hidden gems of information in the stock charts is to use what are called Fibonacci retracements. This is just the very simple calculation of a series of retracement levels that a stock might go through from a peak to trough and kind of rebounding from those levels. If a stock is making a move, you can simply use a Fibonacci retracement tool and most brokers have it or you could probably find some free Fibonacci retracement levels someplace online. But it goes from the low end of a market move, so theoretically, the bottom of a move up to the top of a current move or a current trend and when you draw these lines or put these lines on, the software will automatically create what are called these retracement levels, so these likely levels that we're going to see maybe the stock retrace back to. In most cases, it's around the 23.6% of the full move that the stock had or the 38.2% or 50% or 61.8% or 78.6% or then, 100%. Those are the most common Fibonacci retracements, kind of those four that I mentioned in the middle. Now, I don't know. I've read a lot online and I've seen a lot of studies on this. I don't think there's anything that says that one is more effective than the other. It's commonly referred to that the 50% retracement is a likely area in which a stock will have this huge rally and then come back down and pull back down to the 50% level or the 61.8% levels also seem to be a pretty fairly popular level for a retracement.

I actually did some little bit of digging here and actually recently looked at some Fibonaccis that I drew on the S&P for the last about year and a half, two years or so just from peak to trough on the recent move up that the equity markets had. Now, again, this is the downside to these Fibonaccis in my opinion. Not to say they do or don't work. The downside to them is that they're totally subjective. In the case of what I'm drawing right now in the charts which you guys can't see, but I'll explain, I drew the Fibonaccis to start from basically November of 2016 all the way to the market top that we just had in 2018. Now, the market top is easy to spot. We just had a pretty clear defined market top on the S&P, but where I draw the beginning of this is really up to subjectivity. I could've easily done it back in June of 2016, but I decided to do it in November of 2016. That was the last really rundown that we had in equities before it continued to move higher. But in any case, in the case of the S&P, when I drew this Fibonacci retracement line, ironically enough, the market has stalled both in early February and then here in April, it has stalled at the 38.2% level. Now, it hasn't stalled exactly at that level, but pretty dang close and in multiple cases, it's tested this level before. Again, totally subjective, it could've been totally different if I would've picked a different starting point, but it is something to be aware of, I guess if you want to use them. I'm not totally crazy on using them, obviously. I really don't use any stock charting, any patterns.

I think it's an interesting tool when people point it out to me and they send me email updates on Fibonaccis. I definitely take a look at them. I'll look at the charts if somebody sends me their chart. I think it's interesting to note. I don't think it helps make any investing decisions on my end because we're such short duration and we're so much more focused on staying neutral and playing the volatility edge. But right now, I think that those are interesting picks for sure. Fibonaccis are something I actually used to use a long time ago and then just really phased them out many years ago because I found more value just coming out of just not watching things, not trying to chart things, not trying to assume I know where the market is going. Again, the reason I want to talk about them today is just because I do think maybe they serve a little bit of a purpose when you are trying to figure out, "Okay. Hey, if we're in a market top here and things are starting to fall, maybe where might some of those support levels be, broadly speaking?" I don't think it works necessarily for every obviously scenario and I do not use them practically at all, but again, it's an interesting tool to put in your toolbox, if you will. Hopefully this helps out. If you guys have any questions, let me know. Until next time, happy trading!

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about why the herd mentality continues to prove itself as a valuable indicator of potentially market tops and market bottoms. Herd mentality is basically a very simple concept that describes why investors in general, move in herds or clusters around generally bad ideas. Once it's often said, "Once the herd gets involved, it's basically the end of the road for bull and bear markets." What you see often is you see a market that is starting to rise and starting to move up and then it starts to reach critical mass where everybody starts to succumb to the market and starts to buy in, whether they believe in it or not because everyone is doing it. It's this idea or fear of missing out that eventually gets everyone sucked into the concept or the purchase of shares or the selling of securities because that's basically what everyone else is doing and they don't want to be left behind, they don't want to miss a potential opportunity and it's also culminating with potentially, market tops and market bottoms. Once everyone is in, that's probably the best time to get out or once everyone is selling, that's probably the best time to start buying.

Now, we recently saw this not only in the US equity markets in February of 2018, but we also saw this in the cryptocurrency market. It's probably a shining example of this in the cryptocurrency markets back in 2017 as well. And in both cases, what we saw are huge run-ups in the price of the underlying securities, both in the US equity markets, also in cryptocurrency across the board and everybody was piling into it. And I, myself, even one of the reasons why I continue to run Option Alpha is because I get a lot of the emails and I can see naturally where people are by just the sheer number and volume of emails that I get on different topics. I can tell you in both cases that a lot of people basically just threw in the towel and started buying at or near these tops. In fact, in the cryptocurrency market, you almost heard literally every single day, somebody talk about it on news, podcast, radio, Tweet, Facebook, etcetera. It was everywhere and if you weren't involved in it at the time, you are missing out and you're missing out on this herd mentality, so a lot of people got involved.

I often use unfortunately, a lot of my family members as my indicators or my old-school shoeshine boy type indicators which many of you have probably heard the story. But when the shoeshine boy says that he's going to start buying stocks, then you know it's probably a bad time to buy stocks. But a lot of my family started asking me about cryptocurrency very close to the top and I started telling myself, "Hey. This is probably going to be the top because my family members are not the type that always follows the markets and are always invested in the markets." And so, when they started asking me about cryptocurrency, now I know it's reached critical mass, like it's gotten to this point that it's reached my wife's family and my extended family. Now, it's at the point now where it could be at the top.

I think that the herd mentality continues to prove itself actually in a lot of different ways and it takes time. It's really got to be this over-enthusiasm for a market or an industry or sector or in the reverse, it's got to be just completely throwing in the towel. Whenever we do have a market move down, I think we're going to see herd mentality come into place when basically, every article out there, every new story, everything you see is sell your stocks, dump your stocks, dump your everything, there's no value, it's never coming back. Those almost exaggerated or overly-pessimistic type comments, when we see those, that's probably the time that the market is going to start reversing or start bottoming out in the future. I think it's going to happen in the future. It happens in both sides, so let's not be so naïve that we think that this only happens at market tops. It happens in market bottoms as well. And so, I think we could see that happening many, many times over the course of my lifetime in the future going forward.

Hopefully this helps out. As always, be wary of herd mentality, make sure that you're always taking one extra step back and asking yourself critical questions about where we are in trends and cycles and continuing to sell options all around this because at the end of the day, even if we're selling options, none of this stuff really matters because we have such a short duration and market direction is meaningless with more frequency. As always, hopefully this helps out. If you guys have any questions you want to get added to the daily call or to some of the answers that we're doing on Facebook and YouTube Live, please head on over to optionalpha.com/ask and leave me a private voicemail there and we'll make sure we get you added to the queue. Until next time, happy trading!

Hey everyone. This is Kirk here again and welcome back to the daily call. On today's call, we are going to be talking about the differences between systematic versus unsystematic risk in the market. I think this is an interesting discussion and it gets me back to my roots, I guess of old finance class in college. But it's a concept that I think all investors have to understand. It's a very easy concept that can be a little bit overwhelming just by the terms and the names, but it's actually very, very simple to understand if you take just two minutes here today in our call and podcast to understand the differences between them.

There's two types of risk broadly speaking in the market. The first type of risk is risk that is specific to whatever underlying security or industry you are investing in. To use the furthest end of the extreme spectrum, let's say that you're going to invest in Apple computers and Apple technology. Well, you have risk in just at investing in Apple. Apple has its own risk profile, basically. It's a tech company. It's in the technology space. It has software, it has subscription services. It's definitely not an industrial manufacturing company. It is not a real estate investment trust. It is not a biotech company. All those other companies have their own risk profiles and Apple has its own risk profile. When you invest in Apple, you have risk that Apple is going to go under or be overshadowed by some other emerging technology that we don't even know about or there could be a shift in consumer pricing and sentiment and people don't buy their products anymore. There's all of this risk associated to that particular security which you're investing in. That type of risk is called specific or unsystematic risk. Now, the way that I always think about it is with these two terms, I think system, meaning the entire system… That's probably the easiest way I always think about it, is that systematic risk is risk to everything and everyone. Unsystematic risk is risk that is particular to one particular company. It's not risk that is present to the entire ecosystem or the entire investing universe, the entire global market.

When you have unsystematic or specific risk, that is risk for every single security that you're trading. Each individual security that you're trading has its own little unique risk profile. Now, the interesting thing about this is that when you look at modern portfolio theory and diversification theory, you realize that that unsystematic risk can be diversified. You can not only just invest in Apple, but you can spread your risk or your investment across many different securities and different industries. Even simply investing in say a real estate investment trust or a REIT which buys or sells property, just having those two positions now in your portfolio versus just one position in Apple can now reduce the amount of unsystematic risk because now, your risk is spread across two different industries, two different sectors. They also commonly refer to unsystematic risk as diversifiable risk. You can diversify out of it. You can actively do something to manipulate the amount of risk in your portfolio by not investing all of your eggs in one basket. You can invest in this company and that company, in this sector, in this industry. It's often thought that the S&P 500 and it's probably true that the S&P 500 is consistently the best combination of 500 securities that creates the least amount of risk per unit of potential return. It's the market efficient portfolio. That's why it's the S&P 500. That's what it was built around. It's 500 securities in that basket that create the best combination of risk return profile.

Now, even still, the S&P and every other stock portfolio out there has what's called systematic risk. As we described earlier, systematic risk is applicable or applied to the entire ecosystem or the entire investing global market and its risk that you cannot diversify out of. Now, risk that you cannot diversify out of are things that affect the entire macro economics of global markets, so things like interest rates, inflation, market recessions, sovereign debt crisis these we don't see, wars that we don't see happening. There are so many things that could be lumped into this systematic risk category. The reality is that investors are always taking on some level of systematic risk. We don't know what's going to happen in the future. That's why black swans are present. That's actually why a lot of options traders make money selling options because of this unknown in the future that they have to hedge against. Systematic risk is again, risk that you can't necessarily diversify yourself out of even if you had a bunch of different securities and a bunch of different industries. At some point, there's going to be some market correction or market drawdown that happens that affects a lot of different securities or a lot of different industries, maybe a ton of different companies globally or countries globally. And so, that is the type of risk that you are just naturally going to assume.

Now, we try to minimize when you build out a portfolio, the unsystematic risk versus the systematic risk. That's even what we do in options trading. Like in my account, what I try to do is I try to every single month, build out a portfolio of many different ETFs and tickers in different industries and sectors, so that I try to minimize the amount of risk or exposure that I have to one particular area. I won't invest in just let's say FXE and FXY which are two currency ETFs. That would be stupid of me to invest just in currency ETFs. I would want to also invest in other things like the S&P or XRT which is a retail ETF. We could do gold or silver or a commodity like oil. We could do semiconductors or biotech or healthcare. There are so many different things that you can invest in. You try to get a pretty good mix in your portfolio, so that you reduce this amount of unsystematic risk that's tied to one individual security. Again, I think this concept on the outside is sometimes really hard for people to understand, but if you followed today's podcast and hopefully you did, it's a very easy concept to finally grasp once you just take a couple of minutes to just slowdown and understand what we're trying to do. It's not that all systematic risk can be avoided because it can't. That's unavoidable, un-diversifiable risk. But what you can do is you can reduce the position size of all these individual position, so that you still leave money on the table, you still have cash in reserve, so that if a huge systematic event does occur, especially in stocks and you're 100% long in stocks, you have money left over to trade.

Now, as a side note, what none of this includes in my opinion and has really been covered deeply in the market and the media is that when you introduce a level of options trading to all of this, it creates the ability to profit from down moves. When you hedge with options or use an options trading strategy where you're market neutral, even if the market goes down and there's this huge systematic event risk, it still won't necessarily affect an options trader's portfolio. You might have a sting from the initial move lower, but it won't necessarily cripple you and that's I think something that options trading can give that traditional stock investing on the long side, the long equity side doesn't really have the ability to do. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading!

Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be answering the question, "Are breakaway gaps reliable indicators of trend changes?" Now, I always think it's interesting to talk a little bit about chart patterns and market patterns because a lot of it is pretty subjective. I mean, there's a lot of things that can be left up to interpretation. Was that a shooting star or was that a pennant pattern? There's a lot of interpretation to it. But I do think there's some meaning behind it. I won't totally discredit it. I don't think it's something that you absolutely need to have and understand to be successful. We've clearly proven in our back-testing research and our own trading that you don't need to understand chart patterns or market dynamics to be successful. But having a decent understanding of them I don't think hurts either because if you see something on a chart and particularly on candlestick charting, it can be a good indication of when you might want to shift or rethink your portfolio structure at least on the outside. I won't say that it's absolutely necessary, but it is something that I do find interesting.

Today's question came from a member and the question was, "Are these breakaway gaps reliable indicators of trend change?" First of all, there's three types of gaps basically. You have breakaway gaps which particularly might start at the beginning of a trend where the stock has this huge gap up. A gap just basically refers to the new opening price is significantly above yesterday's closing price or basically, yesterday's entire market trading range. What this does on a chart, on a candlestick chart is it creates a fully functional gap. There is no overlap at all between yesterday's pricing of any kind, high, lows, close, open and today's new pricing. Breakaway gaps are traditionally found at the beginning of a trend, so a stock might be high and then have some really good news and then start this whole new dimension of potentially moving higher as far as the trend and it also could happen at the bottom of a move. A stock is continuing to move lower and then has really terrible news, it just continues to get pounded down and it has this huge gap lower, almost like a new dimension and new trend that continues to move lower. There's also continuation gaps which generally happen just in the middle of a trend, don't really seem like any huge breakaway by any stretch and then exhaustion gaps which are just kind of this final blow off top, if you will.

We recently saw this, not to use cryptocurrency too much, but we did see this a lot in cryptocurrency where like bitcoin and litecoin and all these other cryptocurrencies back in 2017 were topping and you would see these gaps in prices that just their price was going up thousands of dollars a day with seemingly no end, but it was all exhaustion. How do you recognize one, maybe a breakaway gap? The first is it's got to happen at maybe some consolidation. A consolidation has to be a part of it. It can't happen just in the middle of a very stable, nice uptrend. There's got to be some consolidation and then a clear new paradigm or a directional trend change and it's usually accompanied by significant volume. If you look at the average daily volume for a stock, you would see on the day where there's potentially a breakaway gap that there's significant volume, maybe 2X or 3X the regular volume. It's got to be some really, really groundbreaking news that's major, major shift to the stock and its pricing and its future expectation. This happens in either the uptrend or downtrend.

Now, the only place that I can find that really has at least some decent stats on charting these gaps and their reliability is if you go to Thomas Bulkowski's site which he is the author of encyclopedia of chart patterns. Good book, good read. Definitely for sure, I read it many years ago. I haven't read it since then. But he's got some good stats on stuff that he's tracked as far as breakaway gaps and chart patterns, so that's probably the best place to find any numbers on reliability. Now, there hasn't been too much other research on this. Again, a lot of it is very subjective, it's open to interpretation, but as far as Bulkowski's website and his research on this, he says that basically, breakaway gaps both in upward and downward moving markets have the potential to reverse the gap just 1% to 2% of the time. Now, I think it's interesting and it's basically saying that 98% to 99% of the time, if you do find a true breakaway gap that it has a very low likelihood of reversing. Now, again, you have to find these when the market has significant volume and there's been some consolidation and there's major news that's shifting the underlying security.

Now, I don't know if I would technically agree with this, but I understand the premise behind it and maybe the data was skewed and maybe the analysis was skewed. Again, it's very subjective. You can't basically code this into his trading strategy and chart system to trade these. But I think it's interesting to find that if you do see the market consolidating and then have this huge move higher, significantly move higher with a huge gap in the chart that it could be a new shift in the trend or continuation of uptrend that had stalled for a couple of months. I think there's something to it. I just don't know if I would say there's a 99% or 98% chance of it never reversing or closing that window. But at least that's the research that he said. If anybody else has found other research out there, I'd love to know. Hit me up on Facebook or Twitter, Instagram, YouTube, wherever you want to connect with me. I want to know what other research people are doing out there. I thought this was an interesting question today, something we don't often talk about, but it's something that I wanted to get answered for you guys and remember. Again, if you guys have questions, let us know at optionalpha.com/ask and we'll get you queued up for the next daily call. Until next time, happy trading!

Hey everyone, Kirk here again from optionalpha.com and welcome back to the daily call. Today, we're going to be talking about covered calls and how you can automate this entire strategy now using our upcoming auto-trading software. I believe that covered calls are a great bridge between stock traders and options traders. It is in fact, probably one of the easiest bridges to cross as you start transitioning from just trading stock to potentially trading more options or eventually, just options and no stock. Covered calls are a very simple strategy whereby if you are long 100 shares of stock, you are able to then sell a call option at or above where the stock is trading right now, collect a little bit of income and reduce your cost basis on the way. We've done a lot of podcast, a lot of training on this, so you can just search our website at Option Alpha. Just search for covered calls. There's lots of examples and trainings and case studies and research that you can check out.

But the idea behind doing this does require that every single month, you come back in and you sell that covered call against your position. You may have a stock position for a couple of months and you consistently have to come back in and sell a covered call against that position every single month. Or if the stock goes above your call strike, you put the stock and basically, the strategy disappears. You have to repurchase the shares and then resell the covered call all over again. Well, what we're going to be doing with our automated options trading software that we're going to be releasing here is giving you the ability with very simple templates to setup your own covered call and to have this entire process automated for you. All you have to do is be able to pick the underlying security that you want, you adjust how much of the security you want to purchase, how much stock and then from there, you set the covered call level and let the bots, let the auto-trading bots basically take it from there. It will manage the position when it needs to manage it. If you have a profit target setup or if you want to roll the contracts at a certain price point or a certain time in the future, it will all happen automatically.

The key for me on doing this is that if anybody is still trading covered calls out there and we know it's a viable strategy, we know… In fact, we've done research on this and so many other people have done this, so it's not just us that's confirming this. But doing a simple covered call even on the broad markets beats the S&P 500 time and time again. It beats it multiple years, less variance, less volatility in your account, so why not do it, right? And so, for us, it's a way to build out basically an indexed covered call. That's the way that I think about it, is that if you want to be super, super passive in the markets and just invest in the indexes which many people want to do and that's okay, if you want to do that, why not use our auto-trading software to actually do that with covered calls. Be super passive. You don't have to monitor it unless you want to. You don't have to interact with it unless you want to. This way, you can basically trade an indexed covered call with little to no interaction from you. I think that's one of the coolest features that we have and again, it's going to be a very simple template that you can go into once the auto-trading software comes out and be able to just simply one-click clone the strategy template, enter your ticker symbol, enter your parameters or use the ones that are defaulted there for you and let the strategy work for you in your account.

As always, hopefully you guys are excited about this. If you have any questions let us know and until next time, happy trading!

Hey everyone, Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to be talking about short covering and dead cat bounces. And no, we do not harm animals on this podcast, nor in trading. But the dead cat bounce is a concept that's very, very often used in describing markets that selloff quickly and then rebound quickly.

Let's cover short covering first. Short covering just basically is the general concept of closing out a position where you're short. You're covering your short by buying back the stock. And so, this would generally happen if you're trading stock and you sell stock to begin with. You can do that, by the way. Most people actually don't know that that can be an entry position. You can sell something you don't own. But you have the obligation obviously to cover that position by buying back the stock later hopefully at a lower price. If you think that a stock is going to go lower, you might sell stock at $100 hoping to cover or buy the stock back at say $90 and make the difference between the spread. This is different than actually a short squeeze. Short covering is commonly referred to for just covering the position that you're short. It doesn't have anything to do with maybe necessarily a major market bounce or a major reversal in a stock. It's just simply the process by which short options and short stock traders cover their position.

Short squeezes on the other hand are a concept where in the market, if there's a lot of people who are short, open interest or short interest in the security and the security goes down, you might see a little bit of a rally because you get some sort of short squeeze where all of this rush of buying activity comes back in for people to cover positions. Now, it doesn't always have to be at the bottom of a move. It often happened actually at the top of a move. People are really short a particular stock and that stock ends up having really good news, then you might see a lot of people start closing out their short positions and to do that, they have to buy the stock back in the open market and that causes a huge rally in the stock and the stock really never went down the first place. People are just covering their positions. That's what typically happens in a short squeeze.

Dead cat bounces on the other hand are probably one of my favorite things at least to talk about because I think it's a crazy name and I don't even know how this name came about, but it did. But it's this concept that when you throw potentially a dead cat out the window that even a dead cat would bounce off the ground as you throw it out the window. Again, full disclosure, we don't harm animals on this podcast. But this concept I think actually rings really true and although you can't really prove this, it's not really been back-tested. Just in my own trading experience over the last 10 plus years, I've seen this a lot where the markets have very, very sharp selloffs and it's usually at this capitulation point, even intraday or on a weekly chart or on a daily chart, you see this where this market has these capitulations, huge moves down, seems like everything is going to break and fall apart and then it has a nice bounce back up.

Now, sometimes these dead cat bounces don't last forever. It's just this concept that at least after a huge down move in the market, we're going to see some sort of relief rally. People are going to start taking positions off or start bottom feeding and start buying up stocks or buying up the underlying security. It doesn't have to be that this becomes the bottom, but at least it becomes a temporary bottom where the selling subsides or the move down subsides and starts to move back up at least temporarily for people to start, again, bottom feeding or start covering their short positions. I have seen this a lot. I think it's actually true. I don't know… Again, there's no research on the magnitude of dead cat bounces or how often they happen or what move it has to happen, but just generally, you'll get a better feel for it if you start watching some charts for a couple of years which unfortunately means for some of you, they have to do this for a little bit longer. But it's something that we do see, so don't be scared if you see the markets starting to have a little bit of a capitulation move down. There's probably a little bit of a relief and not that it's going to totally end the down move, but the markets don't go straight down and straight up is really the point. Hopefully this helps out. 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 I think broker approval levels are causing more traders to actually lose money. I'll go a little bit against the grain here on this because I understand in theory why brokers have trading approval levels and I get the concept behind why they have it. They have it in place, so that they basically don't give you access to something that you can't handle. But I think that it's been something that hasn't been changed in so long that they don't even have a good understanding of what access is. Most broker approval levels will go through a very simple process where your first or second level of approval will allow you to trade options, but only single options and then usually covered calls. I think this is where the problem lies. The problem lies with just that first or second level, depending on what broker you're at, in allowing you to trade covered calls and then allowing you just to do single long option contracts.

I'm okay with covered calls. I'm okay with covered puts. I think it's an option selling risk reduction strategy, but the problem starts to entertain itself when we get into single leg long options, either long puts or long calls. This is why I think people are actually losing money because what brokers want to see you do before you get into a higher approval level is they want to see that you have some trading experience, some trading knowledge, maybe even done some of this trading before. The problem is that they give you the ability to do it just with single options. They think they're doing you a service by saying, "Here, just go ahead and trade these single option contracts." But that's completely backwards from what we should be doing. We should be trading spreads to begin with or should be at least giving people the ability to trade spreads to begin with, so they don't blow up their account buying all these option contracts and basically getting in the wrong frame of mind of what options trading is and how to generate income from it.

I think it's a little bit backwards. It's something that obviously rubs me the wrong way, but it's something that we have to work through. I would suggest if you're trading, try not to get approval for just the next or first level at your brokerage. You want to try to get approval for the highest possible tier. Now, it doesn't mean that you always have to use every strategy available to you, but at least you have the opportunity to use spreads to begin with. Especially if you're a new trader or a beginning trader, you want the ability to use spreads. It controls risk, it manages your money a lot better and you have a much higher probability of success than if you would just go out and buy single leg long calls or long put options. We do have a really great podcast on how you can manage all these different broker approval levels and how you can quickly work your way up. In most cases, the four main broker approval levels on our regular podcast. It's over at optionalpha.com/show48, so you can just go over to your browser and check out optionalpha.com/show48. Hopefully this helps out and until next time, happy trading!