Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to be answering the question, "Should you manage individual option trades or combine positions in a particular ticker?" Let me just back up and tell you the basis of where this question comes from. If you are getting into laddered entries like we talked about just a couple of days ago in one of the shows here on the daily call, if you're getting into laddered entries and you're starting to enter multiple positions in the same ticker, the question is, "Do you manage each of those individual positions one by one or do you manage them together as a combined community?" Let's say you got into position in SPY. Your first position, you took in potential credit of $100. The second position, you took in $120. Now, do you add those two things together and say, "Okay. Now, the combined credit is $220 and I want to take 50% of that." Or do you take 50% of the first position and 50% of the last.

Well, ultimately, it's your decision, but here's how I would do it. I would still manage each individual position by itself. That's how we built all of our back-testing software. All of our research is based on individual position, not any combined positions. It's just a very simple way to go about it. Each independent occurrence should act like an independent occurrence for the next ones. And it's also how we built out our auto-trading software because we believe that when you start trying to co-mingle things together, it actually creates the opportunity to start mingling things together that maybe shouldn't be together. If you start making adjustments to one position, does that count for the second position or does that count for the whole thing? If you start rolling contracts, do you include those on the whole roll or just because you rolled half of them, it includes half of the roll? It starts really getting it super, super complicated beyond what it needs to be and you can do just as well and be just as effective if you just manage the individual trades when exiting.

Now, does that mean that we don't look at the overall combined position? Of course. When we are looking at our analyze tab and we're looking at the position, I'm not clicking through and saying, "Okay. This is one iron butterfly and this is another iron butterfly. This is one condor, this is another condor." I'm looking at the overall payoff diagram for that ticker, but when it comes time to exiting, I might exit one of the positions today and we might actually find that we exit the next position five days later or not at all. We have to adjust that side of it. That's why I think that you have to manage them individually. It does give you an opportunity I think to smooth out your returns. And back-testing wise, the way that we did a lot of research, is we did it on the individual basis because it's a lot simpler to manage and basically to build automation around that versus trying to combine positions. Hopefully that helps out. As always, if you guys have any questions, please let us know. Until next time, happy trading!

Hey everyone, Kirk here at Option Alpha and welcome back to the daily call. Today, we are going to answer a question from one of our members which is basically, "How do corporate earnings and dividends impact our options trading decisions?" The real question here was that somebody sent in… Again, thanks for submitting questions because it helps out on this podcast in topics and things that we cover. But the question that was submitted was, "Can you talk more about how these corporate actions like corporate earnings and dividends affect trading decisions? For instance, if you're trading in a security that has a dividend being announced before a contract expiration or is going through an earnings event, do you wait until after that announcement or that dividend to pull the trigger?" I think this is a really good topic. It's one that we've covered before, but it's worth covering again. When we start looking at trades, we do look into the future for any trades that we're doing in individual stocks and we want to have a frame of reference for where dividends and earnings come up. Now, in most brokerage platforms, you can actually see into the future a little bit by just adjusting your chart settings and actually showing dividends and corporate earnings. On the Option Alpha website, what we have with our watch list and our software is we have little tags that show you if earnings or dividends are coming up in the future, so that helps out with the watch list. But you just want to be aware that those things are in the future because they could impact your trading decision.

For example: I think earnings are probably the biggest one that impacts our trading decision to either get into a trade or not. We generally know that heading into earnings, though it doesn't happen all the time. But generally, heading into earnings, we start to see implied volatility start to slowly tick up. The stock might be a little bit more volatile than usual because it's coming into this earnings event. It could have great earnings. It could have bad earnings. There could be something missing in there, great revenue, bad revenue, the whole deal. And so, the stock is likely to make a big move after earnings, so we start to see implied volatility start to tick up as we head into that event. How that would impact us was that we would not then start trading a short premium trade heading into that earnings event because if we're going to start selling options, we want implied volatility to either stay low or go lower and that's the total opposite of what would typically happen in that environment. We would rather just wait for the actual earnings announcement itself and trade that one time IV crush that happens or IV collapse that happens around earnings versus trying to get it right heading into the earnings event and taking a lot of risk in the meantime. That's really how it impacts us for trades. That's why you typically see if you're a pro or elite member that we do a lot of trading and a lot of auto-trading on some of the ETFs and some of the larger indexes because they don't have that corporate action coming up every 30 or 60 or 90 days, depending on what industry you're in.

The other thing that we look at is dividends. Dividends for us are not a huge decision-maker. We recognize that dividends are on the horizon for something. That doesn't mean that we won't do the right strategy at that time because by the time we get to the dividend announcement, it does not mean necessarily that we'll always be assigned by the dividend or we'll have any assignment risk. If we get to that dividend event and we are in a position where we could be assigned, then we can adjust or close or roll the position. I've never really found it to be this detrimental thing to trading. Again, I'm aware of the dividends, I know when they're coming up. They're scheduled out and I can see them in the future and as they come closer, we get announcements for them and updates for them, but it doesn't really impact my trading decision because the trade I make today if dividends are 45 days out, I might be out of in 30 days, so it might have no impact at all. I think for me, it's more of the corporate earnings that impact things versus dividends. But hopefully this helps out. As always, if you guys have any questions or want to hear different topics, please submit a question like this person did. You can submit it on email or at optionalpha.com/ask and leave me a private voicemail. You can also just send us a tweet or a message on Facebook, Twitter, YouTube, Instagram, any of the social networks out there. We'll definitely respond to it and get it queued up for the daily call. Until next time, happy trading!

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, we are going to be talking about laddering option trades and specifically, frequency and pricing guidelines that you might be able to use. First, let's talk about what our laddered option trades, what's the concept that we often refer to. Basically what it means is that we're not going to enter one big stinky position around a strike price and plant our flag in the sand and say, "This is our position for the next month." Instead, what we'll do is if we're going to enter say 10 contracts, we'll try to split that up into a couple of different entries, maybe three different sets of trades, 334, something like that where we start averaging around the security, start averaging down or up as the security starts moving. For example: If a stock is trading at $100 and we want to do some straddles, we might sell three straddles at 100 then wait for the stock to move. If it does move up to say 103, we'll sell another three straddles at 103. If it moves up to 106, we'll sell another three straddles at 106 and start moving up with the position. We found that this works really, really well in back-testing and research wise because we spread our entry out over time, we increase our trade frequency, increase our duration in trades and also spread out our strike prices which means that we have overall, wider breakeven points on the overall position. Really, it actually works out well.

As far as frequency goes, I do not have a set frequency that I stick to. I don't say every week, I'll get into a new position or every three days, I will get into a new position. For me, it comes down to movement. If the underlying security is not moving, I will not add another laddered position. To get back to our example: If we have a stock that's trading at $100 and we sell the first set of three straddles at $100, if the stock just stays at $100, maybe goes up to 101, goes back down to 99 and then back up to 100, I'm not going to add to that. The stock is doing exactly what I thought was going to happen. Now, we don't have a big position on, so we can't capitalize on those as much as we hope, but in this case, the stock is doing what we want, so we're not going to add a position to it. But let's say two days later, the stock jumps up to 103 or 104. Okay, then I'll add another laddered position. And maybe one day later, the stock jumps to 106 and now, it's had a huge move in just a couple of days. Okay, maybe then I add another laddered position. For me, it's about strike price spreading, like I want to spread out my strike prices across different movements in the stock. If that happens very quick in a couple of days, great. If it happens a little bit later on in the cycle and I have to wait a week or two before I get into another laddered entry, I'm fine with that too. I'm not holding to any one particular timeline or frequency for getting into laddered trades.

As far as pricing goes, I base pricing and the number of contracts that I do generally off of implied volatility. If we see low volatility, I'll do a couple of contracts maybe two or three to start and keep doing two or three unless implied volatility goes higher. If we start to see implied volatility go higher, then we'll start to see more premium in those contracts and we'll start to scale up. If we start with three contracts, but the next move, we also saw implied volatility jump, then that means that we might do four or five contracts the next time around. I think starting small is always the better opportunity. We know that we're never going to be perfect in picking direction. We know we want to trade consistently neutral, so why not use an option technique like laddering to help facilitate that kind of concept of non-directional trading, not needing to pick the market, just trade where the market goes. If the market goes higher, continue to add new trades at higher strikes. If the market goes lower, continue to add new trades at lower strikes and then scale based on volatility. If it's low volatility, scale back your position sizing. If it's high volatility, scale up your position sizing. As always, hopefully this helps out. Until next time, happy trading!

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to be talking about why I've traded a lot more iron butterflies during low IV markets. This is always one for people who are new to Option Alpha. It's a little bit of a confusing concept because we see low implied volatility which we're generally and most of the time, although we had some high volatility spikes here in March and in February which were good and good trading opportunities, but most of the time, we're in low volatility. Why have I started trading a lot more iron butterflies? I think there's a couple of reasons why and I want to go through this in the podcast just to help share what we've been doing.

The first thing is when we go back and we look at research on what works just generally using our profit matrix research which you guys can all get to at optionalpha.com/profit. But when we go back and look at back-tested option strategies, we'd know that in low implied volatility environments, option selling still works. It's just as simple as that. Option selling still generates nice expected returns, profitable trading strategies, but the key is finding premium. I think it's really what it comes down to. One of the better strategies that we found in low volatility was a variation of either a straddle or a wide strangle. Wide strangles, although I love to trade them in low volatility, like really wide iron condors, basically, you just don't get enough premium to do them in low volatility, especially on some of the lower ETF values. If there's an ETF under $50, selling an iron condor during low implied volatility might generate say $30. It's not a lot of money per contract, per spread and it's a lot of commission to do that.

Now, we have to start thinking to ourselves, "Okay. Well, if we know that we still need to be selling options, how do we replicate to some degree, a strangle type payoff diagram where you have wide breakeven points without doing an iron condor that doesn't make any money or basically doesn't collect enough premium to do it?" The way that we that is by doing a very wide straddle and using a synthetic iron butterfly. The inside of an iron butterfly is basically a straddle. You're selling at the money options. During low implied volatility, at the money option contracts still have significant amounts of value. In some cases, a couple of dollars worth of value. Now, we start selling these at the money straddles and then because implied volatility is so low, what we have the ability to do is buy wings on these straddles very far out or in some cases, actually not that far out for very cheap amounts or very cheap premiums.

One example of this just to use a very standard example which helps out is let's say that the stock is trading at $100. We might sell the 100 strike put, 100 strike call, basically the at the money straddle and collect say $6 of premiums. Now, our breakeven points are $6 out on either end. Now, even though we were selling at the money strikes, because of the premium that we collected which was $6, now our real breakeven points are 94 on the bottom side and 106 on the top side. Now, it actually replicates to some degree, a strangle or an iron condor type breakeven points, like those further out breakeven points. And even though we sold the at the money straddle at 100, we now maybe able to buy say the 95 puts and the 110 calls or something around there, something further out on either end for very, very cheap premium. Say we bought these options for say $.8 or $.10, so basically $20 we give up of our entire premium. That's really the case.

In low volatility, it does not cost a lot of money to buy these further out legs. Even though we collected a $6 credit, so $600 of notional value, it might cost us $20 to buy these further out legs for protection and basically to reduce margin, but if we're still taking in say $580, it's worth it to pay the $20 or $30 or $40 in some cases to buy all of the legs on the outside to give ourselves defined risk, so that if volatility does spike, we're not caught basically holding a bag of positions that have undefined risk with a lot of huge spike in volatility, etcetera. That's why we're starting to do a lot of iron butterflies. It mimics a lot of the strangle, iron condor type breakeven points while giving us the ability to collect enough premium to make the trading worth it and we're using those out of the money options as protection against black swan type of events, market spikes of volatility and it's really, really cheap. Because implied volatility is so low, those out of the money options are very, very cheap. You don't have to go that far out of the money to buy those and they end up becoming very, very cheap insurance.

This worked out very, very well during the recent move down that the market had back in February because we were under-allocated, we kept our allocation size small, kept our overall allocations down and we had a lot of iron butterflies on, so we could afford to wait for the market to bounce before we took a lot of these things off because we had that protection in place and it was very, very cheap. In some cases, we paid $4 or $5 for some of these protections and these out of the money options on the long side. And yes, they were far out when we entered them, but then, when the market started to mini-crash, those really gave us a lot of protection for margin and allowed us to then scale into some of the higher probability, higher payoff trades during high implied volatility. I think they work really well during this environment. We're going to be setting up as we release our auto-trading software. We're going to be setting up some of these iron butterfly auto-trading bots that you guys will be able to use and clone over and that'll help honestly me in just setting up this low volatility strategy on a consistent basis. As always, hopefully this helps out. Until next time, happy trading!

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, I'm going to answer a question, "Can I still enter your trades two or three days later?" As part of our pro and elite membership, I obviously published the trades that I do. These are not buy or sell recommendations obviously of any kind. It's just truly what I do in my account. And so, people always try to mimic what I do and they try to ask like, "If you entered a trade on say Monday and now it's Thursday, is that trade still valid?"

Here's what I say to people in this and that is that what you should always try to do is you should try to mimic the strategy or framework of what I was trying to do. That doesn't necessarily mean you need to mimic the exact strike prices that we did. It means that you should mimic the framework. Let's say on Monday, the stock was trading at $100 and I sold an iron condor around this stock at $100, spreads were $5 out on either end, but now on Thursday, the stock is trading at $105, well, now, you need to use $105 as the center of your trade and then start selling options maybe $5 out on either end. You're using the same strategy, the same framework, an iron condor strike about $5 out on either end as the new basis for making that trade and you just need to basically move your position with the market higher or lower.

At the same time, you also need to try to get the same general credit. If it's a couple of days later, let's say I sold my initial iron condor for say $200. You might want to sell yours for something around $200. It doesn't have to be exactly $200. Maybe it's $205 or $198, somewhere around $200. You want to still try to mimic the pricing, the framework, the strategy of what we're doing. You don't necessarily need to trip over yourself to get into the exact same trades that we're doing because ultimately, markets move, underlying securities go up and down and so, we still want to be neutral to that new market pricing, the new expected move that the stock has. A short one today, but hopefully this helps out, answers the question. As always, if you have any comments or questions, let me know. Until next time, happy trading!

Hey everyone, this is Kirk here again at Option Alpha and welcome come back to the daily call. Today, we are going to be talking about a very interesting topic which is the expected probability paradox for options traders. Yes, this is what I call "the expected probability paradox." I don't know why I referred to it as that, but I did recently in a coaching session and now, I'm going to start using that because I think it actually really truly represents what this means. Here's the crux of why you're listening to this podcast or if I sent you this podcast or emailed you this podcast, added a link to it or referenced it, this is what we're going to be covering. The common question in options trading (we get this literally all the time) is – "If I'm trading at a 70% chance of success level and our max profit opportunity per trade is $100 and our max risk if we lose is say $300…" Again, showing that it's not a 1:1 relationship when trading options. If you could make $100, when you lose, you couldn't make or lose substantially more than that, maybe two or three times. I'm just using $300 in this case because it's a good round number. If we're trading at the 70% chance of success level, when we win, we make $100, when we lose, we lose $300. Then 7 out of 10 trades, we win, so we win $700, but 3 out of 10 trades, we lose and lose $900. It appears that it's either at least a zero-sum game or not. It's actually worse than a zero-sum game and at the end of 10 trades, even though we have a high probability of success, we end up losing $200. Really, what are the missing keys? Hopefully you're saying to yourself right now like, "Yes! Finally, Kirk! I want to understand this." Or if you're listening to this, you've maybe had this question pop up in your head before.

I think there's a couple of things that are missing from this whole equation that people just don't see and it becomes this iceberg effect. What I mean by this is that this paradox is like an iceberg. You see on the top level of the surface just the tip of what really goes on in the entire trading environment. And so, the top level tip looks like an iceberg. Everything below the surface though is really the mass of the iceberg. And so, in trading, people see this, they never take it beyond the entry which I think is where it starts. Everyone's missing if you ask this question. What you're missing is everything that happens post-entry. Even if you get into a trade like this and let's say I said this is a good trade to get into, still people ask, "Well, why did you get into this trade? The expected outcome is negative. It's –200 or –100 or zero. Why do you still get into this?" Well, there's a couple of things that happen beyond the trade entry that not only just happen in the environment, but also that we have control of that can tilt this thing into our favor and tilt this around from a negative expected return or a zero-sum game at the best into a positive expected return going forward.

The first thing that you have to understand is that implied volatility is always over-expecting the market to move and that implied volatility edge doesn't present itself until the end of expiration. What do I mean by this? I mean that if we have a 70% chance of success trade on trade entry, if we were actually to enter that trade over and over and over again and enter it every single time at exactly the 70% probability of success level, what we would find is that trade actually would win a margin that's higher than 70% chance of success. Call it 75%, 76%, 77% of the time. That differential is the fact that implied volatility at the time of trade entry is expecting the stock to move maybe 20%. But as you go through the actual expiration month, maybe the stock only moves 10% or 15%. It's that over-expectation of implied volatility that doesn't reveal itself, doesn't mature until the end of expiration. That's never present in the beginning. Now, we don't know what that edge is going to be. If often does change for some stocks. It's usually maybe a consistent five or six and some months, it's four and some months, it's seven, but that edge is present in the market. And so, that in and of itself means that instead of winning 70%, maybe we win 75% of the time. Okay. Now, we're starting to chip away at this. Now, we're starting to see that we're winning 7.5 times, maybe 8 times out of 10 and that starts chipping away at this potential loss. It starts chipping away at this negative expected outcome.

The second thing that you don't see in this is managing trades early for profits. What people commonly think is that if we manage trades early and say take 50% off the table early which is a common exiting plan, is taking trades off early at say 50% or 25% or 75% of profit, then what we're doing is we're actually cutting ourselves short. And to some degree, yeah, you call yourself short from the max potential profit, but what you also do is you take a trade that could've been at expiration, a massive, massive loss and because you took the trade off early, you don't experience that massive loss. Now, you increase your win rate just that much further and not only just increase your win rate, but you also cut out major losers. I could probably use a chart and point to a million examples of this happening during an expiration month. Literally, probably a million examples. It would take me a couple of days to do it, but I could point out a million examples of where trades would actually be profitable, you could take profits and if you took profits, you avoided massive losses before expiration. You've kind of cut or curved this tail end risk by managing trades early. And so, that's again, another way that you can do this. You've now start coupling these together, a little bit of over-expectation, a little bit of profit-taking, great. Now, you're starting to again, just kind of cut down this net loss.

The third thing that you can do that people always forget about after the trade gets entered is you can adjust and roll for duration. These are probably the two craziest things that you ever think about doing and people don't understand them. But once you understand that you can cut losses down dramatically by making adjustments, smart adjustments and you can roll for durations, so you can take a trade that might be a loser now, but roll that out to the next month or the next month or the next month going forward in the future and have the ability to profit further out in the future. If we have a trade right now that's like a framework of trades like the one we went through in this example where we're going to lose 30% of the time, well, what if instead of just doing nothing and taking that $300 loss, what if we were able to make a smart adjustment to that trade that cut that loss every single time that we had a loss from $300 to $200? Now, just doing that, just making that trade adjustment, now also turns us into a positive expected outcome. That's what we try to teach at Option Alpha and we got lots of examples of how to do that where you can make smart adjustments to trades without adding risk, without increasing position size that cut losses down dramatically. That's I think what makes the difference between a real trader and like a wannabe newbie trader, is this ability to take a loss and know that like, "Look. I'm going to take a loss on this trade, I've accepted the loss, but I'm not going to accept how big it is. I'm going to use what skills I have, what knowledge I have to be able to cut that loss from $300 to $200 or $300 to $150." In some cases, we've been able to cut losses by 90% just by making smart adjustments along the way. Look. If we're going to lose and the markets going to go against us, I can't control that. You can't control that. What we can control is we can control how much money we lose by making smart adjustments.

The other thing that we can do is we can roll for duration. We recently saw this back in February of this year where we had a position on in IWM that we got into November of last year and literally, we got into this IWM position at the worst possible time, right before the market started to go up on this huge run-up in November and December and into January. Every single expiration month, I rolled the iron butterfly that we had in IWM, I rolled it for a credit. Now look. We were able to roll it for a credit which is the power of using options, of being able to do this thing the smart and a logical way. But I rolled the trade from one month to the next, to the next, to the next. Three times, we rolled this thing out into the future and had to hold this trade three times. But the ability to roll that trade gave us an opportunity that when the market fell back down in February, we were able to close the position for a profit. This is a trade that would have been a loser had you just let it expire at the end of the first month and definitely would've fed into this initial topic or framework that we talked about in the beginning of the show, this massive loss where the trade doesn't go against you. But when we were able to roll the trade out into the future for credits that reduced risk as we were going out into the future, but also extended our timeline, so that we just waited for the market to come back into our range, it helped turn this thing totally around. You can't factor that in. There's no logical way to factor that into the initial assumptions that we had and presented in the beginning of this podcast.

Those are the things that I think that people are missing with this whole zero-sum, even negative expected return that you see on the front. You're only seeing just the tip of the iceberg. The paradox for options traders is that there's a lot of things that happen post-entry that you can control to help turn things around in your favor. Now, do we want to enter trades initially that have great expected returns? Absolutely. But do we need to factor these things in that we talked about on this show? 100%. You need to think about the over-expectation and implied volatility. You need to think about managing trades early and cutting losses or adjusting trades and rolling trades and cutting losses. That is a big part of doing this and that's what we try to do here at Option Alpha. Hopefully this helps out. Hopefully this answers the question. If you've been sent this and you like it or think that this was helpful, please share this online. Help spread the word about what we're trying to do here at Option Alpha or just leave us a review. I think this is one of probably the better daily podcast that we've actually done in answering a huge question in the trading community. If you thought this was helpful, please let us know. Give us a rating and a review on iTunes. It definitely helps spread the word. Until next time, happy trading!

Hey everyone, Kirk here again and welcome back to the daily call. On today's daily call, we are going to talk about why you don't recognize the power of this one tremendously good compounding force not only in your life, but maybe in your relationships, your business life, investing life, anything. Really, I think it comes down to it. But this huge thing that you don't recognize the power of, I think is good will. I think people don't recognize the power in this day. I'm talking generally. I'm actually not talking necessarily about a lot of people in the Option Alpha community because this is a really good community of people, very nice, very genuine people. There's a lot of smart people in this community and I respect that and I'm truly humble to be a part of it, obviously. But I think generally, people don't recognize the power of goodwill because they have to give a lot of it away before they ever see it come back around. You can call it karma. You can call it whatever you want. But I think that you've got to overwhelm people with goodwill, with like good intentions, with value and then eventually in the future, you might see that come back around.

One of the reasons why I think that we started Option Alpha and basically have grown Option Alpha the way that we have is by giving a lot of stuff away for free. First, education, then we started giving away software tools. Now, in the very near future, we're going to start giving away some of these auto-trading technology to everybody, so everyone can have the ability to trade, a couple of bots totally for free on us. Yes, it cost us money to have you guys do that, but I think it's good. It's like giving away this goodwill, so you could learn how to do it and use it and execute it as much as you want. But you have to give a lot of that away initially before you see some small results and people just don't understand that. I still get people who email in and they ask things like, "Well, why do you give all this stuff away for free? You could charge for this." I'm like, "Yup, I could, no doubt. I could charge a lot of money for the trading that we have." As we're releasing this auto-trading software, we could charge a lot of money for the ability to trade using our auto-trading software, but we're making the conscious effort, the deliberate effort and decision to give a lot of the stuff away for free, so that people have the ability to make better decisions and then tell five of their friends about us. And so, we have the ability to grow and reach more people and impact more lives by giving something away for free, having a little bit of goodwill and hoping that it comes back tenfold in return later on. That's really the goal of what we're doing.

On the auto-trading side, because we're getting closer to the launch of the auto-trading software, what we are going to be doing is we are going to be having a basically at the free level, the ability for people to trade and use our auto-trading software, but it is going to be limited to the number of bots that you can use or create. We wanted to have this ability and this was a big part for me in releasing this whole thing, is having some sort of small way that you can start trading auto-bots and auto-trading technology inside of your account at Option Alpha without having to pay anything. Now look. So that the record is clear, it does cost us money for every single bot that people create. It costs server times and server maintenance and systems and data feeds and everything. It costs us money to let people run this even for free. We don't have to let everyone run it for free. We are deliberately choosing to give a couple of bots away to everybody for free, recognizing that once you start doing this, you can do this by yourself with a couple of bots if that's just what you want to do. But once you start doing this and you get the hang of it with a couple of bots, you will want to start doing more and then of course, hopefully you upgrade and you choose to go to a higher level which pays for itself as far as value and what you get in profits and community as part of Option Alpha.

We want to do that because I think that that shows the goodwill that we have in presenting this to the community, presenting this to the trading investors that are out there and giving you guys the ability to auto-trade by yourselves and rent out a room in our house on us to get your bearings and get your feet wet in this. And then if it is a good fit, then you can start going to the next level and if it's not, then you can just keep the couple of free bots that we'll give you and you can use those as long as you want on us and we'll still continue to pay all of the server cost on our end and no fees to you. But if you want to start scaling this up and starting to build this into a real business or a real income generation stream, then you just have to help us cover the cost a little bit which definitely is going to be nominal to you guys. Hopefully this helps out. Again, I think I just want to talk about this today because I just… I don't know. Sometimes I find that people just don't understand why we do things. Again, this daily call podcast is just a good avenue for me to tell everyone what we're doing and why we're doing it and the thought process behind it. Hopefully this helps out. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!

Hey everyone, Kirk here again from optionalpha.com and welcome back to the daily call. Today, we are going to answer the question, "What do you do when one leg of a bull call spread is assigned?" First of all, let's go over what a bull call spread is. A bull call spread is an option buying strategy where you are buying one call option and then selling one call option at a higher strike price. Let's assume that a stock is trading for $100. You might buy a 105 call option and sell a 106 call option to help cut down the cost of buying that 105 option. It is an option strategy where you are bullish on the underlying security, you want the underlying security to go higher and you are a net buyer of options. You're actually not a net seller in this case. You're a net buyer.

What happens when one of these legs is assigned? Well, the first thing is that the only leg that would ever be assigned to you (traditionally assigned if you want to use the technical term) is the option contract that you sold. In our example, if we bought the 105 call option, we would only have the choice as the option buyer to assign or use that option contract as we wish at expiration. That's our choice, that's our right as an option buyer. The 106 call leg that we sold to help finance the purchase of the 105, that is the option contract that as an option seller in this case, as the little option seller in this case of part of the strategy, that we might get assigned to us. It would only really be assigned to us if the stock was dramatically higher than where the stock is trading or where that strike price is. If the stock rallied from say $100 all the way up to $110, then yes, the 106 option that you sold might be assigned at that point and you might have to cover those shares.

What do you do in this case? Well, the first thing you can do… There's really two things you can do, I guess. The first thing that you can do if you want is you can exercise your long option contract at 105. Now, this is what people traditionally would do, is they would exercise their contract because that contract is covering and is meant to help protect against that type of scenario happening where one contract gets assigned and the other contract can help cover that assignment. In the case of this example, if we were assigned stock at 106 and basically short stock at 106, we could then use our long 105 call options, we could exercise those, be long stock at 105, it would cancel out the short stock at 106 and we would be left with the difference as profit in this case.

The other thing that you can do though and the reason I say that this is probably the better alternative to go, is you can just simply buy back the underlying shares that you're short. If you get assigned on the 106 call options, just go in the open market and buy back those shares. Yes, you can do that. Yes, the brokers know that you are assigned stock and so, you have to cover that stock. You can buy back those shares in the open market and then at the same time that you do that, just sell the option contract that you are still long at 105. Just sell back that option contract. This is a difference in how you do it. It's not the same thing. It does accomplish the same mission, but it's different because you don't have to go through the exercise and assignment of the 105 call option.

And what that typically means for most brokers is that you have dramatically less commissions the second way of doing it versus the first. Most brokers charge actually pretty much an arm and a leg for you to go through an assign or exercise an option contract and they charge you a pretty hefty commission to do this. I'm saying avoid that and just do the pieces individually and that would probably be in most brokerage accounts, probably be less costly as far as commission goes to buy back the underlying shares in the open market that would basically take care of the 106 call option assignment and then just sell back the option contract that you're long at 105 in the open market, just like we would typically close an option contract position and reverse that very quickly.

You could probably get this all done for like $2 or $3 in commissions, depending on what brokerage you have versus going through assignment which might be $15, $10, $15 per option contract that's assigned. If could be a little bit cheaper alternative if one side is assigned. In either case though, since you're doing a spread, you should be pretty much risk defined, profit defined here, so you should make or lose about the same amount of money no matter what happens, depending on when you got into it and where the options are relative to the stock, etcetera. Hopefully this helps out. As always, if you guys have any questions, let me know. Until next time, happy trading!

Hey everyone, Kirk here again and welcome back to the daily call. Today, I want to answer a question that somebody submitted which was, "Are index options more profitable or are stock options more profitable?" The simple answer to this is – Neither is more profitable than the other. There's no definable difference between trading index options and trading stock options one, in and of itself. Just using an underlying product is not more profitable than the other. It always comes down to strategy and the way that you either buy or sell options and the way you manage your portfolio. I think the only real big difference between these two is that index options just carry a lot more value and weight, meaning you should trade them more with higher denomination accounts, so larger accounts, find that it's easy to start trading index options because they have a higher contract value, you don't have to sell as many contracts or buy as many contracts as opposed to regular traditional stock options on a stock or ETF which might have a lower denominational value and you might have to buy say five or six for every one index option that you buy. I think that's the real difference just from a scalability or leverage point.

The other thing that you will do run into with index options is you run into the fact that there are not as many index options to choose from, therefore, your universe or your pool of trading becomes much smaller. In fact, you can't diversify out of index options that quickly. There's no currency index options right now, for example. If you want to trade a currency like FXE or FXY, like the Yen or the Euro, you've got to choose one of those ETF products because there's no indexable, optionable security out there right now that you can trade versus opposed to say the S&P 500, you can choose the SPY which is more of the ETF type route versus the SPX which is an index option route. There's two different choices there. You can choose which one you want to go with. That's probably another big… I don't want to say downside to index options, but just something you need to be aware of, is that if you need to get diversity in say the oil markets or you need to get diversity in the currency or the semiconductor markets or retail, there's probably not a huge index that you can trade. You're probably better off going with an ETF.

I've often said when I coach clients who've got larger accounts that it becomes more and more difficult actually as your account balance grows to still have the capacity to get all of your trades in because as you start trading significantly higher capital sizes, you have to allocate those and it becomes more tough because if you have an ETF that's a low value ETF, you might have to place 20 contracts at a time or 30 contracts at a time. It's not as efficient as being able to place just two or three index options. There is that scalability, that leverage side of index options which again, doesn't make it more or less profitable, just something to be aware of. Hopefully this helps out. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!

Hey everyone, Kirk here again and welcome back to the daily call from Option Alpha. In today's call, we are going to be talking about why you should practice paper trading like Scotty Roberts plays basketball. And so, you're probably first wondering to yourself, "Who in the world is Scotty Roberts?" Well, that's not his real name. I changed his name to protect his identity and just changed his last name. His first name was Scotty, but he was a guy that went to high school with us. He was a couple of years younger than me, but was a ridiculously good basketball player. Since this kid ever came into high school, he started playing basically varsity basketball as a freshmen and played all the way through his senior year and then went on to actually get a full ride scholarship and play for Division One school. He was really, really good. Now, he was not the tallest kid which was actually kind of interesting, but he was a great shooter. I mean, like really good shooter. I think in high school, I don't know what his actual stats are because I actually tried to look them up on the old high school website from a long time ago, but couldn't find anything on him. But I think his high school free-throw percentage was record-breaking. It broke records not only for our school, but also for the entire district and the region. The guy was automatic when he got to the free-throw line basically.

Why I think that this is interesting and why I bring this up is because I remember coming into school all the time in the morning and I would come in early. I'm just a natural early-riser. I've been from day one. I've been up always early and trying to get things done early in the morning. That's just the best time for me. I remember coming into school because I used to live just very not too far away from our high school, so I used to walk in some cases or drive over and I would come into school and it'd be early in the morning and Scotty would be in the gym, shooting free-throws. This kid would be in the gym literally for hours, shooting free-throws in the morning, two hours before school, an hour before school every single day like clockwork. I thought that was interesting because I saw nobody else in the gym ever. And so, those of you who… Anybody who's listening to this podcast that goes to high school, I actually do know that some people from high school still listen to this podcast and trade actually in the Option Alpha community which is cool. But if you guys remember, Scotty would be in there every single day. What was cool about Scotty is that nobody else was in there. It was literally him and then you wonder why he's the best player on the team, why he got the full ride scholarship and nobody else did because he put in the time and put in the effort to practice.

Now, here's how this applies to options trading. In options trading, especially in paper trading, whenever you get started, people try to use paper trading like it's the real account. But it's not. There's certain things that are going to change when you start real live money trading that you cannot simulate in paper trading. You can simulate a lot of things, but you can't simulate emotion, you can't simulate the real feeling of making money or losing money, you can't simulate real market environments. It's really hard to do. It's very similar in basketball or in any sport. You can simulate what a game is like, but game speed and practice speed are two completely different things. What Scotty knew is that he knew that he had to take a lot of shots in practice, so that when it came time to take shots in the game, he was automatic. He would take in the morning, thousands of free-throws or hundreds of thousands maybe over the course of a couple of months or a year, so that when he actually played a real game, when it actually came down to the wire and he needed to make just two shots or just four shots at the end of the game that he could be able to make those shots.

I think it's really interesting. I always remember this. Literally, I've always thought about this in the back of my mind, is that paper trading for me should be just lots and lots of shots. When you start paper trading, instead of not taking as many trades and not doing as many trades because you want to simulate what it's going to be like in the real world, why not go into a paper trading account and make 100 iron condor trades? Now, I'm not going to say that you're going to make 100 iron condor trades in the real world because you're not. But in a paper trading account, you have unlimited capacity to do anything you want, so why not use that paper trading account to make 100 iron condor trades over the course of a month and then you really get a feel for iron condor trades, how to get into them, what good pricing looks like, what a good fill looks like, how to manage them. If you've got 100 iron condor trades in one single month and that's probably overkill, but it proves the point of saying that you probably have a good portion of those that you're going to have to adjust. What do you do in that case? How do you adjust those? Now, you've got to make adjustments on say 30 trades. Well, now, you get really good at making adjustments.

This self-fulfilling prophecy when you start using your paper trading account like you're shooting free-throws or practicing basketball, so that you learn how to do it, so that when the time comes that you need to make just one adjustment, that you have the capacity and the knowledge to do it because you've already done it 30 or 40 or 50 times. It becomes so mechanical that you don't even think about it. That's how I think you should use paper trading. Hopefully this helps out. Like I said, I think it was an interesting concept and hopefully it relates it to options trading because it can sometimes be vague how you can use paper trading or a practice account, but I think it can be sometimes like I said, vague in how you can use paper trading or a practice trading account and how you should really use it. Like I said, I think you should use it for the sake of making lots of attempts really, like throw up a lot of stuff on there, so you see how everything works really, really quickly and then when you get into the real market and you only need to use a trade one or two times, you have the ability to do it and you've got this whole back history of being able to do it which helps out. As always, hopefully this helps. Until next time, happy trading!