The "daily Call" From Option Alpha: Options Trading | Stock Options | Stock Trading | Trading Online

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “How is the VIX calculated?” The VIX as you commonly know it as potentially the fear index or the volatility index on the S&P is again, a measurement of the 30-day expected volatility in the S&P 500. How do they judge or how do they measure the expected volatility on the S&P? And it’s actually quite simple and it’s quite logical if you actually read the white paper that the CBOE puts out. Again, you can look up CBOE white paper on the VIX and you can read all about it and go through the… I think it’s like 15 or 20 pages of the actual calculations if you want to. But the end result is that they basically take a weighted average of both near and far term put and call options and they weight the value of those contracts and then derive an implied volatility from those values. It’s a little bit of a backwards calculation in the sense that we are solving for implied vo

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is an IV crush?” An IV crush or an implied volatility crush happens when the market goes from a period or an event of unknown information to a period or an event of known information. Now, the best example of this is likely an earnings event that a company might go through on the corporate level. Before earnings are announced for a company, the market has a lot of uncertainty. “Where is the company going to announce earnings? Did they make a profit? Are they growing revenues at the appropriate rate? Is there something that they haven’t told us that they might tell us during this earnings event?” And so, as a result, we start to see implied volatility or expectation of a big move start to rise heading into that earnings event. Now, once the company actually announces earnings and all of the information is now known in public, even if the information is bad or even if the

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What causes market volatility?” Market volatility is simply caused by unknown factors in the market and that’s all there is. I think a lot of people try to overanalyze potentially what volatility means and how it’s derived and what causes it, but the simple reality is that when market participants are unsure of a future event, that could be a corporate earnings event, it could be an announcement from a government official, an election, anything that causes uncertainty, we start to see markets behave more volatile. Now, this doesn’t always mean that markets have to crash for volatility to go up. In fact, we’ve seen time and time again that markets can actually go up and implied volatility or market volatility can also increase as markets are rising. We’ve seen this not only in the commodity markets, but also in markets like emerging markets after elections or after big announ

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is a long strangle?” A long strangle option strategy is again, an aggressive option buying strategy whereby you are purchasing option contracts on either end of where the stock is trading currently. For example, if a stock is trading at say $100, you might purchase the 105 call option and the 95 strike put option. Now, this creates that straddle payoff diagram which is basically a very aggressive option buying strategy in which you are looking for the stock to make a large move in either direction. Now, because you’re not buying options at the exact same strike price, you do have the ability with a long strangle to be fluid with your option strikes and purchase option contracts either far out of the money or close to at the money, depending on how aggressive you want to be with your strategy and how far you think the underlying stock is going to move. Now, all this bein

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is a long straddle?” A long straddle is an aggressive option buying strategy whereby you are purchasing the exact same strike call option and put option. For example, if a stock is trading at say $80, you would buy the 80 strike put option and purchase the 80 strike call option and that’s what creates the straddle payoff diagram. Now, this option strategy like I mentioned, is an aggressive option buying strategy because you are looking for a large move in the underlying stock in either direction. It is a neutral strategy, but you have to get a move in the underlying stock that is more than the combined premium you purchased the option contracts for. For example, if the stock is trading at say $80 and you purchase the 80 strike call and the 80 strike put and the combined purchase of those call options cost you $5, your breakeven points are now $75 and $85. And so, theref

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “How soon can you sell a stock after exercising a call option?” We’re going to go off the assumption that you had a long call option which again, gives you the right, but not the obligation to purchase stock at the strike price in the future. And let’s say that you acted on that right and you purchased or exercised your call option which therefore, allowed you to purchase stock at your strike price. Assuming your strike price is $100 a share, you would exercise your 100 strike call option and you would purchase stock at $100 a share. Now, the question is – “How soon after exercising this call option can you sell the stock back?” And the answer is as soon as the stock hits your account, you have the ability to sell it right back. If you exercise that option contract and it takes half a day for the brokers to actually deliver the shares to your account or if it takes 15 minutes

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why you should adjust your option orders in penny increments. I’m a big fan of getting into option positions at a known price and taking your time with order entry. I think a lot of people for some reason (and I have no idea why this is) feel like they should rush order entry. When you get into a position, there’s this overwhelming sense of urgency that most people have to force the position into the market. Like magically, if I don’t get into this position and this opportunity, I’m never going to have another trading opportunity come by my screen. But it’s just not the case. After trading for over 10 years now, I know that there’s always another trade to be had later on. If this trade doesn’t work out or if the pricing doesn’t work or if I can’t get a fill on the position, I know for sure that tomorrow, there will be another opportunity. For some reason, I don’t think people thin

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is bottom-fishing as it relates to the stock market?” You might often hear people say there’s some bottom-fishing going on or we could see some bottom-fishing when it comes to stocks and basically, it’s this concept that at some point, either the regular market or any particular stock or ETF that you’re trading gets sold off enough that we find people coming back in and fishing for good opportunities. And so, I don’t know why they call it bottom-fishing. Maybe because it creates the bottom in the market. But inevitably, when we see something sell off, it now becomes a better opportunity. You take one company that has the same stream of cash flow and it’s trading at $100. Well, now, if it sells off to $80, that same stream of cash flow hasn’t changed, but now, the price of the equity has changed from $100 to $80 and now, it becomes a more attractive investment and that’s

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why short-term memory loss is critical for options traders. This concept of short-term memory loss for me actually goes back to high school. I’ve talked about it often on the podcast, but I had a coach in high school which was very influential on me, happen to coach me not only in baseball, but also in football and coach Anderson used to always say to me, “Look. You got to have short-term memory loss.” If you throw a pick or if you make a bad read or you overthrow a receiver that’s wide open in the end zone, you ultimately have to forget it and move onto the next play. And this was really important to me because over time, what I realized is that if I had a bad play or if I did something wrong or I just had a bad read that it wasn’t going to affect the outcome of the rest of the game, that I could quickly forget it because I needed to have short-term memory loss and I needed to mo

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to talk about the pros and cons of placing a limit order. A limit order when trading options is simply an order that specifies exactly what your maximum price is that you are willing to pay or your minimum credit in which you’re willing to accept if you are selling options. I prefer to do all my orders using limit orders and the reason I like them is because I know exactly where I’ll get in and where I’ll get out whenever the order gets filled. Now, that obviously to me is the biggest pro of using limit orders. You can naturally adjust limit orders multiple times and you can do this actually very quickly. You can place an order for $150 and if that order doesn’t get filled, you can quickly readjust the order and place it for $151 effectively creating your own little market order, but you are in control of the prices that you’re posting and the prices that you’re using. Now, if we take the flipside of

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to talk about why 98% of investors suffer from nearsightedness. Now, why 98%? Honestly, I have no idea. It could’ve been 99%, but it looks better than 97% or better than 99% being overly assumptive that just 1% do not suffer from nearsightedness. But the reality is I think that most investors suffer from nearsightedness which is a very common thing and it gets back to this idea of recency bias which I believe we talked about in Show 196 or 197 on the daily podcast here. But what investors do (and I see this in particular with traders all the time) is they get into a position or a series of trades and that small grouping of trades that they get into, it could be as small as one, it could be three or five trades. They assume that because those trades did well or did bad that the rest of their trading is going to follow suit. It’s this recency bias that the last occurrence or the last series of occurren

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is an intraday stock reversal?” Lucky for you, an intraday stock reversal is exactly what it sounds like. It is a reversal in the stock price either from low to high or high to low that happens intraday, meaning in the same trading day. And what we’ve actually found in research, though this research is limited to just earnings trades and how stocks trade around earnings, but it could easily be extrapolated out because we did so much research on this, is that when we see stocks open, there’s about a 50% chance that the opening price is the high of the day. We end up seeing that a stock opens at say $100, there’s about a 50% chance that that opening price is the high for the day and the stock may close lower or may close higher. Now, this is irrespective of the day prior. A lot of people would say, “Well, if the stock closed at say $49 and then tomorrow, opens at $50, it’

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What’s the best computer setup for trading stocks and options?” I’m assuming that a lot of people who are listening to this right now or if you’ve found this online, you’re trying to figure out – “Okay. If I’m going to start trading stocks or options, do I need some supercomputers to actually get this done? Do I need some advanced software, some advanced monitoring system?” And the answer to all of that stuff is absolutely no. It’s total garbage. I don’t think that anybody actually needs these super mega computers to do trading either in stocks or options. This industry has advanced so much so in the last even five or 10 years that the ability to trade from just your phone or your iPad or your laptop is light years ahead of where it was even 10 years ago. When I started trading, I still use a regular computer, but I had upgraded servers and ram and memory and all those thing

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why social media is a terrible tool for finding trading ideas. Now, look. This should come as no surprise to anybody, but social media is an absolutely terrible idea for finding trading ideas. I love the aspect of social media in that people can share the trades that they’re doing, but I don’t think you should use the trades that other people are doing to be the basis of the trades that you do because you become reliant on them and you don’t even know if those trades are going to work out or what system they’re trading or if that trade is a hedge or a core position. There are so many unanswered things that go into people posting on social media. Like I said, I love all the aspects of social media in that it gets people engaged. It forces people to defend their positions to some degree because they can post it and people can add commentary and disagree with it or agree with it, bac

Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What does it mean to go short a stock?” If you’ve been trading for a while or if you’ve been new to trading and investing, you probably heard this terminology thrown around. You might hear people say that there’s a lot short selling or there’s a lot of short interest or you might hear somebody say they’ve gone short or they go long a stock, but what does that actually mean? Well, I’m actually going to start this discussion by talking about the traditional sense of stock investing which is to go long a stock. And when you go long a stock, you take a long position which means that you actually buy stock first to enter the position. That’s the initial entry point for the position. And your hope is that if you buy stock at say $50 a share, you can sell it in the future at say $60 a share and generate a $10 profit. Now, what going short is, is you’re doing that process just in reve

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to talk about why understanding asset class correlations can help save your butt. A lot of the stuff that we’ve been doing recently with our research team and back-testing wise has been in the realm of underlying asset correlations and building uncorrelated baskets of securities. And so, what we’ve been trying to do is not only study the relationship between different industries and ETFs to one another and what their long-term correlations have been or not, but also trying to understand how we can build baskets of option strategies in different ETFs and sectors that have very little to do with one another, so how can we get as much diversification benefit with as little number of tickers in our portfolio as possible. And so, I think the key that I want to get across today is not necessarily that you have to memorize every single asset class correlation to another asset class, but it’s just that you s

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “Should you avoid trading around major market events?” I think this ultimately ends up crippling a lot of traders. Many times as people get started or even if you're new to trading, there's always some new story or some new thing to be worried about that's coming on the horizon, some FED statement, some presidential election, some congressional election, some legislature that may or may not come. I mean, it literally seems like there's always something on the horizon that could rock the markets to the core. That's what we hear by talking heads and pundits on TV, but the reality is I don't think necessarily, you should avoid trading around any major market events. I think you should have an awareness, an understanding of what's coming, so you’re not surprised if you get a big move in an underlying sector or ETF, but I don't necessarily think you should avoid trading those even

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the differences between a stock that's moving in a healthy trend or potentially in a runaway bubble. And I think this can honestly be hard to spot in. By no means am I perfect at spotting market moves by any stretch, but I think over time, what I've learned to realize about markets is that when you are in a healthy market or a healthy trend, you start to see a stock or a security create a series of higher lows and higher highs, but this path of higher lows and higher highs happens on a steady slope. Now, a steady slope for one particular stock or one sector could be completely different, but we all can realize and recognize what a steady or a regular trending stock looks like. And you have these regular ebbs and flows in the stock price. It has a rally. Then it has a little bit of a pullback and then another rally, etcetera, etcetera. And I think where we get into the discussion o

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What are valuation multiples?” Valuation multiples are simply just another mechanism by which you might be able to value related companies in an industry. If you’re going to value a company, you could value it based on free cash flow. You could value it based on its assets or the income that it produces from the assets. But oftentimes, you also see that companies are valued based on multiples. And so, multiples are a way to use related industries or related sectors and try to figure out a like kind valuation when the companies are not exactly at the same level, whether revenue wise or in their life cycle or a product wise. And so, it’s another metric that you can use for valuing. Oftentimes, you might hear that a company was sold at two times revenue. If their revenue for the year was $1 million, the company might have been sold for two times their annual revenue, so it was

Hey everyone. This is Kirk here again from Option Alpha and today, I want to talk about why you should start trading with a comfortable account balance. Undoubtedly, one of the biggest questions I get all the time is – “Kirk, what account balance should I start with? How much money should I start with if I want to trade options?” And everyone’s looking for me to give them a perfect answer, something like – “You need to start trading with $25,000 or you need to start trading with $100,000.” But the reality is you can start trading with as little as $3,000 to $5,000 as long as you understand that you’re not going to quit your job and pay off your home and mortgage and buy a yacht with the profits from a $3,000 to $5000 account. You have to be realistic with your expectations. But I often find that people who are starting have this weird thought process that when they have more money to trade with, magically, all their mechanical problems and issues will disappear. Like if I had more money to trade with, then I