When it comes to trading options, you need to be educated first before you take action. But with options trading, you may understand a strategy’s ins and outs but still mess up in the execution. This is why people gravitate towards index funds and mutual funds because somebody else has to do it. With Option Alpha, everything changes with the help of automation and bots.
Join Jack Krupey as he talks to the Founder and CEO of Option Alpha, Kirk Du Plessis. Kirk helps people automate their trading strategies. Tune in to learn how Option Alpha can automate the best strategy for you when it comes to options trading. Discover how they backtest so you can have the winning strategy. Find out more about their bots and how it all works.
Listen to the podcast here
Option Alpha: A Better Way To Trading Options With Kirk Du Plessis
We got an amazing guest, Kirk du Plessis. I have been a fan of yours for a long time. I stumbled across Option Alpha in 2016 and 2017. I went down this 40-hour rabbit hole. It’s amazing the amount of free content you put out and the amount of value that you provided to the community. I’m excited to have you on. Thanks for being here.
Thanks for the invite. It’s going to be awesome. Let’s have a good convo.
Tell us a little bit about your background and how you started Option Alpha.
Option Alpha started as a blog and grew up from there. The quick little rundown on it was that I knew nothing. I was a Finance major in school. I had some jobs in finance throughout, but I wanted to do options trading. I got interested in options trading in school, taking finance courses. I took my own path and tried to figure this thing out. I’m trying to day trade.
I remember specifically one day trading the markets and day trading stocks. One day you would do awesome, and the next day, you get crushed. That eventually led to other questions, like, “Why does this happen to me? What happens to other people?” I started learning about options. I started journaling, for lack of a better word, my progress on that and what I was doing.
People started asking questions. I started answering them. At some point, I wish I knew who it was, but he said, “You should probably put all these together into a course or a video collection. There are links all over the place.” That eventually was the genesis and the foundation of Option Alpha, and that has grown from there.
That is how we ran it for a long time. It is an education-based company and service. Eventually, we graduated into doing software. We launched a back-testing product, watched list product, and in 2021, we also launched the first no-code auto trading product for the industry, which has been super cool. It’s a different path than I ever thought it was going to take. Here we are.
It was a transformation for me. I heard of options trading. I always thought of it as day trading, but more aggressive. In many ways, it’s less aggressive and safer, especially when you think of selling options in the time decay. That was a breakthrough for me when I went through some of your videos. Many of our readers are brand new options. Maybe from a high level, if you could give us the high level of what option contract is, the difference between buying and selling, the time decay specifically on how the advantage is with the option seller if you have done it right.
The important point here is that there are 1 million ways to skin the cat, every potential investment and product that you would trade, but the way that I have been breaking it down for a lot of people is because it’s relatable. You take Warren Buffett, who is arguably the best investor of all time. Still, to this day, he is making huge moves all over the place. His core portfolio of conglomerative companies is insurance companies. When you look at how he makes his money, they even talk about it in the Berkshire 10Ks and 10Qs about the actual value of those contracts. He also is an options trader. He does do options trading that is in the documents anyway.
If you look at the conglomerative of their insurance companies, all he is doing is selling insurance. If you think about options trading and not draw too many parallels, and it’s not exactly one-to-one, and nothing ever is, you could say that selling options and doing options trading are synonymous with selling insurance. If I’m going to sell insurance to you and say, “I’m going to ensure your house. If a hurricane hits your house, I will pay out a huge amount of money and you pay me for that protection that you’re buying. You are buying protection for me. I’m selling you protection. We are transferring risk and capital back and forth.” That is all Buffett and all insurance companies are doing.
The whole idea of selling options is to transfer risk from one party to another. One party doesn’t want the risk. One party is willing to accept risk in exchange for a payment. You are hoping that the catastrophic event, the bad events happen less than expected. That is all it comes down to. There is this mispricing in the market, as it should be assuming that things happen more than expected.
As a trader, you are trying to take advantage of that mispricing that happens in the market where things are not as bad as we think they are or something bad doesn’t happen. The unfortunate part of that whole formula or process is that the time between entering a trade and the time between where the mispricing reveals itself or materializes is patience that has to be borne by the investor and trader.
As an insurance company, if I sell you insurance and you buy insurance, I don’t make money right away. I got to wait until the end of the contract to make sure that I don’t have to pay out anything before I can keep that premium and say, “That is booked profit for me.” It’s the same thing in options trading. There is an over-expectation in the market that things are always going to be more volatile. Generally, long term, they are never as volatile as people price in. It’s the same thing with insurance, car crashes, and hurricanes. That is always priced like it’s going to happen all the time, and it doesn’t. You have to take advantage of that pricing.
It changed the way I approached trading. What I love about it is that the ^SPX is 4,123. You could sell a put spread against the S&P at 3,900. Even if you’re wrong and the market does drop, if it doesn’t drop all the way, you still make money.
The cool thing for me, I have always been attracted to options straight, and even to this day. No pun intended, but options give you options. There are more choices on what to do. When you are traditionally investing in stock, the only choice you have is in or out, on or off switch. Options become this sliding scale and almost a symphony of different things that you could do. It’s almost creating this perfect climate environment for you. Stock trading would be like turning up the heat in your house or turning it completely off. It’s 100 degrees or freezing, whereas options trading is like, “Let’s do something around 70 degrees.” That’s more comfortable, not too hot and not too cold.
With options, you have the ability to combine contracts as a way to express your opinion on the market. It’s not just, “It’s going up or it’s going down, but what if it trades in a range? What if it stays above this level?” It can go down, but what if it stays above some level? I’m willing to make a trade on that. You get into a lot of the math and the mechanics around probabilities, expected moves, and pricing, but it’s cool because you can express your opinion on the market differently than you could in any other financial product. Frankly, this is the reason why Buffett is so big on insurance. He can do this type of thing in a bigger industry.
You mentioned back testing earlier on. It’s a word that makes some people’s eyes glaze over, but it’s surprisingly simple, at least in the way that your system makes it able to be done by a layman. If you could give an example of a trade in a backtest and even maybe one of the bots that is one of the simplest ones or one of the common ones that beginners may use.
The ones that I like to use are things like iron condors, which are neutral strategies. You are not taking an opinion on the market. You are not saying, “The market’s going to go up, or it’s going to go down.” You are almost boxing in the market. The box spread would not be a good analogy for this because that is a completely different strategy, but what we’re trying to do with iron condors is trade neutral. We think the market’s going to be in a range for a certain period of time. It could be 1 week, 2 weeks, 1 month, or 2 months, whatever the case is.
Another strategy that a lot of users or traders like to deploy is a put spread. You talked about it earlier, but a credit put spread where you are selling options out of the money, which means below where the market is trading, giving you a margin of error, increasing your probability of success, and you’re trying to take advantage of the market. You’re either staying at its level, continuing higher, or if it goes down, at least not going down to hit your strikes. You got a little bit of wiggle room there, but you are generally a little bit more bullish in that type of strategy.
What we try to do and what we do on Option Alpha with backtesting and being able to take a backtest and automatically convert it into an automated strategy is try to give some people road markers to trade within. Backtesting is great for filtering out the crazy things that don’t work. We know that backtesting is not going to be forward testing. What happens in the future is not going to happen exactly the same way in the past, but you could probably get some good markers to say, “I should probably do this because most of the time when I do this type of thing, it ends up working out well.”
Is it going to work out exactly the same in the future? Probably does not work out exactly the same, but you are going to be driving in between the lanes. We find people do this all the time, where they come in and they backtest. Their first idea is probably the best one that they have thought about. They were like, “This is my idea. This is the one I want to do.” We see that on the back end, they backtest their first idea, and it annihilates or blows up a portfolio. I always think to myself, “That’s great. That saved me a bunch of time, or hopefully, that saved that user a bunch of time, not worrying about trading that strategy moving forward because it was likely to blow up a portfolio.”
The value in backtesting to me is to understand conceptually and historically how strategies might have behaved in different environments and get a good sense of what guardrails you need to use and what concepts you should start to deploy in your trading. We can go through one if you want to, but that conceptually is how backtesting should be applied, and you can filter in your own stuff on top of that.
To give a potential real-world example, how far back does your data go?
Depending on the ticker that we backtest, it can go back to 2006 and 2007, but some tickers weren’t around back then. We can go back pretty far.
If someone is going to use the S&P as an index and use the put spread that we have been talking about selling at a certain percentage below the market, whether it maybe has a 10% chance of losing money or 20% historically. You could run scenarios where if you sold once a week for up to $100,000, what’s the expected return? What would have happened if you started in 2001 and went through to 2021?
The one I pulled up was on IWM. It is similar to SPY, but we ran one on IWM. That was going back early in 2007 before the market crashed in 2008. You had this strategy starting at that point. If you run an iron condor strategy where you are selling options and you’re 100% neutral, you could almost split test and stress test your portfolio with different allocations or different management styles. If you ran that strategy all the way through and depending on the portfolio allocation that you had, you had a high win rate. It was a 90% win rate on this particular one that I ran.
We can get into details if you want to because there are lots of different things that you can do, but I had a 90% win rate. You had a 37% drawdown. That’s an aggressive drawdown. You got to have the stomach for that to get the high win rates, high returns, and stuff like that. Even at 10% of your portfolio allocated to this, you still did a compound annual growth rate of 5%.
Think about that conceptually for a second. You only have 10% of your portfolio allocated to this. 90% could have stayed in cash the entire time. You would’ve generated a 5% compound annual growth rate. That’s a decent return. I’m not saying it’s crushing it. You could add other strategies in there and other ticker symbols. For that one, that’s a pretty decent return for 90% of your cash or 90% of your portfolio staying in cash.
Most people are going to have most of the rest of their portfolio in other stocks or index funds. If they are averaging 8% to 10% on the rest of the portfolio and that one strategy adds an extra 5% a year, that’s beating the market.
The whole idea for me is that options are leveraged, which is great. You have to use it. It’s a double-edged sword. The leverage is where you get the over premium, the better pricing, and all that. That’s where you get it from. Leverage anything and probably as well as everybody buying distressed debt in real estate and all that stuff.
Leverage can kill you, and it can also be your best friend. It’s finding that medium ground where people who trade options sometimes fall into the pitfall of trading too much of their portfolio. It makes it good when it’s good, but it quickly evaporates. There is that trade-off of sprinkling in some options, trading strategies to try to enhance things, and trying to smooth things out while also doing whatever you want to do regularly.
I have been through some of that. I started following your systems, trading lots of small contracts and mostly selling premiums. In mid-2020, after the bottom came in, I started doing debit spreads on Tesla, Broken Wing Butterflies. I went down the rabbit hole of all these other strategies. I crushed it and 3X my account in six months. I thought I was God for a little while. During this downturn in 2022, I saw a lot of red in the portfolio. I had to go back to the basics on certain things after riding the wave. Fortunately, I’m still up, but it had some pretty bloody days.
It happens in every strategy. It happens to the best of us. It goes to show that for every investment that you could possibly make, you’re going to have that volatility for sure.
The best part about this for me is that I am not a quant-type trader. I will pull a chart up, but I’m not analyzing the chart. I’m making decisions purely on a few key items. What is the delta? What is the probability that the contract ends in the money and the amount of time? That’s it. I don’t have to watch the screen all day.
I even do these zero-day trades, which I don’t know if you ever put content out on this, but I found it on a Facebook group. I had a lot of success selling contracts at 9:30 in the morning Eastern, and it expires at 4:00 on SPX. It’s exactly that collar trade. I go in one side at a time, but as an iron condor, I sell the puts and calls. As long as the S&P doesn’t move at a crazy amount, I can make a few thousand dollars a day.
It’s important to set stop-losses without one. If there’s one thing I could make sure everyone is reading, it is if you’re doing a strategy that is high volatility with high dollars, you need to stop-losses, or you need to be trading a spread. You should not be taking unlimited risks on anything. That’s how you can blow up an entire portfolio.
We have an entire community at Option Alpha, but one of the big groups or subgroups in the community is a bunch of these zero DTE strategies. They trade templates and strategies back and forth with each other. We see it on our end. Those volumes are crazy for the zero DTE contracts when those contracts expire. It’s a big one, but the thing is you could do both.
You could do zero DTE plus, which is trading contracts the day they expire and compressing that whole timeline to a day. Things happen much faster. You could do that plus. I like to do it a little bit further out, but not too far out. I give myself some time where I’m not focused on now, but it is the whole benefit of doing options training in general. You can choose and pick your battles and where you want to play, what sandbox, and what products you want to play with and express that in a couple of different ways.
Let’s talk a little bit more about overall macroeconomics or overall philosophy right now, given that we’re in a pretty interesting time. There are commodities issues with Russia and Ukraine. There are interest rates and inflation. What else besides options? How do you look at your overall picture? What’s your overall game plan, at least the next few months to a year?
I and my wife have taken the stance of being flexible and nimble. We still invest in real estate, but the real estate that we had, and even over the last few years, we have divested over pretty much all the real estate, except for a couple of key portfolios, properties, or collections. This is my opinion. You are prone to be 100% wrong in the wrong direction or right. Whatever, I don’t care. What you’re seeing is that even in the small town that I live in here, real estate has gone crazy. It has gone up so much.
For all the macro factors that would lead people to buy real estate, trading up, demographics, and whatever, the way that I see it broadly, it has gone up so much. I don’t think you have seen incomes rise at the same level. Now you are starting to see rates go up and dramatically impact mortgage and payments. Particularly anybody who was in an adjustable several years ago that is now starting to see those adjustable, maybe potentially adjust.
This was the scenario that was talked about, hopefully with a lot of these borrowers at that point. Interest rates might go up, and they might adjust. Did everyone think that that was going to happen? Probably not. They thought, “The interest rates have been low for so long. How could they possibly go up, and how could they possibly go up at that pace?”
There is a systemic risk that those types of things start to snowball on the top of one another. You get a bad combination of things for real estate that would lead to divesting in real estate and that would lead to stock portfolios coming back down to pay those cashflows. It’s why you’ve even seen it. I’m not a crypto expert by any stretch, but as a market, you saw crypto go down because it was easy for people to say, “I got to pull out crypto to go someplace else or to cover a margin call someplace else.”
That was an easy call for them because it was bad money or maybe side money. Maybe not a lot of people were investing for the future there. That swap in assets is going to go faster in the future. I don’t think we have seen it play out right now. I want to position myself accordingly where I can swap between products quickly. I’m having as much liquidity as possible so that, in my case, turn off or turn on a bot for different products.
If I want to be exposed to crude and natural resources, I can turn something on, and I can turn off the other ones. I can be in and out like that. I don’t want to be in anything personally that takes too long where the runway is too long to divest out of it or get into more of the assets. Anything I can go into and out of faster is what I’m focusing on.
You reminded me of something. I’m in a couple of private oil deals. I got it in January 2022, right before Russia made it to Ukraine. It was dumb luck, but I own a piece of oil wells in Texas and Oklahoma. I tested the waters with some friends on that for tax benefits because oil and gas are one of the few investments where you could offset active income.
If you’re a brain surgeon, you make $2 million a year and you put $1 million into oil, you make $1 million that year, you could take the tax. It comes off of your ordinary income. With that said, I got exposure to oil prices. I hadn’t thought about the options on oil, but I probably should structure some type of put or something on oil where if it drops dramatically, I can hedge my other positions in other things.
I tried to convince a friend of ours that’s a builder to start buying lumber futures. If you wanted to take advantage and hedges exposure to lumber because he is a home builder. That is going to be the biggest component that he and his clients are going to buy. Think about that. That’s why it’s cool to think about alternatives and things you can do outside of the normal box. “Here are my choices. I save or invest in the market.” That’s not even close to the total scope in the universe of things you could do.
There are some good financial advisors, but a large part of the industry is more sales. Products that you are pushed into because there is a large commission. A great majority of the country is pushed into mediocre investment options. There are a lot of nichey alternatives that if you put a little bit of time and effort into researching, you can far exceed the standard returns that are out there through the standard options, especially when you’re talking about annuities and things that only spit off 3% or 4% that is probably not beating inflation.
I had a love-hate relationship with the industry, as I’m sure you have for a long time. There are things I’m like, “I’m glad that they do this.” There are things that I’m like, “I can’t even believe that they do this.” The fees are something that has been more forefront for a lot of people for a long time, which is great. That is getting more exposure. The risk appetite of more people is probably higher than it should be. That’s leading them down the path of choosing more riskier products and dumping them faster, which is not going to work out.
There is this blob or mob mentality when it comes to all investing being the same thing. You get this crowding out effect of everybody coming into index funds, and that being the hottest and greatest next thing. You do get the crowding out effect where if you’re buying and you have no idea, no concept of valuation, expected returns, or anything, what are you doing? What is it serving you if you are dancing on a floor that is breaking?
People are starting to realize that, and they are starting to explore different things. We see it off-shelf. Every time the market has any down move, those are always our biggest days of traffic. People explore some other things to do. How do I hedge it? How do I trade it differently? How do I make money in a sideways market?
I want to go back to the bots thing because we glossed over that. To a person who is far from a full-time trader and has a full-time job, maybe they log into TD Ameritrade or E-Trade once or twice a day from work. You could even give an example of some of your current partners and customers, somebody who maybe has a $100,000 account and sitting on some stocks or some cash. How does somebody who is somewhat of a beginner take advantage of the system from starting with some of the tradings, first, but getting to the point where they can have a couple of strategies that are at least backtested, have been proven, and there is no guarantee of future results, but you got in some cases, a twenty-year track record of something working?
The way I have seen it for a long time is that the investing universe for retail traders has always been this universe where you could call almost two sides. The way that I teach it is with two hemispheres of a graph. There is the research, thinking, and psychology side, which you can’t get away from and is arguably the most important side. Your psychology has got to be right. You got to do research, know what you are doing, and build a strategy, the trading plan, or the strategic side of investing.
For all time, the actual tactical execution of a trading plan or strategy was all manual. Because we’re a startup, we’re growing, and people are starting to do this, it’s still predominantly manual, which means that you could understand all of the ins and outs of a strategy. You could understand everything someone is doing. You could watch all their demos, webinars, and everything. You could understand the backtest, why it happened and how it worked. You could love all of it.
You have to cross this huge bridge where now you have to execute on a day-to-day basis. You can’t miss a beat. You can’t screw up the rules. You have to do it. You got to be on and present. If you’re not present, you’re not watching, and you miss something, it could throw the whole thing off. I always thought that there was this major disconnect, which is why I think people gravitated admittedly to index funds and mutual funds because somebody else was doing it.
They were willing to say, “I will pay a fee for somebody else to do it because I don’t need to do it. I understand it, but I don’t need to do it.” What we decided at Option Alpha to do is to build that retail trading product that people have frankly wanted and needed for such a long time, which is a way to automate their trading strategy. That’s all bots and automation are. It’s a way to take what they are doing and then automate it. We tried to build in a lot of tools to make that easy.
We launched Bot Wizard. If you go in, you backtest the strategy and you love the strategy, in one click, it will build a bot for you. You have to click it, confirm which account is trading in, write all your risk, credentials and stuff like that, and turn it on. That bot is executing the strategy that you told it could execute. It could be a backtested strategy. You could build a custom strategy if you have your own custom way of doing it.
What you’re starting to see, and we see it inside of Option Alpha, is people who spent all of their time focusing blinders on one strategy because that’s the bandwidth that they had. Their universe of things that they can do is now expanded. This gets to a bigger philosophical reason why I do this. People should spend all of their time on the education research and backtesting component of investing. Almost no time should be spent on tactical execution. If you spend all of your time tactically executing the strategy, you are a glorified computer. That’s all you are. You’re a computer that clicks instead of the computer making the decisions.
The reason we built it was to do that, to free people up, to be able to think critically about, “Why am I doing this? Am I doing this because it’s easy, or could I do something else? What strategy should I be using? What allocation? Should I be trading put spreads or iron butterflies?” That’s a hard question for a lot of people to self-answer and self-reflect on. If you get to the point of not wanting to follow the market and ebbs and flows, which is where I have always been, it is like, “I don’t want to be the person or the trader investor. Particularly, I don’t want to be the head of my family that is reliant on market ups and downs. I don’t see that as a viable path moving forward. I wanted something that could do that for me so I could focus on the strategic aspect.”
I felt that pain myself of having to be there. I was on the West Coast, and I have zero date expiration has been incredibly profitable for me, but I’m not awake at 6:30 in the morning on the West Coast most days. I didn’t trade, and I lost 1 week or 2 of potential income.
The analogy I always use is not a perfect analogy. No analogy is perfect. A lot of people use auto bill pay. Auto bill pay is great because people don’t miss payments. Auto bill pay can pay the same bills that you shouldn’t have expenses for as fast and as easy as it can pay the right bills. It can pay your mortgage, rent, or whatever. You have to know what an automated system is doing. You have to think about it a little bit. You can’t blindly set it, forget it and say, “It’s automated. It must be smart.” It’s only as good as the inputs that it’s using, but it allows you to have extra eyes and extra feelers out there all the time.
Now, as we are discussing this, my bots are running and monitoring P&Ls, time until expiration, and deltas of positions. Is the market up or down or whatever? I don’t have to make those judgment calls anymore, and more importantly, I’m not expressing my biases on the market. I can trade completely emotionless and systematic because I have already set up a system. I believe in what I have set up for this, and I let it be executed. That is what people should be doing, but they don’t.
That’s why we see most investors lose because they don’t. You probably have heard me say this on a podcast, but they are cowboy gunslingers. They come in every day, walking into the saloon, and they’re trying to find, shoot and hunt down a trade to kill for that day, and they go home. The next day, they do it again. It’s such a terrible strategy to do that.
We should probably give a real-world example of a couple of bots on the type of criteria for entry and exit. When you mentioned monitoring the profit and loss, I have seen this at least across a number of the case studies of taking profits when you have made 50%. In many cases, that is so much more profitable than trying to geek out every dollar of return because the majority of options and contracts at some point are 50% profitable. It might even be for five minutes.
Having that bot to make sure that you can pick up your returns the moment it gets into the money, where you don’t have to be looking at the screen, is powerful. You covered the implied volatility a little bit at the beginning, but that was always a key indicator to me, especially the ranking that you had. Can you give a typical example of a type of entry? What would trigger a bot to come in, and what triggers the bot to exit?
In Option Alpha, it’s not like we build our bots because users can build them. I build them because I’m a user there too, but everybody can build their own, clone templates, or copy each other. They can do whatever they want. If people share templates, they can share and clone a strategy back and forth or build their own custom one.
The one that I picked out that we can talk about is funny because I picked it out before you talked about IV rank. I have a bot that I run called High IV Rank Iron Condors. All that bot is doing is it’s performing two automations. One automation is designed to get into the trade, and the other automation is designed to manage any trades that it gets into. One is finding, and one is managing.
Inside that automation, which is my scanner, I’m looping through a list of ticker symbols that I’m comfortable trading. I’m simply asking the bot to check and see if that ticker symbol has a high enough implied volatility rank right now that would deem it available to trade. That would cross my first criteria threshold. All that means is, “Is the pricing on that option right now? Is it inflated enough to a level that I would feel comfortable placing a trade?”
You can rank that with implied volatility rank, which is a good way to filter that out and do a pre-scan filter. That’s all it’s doing. All day, every day, it’s going through that list of tickers and watching it and most of the time, it’s no, and that’s okay because I want the times where it says, “Yes.” It could be tomorrow at 11:00. It could be next Friday at 3:30. Whenever the option premiums inflate enough that I would feel comfortable making a trade, it would continue down the path of starting to send trades and execute trades to my broker platform. That’s the entry side of it.
There are a couple of little extra things that we throw in there. It checks the spread and open interest and all things that I would normally do manually trading anyway. It calculates the probability of success. Make sure that’s above my threshold. It’s going down my checklist and making sure everything lines up before the orders go to my broker.
The second that the orders go to my broker, the scanner’s done its job, and automatically, my monitor automation kicks in and starts managing the position. Because the position is open now, I don’t care about implied volatility. I’m looking for things like, “Did I reach my profit target? Is the position challenging me?” I can exit the position if the stock turns around and starts trading towards one of my short strikes on the iron condor or if expiration is coming up and I never had a profit. It’s never challenged me, but now I’m running out of time. It can also exit for time.
The monitor automation has all of my criteria for any market environment in that I would exit the position. If I had a profit, it would take the position off. If I got challenged and I wanted to exit, it could take the position off. If I never had a profit, never got challenged on the position, but never made money on it, but ran out of time, it would take the position off. It’s that systematic management that people do naturally now manual. They go through a checklist in their head and they do this with all their positions. I want a bot to do it for me.
What are the top 2 or 3 mistakes that you see new options traders make?
Here is an easy one, and this is one that we’ve wanted to solve for a long time. Let me ask you a question. Have you ever done this? Have you ever placed a trade and had it filled immediately?
It happens regularly.
If you haven’t filled it immediately, it’s like real estate. I always think about like real estate. If your first offer is accepted, it probably wasn’t a good offer. You left money on the table. They didn’t negotiate anywhere. If your first offer is accepted, it means that it was high enough that it was accepted by the buyer. They were like, “I would never even come back with anything else. Let’s take it.”
That same thing happens a lot with retail traders. Here’s my assumption, having worked with a lot of traders over the last several years. When traders trade manually, they open up a trade and place their trade at mid or some price to get a fill quickly because to them and their mindset at the time as a manual trader is they want to get into a trade. They have this mentality of, “I want to get into this trade. I don’t want to miss this opportunity.”
That causes a lot of slippage for traders. A lot of forced and almost self-inflicted slippage for traders. The example is like what you said. It happened to me all the time when I would place a trade and I would be rushed. I’d be fast. I got to get out of the house or have a call or a meeting, but I got to get this trade-in. I would place a trade at pricing that was mid, or I know it would be filled, and I would lose out.
Everyone talks about commissions. I’m a fan and believer that broker commissions are going to keep going to zero and I’m a fan of it. The untold story of trading is slippage and bad fills. If you can improve your slippage, even with tools that are automated, you start to get hundreds of dollars on trade by improving the fill by a penny or two.
The easy win here is to 1) Be cognizant of it if you’re a trader. Cancel and replace if you’re a manual trader. We built a tool called smart pricing that does this for you. It tries prices at different intervals. If you want to use that, it can try for better pricing and have a system of automated orders that fire and try to get better pricing. That’s an easy win. It doesn’t matter what you’re trading. It doesn’t matter where you’re trading. Focus on your fills. Take your time with it. Don’t rush it. Don’t be aggressive that you don’t feel like there is not going to be another opportunity because there might be. The next best opportunity could be fifteen minutes away. Don’t be so aggressive on entries.
Number 2) is position sizing. It crushes all traders. At any point, if I ever see anybody email and they email in, they were like, “I had a strategy that blew up.” I’m like, “What happened?” They’re like, “I was trading 50%.” It always comes back to position sizing. Too much of a good thing, which is leverage, contracts, and trading options, too high of position size, will always come back around and bite you in the end.
Be cognizant of position sizing. Make sure your position sizing is small, extra small if you can. Realize you’re trading a leveraged product. I don’t think people realize that. They think options are just the options, but it’s derivative of the underlying contract. It’s a 100X leverage. Be cognizant of that, respect the leverage that you’re trading, and don’t overdo it. That’s the second thing.
3) I don’t even think they have a strategy. Whatever they’re doing, whatever combination of things that they have picked up all over the place, which is part of what makes trading fun. “I like that idea from Kirk. I like this idea from you and from this other person.” They all throw it together, and they think it’s a strategy, but they don’t test it. There’s no research behind it. There’s no backtesting behind it. Would this logically work? Does this fit within my risk profile? If people spent a little bit of time developing a trading plan, even if it’s two things or rules that you’re going to follow, they would do dramatically better.
The resources available are amazing. I have never come up with my own custom strategy yet, but I have been able to take things from your site and/or things I have found on Facebook and implement them. For those that are believing in the efficient market, why does this work? Why is it Wall Street copying all these strategies and making it efficient that there’s no money left at the table?
Efficient pricing is accurate to a degree. There are two things. There is the efficient market hypothesis, which is the idea that everything is priced. That’s not true. It’s not true on its face because we know not everything is priced in because of 2008 and COVID. You pick your poison. There is this idea that markets are efficiently priced at the time that they are priced. I semi-subscribe to the sense of options that people are expecting volatility to be X. Therefore, options are appropriately priced right now, based on that future expectation.
This is what I use for people. We don’t know if there’s gold, but if you thought there’s this monster deposit of gold beneath your house, you price your house higher. You were like, “There’s a huge deposit of gold underneath my house.” If you can get somebody to come along and buy that house from you, their assumption is there is a huge deposit of gold under there, possibly more than this guy thinks.
It’s the same thing that happens in the markets where options are priced assuming something is going to happen in the future. You could say they are priced for the right expectation, exactly priced for the future expectation. The difference is that you have to wait out that whole time to see if that future played out. In our example here, you’d have to dig up the house and see. Is there gold underneath the house? That takes time, energy, patience, and whatever.
The same thing happens in trading. When you make a trade, you are trading based on the future expectation for that trade. As time starts to come back in and compresses back down to expiration, it reveals if that expectation was true or not and if that contract was priced high or not. The reality is that people on Wall Street, firms, companies, and even Warren Buffett sell options based on this expectation.
People buy options based on the premium that they want to outlay, knowing that they might lose money because they are trying to cover some additional risk. There is a reason why both parties exist. It’s that as time compresses and gets back down, we start to reveal the differences in the contract for that based on expectation time.
My option strategy is time decay. I made a decision right off the bat that I’m not good at reading charts and figuring out when things cross certain moving averages. Not that I won’t gamble here and there. I have done some Tesla Broken Wing Butterflies to ride that wave, but I know it’s gambling. It’s like, “I’m not going to go play.”
Time decay is a cool one, and I like option selling personally because you get paid in patience. The more patient and calm you can be, that’s your payout. How you derive your income is through time, patience, and the decay of the contracts. It fits my personality well because I know what the odds are. I’m willing to be more patient than the next person down the line who is on the other side of that trade for me. I’m willing to be more patient to let all the fluctuations happen from here until expiration because I know, generally, at expiration, I’ll be on the right side of that trade more often than not.
Once you start building a position of these, it’s nice to look at think or swim. You can see your theta decay column. In some cases, it’s $500 a day or $1,000 a day of money you’re making purely by the time expiration. One of the goals I have is trying to build that number up as high as possible. How does everyone get ahold of you? You have a lot of videos, but tell people if they’re looking to learn more and how they engage with you at Option Alpha.
We’ve continued to plow a ton of resources and team members into free education. We have even taken what we had originally and expanded it out. We have this entire library and handbook of all kinds of trading concepts, terminology, and ways to think about it. It’s all non-subjective. We’re going to teach people what it is, how it works, the benefits, and the drawbacks. They let you guys make your own decision on how you want to put it all together.
If you head to OptionAlpha.com, you can check out all of our free resources and training. It’s all completely free. There is no gated content. There is no catch. We publish a lot of research. We’re going to be publishing even more technical indicator research all for free and give people as much ammunition as possible.
When I say, “I’m a big believer in education and research on the strategic side,” that is because it gives you the most value. We give that all out for free. We have a technology and software platform on the back end, where if you want to do automated trading or use our backtester, you can do that. You don’t have to. You could trade manually. You could do your own backtesting, but we want to give people a path and an avenue to use technology to help improve their process, which is what we do.
I can vouch for it. I’m a lifetime member.
You got the highest package for everything.
I don’t spend a ton of money on trading too. I will dive into the forums in general. It’s a big step for me to write a check. It was between Christmas and the New Year. I went down a rabbit hole. I had the Chromecast on the big screen. My wife was about to kick me out of the house because she was like, “Can we watch Netflix or something like that?” I went through about 40 hours of video over the course of a few days. I dove in, and it has been great for me. I’m far from a professional, but I have been profitable, and it has been a good addition to my overall investing strategy. Thank you so much for putting us out there to the community.
I hope that’s exactly what it is for people. Just an addition, like it’s another quill in your hat.
Are you still running your podcast?
We still have the podcast. We do the podcast every week.
What’s the name of the podcast?
It’s called the Option Alpha Podcast. We also do workshops every week. We do a live workshop where we will build a bot or do an automation strategy. We did hybrid trading where you are clicking buttons to manually trade but automating the management or vice versa. We always try to do some education every single week and do a live demo or workshop. You can also look out for this.
Kirk, thank you so much for being on the show. This was awesome. Hopefully, we can do it again sometime.
I appreciate it. Thanks so much. I appreciate you being a member. This was a great convo.
About Kirk Du Plessis
Kirk is the Founder and CEO of Option Alpha. I love my wife, our 3 kids, my company, and anything finance.
Education: BS in Finance, University of Virginia, McIntire School of Commerce
References: Tradier Options Summit in Partnership with CBOE