342: Options Trading 101: 8 Rules for Success for Total Newbies

Side hustle show 342, how to make money trading options. Here are 8 rules for success for total newbies. What's up, what's up Nick? Looper here. Welcome to the side hustle show because sometimes you're going to lose your voice and the show must go on. I feel like there's a metaphor in there somewhere. In this episode we're tackling a topic that's been frequently requested by listeners but is somewhat foreign to me and that is Options Trading. To help school me on this, I'm excited to welcome my friend Kirk DuPlessis to the show. Kirk runs the mega popular site option alpha.com where you can get all sorts of free options trading training. He's been at this for over 10 years and the site has over 150,000 members. Kirk explained Options contracts as insurance and as a trader you can either be a buyer of insurance or a seller of that insurance. On the buying side, it's a way to kind of amplify your trading power through leverage. Instead of buying 100 shares of a certain stock and hoping it goes up, for example, you could buy contracts for a fraction of the share price that give you the option to buy the stock at today's price should it go up by a defined amount in a certain amount of time. That's the contract term. If it does, you exercise your option and you make a big gain on that small initial investment. If it doesn't, you just lose out on your initial option contract purchase price, kind of like your car insurance premium if you don't get into a wreck. On the seller side, you're the person selling that insurance. You collect the cash upfront and as long as the trigger event doesn't happen, you keep it. Kirk argues that just like insurance companies are some of the most profitable in the world, option sellers are most often the winners in the options trading game. Stick around in this episode to learn more about how this all works in practice and for Kirk's eight rules for success in options trading. Notes and links for this one plus the full text summary are at sidehustlenation.com/KirkKIRK. I'll be back with my top takeaways from this call with Kirk after the interview. Ready? So let's say you think Apple stock is going to go much higher than $100 a share. You could lock in the choice to buy Apple stock at $100 a share for a couple hundred bucks. Then in the future, if Apple's higher, you can exercise your choice to buy it at $100 a share. The benefit to you as the option buyer in this case is that let's say Apple tanks, right? Well, you're better off using an option contract than you were to just outright buy the stock and have your equity tank with the stock, right? So if the value of Apple stock goes down, you just walk away from your contract and say, no thanks. I'd rather lose $200 than $2,000. And I imagine where this gets interesting is policing a bunch of smaller vets. Like you said, you're not tying up 100% of your play money or investment money in that stock itself, but now you're kind of playing a bunch of different levers. And if some of them are losers, it doesn't really hurt you overall as long as your tail flips heads most of the time or something like that. It's difficult because in this industry in particular, I think a lot of people get attracted to options trading because you can use a little bit of leverage basically with these contracts and basically tie up a stock's price for a small amount of capital. And then if this stock price goes dramatically higher, you look like a hero because you made 400% return on your little small investment. But the problem that we see time and time again, and this is not only documented by us, but also lots of other institutions, hedge funds, we'll talk about Warren Buffett here in a second because he's an option seller, not an option buyer. The problem is that people over expect more often than what the actual reality is. And we find this even just in generally life and probably in business and everything else, people always have very extreme views of what something is going to do. So they think that Apple stock is going to go up 20%, but the reality is in that given month or quarter cycle, it only goes up 10%. So they end up overpaying for the potential right to buy stock. The same thing happens on the put side, so people end up overpaying for insurance. This is why insurance companies are some of the most profitable companies, because they charge a premium that's enough to cover the losses plus a profit that they know is going to be materialized after enough policies are written. So it's this over expectation that actually really kind of trips people up and leads people into believing that buying option contracts is the way to go when in fact it's the reverse that ends up being true. So you want to be an option seller and this is something you can just manufacture out of thin air. Well, you don't manufacture it because you end up becoming the party on the other side of a trade, right? So you would only be an option seller if there was somebody who is looking to offload their risk. But it's just paper. It's just like, hey, I will, Nick Loper, I will sell you this insurance contract. There's nothing else. It's as simple as that. Correct. I mean, there's probably a lot of paper on the back end for the exchanges, but yeah, you can do it on your phone, on your desktop. It doesn't matter. You can choose to be part of it if you want to or not. And how do you figure that out without getting a hose that seems like, I'm going to start, I'm going to start my own insurance company. And here we go. Maybe we can dive into an example of that for somebody starting out. And it's like, do you need an in-depth knowledge of the stock market or I'm not going to say like insight information, but like you have to have an understanding or a theory on like what movement is going to happen. So I think that's a common misconception actually. So I think what a lot of people end up doing it. And look, I was guilty of this for sure when I first started. Like when I first started doing this, I started trading trying to be a day trader. I realized very quickly, that's just now work, right? Then I tried Forex trading. And I was up all night babysitting the Euro Great British pound spot overnight, right? Just like watching it. And I realized like that didn't work. And that kind of led me eventually down this path of trying to understand like how other parts of the business work, trying to figure out what other major investors do and what institutions do, what great hedge funds do with trading. A common misconception is that they have perfect vision or even semi-perfect vision on where things are going. The reality is that the options market naturally prices in all expectations of option buyers. And what we've seen time and time again is that option buyers, as a general whole, always are going to pay a higher premium for insurance than what actually happens. So does this mean that we have perfect vision on where a security is going to go? 100% not. I don't think anybody, in fact, if anybody ever said they had perfect vision on where a security is going to go, it's probably total garbage. Because you don't. And you shouldn't need perfect vision. In the same way that an insurance company has no real idea if you're going to crash your minivan tomorrow or not, they just base it on the likelihood of people like you driving a car or minivan or whatever with your age and driving record and history and where you live. Like they just base it on actuarial statistics. So they have no idea if you're going to do it. Do they try to predict that? No, they're just playing the high probability math game that's involved in this. And that's really what it is. I think people overanalyze it to be something else when it's actually not. Yeah, that makes sense. So you're going to want to be on the other side of the equation. But I'm just trying to figure out how do you set yourself up for success there instead of selling all these contracts or like maybe underpricing your contracts? Yeah. So one thing is, and I'll use actually Buffett as probably the best example. And by the way, Warren, if you're listening to this, I still want to interview you. I've been trying to get Buffett to get on and be an interview guest from mine for like years. It's like my mission in life to get him to talk about this. But he publicly shows, and we've done podcasts on this on our own show. And he publicly shows in his 10Ks and 10qs that he sells $5 billion worth of option contracts. So think about that for a second, literally the poster child investor for value investing and passive investing, which is not taking anything from value investing or passive investing. Also happens to be not secretly, but actually publicly discloses one of the largest single option sellers in the entire world. Now that's actually just his single option contracts that he sells. If you actually factor in the fact that he is also a huge proponent of the insurance business because he owns companies like Geico, then you could say he's literally the biggest option seller in the world in every way, shape, and form. He sells insurance, which is just a variation of options trading. And he actually sells real option contracts on the open indexes. So I tell people that all the time because it's really fascinating to know that nobody actually asks him about this. But it's all publicly there. And he talks about it. In fact, he writes about it often in his quarterlies and 10Ks and talks about why he does it and why he believes in it, etc. So if I use that as the baseline for how we should build a business around kind of this insurance in selling option premium, there's probably a couple things that I would say you have to do. And I actually just wrote down for you, Nick, about eight of these things last night. I figured like eight of these things I would say would be kind of like critical things that you have to do. And they're all very logical things when you think about it. So you want to go through these? These are like, I think probably the eight things you should do. All right. Let's do it. Okay. Good. Number one, you've got to have small positions. So for me, this has been something I've like harped on for years and years and years. So if we know that we're going to get into a market that is very volatile, right? And even nowadays, like yesterday or two days ago, Trump made a tweet about Mexico and the markets were crazy, okay? So like, did I know Trump was going to make a tweet about Mexico? No. Did anybody else know? Only Trump knew that. But when we are in markets like this, it's only natural to assume that potentially at any moment, something really, really bad could happen in the market and change how things move, right? For that reason, I always tell people and I harp on this and harp on this. You have to make trades that are insanely small. So like, you don't see Geico going out and I keep really in this to insurance because it's so relatable. But Geico doesn't write one policy, right? Like, Nick is not their only client. Because if Nick were to crash and if Nick was their only client, then yeah, they go out of business. But no, they write millions of policies. So if you're going to get into the options trading business, especially on the options selling side, you have to be willing to make lots of small positions all over the place. Because if you don't, one random event, what we call a market of black swan event, could randomly come in and knock you out? And that's a real possibility. Does that make sense? It does. How small are you considering small? Yeah. So this will definitely upset people because I think the mentality for most people is that when they get into the options market, they're trying to like get rich quick, whether they say they are, whether they say they're not, that that's just mentality people when they get into the stock market. They're trying to, for some reason, for some internal external factor, they're trying to make some quick dollars. My position sizing on everything is about less than 1%. So any particular trade that I get into or even at a grouping of trades in a particular stock or ETF will usually be less than 1%. Sometimes we'll go as high as 2 or 3% of risk, so like not how much we can make, but how much we can lose on the position. That's where I base my risk is very, very small. So if we do have a random event where overnight Mexico drops like a rock, okay, if I have a position in Mexico, I could lose 1%, but that's not going to kill me. I could lose on 4 or 5 of those types of positions in a really bad, weird black swan event. But it's not going to kill me. It's going to hurt, of course, but it won't knock me out. So you're going to say 1% of your trading budget or trading accounts, if you have $10,000 in there, you say, okay, this is a $800 bet. Exactly. And I often find, like no doubt, this is the number one thing that kills people as option traders. So like you'll hear stats all the time, it's things like 90% of options traders fail. Well, I would probably bet that 90% of the people who failed traded really, really large position sizes. And to me, large would be anything over 5%. Over 5%, you probably have a pretty good chance of blowing up your account, just randomly. Not even like a black swan event, but just a bad sequence of trades, right? The analogy I use when I talk about all time in coaching and webinars is if we flip a coin, heads and tails, we know that over time it's going to be 50% heads and 50% tails. But in the first 10 flips of that coin, it's possible to have 5 heads in a row. And then followed by another 5 heads in a row. So now you have 10 flips of this so-called 50/50 coin, but the first 10 flips are heads. So that's what I talk about when I talk about just a random string of bad trades. Does that mean that the coin is a fake and fraud and broken? No. But it just means that you haven't traded it enough or you haven't flipped the coin enough for the actual probabilities to work themselves out. 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So I often use a 70% probability of success level as kind of a starting point and say, look, if you want to sell options, it's very easy to determine your broker platform where the 70% probability of success level is. Some brokers like think or swim through TD Ameritrade, they actually tell you the probability of success before you get into it. They say, if you sell this option contract, you will have a 71.26% chance of making money. Or people mess up as they think that that probability equals, they will make money, right? So 70% is not the same as 100%. So probabilities only work after lots and lots of occurrences. This is the law of large numbers that basically probabilities will converge based upon their expected value only after a lot of trades are made or a lot of occurrences. So that's why insurance companies are all about getting more people. Even if they have to shave their profits because the more people that an insurance company can collect under its umbrella, the more consistent their returns are going to be. In fact, if you actually look at the gaming industry, the gaming industry and casinos literally preach this stuff all the time by the way that they run their business, right? So the casino, it forces you to make small bets at your table, right? If you've ever been to Vegas or any of these other places, they have table limits. And I often question people like, why would a casino, if the casino's goal is to get as much money out of you as possible, why do they limit the dollar amount that you can bet at any one time? And it's because by forcing you to play your $1,000, $10 at a time, they increase the number of plays on all their games. Because they know if you play the game 100 or 1,000 or 2,000 times, you're going to blow all your money. But if they let you spend $1,000, they could randomly lose on just that one hand and you could walk away. I mean, it's literally the same logic that's applied to casinos in gaming. Yeah, this was my foolproof roulette strategy from several years ago where it's like, well, if you just bet on black and keep doubling every time you lose, eventually, it's going to pay. But eventually, you run into that table limit. Yeah. And actually roulette's one of those games where I think it's after 1,000 plays, there's almost 0% chance that you have money left over. So their goal is just to get you to spend your money as small as possible to get you to a 1,000 plays. And then you're done. Let's go back to this probability thing for a minute. So these trading platforms, you mentioned TD Ameritrade and these other ones. So we're going to tell you, OK, this trade has a 70% probability of being successful. How are they coming up with that number? The way that they come up with those numbers is a pretty standard metric in the options market. They use a formula and most of them use a formula called the black sholes model. And basically what that does is it projects and calculates option premium and takes that option premium and then reverse engineers the expectation of the market. So what's cool about the black sholes model is that it's not the brokers determining what the probability of success is of a position. They're just displaying what the market is telling them. So option pricing, as it gets more and more expensive, what that means is that there's more and more risk in the market. So if your insurance on your minivan starts to get more and more expensive, it's probably because Geico perceives that you're going to have a greater chance of crashing your car. So as people buy insurance at faster and faster paces and they aggressively bid up the insurance that they're paying for, the options market can now reverse engineer that buying and selling and determine what the likelihood is of the stock moving based on how aggressive or not the actual market participants are buying contracts. So it's a little bit of a crazy formula, I don't think we want to go through for a beginner podcast, but it's safe to say that the market basically determines how far it thinks things are going to go. Market participants themselves determine how far they think things are going to go and then we can calculate or back into probabilities from there. Well, let's let's take that 70% win probability example. Say I buy this or I sell this $100 option with a 70% chance probability, like what does that pay out? So in the case of an option contract, you get paid out at most the premium that you collect in. So remember, put yourself in the mind of the insurance company. If you buy insurance from Geico and they sell you insurance and you pay them $500 for the year, at the end of the year, if nothing happened, all Geico gets to collect is the $500 premium they initially got. So you can make any more money than the initial premium you collect. But you might have to pay out on top of that. Correct. Actually, the classic exchange of risk and reward, right? So in this case, and this is why people don't actually, they don't get to option selling first. A lot of people gravitate towards option buying. They realize it doesn't work and then they eventually find option alpha or find somebody else who talks about option selling because option buying didn't work. But people don't like option selling on face value because they think to themselves, well, that's kind of crappy. Like my premium is capped and I have all this downside risk. But in exchange, you're getting a very high probability of success. And so it's the same trade off that insurance because he knows we're making all these other very large profitable companies run their same business on. It's the same model just applied in a different arena. If you can win 70% the time, why isn't everybody doing this? Yeah. I think it's a common question. And I think a lot of people are starting to do this more often. I think what the problem is is that when you get into this, like I said before, just because it's 70% does not mean that that's 100%. And you could easily go through periods of drawdowns or just a bad sequence of trades where things don't go your way and you do have massive, massive losses that come from that. So I think it's unfair necessarily to characterize it as a sure bet. It's a high probability bet and it's based on risk. So the analogy or the concept I would use is like a casino could go through a period like in roulette where they see roulette hit red, red, red, red, red, 25 times in a row, right? So if it was such a sure thing, like why would somebody ever place on anything else besides red, but then they go through the regular flow of different numbers and colors, right? So it's a high probability bet, but it's appropriate for the risk. I mean, like you're going to have risk. This is why you should account for that right up front. If you spread it out with 100 or 1000 different of these similar probability bets under what scenario would that fail? Like if you're significantly diversified, would it just take one of these black swans or the entire market tanks and then that screws you over and then you're like no longer even have the ability to pay out these contracts? Yeah. Okay. So number three on my list because I think this is a good segue to that. Number three is you have to trade what I refer to as uncorrelated tickers. So I think a lot of times the word diversity gets thrown around and diversity doesn't necessarily mean the same thing as uncorrelation. So I'll explain. Diversity could be trading two different symbols. That's diversity. But for example, if you're trading Facebook and Twitter, well, are you really diverse? Because you're actually trading yes, two different symbols. I get that, but you're actually trading two very large, very similar, probably going to move very similar to market reactions to social media, social media companies, right? So if you trade Facebook and Twitter and Snapchat, you got diversity for the quantity that you're trading versus just trading one of them, but they all could be impacted by the same black swan event like you just mentioned. So the key is actually not trading just diverse tickers, but uncorrelated tickers. So things that are going to move irrespective of what other things are doing. And we actually saw this just recently in kind of the last market downturn that we had at the end of 2018 where the market had a huge sell off in the equity markets for the U.S., right? Many people, I don't know if you're aware of this or not, if you're listening to this, but they did. Okay. They've since rebounded another falling a little bit, but they did. But during that time period, while the U.S. markets were falling, gold, bonds, emerging markets, the euro, all stayed relatively calm. So if you are going to get into this space, what you need to do is not just diversify and trade a bunch of ticker symbols just for the sake of accumulating random ticker symbols, you really need to focus on things that are non-correlated to each other. We use like 10 broad sectors that are non-correlated or uncorrelated as possible to one another. So could a black swan event knock out a decent amount of those? Maybe, yeah. But do they always move the same way that the opposing players in the market move? Not all the time. Does that help? You're creating a bunch of different small-position, high-trade count bets across all 10 of these different categories. Right. A great analogy that I heard that I think is so maybe important to look at here is that when people think about diversity, they think, if I lose on one, I should win on the other. So what's the benefit of doing it? But a good analogy of this is if you're, like let's say, a ski shop in Canada. And so you sell skis in the winter and in the summer, you sell bikes. Now bikes and skis, totally different markets. But because you sell bikes and skis, means that in the winter months, you don't sell as many bikes, maybe no bikes, but you don't lose on bikes. You sell more skis. And in the summer months, you sell bikes and you don't sell any skis. So that's an uncorrelated example, whereas a diversity example would be selling 52 kinds of skis and no bikes. That's what we're talking about. We're trying to find things that not necessarily always move opposing, but just don't have a lot of overlap or correlation to each other. Fair enough. All right. So that was number three. What's number four? So number four, and this is my opinion on this, is I think you have to have a balance portfolio. So what I talk about it, and when most people think it was balanced, it's probably like, what, 6040 stock portfolio. Right. Like that's what most people think about. I've got a balance portfolio, 6040 stock. What's cool about options trading is you can bet on the price direction in both directions. So you can just as easily bet on a stock staying the same or going up as you could bet on the stock staying the same or going down. Why on earth? I think that most people have the investing mentality nowadays that the only way you can make money is to buy something low and sell it high, but markets are cyclical. They move and ebbs and flows. And so my thought process on this is that I don't ever want to have all of my positions betting on every single market that I'm trading going up. I want to have a good mix of positions so that if some markets go down or some markets go up in a range that I'm always in a position to take money off the table. And that's really what it comes down to is making sure that we have a balanced portfolio so that if the market does go down, we're okay. So I'll give you a classic example of this during the last decline that we had in 2018, the last quarter of the year from September to the end of December, the markets crashed, right? During that time period, net, we made money during that time period. And we traded totally neutral. We had some positions that were bullish, that lost, but we had more positions that were bearish than one. And we kept things balanced so that that impact wasn't felt in our portfolio. We have some volatility going into that, of course. But at the end of that period, we actually were up money versus being down money because we stayed consistent with these kind of like themes I'm talking about. Okay. And that's one advantage of the options business versus like if you just held the securities themselves, you would have been down 20% or whatever the market was. Sure. And I mean, look, I mean, the reality is it's going to take more effort to do what I'm doing. No doubt. It takes no effort to hold securities. And there's no disputing the fact that holding long stock is a good long term. My personal opinion on this is I don't want to go through that volatility. So what if the markets didn't recover and kept going down, right? Could you basically push all of your life savings and everything you work for and just put it into the market and say, I hope it works out. Maybe it does in the next 10 years. Maybe it doesn't. Maybe we stay flat. Who knows? Okay. So balance portfolio with taking some positions that had bet on the market going up. Some positions of bet on the market going down. What's the fifth point? So fifth is you got to play the edge. So we've kind of already talked about this and kind of maybe danced around the topic. But the edge in options trading is to the option seller. So this is no different than insurance, if the insurance market was a market where you could make money buying insurance and crashing your car, then people would do that. But it's not. And so in the options market, you have to recognize that the edge is to the option seller. Now does this mean that you can't buy options and have a good string of trades or get lucky on a position? Of course. Like people do this all the time. They post on it. Believe me. They post on it on Instagram and all over the place. But I think that's probably the exception to the rule. So my thought on any business, frankly, is you have to have a definable profit margin. Casinos have a profit margin. They have an edge in how the games are structured so that it pays out over time to the casino. In the options market, the edge is clearly defined for the option seller. So long as you are net option selling, more so than you are randomly speculating an option buying, you should be okay. And it's as simple as logging in to these platforms and saying, okay, I see this contract for sale. I want to sell one too. Like on eBay, like, do you have one to sell and you just click the button and it makes it easy for you? Yeah. I mean, like, I don't want to like oversimplify, but yeah, I mean, mostly broker platforms are advanced enough now where you can log into the platform and you can see how many people have traded that contract today and how many contracts are still open in the market, what the price is, what the probability is. That's the easy part to me is actually executing it. The hard part is just kind of understanding what we've gone through here to make sure what you execute is not something that's going to cripple you and it's going to derail you or hurt you financially, kind of understanding what you're getting into. So the easy part is actually executing it. Okay. So trying to be a net options seller. Do you have any platforms? I know you have your own software for this too, but like any platforms that you really like for beginners? Yeah. So totally partial to thinkorswim, I've been with them for many, many years now for basically the entire time I've been doing this. So thinkorswim from TD Ameritrade, there's a lot of other brokers out there that have options trading capacity. Robinhood is a great example of it because they have free commissions. TD Ameritrade's not free and I actually willingly choose to pay a commission on it because I think their platform is better. TD Ameritrade has one ally has a broker platform where you can trade them interactive brokers, Robinhood. So it's very crucial to probably TD Ameritrade through thinkorswim, TastyWorks is another good one. There was a spin off originally from the thinkorswim founders. They have their own platform now that's kind of specific to options, focus very cheap commissions. So yeah, you can do it pretty much anywhere if you focus on those big ones. Okay. Let's do point number six. Okay. So point number six, Ambulcash Reserve. So this hopefully should go as a no-brainer, but options contracts are leveraged investments. And I don't know why people don't understand or really realize this. Maybe they don't realize it until they pay a little market tuition, but because options contracts are leveraged and because of all the things that we talked about about random black swan events kind of crippling the markets, it's in my opinion insanely important that you keep a lot of money in cash. And I don't think that you need to invest a lot of money in options to do well because options are leveraged. You should be able to invest a little bit of money in options and do okay keeping a lot of money in cash. The best traders I know keep more than 50, 60% in cash, and I usually do pretty much at all times. And the reason I do is because say everything that I just said totally breaks and falls apart. Everything becomes correlated. The market ends, the world ends. I got to make sure I have enough cash to keep the lights on at the end of the day, right? It's no different than insurance. I mean, you look at insurance companies and how they run their business. They have massive stockpiles of cash because they need to. New year, new systems, right? It's the time when we all look at some of the messier parts of our business and think, well, what would it look like if it were easy? There's got to be a better way. Streamlining your communications is one of the quickest and easiest upgrades you can make. That's why today's episode is brought to you by Kuo spelled Q-U-O. This is the smarter way to run your business communications. 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Do you have to prove that up front if you're selling a contract that's going to have a $5,000 payout or something? Do you have to prove to the platform or to the buyer that like, "Okay, look, I'm liquid enough to cover this in the case that it happens?" Indeed. Actually, that's what's called a margin requirement for brokers. What brokers will do as an option seller is when you get into a contract and let's say you're selling a contract for $100, but the risk that it goes completely sideways is, say, $1,000. The broker will basically partition $1,000 in your account and put that in what's called margin. Now, it's not the same traditional margin that people are used to. Regular margin and investing is where you borrow money from the broker to buy stock. This is not that. They're just basically saying, "Look, $1,000 of your liquidity is now being set aside that you can't trade because if this contract goes bad, you've got to cover it." Yeah, they absolutely do that all the time. The problem is, and I think this is actually an industry problem. The problem is brokers will allow you to trade your full account balance if you want to. Now, I don't know about the legalities of it. I just think that when it comes to option selling, they should probably put some sort of cap on how much you keep in reserve personally. This is where people probably get into a lot of mistakes and a lot of pitils as they just trade their whole account, and then something bad happens randomly. You get a flip of five heads in a row, and now you're down and you lost all your money because something bad randomly happened. That's interesting. They're going to set it aside for the 30 days, 90 days, whatever, the duration of the contract and say, "Okay, this is locked up just in case we need to call it." Sure. That's where margin calls come in. People have heard the term margin call, or it's this big, scary thing, but that's where basically the risk in your account is exceeded by the cash that you have, and they do what's called a margin call, where they call you for more margin. They basically say, "Look, you need to transfer more money, or we're going to liquidate these positions on your behalf, because you don't have enough capital to deal with them." Can you win seven times out of ten? Is the premium that you collect up front, 70% of the time assuming perfect math world? Is that enough to cover those 30% of outsized payouts? Yes. 100%. Again, I'm glad you actually asked this, because a lot of people will run the math on these and what they'll see when they get into a position is they'll be like, "Oh, Kirk, this is a zero-sum game, but it's not, because the biggest factor that's not directly included in the platforms, and they couldn't include this even if they want to, is the difference between what happens today and at expiration." Let me explain this. When you sell an option contract, that contract is based on what the market thinks the stock is going to do, let's say, from today until expiration and 30 days. This expectation is always way over-exaggerated. What the market thinks the stock is going to do is never what the stock actually does. That difference in holding the contract during that time period is where the edge starts to materialize in option pricing. The quick answer is, yes, the small wins that you collect 70% of the time absolutely are going to cover the random string of losses that you have in any particular contract over time that are going to be much larger. No doubt, when you lose on an option selling contract, you're going to lose a couple hundred or a couple thousand dollars on a contract. This is why position sizing is important, high trade count on correlated tickers. We get back to all the same basics, but the small wins do add up and cover the difference. Fair enough. What's the seventh point? Number seven is you have to base everything on non-emotional expected outcomes. It was probably a mouthful, but it's really important. One, you can't be emotional about this. My thought process on this and the way that I've run this is I have opinions on the market, but my opinions do not mean that the market's going to ever listen to me or behave or do what I want it to do. I've tried and I tried, originally, to yell and scream at the computer and be stressed out about it. Apparently, the market doesn't care what I think. A lot of people think that the market does. It's the sportsroom in Vegas. How did you throw that last touchdown? Basically, just trying to be impartial or just looking at the numbers versus saying, "I really like this company." That's a really good point because a lot of people say, "I love what Tesla is doing." Just because you love what Tesla is doing doesn't mean that the market does. What I try to do is I try to teach people, "Look, you've got to be as non-emotional as possible." This is why, in my opinion, educations like the front line, before you even get to the point of actually making a trade, you got to understand all these things because they're so important. You have to play an expected outcome. In option selling, we know there's an expected outcome. In order for that expected outcome to materialize, we have to do all the things we talked about. Small position size, high trade count on correlation, blah, blah, blah. If you don't understand that and you're not willing to actually run the system the way that it's meant to be, then you're going to start slowly being your own worst enemy. Even in the case of trading, what happens often is this thing called "reconcy bias." People get into a position or a couple of positions and they might have four losing trades in a row. Now, "reconcy bias" starts to creep in and they think to themselves, "Wait a second. This isn't working. There's a scam. It doesn't work. Kirk's totally lying to me. The numbers don't work." It's just because their entire framework is based around the recent set of events. It'd be no different than if you walked into a casino. You never knew anything about a casino, how roulette worked, and you saw that red got hit five times in a row. You might think yourself, "Hey, it looks like red always gets hit, so I'm going to place money on red and then the next one's black." That's where I think having a really strong, it takes time. I mean, I get it. It's your money. It's your harder money. I totally get it. But having a really strong, non-emotional framework for doing this is critically important. I mean, it's hard to not be emotional when it is your hard-earned dollars at work. Yeah. Totally is. I get that. That's why my thought process on this and what I try to teach is that you can be emotional and you can let the mechanics of your rules and position sizing be your backstop. You can be emotional and hate the fact that you lost, but just make sure you've lost less than 1%, or 1%, so it doesn't kill you. Have that rule be your backstop. All right. Number eight. We'll bring it home. Number eight. Bring it home. Reduce commissions and fees. This, to me, will probably be my second life in 10 years or something after I'm done with Option Alpha, but commissions and fees are just absolutely devastating regular investors. So I'll get all my soapbox for men and just talk about regular stocks and mutual funds. If you're paying fees already on those, you're literally cutting yourself off at the knees. So there's no reason anybody should be in a mutual fund right now. There's a million reasons why people are in mutual funds and why it's still a very large part of the industry, but you're literally cutting yourself off at the knees. In addition to that, if you're paying a high amount to enter transactions or to rebalance your portfolio, again, those commissions and fees are literally crippling you. You can own the entire world of investing for less than a fifth of a percent in fees by using low-cost ETFs, et cetera. So if that's the baseline, if you don't even take anything away from this, like you decide option trading is not what you want to do, and that's totally cool, I get it. I'm not for all people. That's okay. But at least reduce commissions and fees. So when it comes to options trading, the same thing could be said. You just want to reduce the commissions or fees as much as possible. Do I think that you should trade commission free on everything? I've already said, like I willingly pay $0.75 per contract to trade on TD Ameritrade because their platform is way better than some of the other platforms. So could I trade for free on Robinhood? Yep, I sure could, but I just don't think that it's worth the cost. So a guy who's running a business of trading options, I'm willing to pay a little bit of money for the cost of doing business, because I think I get enough out of it. Most investors though, you shouldn't pay anything like nowadays. You should pay nothing to invest in stock. Stock should be 100% free. There's a lot of brokers who are already doing it. I've already said the entire world of investing and trading in a good way is heading towards commission free. Robinhood was the first. JP Morgan announced a couple months ago, they're going commission free, then Stock Tweets is launching their own platform, they're going commission free, there's a lot of other commission free ones out there. They're paying fees like this is an easy savings, honestly. You know, if you're paying a percent off the top or some of these managed funds where the performance is going to not always justify that in any case, but hey, 75 cents a contract that is worthwhile for you for the value that it provides. What's a day in the life, either for yourself or for a successful student of yours, like if I want to do this on the side, like what is my time commitment look like in terms of the research and actual execution of this game? Yeah, so it varies based on how quickly you pick it up, right? I mean, I think that's probably the easiest thing to say. I mean, I relate it to parenting a lot, honestly. Once you decide that you want to have kids, and I've got three kids and we were talking about this earlier, once you decide you want to have kids, it's a lifelong commitment. I think options trading should be the same way. If you're going to decide to be in this, you've got to be in it for the long game. That being said, when my first daughter was born, there's a huge learning curve. I didn't know how to do any of this stuff, right, read about it in books. I had watched videos, right? I kind of knew what to do, but there's a huge learning curve, and that curve got much easier over time. Options trading is going to be the same way. You're going to have a steep learning curve, because there's jargon, there's new platforms, there's new terminology to get over, and I get that. That's why we give away all of our training and courses for free, because I know it's going to take some time. Once you get over that hump, and you start actually realizing what the core mechanics of this business are, you can execute these things 30, 45 minutes a day. It really doesn't take that much time. To be totally honest and transparent, I told people this all the time, this is the reason I run the option alpha. I don't have to run option alpha. It partially keeps me away from the markets, so I don't overanalyze things. I get to practice what I preach and kind of put myself out there publicly and let people criticize what I do and have to defend it and whatever, because I want to show people that you don't need to do this for hours, hours, hours, and hours at a time. You shouldn't need to be glued to your screen for 12 hours a day. That's not what this is about. If you focus in on the mechanics, you have a clearly defined set of rules that you're going to work with, it shouldn't take you that much time to do it. What's next for you? Are you taking this thing to a million members or you're working on the next project, the real estate stuff? What's got you excited these days? Yeah, so I think for us, I mean, I've had for a long time a dream of kind of like using what we learn at Option Alpha and how we run our business just so you know, is we take the membership premiums that we get and what people pay us for research and for software access. We're literally like plowing it back into more research, more software. To me, it's like a crowdsourced intelligence platform at this point. As people now stay on as members, we continue to do more research, build more software. The next iteration for us, which is coming out this year, is something that I've been super excited about for a long time and we finally just have all the pieces together to actually make it happen, is rolling out a platform that allows people to build automated options trading strategies. So the big rub in this industry right now is that everything that I just told you has to be done manually. That's crazy. I don't understand why the industry is so backwards and behind when it's basically like writing checks when there's auto-bill pay nowadays and that's what the options market is. I have to manually go in every day and click and choose and position size accordingly. So now there's been nothing that allows you to set up these rules and let it run automatically, which is really what is going to make people more profitable, better investors, is to not be able to mess with it, you know, is to have it kind of set on autopilot. Yeah, kind of the set and forget, the wealth front, betterment option, just like building me, I diversified portfolio and trust the algorithm. Yeah, let it go. And it's funny because I've said this to our team for many years now, it's like I do not like, and it's very monotonous for me because I've just been doing it for so long, like, I get no pleasure out of doing this and it's hard to keep my focus on continuously going in and doing the same thing because it's like Groundhog's Day, come in the next day and sell some more option contracts, right? And it gets to the point of which like it could be done automatically, better by a computer. So anyway, so we partnered up with TD Ameritrade and we're going to be rolling out the first fully automated option trading platform later on this year. I think it's going to be really cool and I think it's going to totally shake up the industry. I think it's going to change how people trade because now this whole technology doesn't require the manual writing of checks. It's going to be the same change that bill pay went through when we had online bill pay. Can you imagine writing checks anymore to all these different things that you pay for? Well, in the future, I think people are going to just totally forget about the fact that they ever had to point and click to execute an entire strategy. Well, very cool. Looking forward to checking that out. In alpha.com, tons of free resources, if you want to dive in a little bit deeper into this industry, into this potential side hustle, Kirk, really appreciate you joining me and taking a really layman's walk through this for a rookie investor like myself. Let's wrap this thing up with your number one tip for side hustle nation. I think the number one tip is just educate yourself. I think a lot of people unfortunately just dive in and they try to rush through the process. They try to rush through the training and they try to get quickly to the point of which you're trading. I think educating yourself and spending some time on that is worth everything. Just take your time with it. You don't need to rush. It's worth it to spend a little extra time to understand it versus just so-so understanding it and trying to rush, rush positions. Yeah, of course. Whenever you're dealing with money, please don't make any bets. You can't afford to lose and at least make sure you're educated and confident before you dive in. Appreciate that and we'll catch up with you soon. All right, my top three takeaways from this call with Kirk. Number one is to take small, uncorrelated positions from the sounds of it. This is a game one with a calculated, intentional, mathematical approach. Not coming in with big, reckless bets. It's spreading your chips around to give yourself the best chance of earning a positive return over time. And of course, that makes sense if you're making the right high probability moves, given a big enough sample size, it's the law of large numbers. You can do well. It's just that building and constantly replenishing that portfolio of contracts since they have finite expiration dates takes time. It takes education and it takes real money. But that's takeaway number one. To take small, uncorrelated positions. Take away number two is that this takes daily dedication, or at least until that automated tool is available. So you have to consider the opportunity costs. What else could you be doing with that time? Did you be building an asset that you have more control over? Or does building your own mini insurance company sound exciting? I think the daily dedication piece is crucial not just to options trading, but really to any side hustle you're trying to get off the ground. I know I referenced the book, The Slight Edge in the past, which talks about the cumulative compound returns of your positive efforts, like you might not see results right away. But over time, the flywheel starts spinning easier and easier. New York Oström from FoodBlogger Pro called it 1% infinity, the idea of getting 1% better every day. The same applies here. It just, to me, it doesn't seem like something you can dabble in and expect to win, specific to options trading. So think about that daily dedication piece and takeaway number three is, don't do this alone. One thing I've been paying more and more attention to lately is the value of coaching or mentorship. And no idea why this took me so long to embrace. Maybe it cheapness, stubbornness, an inflated sense of my own intelligence, or perhaps all of the above. There are more than 7 billion people sharing the planet with us right now. The odds are exceptionally good that one or more of them have done what you want to do. My revenue growth accelerated when I stopped trying to do everything on my own and really started paying attention to what was working for other people. This goes for options trading, blogging e-commerce, whatever it is you're interested in. Check out the advice of people who are doing what you want to do, even if it's just virtually looking over their shoulders. If there are any shortcuts in life, not reinventing the wheel has got to be one of them. Once again, be sure to hit up sidehustlenation.com/curkkirk for links to all the resources mentioned and the full text summary with all of Kirk's top tips from the call. That's it for me. Thank you so much for tuning in. Until next time, let's go out there and make something happen and I'll catch you in the next edition of The Side Hustle Show, where I'm joined by a pair of innovators in the virtual assistant space. We're talking through why, when, where, and how to make your first virtual hires to start better leveraging your time and make the leap from working in your business to working on it. I'll see you then. Hustle on. (upbeat music)