Options trading alpha

Alpha.

What is 'Alpha'

Alpha is used in finance as a measure of performance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.

Alpha is used for mutual funds and all types of investments. It is often represented as a single number (like 3 or -5), but this refers to a percentage measuring how the portfolio or fund performed compared to the benchmark index (i. e. 3% better or 5% worse).

Alpha is often used in conjunction with beta, which measures volatility or risk. Alpha is also often referred to as “excess return” or “abnormal rate of return.”

Deeper analysis of alpha may also include “Jensen’s alpha.” Jensen’s alpha takes into consideration capital asset pricing model (CAPM) market theory and includes a risk-adjusted component in its calculation.

BREAKING DOWN 'Alpha'

Alpha is one of five technical risk ratios. The others are beta, standard deviation, R-squared and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-return profile of an investment.

Portfolio managers seek to generate alpha in diversified portfolios with diversification intended to eliminate unsystematic risk. Because alpha represents the performance of a portfolio relative to a benchmark, it is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. In other words, alpha is the return on an investment that is not a result of general movement in the greater market. As such, an alpha of zero would indicate that the portfolio or fund is tracking perfectly with the benchmark index and that the manager has not added or lost any value.

The concept of alpha became more popular with the advent of smart beta index funds tied to indexes like the S&P 500 and the Wilshire 5000. These funds attempt to enhance the performance of a portfolio that tracks a targeted subset of the market.

Despite the considerable desirability of alpha in a portfolio, many index benchmarks manage to beat asset managers the vast majority of the time. Due in part to a growing lack of faith in traditional financial advising brought about by this trend, more and more investors are switching to low-cost passive online advisors (often called robo-advisors​) who exclusively or almost exclusively invest clients’ capital into index-tracking funds, the thought being that if they cannot beat the market they may as well join it.

Moreover, because most “traditional” financial advisors charge a fee, when one manages a portfolio and nets an alpha of zero, it actually represents a slight net loss for the investor. For example, suppose that Jim, a financial advisor, charges 1% of a portfolio’s value for his services and that during a 12-month period Jim managed to produce an alpha of 0.75 for the portfolio of one of his clients, Frank. While Jim has indeed helped the performance of Frank’s portfolio, the fee that Jim charges is in excess of the alpha he has generated, so Frank’s portfolio has experienced a net loss. For investors the example highlights the importance of considering fees in conjunction with performance returns and alpha.

Seeking Investment Alpha.

The entire investing universe offers a broad range of securities, investment products and advisory options for investors to consider. Different market cycles also have an influence on the alpha of investments across different asset classes. This is why risk-return metrics are important to consider in conjunction with alpha.

This is illustrated in the following two examples for a fixed income ETF and an equity ETF:

The iShares Convertible Bond ETF (ICVT) is a fixed income investment with low risk. It tracks a customized index called the Bloomberg Barclays U. S. Convertible Cash Pay Bond > $250MM Index.

ICVT has a relatively low annual standard deviation of 4.72%. Year-to-date as of November 15 its return is 13.17%. Year-to-date the Bloomberg Barclays U. S. Aggregate Index has a return of 3.06%. Therefore the alpha for ICVT is 10.11% in comparison to the Bloomberg Barclays U. S. Aggregate Index and it offers relatively low risk with a standard deviation of 4.72%.

The Wisdom Tree U. S. Dividend Growth Fund (DGRW) is an equity investment with higher market risk that seeks to invest in dividend growth equities. Its holdings track a customized index called the WisdomTree U. S. Quality Dividend Growth Index.

It has a three year annualized standard deviation of 10.58%, higher than ICVT. Its year-to-date return as of November 15, 2017 is 18.24% which is higher than the S&P 500 at 14.67% so it has an alpha of 3.57% in comparison to the S&P 500.

The above example illustrates the success of two fund managers in generating alpha. Evidence however, shows that active managers’ rates of achieving alpha in funds and portfolios across the investment universe are not always this successful. Statistics show that over the past ten years 83% of active funds in the U. S. fail to match their chosen benchmarks. Experts attribute this trend to many causes, including:

The growing expertise of financial advisors Advancements in financial technology and software that advisors have at their disposal Increasing opportunity for would-be investors to engage in the market due to the growth of the internet A shrinking proportion of investors taking on risk in their portfolios and The growing amount of money being invested in pursuit of alpha.

Alpha Considerations.

While alpha has been called the “holy grail” of investing and, as such, receives a lot of attention from investors and advisors alike, there are a couple of important considerations that one should take into account when using alpha.

1. A basic calculation of alpha subtracts the total return of an investment from a comparable benchmark in its asset category. This alpha calculation is primarily only used against a comparable asset category benchmark as noted in the examples above. Therefore it does not measure the outperformance of an equity ETF versus a fixed income benchmark. This alpha is also best used when comparing performance of similar asset investments. Thus, the alpha of the equity ETF DGRW is not relatively comparable to the alpha of the fixed income ETF ICVT.

2. Some references to alpha may refer to a more advanced technique. Jensen’s alpha takes into consideration CAPM theory and risk-adjusted measures by utilizing the risk free rate and beta.

When using a generated alpha calculation it is important to understand the calculations involved. Alpha can be calculated using various different index benchmarks within an asset class. In some cases there might not be a suitable preexisting index, in which case advisors may use algorithms and other models to simulate an index for comparative alpha calculation purposes.

Alpha can also refer to the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like CAPM. In this instance, a CAPM model might aim to estimate returns for investors at various points along an efficient frontier. The CAPM analysis might estimate that a portfolio should earn 10% based on the portfolio’s risk profile. If the portfolio actually earns 15%, the portfolio's alpha would be 5, or 5% over what was predicted in the CAPM model.

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Real Money, Live Options Trading.

Here at Option Alpha we "walk the walk" and "talk the talk" when it comes to options trading on a serious, professional level. In this new module you'll find an insane resource of live, real-money, real-time options trading examples. We recorded our screen in real-time so you can watch over our shoulder as we scan for, enter, adjust and exit options trades.

Showing you live options trading examples like the ones below is just one of the many ways we continue to differentiate ourselves as the absolute leader in the options trading industry. Keep checking back often as we are always adding fresh, new live trading examples for you to view.

IWM Iron Butterfly (Closing Trade)

Exiting this IWM iron butterfly options trade gave us an $1,100+ profit after pinning the stock price one day before expiration at the peak .

USO Iron Butterfly (Closing Trade)

Today we're closing out of our iron butterfly position in USO by only purchasing back the short strangle or inside short strikes since the O.

CMG Iron Condor (Opening Trade)

Post-earnings CMG is still showing fairly high IV and good pricing in the option chains. In this live video I'll walk through our entire ent.

SPY Put Calendar (Opening Trade)

With the SPY on a huge run higher and prevailing low volatility we are taking this opportunity to get a little bearish with a put calendar s.

IYR Call Credit Spread (Adjusting Trade)

This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still lea.

CMG Iron Condor (Closing Trade)

After holding our CMG trade for about a month we are out with a nice profit after CMG traded basically sideways to lower. Time decay was the.

GDX Strangle (Opening Trade)

We've traded Gold profitably all year, and this is just another GDX short strangle example of how I think about entering trades.

QQQ Call Credit Spread (Closing Trade)

This QQQ call debit spread was a quick trade given that we didn't expect the market to move higher so fast which helped generate a decent pr.

IBB Iron Condor (Closing Trade)

This early exit to our IBB iron condor gave us a $142 profit after being in the trade for only a couple weeks. Plus, I'll also show you why .

XOP Strangle (Opening Trade)

XOP has been a favorite trading vehicle for us and today we'll continue to "stack" or "ladder" into this short premium position even though .

GDX Strangle (Closing Trade)

Gold has been an incredible trading vehicle for us this past month and today we close another set of strangles in GDX to generate some incom.

APC Strangle (Closing Trade)

Took about $150 out of this small APC strangle trade even after the stock moved completely against our call short strikes this month. But as.

EWZ Iron Butterfly (Closing Trade)

Today's live closing trade example with EWZ is a little unique in that we had the iron butterfly over the $25 strike price and now that it's.

DIA Iron Condor (Adjusting Trade)

This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video we'll discuss .

AAPL Call Calendar (Opening Trade)

Look behind the scenes as I use our new watch list software to quickly filter and find this AAPL call calendar spread trade during overall l.

XHB Straddle (Closing Trade)

We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of ou.

COP Short Put (Closing Trade)

These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after w.

AAPL Call Calendar (Closing Trade)

Call calendars work well when the stock moves in the direction of the strike price or when IV rises. In this case with our short-term AAPL c.

COF Strangle (Adjusting Trade)

Our COF short strangle position is the mini-example today as I walk through the entire thought process we used to make an adjustment to my p.

GDX Strangle (Opening Trade)

With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.

XOP Strangle (Closing Trade)

Very quick exit fill on our skewed XOP short strangle trade that brought in a nice profit after holding it for a couple weeks.

X Strangle (Closing Trade)

Our initial entry point in this X short strangle wasn't bad but the stock continued to rally and challenged the short call strike all month .

QCOM Strangle (Adjusting Trade)

With QCOM now trading above our short strike and break-even point we are making a small adjustment to the position to reduce risk and increa.

FXE Strangle (Opening Trade)

After gapping lower on Monday morning, our first trade of the week included selling this wide strangle in FXE which nearly a 70% chance of s.

BABA Put Debit Spread (LIVE Opening Trade)

With BABA trading down over 6% on the day we jumped in with this new bearish put debit spread betting on continued weakness.

TSLA Put Debit Spread (LIVE Closing Trade)

Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today.

TLT Call Debit Spread (LIVE Closing Trade)

This quick fill on our directional call debit spread in TLT near the end of the trading day took us out with a $171 profit after patiently h.

FXE Iron Butterfly (LIVE Closing Trade)

Just five days after the BREXIT vote trade in FXE we closed our iron butterfly option trade for a $216 profit.

MON Iron Condor (LIVE Closing Trade)

Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill be.

IBB Call Debit Spread (LIVE Opening Trade)

We'll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher .

XBI Call Debit Spread (LIVE Closing Trade)

Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit .

GDX Strangles (LIVE Closing Trades)

Today we'll go line by line and show you how we close a bunch of single leg positions that we have leftover in GDX by combining some into st.

XLU Put Calendar Spread (LIVE Opening Trade)

Scanned through our watch list to find a new low volatility and bearish trade put calendar spread giving us a wide window to profit if XLU m.

COH Iron Butterfly (LIVE Closing Earnings Trade)

Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.

TSLA Put Debit Spread (LIVE Opening Trade)

TSLA has made a huge run higher since February and these moves don't last forever so we're getting bearish in the hot stock with a put debit.

GDX Strangle (LIVE Closing Trade)

Once again bought back our set of 3 strangles in GDX for a $153 profit 24 days before expiration.

IBB Call Debit Spread (LIVE Closing Trade)

Nice simple closing trade here with a $230 profit after this directional call debit spread trade in IBB moved higher just 17 days later.

USO Call Debit Spread (LIVE Closing Trade)

Well before expiration we got a nice early move higher in USO and took off our call debit spread for a $195 profit after bidding a couple do.

EWW Debit Spread (LIVE Closing Trade)

Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bea.

VXX Short Call (LIVE Closing Trade)

One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked sho.

IWM Iron Condor (LIVE Closing Trade)

The IWM iron condor position we had reached our 50% profit target early (netting us approx $180) with more than 18 days still left in the op.

TLT Iron Butterfly (LIVE Closing Trade)

Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly - even still the drop in implied volatility helped genera.

GDX Short Strangles (LIVE Closing Trades)

We had to be patient with the order fills but we were able to close out a set of GDX strangles today for a couple hundreds dollars profit.

How To Adjust Earnings Trades That Go Bad (Live NFLX Adjustment)

You've made a great earnings trade but what happens if the company gaps much higher or lower than the expected move that you planned for? W.

IBM Iron Condor (LIVE Earnings Trade Close)

Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing ou.

SLV Iron Condor (LIVE Closing Trade)

Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing ou.

QQQ Put Calendar Spread (LIVE Closing Trade)

Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing ou.

GDX Iron Butterfly (LIVE Closing Trade)

With 9 days left in the expiration cycle we had yet another opportunity to close GDX for a nearly $400 profit.

EWZ Iron Butterfly (LIVE Closing Trade)

After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.

SLV Short Straddle (LIVE Opening Trade)

Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices refl.

GDX Iron Butterfly (LIVE Closing Trade Example)

In order to avoid the gamma risk that comes with options expiration week, we took off our GDX iron butterfly for a $330+ profit.

GDX Iron Butterfly (LIVE Closing Trade)

Gold jumped nearly 10% today which actually gave us the perfect opportunity to close our iron butterfly option trade in GDX for a $190+ prof.

Kirk Du Plessis.

Full-time options trader, real estate investor & Option Alpha founder. Fo rmer mergers and acquisitions investment banker for Deutsche Bank in New York, REIT Analyst for BB&T Capital Markets in Washington D. C., and Options Strategy Consultant for multiple hedge funds.

Section Objectives.

What You'll Learn:

Watch me place trades in real-time inside my real money brokerage account. See how I scan for and find trading ideas from scratch each day. Learn how I place adjustment or hedge orders to reduce risk on trades that go against me. Understand how to enter, exit and adjust all types of option strategies with multiple examples. How to manage trades near expiration including rolling and closing trades. Dealing with stock assignment and dividends and how to exercise options when necessary. Get inside my head as I talk through portfolio balance and my overall trading strategy.

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12 Specific Options Trading Courses Designed to Get You From Beginner to Professional.

Learning with Option Alpha for only 30 minutes a day can teach you the skills needed to generate the income you’ve been dreaming about.

20 Video Lessons.

Options Basics.

Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.

12 Video Lessons.

Bullish Strategies.

If the market is heading higher we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.

11 Video Lessons.

Options Expiration.

Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.

14 Video Lessons.

Professional Trading.

Mindset is everything. The business of trading full-time or professionally only requires 2 things; being consistent and persistent. In this bonus section we'll show you what it takes to make options trading an income machine.

26 Video Lessons.

Entries & Exits.

Teaching you the different option order types so that you can properly execute smarter option trades each day including market, limit and stop orders while highlighting some key tactics and tips you can use today.

7 Video Lessons.

Neutral Strategies.

You'll learn to love sideways markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all. This is how you learn make money trading in any market.

10 Video Lessons.

Earnings Trades.

When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go.

27 Video Lessons.

Real Case Studies.

Detailed look at some of our best trades broken down by date, time, price so you can follow along step by step and learn in the process. Everything from multiple iron condor adjustments to calendar rolls and earnings hedges.

16 Video Lessons.

Portfolio Management.

When I say "portfolio risk management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. But you do need to use simple checks and balances.

13 Video Lessons.

Bearish Strategies.

Declining markets and higher IV gives traders like us an amazing opportunity to sell expensive options that decay in value. We'll cover our favorite strategies to profit even when stocks are falling like iron condors, strangles, etc.

12 Video Lessons.

Pricing & Volatility.

A complete and full understanding of how options are priced and where we get our "edge" as options traders using IV percentile. This section includes mastering implied volatility and premium pricing for specific strategies.

15 Video Lessons.

Trade Adjustments.

What happens when a trade goes bad? Do you roll out to the next month, move your strike prices, add/remove one side or do nothing at all? We'll give you concrete examples of how you can hedge different options strategies.

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Membership is always free & you can upgrade anytime to unlock our live trades.