what’s going on YouTube my name is Chris and in today’s video .
I’m going to explore the world of options trading with you even if you don’t know one thing about options trading .
I will be explaining the most important options trading concept to you using examples lots of examples and visualizations so that you can understand and actually see how options work in the real world my goal is to provide you with all the information that .
I would put into a beginner course but give you everything for free so with that being said grab your favorite beer your favorite wine kombucha or whatever your thing is and let’s get started so the first step in our options trading journey today is to first understand and learn about the basic option characteristics that all options have and briefly discuss how options are different from shares of stock option characteristic number one is that all options have an expiration date this is different from shares of stock because if you buy a share of a company’s stock there’s no expiration date on that position you can hold that share of stock forever as long as that company doesn’t go private there’s nothing that’s forcing you from closing that position but with options all option contracts have an expiration date and the expiration date could be today or it could be two and a half years from now and that means that when you are trading options you have to choose a time frame for your position and this will make more sense when we go through the examples in just a second but the first thing to know is that all options have an expiration date and after that expiration date that option will no longer exist option characteristic number two is that all options have what is called a strike price the strike price is the price in which the option can be converted into shares of stock and exactly what that means is that if .
I have an option with a strike price of 105 dollars that means that in the future if .
I want to buy or sell shares of stock using my option .
I can do so at the options strike price of 105 dollars so this is really important and it doesn’t have to make sense right now but basically an options entire valuation or price is based on the fact that it has the ability to be converted into shares of stock at its strike price so we’ll go through a bunch of examples so don’t worry if this doesn’t make sense quite yet option characteristic number three that we have to discuss and the final one that we will discuss before moving forward is what is called the option contract multiplier so this is really confusing and .
I hate it myself as someone who teaches options because it makes things pretty confusing but if .
I see a share of stock that has a stock price of 120 dollars .
I can buy one share of that stock with a hundred and twenty dollars but if .
I see an option in the option price is five dollars .
I cannot actually buy that option with five .
US dollars .
I actually need $500 because options on stocks can be converted into 100 shares of stock and because of that we have to multiply the price that we see by 100 to get the options actual value or what is called the option premium so let’s build on these three option characteristics and let’s move forward by discussing the two option types and get into some examples and clearly look at what these three characteristics mean in regards to the examples the first option type is called a call option at a very high level call option prices will increase as the stock price increases and call option prices will decrease as the stock price decreases so the price of call options moves with the stock price but why do call option prices move with the stock price well a call option gives the buyer the right to buy 100 shares of stock at the call options strike price between now and the expiration date of that option remember that one of the characteristics of all options is that they have a strike price and four call options the call option can be used to purchase 100 shares of stock at the call options strike price and as we’ll see in an example in just a moment the ability to purchase shares at the call options strike price which never changes we’ll get immensely valuable if the stock price increases significantly higher than that call options strike price because the option can then be used to purchase shares of stock at a steep discount to the current share price so without getting into an actual option or stock market example just yet let’s explore what a call option does and how it works by using a very simple example let’s imagine that there is a house and the current value of this house is $200,000 now .
I am personally interested in buying this house because .
I think that the value of the house is going to appreciate significantly over the next two years but .
I don’t want to buy the house right this second so .
I’m going to buy an option that gives me the right to buy the house at a price of $200,000 between now and two years from now so we can call the strike price $200,000 since my option that .
I’m buying on this house gives me the right to buy the house for $200,000 or at the strike price of $200,000 between now and the expiration date in two years from now so that’s what .
I’m gonna do .
I’m gonna buy this option that gives me the right to buy this house for $200,000 no matter what the house price does between now and two years from now but .
I don’t just get the ability to purchase this house for $200,000 between now and two years from now for free .
I have to pay for this contract because for me there has to be some sort of risk there can’t just be reward if somebody were to say you can buy this house for $200,000 between now and two years from now no matter what and you don’t have to pay for that right at all well that would be amazing for me because if the house price Falls .
I don’t have to buy the house but if the house price goes up to $300,000 and then .
I can buy the house at 200,000 and there was never any risk for me but there was only reward so that’s not a real scenario and for me there has to be some risk and what that means is that .
I have to pay a premium or the right to buy this house at $200,000 between now in two years from now so we would call that the option premium let’s say that .
I pay ten thousand dollars for this option so .
I’m saying .
I want to buy this house for two hundred thousand dollars which is the strike price between now and two years from now which is the expiration date and my premium for having that ability over that time frame is ten thousand dollars now let’s say that one year from now the house is valued at three hundred and fifty thousand dollars .
I have possession of a financial contract that gives me the right to purchase that house for $200,000 and with the house currently valued at three hundred and fifty thousand dollars what do you think that means for the value of the financial contract that .
I have which is called an option well as you might imagine since .
I can buy the house for $200,000 but the house is currently valued at three hundred and fifty thousand dollars the financial contract that .
I have which is called an option is immensely valuable so now .
I can actually exercise my option meaning that .
I will buy the house at the strike price which is two hundred thousand dollars and since the house is currently valued at three hundred and fifty thousand dollars .
I am buying something that is worth three hundred and fifty thousand dollars for a value of two hundred thousand dollars and because of that we could say that my profit from this scenario is one hundred and fifty thousand dollars so that’s the golden scenario now because .
I paid $10,000 for the option initially my net profit in this case would not be the full one hundred and fifty thousand dollars it would be one hundred and forty thousand dollars so my total profit – what .
I paid for the option initially so that is the golden scenario but let’s say the opposite happened and the house price did not increase and actually fell to one hundred and fifty thousand dollars two years from my purchase date of that option well .
I don’t actually have to buy the house for $200,000 because .
I had an option to buy it but .
I don’t have to exercise my right to buy the house at the strike price so since the house is at 150 thousand dollars obviously .
I don’t want to buy it at my strike price of $200,000 because if .
I really wanted that house .
I could just buy it at the current market price of one hundred and fifty thousand dollars and because of that the option that .
I have is worthless in since .
I paid $10,000 for that option and now it is not worth anything .
I have lost my full ten thousand dollars that .
I invested into that option but if we compare this to the loss .
I would have had if .
I purchased the house initially without buying an option .
I would have paid two hundred thousand dollars for the house and at the current price of one hundred and fifty thousand dollars .
I have lost fifty thousand dollars as opposed to the ten thousand dollars that .
I lost in my option premium example so with the option .
I only lost ten thousand dollars but if .
I would have just bought the house initially .
I would have lost fifty thousand dollars so with options you have limited risk and immense upside potential which is why traders love to buy options so let’s take all of these concepts that we just discussed with this basic house example and let’s look at it with a real option example in the stock market and for this first example we are going to be looking at a call option on Tesla which is everybody’s favorite stock right now unless you’re short then maybe it’s not so much your favorite stock in this real image of Tesla options .
I have set up an order to purchase the Tesla call option with a strike price of $800 and an expiration in June which is thirty nine days away as of this image the strike price of this call option is eight hundred dollars which means that between now and the expiration date in 39 days if .
I own this contract .
I have the right to purchase 100 shares of Tesla stock at the call options strike price of $800 so in our house example it was just buying one house so therefore we would say the option contract multiplier in that case is one but in this case since .
I can buy 100 shares of test the stock at the options strike price the option contract multiplier is set to be 100 and because of that we have to look at the options price and multiply it by 100 to actually get the options value or option premium now let’s note that the current Tesla stock price is eight hundred and eleven dollars so the stock price is the current market price of the shares but we are looking at a call option with a strike price of eight hundred dollars in the bottom middle of this image we can see that the option price is 81 dollars and seventy cents but remember this is not the actual value or premium of the option this is the option price to get the options actual value or the cost of purchasing this option one contract is actually eighty one dollars and seventy cents multiplied by the option contract multiplier of 100 which gives us an option value or option premium of eight thousand one hundred and seventy dollars now this is a really expensive option now don’t worry because not all options are this expensive but we’ll talk about exactly why this option is so expensive in just a little bit but why would this option be worth over eight thousand dollars that seems a little bit crazy remember a call option buyer can use the call option to purchase 100 shares of stock at the call options strike price between now and the expiration date and in this case the expiration is 39 days away so let’s say that .
I think Tesla shares are going to increase significantly over the next 39 days .
I’m gonna buy this Tesla call option right now with a strike price of $800 and .
I’m going to pay the premium of eight thousand one hundred and seventy dollars to buy this call option just one contract now let’s say two weeks from now Tesla has had a massive rally in the stock price and now Tesla shares are trading at $1,000 per share well .
I have in my possession a financial contract called a call option that gives me the right to purchase 100 shares of Tesla stock at my call options strike price of $800 but Tesla shares are currently trading for $1000 so with my option .
I could exercise my option meaning .
I want to go through with what the option allows me to do which is with a call option purchase 100 shares of stock at the strike price and if .
I do that .
I will buy 100 shares of Tesla stock at the strike price of $800 so if we take $800 per share times 100 shares .
I will pay $80,000 to buy that share position but Tesla shares are currently trading for $1000 so if .
I go ahead and turn around and sell my shares if .
I sell 100 shares for $1,000 per share .
I will .
I will receive $100,000 for selling those shares so my profit in this scenario is $200 per share multiplied by 100 shares giving me a $20,000 profit but remember that .
I paid eight thousand one hundred and seventy dollars for this option initially so my twenty thousand dollar profit – my initial cost of entering the trade of eight thousand one hundred and seventy dollars gives me a net profit of eleven thousand eight hundred and thirty dollars if .
I make a profit of eleven thousand eight hundred and thirty dollars on an initial trade cost of eight thousand one hundred and seventy dollars my return on that position is one hundred and forty five percent so the reason a trader would pay so much for a Tesla call option is because the Tesla shares are incredibly volatile and can move around hundreds of dollars in just a few days time so if a trader believes that Tesla’s stock price is going to surge in the near term they might buy a call option and by doing so if they buy the call option and then the stock price increases significantly the value of their call option will also surge because the ability to buy shares of stock at the fixed strike price gets immensely valuable as the share pray rockets to higher and higher prices but we need to discuss something that’s extremely important and it’s a major sticking point for options trading beginners and this is that when you are trading options very rarely will you actually exercise the option to purchase shares of stock at the call strike price and then sell them at the current market price as .
I just described in this Tesla example the reason .
I described it like that is because as an options trader you have to understand where the prices are coming from and why the price changes make sense so in the case of buying this 800 call option when Tesla is at 811 dollars if the stock price goes to $1,000 .
I have a contract that allows me to buy 100 shares of stock at my strike price of $800 so then .
I could exercise that right buy the shares at 800 and sell them at 1000 which would give me a two hundred dollar profit per share but here’s the thing an option will always include the benefit that it provides the owner in its price so the option price will always embed any profit that can be made by exercising it so in the example where .
I buy the 800 Tesla call option and the stock price goes to $1000 since .
I have a call option and the call option can buy shares of stock $200 below the current stock price of Tesla my call options price will be at least $200 and that’s just the price so if we multiply by the contract multiplier of 100 we get an option value of at least $20,000 now it’s a law that an option has to be worth at least the benefit that it can provide the owner and by benefit .
I mean if .
I exercise the option do you buy 100 shares of stock at 800 and the stock price is currently at a thousand the benefit or the profit that .
I could make by doing so is $200 per share and that means that the call options price must be worth $200 or more so in this Tesla example .
I mentioned that .
I could buy the call option the stock price increases that .
I could exercise the call option but in reality you would not exercise the call option you would simply sell the call option at the higher price and you would make the difference between your purchase price and your sale price so it’s just like buying shares of stock when you buy shares of stock your goal is to see the shares increase in value and then you can sell the shares at the higher price and secure your profit with options it’s the exact same thing 99% of the time when you are trading options you will be trying to trade options with the goal of profiting from the price changes of the options very very rarely will you actually want to exercise the option because you don’t need to exercise the option because the benefit or the profit that you could make by exercising the option will be embedded in the options price so .
I really want you to internalize the fact that when you’re trading options you don’t have to exercise the option to realize the profit the profit will be realized by selling the option at a higher price if you are buying options so really quickly if we just want to fact-check what .
I just said let’s look at an option on Tesla with a strike price $100 below the current stock price that option is worth more than $100 so that checks out if we look at a call option with a strike price $200 below Tesla’s current share price that call option is going to have a price higher than $200 so that checks out as well so .
I want you to internalize that when you’re trading options you do not have to exercise the option to realize the profit and 99% of the time you are going to be trading options with the goal of profiting from the price change in the options at which point you could close your position and you could realize the profit which will be the difference between your purchase price and your sale price so let’s take a look and see exactly what actually happened with this Tesla call option as it turns out the day after .
I took the first image where Tesla shares were at 811 dollars Tesla was actually higher so .
I took another screenshot to look at that same call option with the increase in Tesla share price so that we could see exactly what happened to that call option with the passage of one day and an increase in the stock price so let’s take a look the stock price in this image is now 836 dollars which is a $25 increase from the Tesla share price of 811 dollars that we just looked at a moment ago so now that the share price is 836 dollars let’s go ahead and go to the June expiration and look at the call option with a strike price of $800 and see exactly how that option price changed given the increase in Tesla’s stock price as we can see the 800 call option in that June expiration cycle is worth 94 dollars and 10 cents and if we multiply that price by the option contract multiplier of 100 we get an option premium of nine thousand four hundred and ten dollars so if .
I purchased that call option just the other day and .
I paid eight thousand one hundred and seventy dollars for that call option and held it until today which is the share price of eight hundred and thirty six dollars which is a $25 share price increase from when .
I purchased the call option now my 800 call option is worth nine thousand four hundred and ten dollars so now .
I could just go ahead and sell the call option for nine thousand four hundred and ten dollars and my profit on that trade would be one thousand two hundred and forty dollars a one thousand two hundred and forty dollar profit on an initial trade cost of eight thousand one hundred and seventy dollars gives me a return of 15% but Tesla’s stock price itself only increased by three percent so this is another benefit of trading options and this is one huge draw of options is that they give you leverage so in this case we saw a three percent increase in the share price of Tesla but this 800 call option in the June expiration cycle saw a 15% increase in its value so the stock price went up 3% but the call option went up 15% which means comparing the two returns the return in the call option was five times more than the actual return in two shares themselves this is exactly how options traders make money they think that something will happen with the stock price they put on their position if that happens their position benefits by seeing an increase in its value and then they can go ahead and sell their position at the higher price and their profit is the difference between the two prices so it’s just like trading shares of stock if you buy a share of stock for $100 per share and it goes up to 125 dollars per share you can sell your shares for 125 dollars a share and your profit is the difference which is $25 per share or 25% so it’s the same idea with options trading except with options trading you have a more narrow time frame because as .
I mentioned earlier with shares of stock you have no time limit but with options since you have to choose an expiration you do have a time limit and because of that it is a more sensitive activity but the reason people do it as we just saw in this test little example is that it can leverage your returns if you are right so through this example we learned a few things about call options first is that the first option type is a call option the second is that the call option has a strike price and that means that the call option can buy shares of stock at the call options strike price between now and expiration so that is what a call option does and because the call option can purchase 100 shares of stock at the call options strike price if the share price increases immensely that ability or value is going to be immensely valuable because if the share price ends up being $200 above that strike price then you have a financial contract that allows you to buy 100 shares of stock $200 below the current stock price and obviously that’s a pretty sweet deal but also what we learned was that you do not have to exercise the option to realize your profit because one of the laws in options trading is that an option must be worth the benefit or the profit that it provides the buyer should they decide to exercise it so what .
I mean by that once more is that if .
I buy a call option on Tesla with a strike price of $800 and the stock price increases to $1,000 if .
I decide to exercise my call option .
I will buy 100 shares of stock $200 below the current stock price and because that will give me a profit of $200 per share that call option must be worth $200 or more meaning that the premium has to be $20,000 or more and if you look at any call option and you look at the difference between the stock price and the strike price the option will be trading for at least that amount because it is a law and options trading that all option prices must include the benefit that they can provide the owner at that moment and the last thing that we learned about call options is that they provide leveraged returns so in this Tesla example the share price increased by 3 percent but the call option that we were looking at actually increased by 15 percent which means the return and the call option was 5 times higher than the return in the shares themselves so everything seems great and all but .
I know you’re wondering what’s the catch and there is a catch the catch when buying call options is that you have to be right about the stock price increasing otherwise you will lose money on that trade so in the house example remember that .
I bought a call option with a strike price of $200,000 and .
I paid ten thousand dollars in premium for that call option and remember in my second scenario .
I said that the house price goes to 150 thousand dollars but .
I have a financial contract called a call option that allows me to buy that house for $200,000 but since the curve valuation of that house is 150,000 dollars there’s no benefit of having my call option because my call option gives me the right to buy the house fifty thousand dollars higher than the current market price of the house and obviously .
I don’t even need the option to do that if .
I want to buy the house .
I can just buy it for the lower price of one hundred and fifty thousand dollars which is the current market price and in that example .
I said that my option would be worthless and because of that .
I lost the entire ten thousand dollar premium for buying that call option on that house when the house price did decrease so there is a catch when buying call options and that is that you need the stock price to increase otherwise you will lose money on that transaction and we’ll talk very in detail later about why buying call options or buying options in general will lose money if the stock price does not change but for now .
I want to focus on teaching you the basic option trades and how the two option types move with the stock price and how traders actually make money when trading options .
I need some water .
I just talked a lot alright let’s keep going so let’s go ahead and really quickly look at an example where a call option trade does not make money because the stock price falls and we’ll see exactly what happens to the call options price as that is happening in this image we are looking at the shares of .
Adobe which has the ticker symbol a DB.
E and we are looking at the shares on May 6th on this date .
Adobe shares closed at three hundred and sixty two dollars per share let’s say a trader thought that the upward trend in .
Adobe shares would continue so they went to the May expiration cycle and they bought the 380 call option so the call option in the May expiration with a strike price of three hundred and eighty dollars and let’s look at a chart of that exact option so we can see how the option price changes as the stock price is changing side by side on May 6th the May 380 call option closed at a price of $1 and 92 cents so that means the premium or the value of that option is 1 and $92 meaning that if .
I wanted to buy one of these call options .
I would need to have 192 dollars available in my trading account so let’s say a trader buys this 380 call option and they pay in 192 dollars to enter that trade as we can see the option price initially jumped higher as the share price continued higher but then unfortunately things turned around the stock price crashed and with it the call options price decreased as well the very last data point on this call option chart the option only had one day left until expiration and with a strike price of 380 dollars and with .
Adobe shares significantly below that at about three hundred and fifty five dollars per share the 380 call option with one day left until expiration was essentially worth $0 it was just a couple pennies but essentially that means that the option is worthless we’ll explore exactly why this happens in just a little bit but for now just understand that if you buy call options and the stock price decreases and is below the call options strike price as the option gets closer and closer to expiration the options price will steadily approach zero dollars or being worthless by the time of expiration and that’s because if the stock price is well below a call options strike price near expiration there is little value in having that call option because traders don’t need the call option to buy shares of stock so if .
I bought this call option initially for one hundred and ninety two dollars and a few days later the stock price was way lower the option was close to expiration and the option was worth only a couple pennies then .
I would have essentially lost 100% of the premium that .
I paid for that option since if .
I buy something for a hundred and ninety two dollars and its value Falls to zero .
I have lost everything that .
I put into that position and if .
I held this option through the expiration date and the strike price is three hundred and eighty dollars but the stock price is below three hundred and eighty dollars when the option expires .
I don’t have to do anything because the option will simply disappear from my account as it will expire worthless and .
I will be left with the full loss of one hundred and ninety two dollars on this trade alright let’s take a quick breather because .
I know we just went through a lot of information in a very short period of time and .
I want these videos to be information dense but unfortunately for our brains that means that we are going to get some headaches and if your head hurts right now do not worry about it at all because my head hurts even having seven years of experience in this industry it doesn’t matter how much experience .
I have going through these examples and explaining all the numbers it makes my head hurt too so let’s take a quick breather take a glass of water do whatever you need to do and then let’s get back to it so now we are going to move on to the second option type so thus far everything we’ve talked about has been call options and particularly buying call options and how that trade works so now we are going to explore the second option type which is called a put option now if you started to understand how call options worked in the previous section then you’re gonna pick up put options just like that because the concepts are all exactly the same except everything is flipped on its head so with put options put option prices actually increase as the stock price is falling and they actually decrease as the stock price is increasing the reason that is is that a put option gives the buyer the right to sell 100 shares of stock at the put options strike price between now and expiration so while call options allow you to buy 100 shares of stock at the call strike price put options allow you to sell 100 shares of stock at the put options strike price so because of that put options actually increase in value as the share price is falling because the ability to sell shares of stock at the put options fixed strike price gets more and more advantageous as the share price is falling and just like we did for the call options we are going to look at numerous put option examples so that you can understand and that you can see how these traits perform and what you need to happen to make money when trading put options so let’s get started with an example and look at an image that .
I recently captured in .
IWM which is the Russell 2000 .
ETF in this image and in this moment the first thing that .
I want you to notice is that the .
IWM share price is 130 dollars and 71 cents again we are going to go to the Jun options and this time the Jun options expire in 38 days in this example .
I’ve set up an order to purchase the Jun put option in .
IWM with a strike price of 130 dollars so the stock price is currently 130 dollars and 71 cents and the put option trade that .
I am looking at is buying the put option with a strike price of 130 dollars that expires in June which is 38 days away as we can see in the bottom middle of this image the put options price is $6.24 but as we’ve discussed to get the actual value or the premium of this option we have to take that price of $6.24 and multiply it by the option contract multiplier of 100 to get the options cost value or premium of 624 dollars and that’s because just like call options a put option can sell 100 shares of stock at the puts strike price so the put option contract multiplier is the same as calls and to get the actual cost or the value or the premium of the option whatever you want to call it is the price which in this case is $6.24 multiplied by the option contract multiplier of 100 which gives us an option cost or premium of 624 dollars and we can verify that this option is worth 624 dollars by looking at the maximum loss on this trading platform the maximum loss says 624 and when you buy options the most you can lose is the premium that you pay for the option as we briefly discussed in the previous call options section now you might be wondering the stock price is currently at one hundred and thirty dollars and seventy two cents but the options strike price for the put option that we are looking at is one hundred and thirty dollars and since a put option gives the buyer of that option the right to sell 100 shares of stock at the put options strike price between now and expiration why is this put option worth six hundred and twenty four dollars when there’s really no value in owning this put option .
I could just sell shares of stock right now for one hundred and thirty dollars and seventy two cents and .
I would sell it at a higher price than .
I could sell these shares for by using my put option so why is this put option valuable when the stock price is above the put options strike price we’re not going to talk about it right now but this is just something .
I want to put on your radar because in the next section we are going to dive in exactly why this is but for right now .
I want to focus on how put options work and how their prices change relative to the stock price but .
I want you to just notice that the strike price of this put option is one hundred and thirty dollars but the stock price is currently above that strike price but this option still has pretty significant value so .
I want you to just be aware of that we’re not going to discuss why that is right this second but if you were wondering why is this put option valuable when the stock price is above its strike price .
I want you to know that .
I hear your questions and we are going to get to it in the next section but for now .
I want to focus on teaching you how put option prices change relative to the stock price and why that happens so let’s go ahead and see what happens with this .
IWM put option so a few days later as luck would have it .
I took another screenshot of .
IWM and this time .
IWM had fallen significantly since the first image that .
I captured where .
IWM was over 130 dollars purse in this image .
IWM is currently at a share price of one hundred and twenty two dollars and seventy two cents which is essentially eight dollars lower than it was in the first example if we look at the 130 put option in the June expiration cycle in this second image with .
IWM share price significantly lower we can see that the 130 put in the June expiration cycle is trading for $11.30 meaning that the option has a value or premium of one thousand one hundred and thirty dollars the put options value surged because the share price of .
IWM fell and because put options have the ability to sell 100 shares of stock at the puts strike price and since the put strike price was 130 since we saw i but .
IWM go from 130 71 all the way to 120 to 72 the put option is now in the money so to speak meaning that the stock price is significantly below the put options strike price of 130 dollars and now that this option can actually provide a benefit to the buyer of that option meaning that if .
I bought this option a couple days ago for 624 dollars in premium and now the share price is 120 to 72 which is way below the strike price of 130 .
I could use my put option to sell shares of stock at 130 which is immensely valuable because the stock price is currently well below that at 120 to 72 but remember earlier .
I said that you never have to exercise an option to realize the profits and we can see that is the case because the option in this example with the lower stock price is $11.30 so if .
I had purchased this put option on day one and .
I paid six hundred and twenty-four dollars for this option and .
I hold it until this image where it was worth one thousand one hundred and thirty dollars if .
I sold this put option .
I would secure a profit of five hundred and six dollars on a 624 dollar initial trade cost and if .
I secure a profit of five hundred and six dollars on an initial cost of six hundred and twenty four dollars my return on that trade is eighty-one percent but if we look at the percentage change in the shares of .
IWM initially they were at one hundred and thirty dollars and seventy one cents but then they fell to one hundred and twenty two dollars and seventy two cents which is a six point one percent decline in the share price of .
IWM but the 130 put option that we were looking at experienced a price increase of eighty one percent and again that means that when you buy put options you have leverage not just like we did with the call options section .
I know you’re already thinking what is the catch and there is a catch just like with buying call options when you buy put options if you buy put options and the stock price does not decrease you will lose money so in this example where the .
IWM share price was 130 dollars and 71 cents if .
I bought that 130 put option for six hundred and twenty four dollars in premium and at the at the time of June expiration .
IWM was above one hundred and thirty dollars per share because .
I don’t actually need to use my put option to sell shares of stock at the strike price of 130 because if the share price is higher than the strike price .
I can just sell shares of stock in the open market and there is really no value in owning my call option so just like with call options if you buy a call option and the stock price doesn’t increase or decreases you will lose money and with put options if you buy a put option and the stock price does not fall or the stock price increases you will lose money so we’ll look at an example of that right now and for this example we’re gonna look at a put option trade in .
Invidia and obviously this trades gonna lose money because who is buying puts in invidia who is betting against Nvidia come on man on May 1st Nvidia share price closed at 280 three dollars in the middle of a pretty vicious sell-off so let’s say a trader thought that the downside would continue in nvidia huge mistake and they went and bought the 280 put option in the may expiration cycle with nvidia shares at 283 on May 1st the May 280 put option meaning the put option in the May expiration with a strike price of 280 dollars was trading for $11 meaning that .
I would have to pay $1,100 in premium to buy one of these put options at the strike price of two hundred and eighty dollars and expiring in May which had about two weeks to expiration at the time of entering this trade so let’s say a trader buys this 280 put option paying $1,100 in premium for the put option that expires in two weeks in the May expiration and has a strike price of 280 unfortunately that trader would have lost everything that they put into that trade because immediately after that sell-off after May 1st the stock price did end up surging higher and therefore the put options price collapsed and in the most recent date on this chart we can see that Nvidia stock price was at around three hundred and twenty one dollars over $40.00 higher than the put options strike price of two hundred and eighty dollars and on the very right hand side or the last bar seen in this option chart the option only had one day left until expiration and with the stock price over $40.00 above the put options strike price and with only one day left until expiration the option is basically going to expire worthless because the stock price needs to fall over $40 for this put option to gain actual value or benefit by the time it expires in one day and because of that and since there’s such a low probability of that happening we can see that this put options value one day before expiration and with a strike price $40 below the stock price that put option was trading for one or two pennies meaning that it was essentially worthless so if a trader bought this put option for $700 and they held it until the expiration when NV.
A was three hundred and twenty dollars or higher they would have lost the entire $1100 premium that they paid for this put option because the put option would have expired worthless now if the stock price is above the put options strike price at expiration the put option will expire worthless meaning that if you have a position in that option it will disappear from your trading account after the expiration date and you will be left with whatever profit or loss you had on that position and in the case of buying a put option you will have a loss since if in this case you bought the put option for $1100 and it expired worthless you would have a loss of $1100 on that trade so while you can make significant returns on your investment or trade cost when you are buying put options obviously you can lose a hundred percent of what you pay for those put options which means that while you can make a hundred percent returns on the trade cost you can also lose a hundred percent when you are buying options but the big benefit of buying put options is that compared to shorting 100 shares of stock buying put options is far safer by a long shot if you’re not familiar with what shorting stock is shorting stock is essentially betting against the stock meaning that you make money when the share price falls but if you short a stock where you bet against the stock price increasing since there’s no limit to how high a stock’s price can go when you’re shorting stocks you have theoretically unlimited loss potential so in that case if you were comparing shorting 100 shares of stock to buying a put option you would have much less risk buying a put option compared to shorting 100 shares of stock so in this Nvidia example if .
I shorted a hundred shares of stock at 280 dollars per share and the share price went to 320 .
I would have a loss of $4,000 so a $40 loss on 100 shares would give me a loss of $4,000 but in this example we saw that the put option purchase only lost $1,100 so when you compare shorting stock to buying a put buying it put is in my opinion a much better way to do things if you’re unfamiliar with what shorting stock is and how it works .
I will leave a link down in the description below so that you can get my video explanation and demonstration of shorting a stock by the way you can download a full PDF of all of the slides and the images shown in this presentation so if you want to download that you can do so for free and you don’t have to put in an email address to be honest with you the only reason .
I would want your email address is to send you my future YouTube videos so if you download that PDF .
I would love to have your support and see you in my future videos by having you as a subscriber we’ve covered a lot of content thus far my head hurts a little bit but .
I can still keep going and .
I hope you can too but .
I want to really quickly just say that if you made it this far you are doing a great job because we have discussed the two most basic options trades that you can make which are buying call options and buying put options but before getting to the next two options trades that make up the four most basic options trades that you can make .
I want to talk more about option prices more specifically in the Tesla example when the stock price was at eight hundred and eleven dollars why was the call option with a strike price of eight hundred dollars only eleven dollars below the share price why was that option worth over eight thousand dollars and also in the .
IWM example the stock price was 130 dollars and 71 cents but the put option with a strike price below that at 130 dollars was worth 624 dollars so .
I would like to go and explore those prices with you and explain to you why those prices make sense and where option prices come from in more detail before moving on to the other options trades that you can make as an options trader so let’s get started in this next section we are going to be talking about the components of option prices we’ve already kind of talked about the real value that an option can provide the owner in certain scenarios and depending on whether we’re talking about a call option or a put option but as we discussed and as we saw in the previous examples particularly the .
IWM example that does not fully explain where an options price comes from so in this section we are taking a deep dive into option prices and .
I am pretty confident that after this section options are going to make a whole lot more sense to you so let’s dig in there are two components that make up the whole of every options price the first is called intrinsic value and the second is called extrinsic value you don’t know it yet but you essentially already know what intrinsic value represents in an options price remember when .
I had the house example where the house was three hundred and fifty thousand dollars and .
I had a call option on that house with a strike price of two hundred thousand dollars in that example since my call option allows me to purchase the house for $200,000 and the house is currently one hundred and fifty thousand dollars above that at three hundred and fifty thousand dollars we would say that that call option in that example had a hundred and fifty thousand dollars of intrinsic value meaning that the option contract was worth at least a hundred and fifty thousand dollars because me as the owner of that option .
I could use that option to buy the house for a hundred and fifty thousand dollars lower than the current market price of three hundred and fifty thousand so that is what intrinsic value is for puts it’s the opposite so if you have a strike price of one hundred and thirty dollars and the stock price is at one hundred and twenty dollars you have a put contract that can sell shares of stock ten dollars higher than the current stock price and that has real or intrinsic value equal to ten dollars so since the put option can sell shares of stock ten dollars above the strike price we say that the put option has $10 of intrinsic value in the Tesla call option example where .
I purchased the 800 strike call option and Tesla shares go to $1,000 per share since that call option has the ability to purchase shares of stock $200 below the current stock price in that instance the call option has $200 of intrinsic value and .
I also told you that an options price must be worth the benefit that it can provide the owner at that moment and what .
I really meant by that is that an options price must be worth at least the amount of its intrinsic value because the benefit that it can provide the owner at that moment that is the minimum that the contract should be worth so if .
I had that Tesla call option with a strike price of $800 and the stock price is at $1,000 since .
I personally could use that option to make a $200 gain on the shares if .
I exercise the option but .
I don’t want the option .
I’m not gonna sell it to somebody else for any less than $200 and that’s because if .
I use it myself the benefit to me could be a $200 gain per share so if .
I want to sell to somebody else it’s going to be worth at least that amount or more when .
I sell it to them so let’s go to that Tesla call option example and let’s look at the image where the stock price was currently at around a hundred and thirty six dollars per share in this image the share price of Tesla is eight hundred and thirty six dollars and forty-one cents and again we are looking at the call option with a strike price of eight hundred dollars now because this call option has the ability to purchase shares of stock at eight hundred dollars but the share price is eight hundred and thirty six dollars and forty one cents this call option has thirty-six dollars and forty one cents of intrinsic value but we can see that the options actual price is much higher than its intrinsic value because the options price is currently 94 ten in this image so the portion of the Tesla call options price that is above its intrinsic value of $36 and 41 cents is called extrinsic value and extrinsic value is sometimes referred to as time value because it can be associated with the options potential to become more valuable particularly intrinsically valuable before it expires so in the case of this test a call option there are over 30 days left until that option expires but right now in this moment it has 36 dollars and 41 cents of intrinsic value but since the options price is currently 94 dollars and 10 cents the additional fifty seven dollars and 69 cents in the options price is extrinsic or time value now let’s think about this Tesla shares are incredibly volatile and with an option that has over 30 days to expiration there is a lot of time left for Tesla shares to move around a lot particularly in the case of this call option if Tesla were to go to $900 this 800 call option would now have $100 of intrinsic value so just because it only has 36 dollars and forty one cents of intrinsic value right now there’s the potential that the option will have significantly more intrinsic value in the future if Tesla shares increase by a significant amount which is certainly possible considering that Tesla shares can move around hundreds of dollars in just a few days time so that explains why this option has a lot of extrinsic value or time value in its price the current real value or intrinsic value of this call option is only $36 and 41 cents right now but it has almost 60 dollars of extrinsic value or time value because with over 30 days left until this option expires there is plenty of time left for Tesla to make a big upside movement and that would leave this call option with significantly more intrinsic value so you can think of an options extrinsic value as the time value or the potential for that option to become significantly more valuable through share price movements between now and expiration now this brings us to a very important point about extrinsic value or time value options with more time until expiration will trade with significantly more extrinsic or time value compared to the same exact option with less time until expiration and what .
I mean by that is if we look at two call options with the same strike price and we look at two different explorations the call option that has a further expiration date will be trading with significantly more extrinsic value because there’s lots more time left for the stock price to move and therefore cause the option to become significantly more valuable particularly intrinsically valuable now the .
IWM put that we looked at earlier it should make complete sense why the put option was worth 624 dollars when the strike price of the put was 130 dollars but the price of .
IWM shares at that moment were actually above 130 dollars the reason that the put option was worth 624 dollars is because it had over 30 days to expiration and in a 30 day time period especially right now during the corona virus pandemic and the market volatility that we’re seeing there is certainly a good possibility that .
IWM Falls significantly and for that reason that 130 put option would become significantly intrinsically valuable and that’s exactly what we saw happen so the reason that the put option was valuable even though it did not have any intrinsic value is because it still had lots of time left and since the strike price was close to the stock price any downside movement and the stock price would leave the option intrinsically valuable which as we know is exactly what happened so if an option doesn’t have any intrinsic value it doesn’t mean that the option isn’t anything because if it has lots of time left until expiration then there’s still lots of time left for the stock brakes to move and that could leave the option with intrinsic value or real value but as we saw in our losing call option and put option examples if an option does not have any intrinsic value but also does not have a lot of time until it expires then there is very little time for that stock price to move and therefore there’s very little time for that option to actually become intrinsically valuable now one of the most important concepts to understand and option trading is what we call extrinsic value decay or time decay as .
I’ve just described options with more time until expiration will trade with more extrinsic value or time value and .
I also said that options that are expiring very soon will not be trading with significant levels of extrinsic value or time value because there’s not a lot of time left for the stock price to move and therefore there’s not a lot of time left for the option to become intrinsically valuable so to look at some real examples as .
I like to do in this video let’s look at some .
Apple call options and we’ll look at a call option with the same exact strike price but in different expiration cycles and we’ll compare the values of those options in the exact moment that .
I took this screenshot .
Apple shares were currently trading for three hundred and four dollars and 92 cents and .
I have opened up a couple different expirations so that we can compare the option prices so let’s focus on the call options with the strike prices of three hundred and five dollars and since the stock price is below three hundred and five dollars these call options have 100% extrinsic value so since they don’t have any intrinsic value because the stock price is below the strike price the prices of these options are entirely extrinsic meaning that they are entirely associated with the time left until expiration and for the possibility that .
Apple could make a big movement over those specific time periods as we can see the call option with a strike price of 305 dollars in the January 2021 expiration cycle is trading for $34 meaning that the cost or premium of that call option is $3,400 so this option has 246 days until expiration and since there’s 246 day left until expiration and the stock price is already right at the options strike price with over 200 days left until the option expires there is plenty of time for .
Apple to make a big stock price movement particularly to the upside which could leave this option with significant intrinsic value so the reason that this 246 day call option is worth over $3,000 is because .
Apple can make a pretty large move in the stock price over a 250 day period as compared to a 1 day period so the option prices will reflect this if we look at the 3:05 call option in the May expiration cycle this option expires in one day and the cost or premium of that option is three hundred and seven dollars which is the price of 307 times 100 so if we compare the one-day 305 call to the 246 day 3:05 call we can see that the 246 day call is about 10 times more expensive than the one-day 3:05 call and that’s because with 245 more days until expiration there is a greater potential value in the 3:05 call expiring in 246 days as compared to the 3:05 call expiring in one day so the reason that the one day call option with a strike price of 305 he’s only worth 307 is because .
Apple is not going to make a $100 movement in the stock price over the next one day but over the next 246 days that is a much higher probability of actually occurring so the reason that a longer-term option will trade with more extrinsic value or time value is because there’s a lot more time left for the stock price to move and because of that there’s a lot more time left for the option to become intrinsically valuable so if we can imagine that .
I buy that 246 day call option for $3,400 and hold it until it only has one day left until expiration and .
Apple is still right at 300 492 then we could think that .
I would lose about $3,100 on that position and that’s because if .
I buy a call option with 250 days to expiration that is 100% extrinsic value and .
I pay thirty four hundred dollars for that option but with one day to expiration that same option is worth three hundred dollars well .
I will lose $3,100 on that trade simply from the passage of time and that is called extrinsic value decay or time decay so that just means that as time is passing and as an option approaches its expiration date it will trade with less and less extrinsic value because its final valuation is becoming more certain and what .
I mean by that is if an option has 10 minutes left until expiration and it has zero dollars of intrinsic value there’s a good chance that in the next 10 minutes the option is not going to be worth anything and because of that it’s going to be trading with very very little extrinsic value but if that same option had 10 days to expiration then it would probably be trading with a lot more extrinsic value because there’s a lot more time left for a stock price movement to occur that could leave the option with intrinsic value so in the sections of buying call options and buying put options .
I had stated that when you buy a call option or you buy a put option and the stock price does not move you will lose money and the reason you will lose money is because if you buy a call option or buy a put option that option is going to have some extrinsic value or time value in it especially if you are buying an option that is not in the money or has intrinsic value and because of that as time passes the extrinsic value will come out of option leading to a lower overall option price and if you buy something and it’s price falls you will lose money so in the next section we’re going to cover the other two options trades that you can potentially make or that will make up other strategies that you’ll learn about in the future and these strategies will actually make money when the option prices are decreasing from the passage of time and from the decrease in the extrinsic value of the options so the next two strategies that we’re going to learn which are completely opposite of the first two that we learned will actually benefit from the loss of extrinsic value as time passes and as an option approaches its expiration date but first .
I want to familiarize you with three terms that options traders use quite frequently that describe if an option has intrinsic value or only has extrinsic value and these three terms are in the money out of the money and at the money so these terms describe an options strike price relative to the stock price which essentially describes whether or not they have intrinsic value or not so in the money is any option that has intrinsic value so in our Tesla call option example if the strike price of the call option is 800 and the stock price is at 836 this option has 36 dollars of intrinsic value and for that reason we would say it is in the money but out of the money is the opposite out of the money refers to any option that does not have intrinsic value and therefore only has extrinsic value in its price so an example of an out of the money option would be the .
IWM put option that we looked at earlier the stock price was at 130 dollars and 72 cents and we looked at the option the put option with a strike price of 130 at that moment the put option did not have any intrinsic value in its price and therefore it is said to be an out of the money option but the last term is called at the money and an at the money option is any option with a strike price that is equal to or very close to the current stock price so based on that definition we can also say that the .
IWM put option was at the money since the stock price was near 130 and the put options strike price was also near 130 so .
I just wanted to familiarize you with these terms because you will hear them at some point and .
I know the jargon and the confusing terms can be confusing but as an options trading beginner it is very helpful to learn these terms because you will understand what people are talking about when you hear them okay so these next two sections are very confusing for beginners because as you’ll learn we don’t always just have to buy options we can actually bet against an options price meaning that we put on a trade that profits when the option price falls so thus far we’ve only talked about options from the perspective of buying them and similar to buying shares of stock if .
I buy shares of stock .
I make money if the stock price increases but that’s not the only way .
I can participate in the stock market .
I can also short stocks meaning that .
I can sell them first without owning them and if the share price Falls .
I can make money on that transaction by purchasing the shares or closing my position at a lower price so if .
I short a stock at $100 and it falls to $90 .
I can buy back the stock for $90 and .
I will make 10 dollars per share so the same thing can be used in options trading where we can bet against an option price and therefore we can make money when the option price decreases this is called shorting options and it is done by selling an option that you don’t own so you are selling an option as an opening trade and your goal is to buy back the option or close it at a lower price in the future so if .
I sold a call option for $5 meaning .
I collect $500 in premium and later the option price is worth $3 or has a premium of three hundred dollars .
I could pay three hundred dollars to close the option and since .
I collected five hundred dollars initially and .
I paid three hundred dollars to close it my profit on that trade is two hundred dollars in this image .
I have an order to short the one twenty five strike call option in .
IWM that is expiring in June which has thirty six days until expiration as we can see the current share price of .
IWM is one hundred and twenty dollars and fifty nine cents so first of all what does that mean about the call options price does it have intrinsic value or is it only extrinsic value well since the strike price is one hundred and twenty-five dollars and .
IWM stock price is at one hundred and twenty dollars and fifty nine cents this call options price is 100 percent extrinsic value or time value and as we discussed in the last section time value or extrinsic value comes out of the option price as it approaches expiration in the bottom middle of this image we can see that the price of this 125 call option is four dollars and sixty six cents and that means that the options cost or premium is four hundred and sixty six dollars now when you sell or short an option meaning you sell it as an opening trade you don’t pay the premium you collect the premium but in this case since the option premium is four hundred and sixty six dollars if .
I sell this call option short .
I will collect four hundred and sixty-six dollars into my account and that will be the start of the trade but just because .
I collect the premium it does not mean it’s a profit .
I have to close the trade later for a lower premium to realize a profit as the option price Falls if the stock price remains below 125 as the option price decreases in value my profit on that position will increase it is a very fluid process and it doesn’t happen it’s not a binary thing where you only get the profit at expiration it happens in real time and as the option price is changing but more importantly this is an incredibly risky strategy since there’s no upper limit to how much a stock’s price can reach when you short a stock or bet against a stock’s price from increasing you theoretically have unlimited risk and since call option prices are tied to the stock price meaning that if the stock price increases significantly the call option will take on intrinsic value and become more valuable but since there’s no upper limit to how much the stock’s price can go the call options price also has no upper price limit to get an idea as to what this 125 call option would be worth if the stock price were at its current level but the option only had one day until expiration let’s just go ahead and open up the one day expiration cycle and look at the price or value of the 125 call option that expires in one day in this expiration we can see that the 125 call option has a price of 23 cents which means its value or premium is $23 so if .
I shorted this 125 call option collected 466 dollars and 30 days later or when the option had one day left until expiration the option was only worth 23 dollars in premium .
I could buy back the call option that .
I shorted and paid $23 to close the trade and because of that my profit on that position would be 443 dollars but really quickly .
I want to mention that with this strategy since it is so risky you have to have a margin account and that means you have to be able to put collateral aside to enter that position so on this trading platform it’s saying that the buying power effect will reduce my available buying power by about $2,000 now all that means is that .
I need $2,000 in available cash or option buying power that .
I can set aside to enter this position so if .
I want to sell this 125 call option short and collect 466 dollars .
I have to set aside $2,000 in my account to account for potential losses in this extremely risky position so it is an expensive trade to enter in terms of the amount of money that you will need but .
I just wanted to mention that really quickly so that you can understand kind of the logistics around shorting options so hopefully thus far you can understand that when you buy options it’s a buy low sell high approach you buy the option you hope that the option price increases and then you can sell the option at a higher price and pocket the difference in your purchase price and sale price shorting options is the exact same but it’s in Reverse so you sell first with the goal of buying low later so you want to sell an option short you’re betting that it’s price will fall if the price does fall you buy it back at a lower price but what happens if the stock price does increase significantly after you’ve shorted a call option well let’s look at a real example and let’s go to Netflix the very left-hand side of this chart is .
April 9th and on that day Netflix shares close around three hundred and seventy dollars per share just a few days later Netflix was considerably higher closing around four hundred and forty dollars per share what do we think happened to a call option and Netflix with a strike price of $400 let’s go ahead and look at a chart of the price for the June 400 call option in Netflix through this same exact time period just to see what happened so this chart is the June 400 call option in Netflix on the very left hand side of the chart is again .
April 9th on that day this 400 call option expiring in June closed at a price of around $17 meaning the premium was around $1700 so let’s say .
I was a trader who believed that Netflix was not going to increase above 400 dollars through the June expiration and .
I thought Netflix would either trade sideways or even trade lower leading to a decrease in the call options value over that time period so to enter this trade .
I would short the June 400 call option for its premium of $1700 so .
I sort the option for $17 i collect $1700 in premium and my goal with that trade is to see netflix shares decrease or not increase above my call strike price of $400 through the expiration date in June unfortunately if we fast forward a few days we can see that Netflix shares actually closed at four hundred and forty dollars and at that time the Netflix call option that .
I was short reached a price of sixty two dollars and fifty cents if we multiply that by 100 we get a premium of six thousand two hundred and fifty dollars on that June Netflix 400 call option so since the stock price was around 440 and .
I was short the 400 call option we know that at this moment in time the call option had $40.00 of intrinsic value but since its options price was $62.50 the additional $22.50 is extrinsic value or time value so unfortunately if .
I would have shorted this call option for $1700 and its price increased to six thousand two hundred and fifty dollars .
I would have a loss on my short call position just one contract of four thousand five hundred and fifty dollars so this really highlights the risk of shorting call options if you short call options you are essentially betting against an increase in the price of the stock and if you’re right you will make the premium that you sold the call option for as the extrinsic value will come out at the option as time passes but if you’re wrong and the stock price does surge higher as it did in this case then you will lose considerable amounts of money especially if it’s a huge stock price increase in a short period of time such as the case in this call option or Netflix example so .
I shorted the call option for $1,700 in premium the stock price shot $40.00 higher than my strike price increasing a total of 70 dollars in just a few days and because of that the call option only approached expiration by a few days but the price of the stock increased significantly and was considerably higher than the strike price and because of that at that moment the option price was $62.50 or had a premium of a six thousand two hundred and fifty dollars so just on one of these trades if .
I shorted the option for $1700 and the option price or premium increased to six thousand two hundred and fifty dollars and .
I didn’t want to deal with any more losses and .
I bought back the option for six thousand two hundred and fifty .
I would have lost four thousand five hundred and fifty dollars from this trade in on just one contract really quickly before we move on .
I want to mention that it is possible to make money on a short call position even if the stock price is above the strike price due to what is called the bridge even price if you shorten an option for 17 dollars meaning in this call option example if .
I short the Netflix call option with a strike price of $400 and .
I sell it for 17 dollars then what price does the stock price have to be for the option to be worth 17 dollars or less at expiration well it’s the short calls strike price of four hundred dollars plus the option price that .
I sold it for which is 17 dollars and that gives me a breakeven price of 417 dollars why is that the break-even price at expiration well it’s because at what price does Netflix stock have to be for the 400 call to have intrinsic value equal to what .
I sold the option for meaning if .
I sold the option for 17 dollars at what price does the option have 17 dollars of intrinsic value well it’s the strike price plus what .
I received for selling the option so it’s 400 dollars plus 17 dollars gives me a breakeven price of 417 so if Netflix was at 417 dollars at the June expiration my 400 short call option would have 17 dollars of intrinsic value no more time value or extrinsic value which means it’s price would be $17 and if .
I initially sold it for $17 .
I don’t have a profit or loss so what if it what if Netflix shares are at four hundred and five dollars at expiration well the 400 call option would have five dollars of intrinsic value no more extrinsic value which means .
I would have a twelve dollar profit on my short call position so if .
I sold the 400 Netflix call for 17 dollars but the call option was only worth five dollars at expiration then .
I have a twelve dollar profit on the option meaning that .
I actually have a $1,200 profit when considering the option contract multiplier so if .
I saw if .
I short the option for $1,700 in premium and at expiration it only has 500 dollars of value or premium then .
I have a $1,200 profit on that position so .
I just wanted to point out that you can make money on a short call trade if the stock price is above the strike price but it just has to be below your breakeven price and the breakeven price for a short call position is the call strike price plus the price of the option when you sell it all right we got to move on to the fourth and final basic options trade that you can make and thus far we’ve talked about buying call options buying put options shorting call options so the fourth and final one as you might be able to guess is shorting put options so this is selling put options as an opening trade and your goal is to buy back the put option at a later date for a lower price or paying a lower premium to close that position and since put option prices increase as the stock price Falls and decrease as the stock price increases when you short a put option you are putting on a bullish trait meaning that you are putting on an options trade that will profit if the stock price increases or at least remains above your short puts strike price as time passes because in that scenario the options price will be 100% extrinsic and as time passes and as an option approaches its expiration date the extrinsic value or time value will approach zero so let’s go through an example to see exactly how this works for this example we will look at a put option in activision which has the ticker symbol eighty V.
I the very left-hand side of this chart is april 27th and on this day activision shares closed at around sixty seven dollars per share so let’s say i was a trader who wanted to profit from an increase in the share price of activision but i also was not super sure that the stock price was going to increase and i wanted to put on a position that would make money so long as the stock price remained above a certain price for this type of trade shorting a put option is perfect for this trade we will look at a put option with a strike price of $65 which is just a few dollars below activism share price of sixty seven dollars and we’re going to look at that put option in the May expiration cycle because we are looking at the May expiration cycle and the trade entry date is .
April 27th this put option at the time of entry will have a little bit over two weeks to expiration so let’s say .
I shorted the 65 put option in the May expiration cycle and .
I did that while .
Activision shares were at 67 dollars in this chart we are looking at the price changes of that May 65 put in .
Activision on the very left hand side of the chart which is .
April 27th we can see that the puts price closed around one dollar and seventy-five cents meaning that if .
I shorted this option .
I would collect a premium of 175 dollars briefly during the short call example .
I mentioned the break-even price which is the expiration price of the stock where .
I will not make or lose any money on my option position and for the short call position .
I said it was the calls strike price plus the price received for the option initially so in the case of the Netflix call the strike price was $400 and .
I collected or .
I sold the option for 17 dollars initially so therefore the breakeven price was 417 dollars for shorting puts the break-even price is the puts strike price minus the price that you receive for selling the option and that’s because put options have intrinsic value when the stock price is below the puts strike price so in this example if .
I short the put option with a strike price of $65 and the price of that option is $1 in 75 cents when .
I sell it then my breakeven price on this trade is 63 dollars and 25 cents meaning that if .
Activision is at $63.43 trade but that’s at expiration not before expiration but .
I just wanted to mention the break-even price on May 1st .
Activision shares had actually fallen and the 65-foot was actually trading for $3.82 meaning that the premium or value of that put option was 382 dollars at that moment if .
I short a put option and collect 175 dollars in premium but the premium of that put option increases to 382 dollars .
I will have a 207 dollar loss for every put option that .
I shorted so at the moment where this may 65 put option in .
Activision was worth 382 dollars since .
I initially shorted it for 175 dollars .
I have a loss of two hundred and seven dollars per contract at this moment in time but fortunately .
Activision shares turned around and they increased pretty significantly and in a short period of time and as we can see the price of the 65 put option that .
I shorted collapsed and that’s because the stock price rallied really really high relative to the put strike price reaching a price of 72 dollars and 59 cents in the shares and with my put strike price being over $7 below that at $65 and since the option only had a few days left until expiration there was virtually zero chance that the option would become intrinsically valuable by expiration not 0% but really really low and because of that the option was trading with very very little extrinsic value and we can see that by looking at the price of this put option on the final days that we have the data for so on the last bar on the very right hand side of the put option chart we can see that the put option was only trading for a few pennies so let’s say .
I bought back this option for two cents there for paying a premium of $2 to close the short put option since .
I initially shorted the put and collected one hundred and seventy-five dollars in premium and then .
I later closed it by paying two dollars in premium my profit on the trade is the difference between those two money flows and in this case that means .
I make one hundred and seventy three dollars on this put transaction .
I could have just simply allowed this put to expire worthless by holding it through expiration and therefore .
I would have made the full one hundred and seventy five dollar profit because if .
I shortly put option for one hundred and seventy five dollars in premium and it expires with a value of zero then .
I make the difference between those two prices which is one hundred and seventy five dollars but as .
I mentioned .
I would not advise holding short options through expiration because even if it’s only worth a couple pennies if for some reason .
Activision shares went from seventy two dollars and fifty nine cents and they fell to sixty dollars during that one day period well then my option with a strike price of $65 would be worth five dollars because it would have intrinsic value and that means the premium would be five hundred dollars and since that’s three hundred and twenty five dollars more than .
I shorted the option for .
I would have a loss on that position so even though .
I can just simply allow the short put to expire worthless and make the additional two dollars in profits it is not worth it because you never know and if the stock price did collapse that full winner or essentially 99 percent winner could have gone to a Sigma or sizeable loser so for that reason .
I would always recommend closing option positions before expiration so at this point in the video which is obviously more of a class at this point we have learned the four basic option trades so give it up for yourself if you made it this far because you have absorbed a ton of content and now you have seen four examples or you’ve seen examples for four of the most basic option trades that will make up every single option strategy that exists so buying calls buying puts shorting calls and shorting puts are the four building blocks of every single option strategy so the first step in your journey is to understand very clearly how these strategies work and how you can expect them to make money or lose money in certain scenarios and .
I really hope that the examples thus far in this video have helped you to accomplish that even in a short period of time such as an hour or two hours however long this video ends up being but if you’ve made it this far you have learned a ton up to this point in the video we have talked about a ton of different things more specifically the four basic options strategies we have talked about intrinsic value and extrinsic value and how extrinsic value decays away as an option approaches its expiration date and why that makes sense but now we need to discuss something called implied volatility which you should not be intimidated by this term because .
I’m gonna explain it to you very clearly in just a second but implied volatility concerns itself with option prices particularly how we can look at two different stocks and understand why their option prices are different and understand a metric called implied volatility that essentially nicely summarizes to us how the two options on these stocks compare so do not be intimidated by the word implied volatility but it’s a very important topic because we need to further understand option prices the first step in understanding option prices was talking about intrinsic value and extrinsic value but now we need to talk about implied volatility so do not be intimidated the words implied volatility if we use different words to swap out implied in volatility we would get expected magnitude of stock price fluctuations so we could we could swap out implied for expected and we could swap out volatility for magnitude of stock price fluctuations or changes so implied volatility is essentially the markets expected magnitude of a stock’s price changes in the future and what is the market or how is the market telling us that is it that it is expecting these stock price fluctuations or what is implying the level or magnitude of these stock price fluctuations well it’s the stocks option prices let’s look at two similarly priced stocks because options are somewhat a function of the stock price because a 10% move in a $100 stock is $10 but a 10% move in a $1000 stock is $100 and because of that the option price is on two different price stocks will be drastically different simply because they are different priced stocks so let’s go ahead and look at two similarly priced stocks and look at the options in those stocks with the same strike price and the same amount of time until expiration and see what we find the first stock that we were going to look at is visa with the ticker symbol V and as of this image visa shares were trading around a hundred and seventy nine dollars so let’s go to the June expiration cycle in visas options in the June expiration cycle which had 36 days until expiration the 180 call option or the call option with a strike price of 180 was trading for $7.35 now keep in mind since the call options strike price is above the current stock price we are looking at an out of the money call and that means this $7 and 35 cent price we are seeing is 100% extrinsic value or time value and also .
I just said that the option was out of the money but .
I also mentioned that options with strike prices near the stock price .
I refer to you as at the money so you could say this is an at the money call option in visa since the stock price is 179 and we are looking at a call option with a strike price of 180 but since the call option is only extrinsic value it is technically out of the money as well so this is our first stock in our comparison our second stock that we are going to look at is telehealth which has the ticker symbol TD .
OC so as of this image tella doc shares were also trading around one hundred and eighty dollars so just like we do the visa let’s go to the June expiration cycle with 36 days to expiration and look at the price of the 180 call so the call option with a strike price of 180 dollars expiring in June which is 36 days away as we can see here the 180 call option .
Intelli doc that expires in June is trading for fifteen dollars and forty-five cents and as we just saw in visa which was trading for essentially the same stock price and has a June expiration cycle with options that have the same amount of time until expiration as the ones we are looking at .
Intelli doc that 180 call option was trading for seven dollars and 35 cents but in tell a doc the 180 call option with the same amount of time until expiration is trading for fifteen dollars and forty-five cents so the call option .
Intelli doc with the same strike price and time to expiration as the visa call option that we looked at is trading for twice as much so the extrinsic value in this call option is twice that of the call and visa so if .
I wanted to buy one of the visa call options .
I would need to pay seven hundred and thirty five dollars in premium but for the one eighty call option .
Intelli doc with the same amount of time until expiration .
I would need to pay fifteen hundred and forty-five dollars for one contract so why is this we would say that tella doc has higher implied volatility than Visa and what that means in plain .
English is that the market is expecting larger stock price changes over the next thirty six days intelidox shares as compared to visa and how do we know that we know that because this the option price is .
Intelli doc are twice as expensive as the options in visa and as we have discussed earlier time value is associated with the option becoming intrinsically valuable or significantly intrinsically valuable before it expires so the fact that the 180 call option in visa is trading for $7.35 but the tele doc 180 call option is worth fifteen dollars and forty-five cents and both of these call options have the same amount of time until expiration this tells us that the market thinks that tella doc shares could increase significantly more as compared to visa shares in the same amount of time and this is called implied volatility which again is the markets expected magnitude of stock price movements in the future so since telly Doc’s options are twice as expensive as the ones in visa we know that the market is expecting much larger stock price fluctuations intelidox shares as compared to visa but why would the market think this to understand why this could be the case in visa and tell a doc let’s look at the volatility or the daily price ranges of telev .
Akshay’s and visa shares over the same period of time so what .
I’m going to do is .
I’m going to plot the high to low stock price range .
Intelli doc and then the high to low stock price range in visa every single trading day over the past few weeks and we are going to look at the basic stock price ranges for these stocks over the same period of time to see if we can learn something about the volatility that has historically been observed in these stock prices as we can see in this visualization the high to low range intelidox shares has been significantly higher on every single trading day as compared to visa shares for example on May 14th the high to low stock price range in visa meaning the highest price of the shares subtracting the lowest price of the shares on that trading day was somewhere six dollars so visa share is traded in a six dollar range on May 14th but if we look at the high to low range seen .
Aires we can see that the high to low range was somewhere around thirteen to fourteen dollars so the the stock price range .
Intelli dock on May 14th was twice the magnitude or twice the range as the daily range seen in visa shares on that same day that is a measure of stock price volatility how much the stock price has moved on a trading day now .
I’m not saying that the option prices are looking at this chart and they are saying we need to pay twice as much for telling a cop shion’s as compared to visa options but .
I decided to make this visualization to cleanly describe why the options on tell adat are much more expensive than the options on Visa and very simply it’s because the observed volatility intelidox shares has been significantly higher than the observed volatility or stock price changes that were seen in visa over the same time period alright so implied volatility is the markets expected magnitude of stock price fluctuations and what is implying the magnitude or expected magnitude of the stock price fluctuations in the future and it is the option prices so in the options world when you look at two similarly priced stocks and one has significantly more expensive option prices than another stock that has the similar share price then the one with more expensive options has higher implied volatility and that just means that the stock market or the market is expecting that stock to experience much larger stock price swings compared to a stock with lower levels of implied volatility and typically that implied volatility will be directly tied to the observed volatility in that stock as we just saw in visa and tell a doc over the past few weeks tella doc shares have seen much larger daily ranges in the stock price as compared to Visa and they are similarly priced stocks so because of that the option market or option buyers are willing to pay higher premiums for tell adoptions as compared to visa and also options sellers or people that are shorting options are demanding higher premiums to take the risk of shorting options on the higher volatility stock which is tell a doc so anytime you see two similarly priced stocks and one has significantly higher option prices it’s because that stock is probably a lot more volatile and the market particularly options traders are willing to pay much higher premiums for those options because since the stock price is moving around a lot more those options have the ability or the potential to become significantly intrinsically valuable before they expire so that is just a very high level .
I’m not gonna go super deep on implied volatility in this video .
I do have many other videos in my channel and .
I will link my most recent one below so that you can get a full deep dive into implied volatility .
I think it’s an incredibly important topic for you to understand but .
I wanted to bring it up because when we are trading options we can make money or we can lose money from the changes in the stock price we can also make or lose money from the passage of time which is quite literally the extrinsic value or time value coming out of the options but we can also make or lose money and options trading from a change in implied volatility and a change in implied volatility quite literally means that the option prices are changing so in our tell a doc and visa example visa is 180 call option was worth $7.35 intelidox June 180 call option was over $15 so because of that visas implied volatility is lower than tell adducts and what .
I’m saying by a change in implied volatility is that if the market learned up some new news related to visa and they expected significantly more stock price movements from Visa in the future or through the June expiration cycle say that options traders started to buy up those options aggressively and because of that increased demand the option prices in visa would increase meaning the extrinsic value or time value would increase in visas options so if we hold the stock price to the same and we are looking at one single trading day and visas call option with a strike price of 180 went from seven dollars and thirty five cents to fifteen dollars that would be called an increase in implied volatility and it is quite literally the options are getting more expensive relative to the amount of time they have until expiration and that tells us that the market is expecting greater levels of volatility and the stock price going forward so if .
I bought an option so .
I bought that 180 call option for seven dollars and the news came out but the stock price stayed the same and no time pass because we’re looking at one trading day and that 180 call option went from $7 or having a premium of $700 all the way up to $15 or having a premium of $1500 obviously since .
I own that call option an increase in its price is advantageous to me and .
I will profit from that so when you are buying options you can make money from an increase in implied volatility which literally means that the option prices are becoming more expensive because the market expects greater levels of volatility from that stock in the future but on the flip side you can lose money from a decrease and implied volatility or a shrinking of option prices when you buy options so if .
I bought a call option and the stock price didn’t change but all of the sudden the market expected significantly lower levels of volatility and the stock price going forward the option prices particularly the extrinsic value would collapse and because of that .
I would lose money on the decrease in my call options extrinsic value because the implied volatility or expected volatility for the stock is decreasing so when we are trading options it’s important to be aware of implied volatility because some traders like to buy options when implied volatility is really low and they like to do that because they think that they can make money when the implied volatility reaches higher levels and on the flip side of that trader is like two short options or sell them and bet against an increase in their prices when implied volatility is incredibly high because a few short options when their prices are extremely expensive meaning that there’s high implied volatility if you short the options and then a few days later the implied volatility is lower meaning that the market is expecting lower levels of volatility and the stock price going forward then you will make money from a decrease or shrinking in the valuations of those options and you can do so without any change in the stock price or without any passage of time because implied volatility changing literally means that the option prices are changing and really important changes and option prices are what drive changes in implied volatility it’s a confusing topic for beginners and for a lot of options traders to be honest that implied volatility somehow changes option prices that this percentage is is changing and the option prices are following it but in reality the option price is changing is what is causing the implied volatility to change so an insurance premium could be another analogy if .
I am working out a lot and .
I’m living a very healthy lifestyle my implied volatility so to speak or the amount of insurance premium that .
I have to pay for my insurance will be low because .
I’m a healthy individual and there’s probably not a high probability that my health will deteriorate because .
I live a healthy lifestyle so we could say that the low insurance premium is low implied volatility meaning that there is not a lot of volatility or negative consequences expected for my health but let’s say .
I changed my lifestyle and the next time .
I go to the doctor in a year .
I have admitted to them that .
I am no longer working out .
I am not eating healthy and .
I’m living a very unhealthy lifestyle well they’re going to demand a higher premium for my insurance because now .
I have more risk so there’s more risk for my health deteriorating and for me to actually need to file insurance claims and because of that they are going to ask me to pay higher premiums for my insurance so we could say that is high implied volatility so the insurance premium going from cheap to expensive that’s what causes the implied volatility to increase and vice-versa if .
I started unhealthy and my insurance premiums were high that would be high implied volatility but as my characteristics changed and as .
I became healthier .
I could pay less money in insurance premiums and we would call that lower implied volatility so the insurance premium going from high to low is what causes the implied volatility to decrease .
I left the video in the description below where .
I do my deep dive into implied volatility and so you can learn about it in depth but .
I’m not going to dive deep into it here because how add probably another hour or two hours to this video and it’s already been long enough so if you’re made it this far congratulations you have learned so much about options trading and honestly .
I’m giving you all the information that .
I’ve learned over the past seven years and .
I am packaging up all of my aha moments for you so that you can learn basically the most important options trading concepts in just a few hours and all those lightbulbs can turn on for you much faster so .
I really hope all these explanations and examples are really helping you understand how the world of options work and operate in the real world we’ve got a couple more topics to go through before wrapping up this video the next couple of things .
I want to talk about very quickly are what happens at expiration which we’ve already kind of talked about and .
I want to talk about exercise and assignment and some people will think it’s crazy that .
I waited this long in the video to talk about exercise and assignment but the reason .
I waited this long is because when you are trading options and as .
I mentioned earlier 99% of the time you are not going to exercise an option and because of that and because most traders do not exercise their options when you are shorting options most of the time you do not have to worry about being assigned so .
I did not go into detail into explaining these more boring concepts early in the video because frankly you’re not going to use them that much but it is important to understand what happens when you exercise an option and we’ve already talked about that in regards to buying call options and buying put options because the ability to exercise the options is exactly why the option prices make sense and why they change as the stock price reaches various levels so as we already discussed exercising an option is when you own an option so the people that can exercise options are those that own the options so if .
I buy a call option or .
I buy a put option .
I am the one that decides if .
I want to exercise the option and therefore buy 100 shares of stock at the strike price if it’s a call option or sell 100 shares of stock at the strike price if it is a put option but there is a balancing act to every single trade that happens and if .
I buy 100 shares of stock by exercising my call option somebody who is short that same option is selected at random through a complex process and that person will get assigned and what will they get assigned they will get assigned or obligated to fulfill the opposing share position that .
I just took so if .
I exercise a call option .
I buy 100 shares of stock at the strike price and that means somebody who was short that same exact option is selected at random because there could be thousands of people who are short that option that .
I exercised one of them is selected at random and they are assigned a short stock position or they sell 100 shares of stock at the strike price when they are signed so .
I will no longer have my option .
I will have the stock price or .
I’ll have the stock position and they will no longer have their short call position they will be given negative 100 shares or they will sell or short 100 shares of stock at the calls strike price so that is called assignment 4 put options if .
I exercise my put option .
I sell 100 shares of stock at the put strike price and .
I no longer have the option so .
I just have my short stock position if .
I didn’t have any shares or if .
I already had 100 shares and .
I exercised my put .
I effectively sell my 100 shares at the puts strike price but somebody who was short that option will get assigned so if there’s a thousand different traders and they all have one contract that they were short of that put contract and .
I exercised that put one of them is selected at random and since they are assigned and .
I sold 100 shares of stock at the put strike price a short put trader will buy 100 shares of stock at the puts strike price if they are assigned so this is exercises an assignment very basically and this is exactly what happens when an option is exercised if an option is exercised by the buyer someone who is short that option is assigned the opposing stock position that the exercising party took out so for buying for a long call option or someone who owns a call option they exercise the option they will buy a hundred shares of stock at the called strike price meaning someone will get assigned a short stock position of 100 shares at the call strike price for put options if somebody exercises the put they sell or short 100 shares of stock at the put strike price which means somebody who was short the put option will get assigned 100 shares of long stock meaning they will buy 100 shares of stock at the puts a strike price and they will no longer have the option so at expiration any option that is one penny or more in the money meaning if it has intrinsic value of one penny or more and it has healthier expiration those options are matically exercised so if .
I owned a call option with a strike price of 105 dollars and the stock price on the day of expiration closed at 105 dollars and one cent then my 105 call option would automatically get exercised and because of that .
I would buy 100 shares of stock for 105 dollars per share which is my strike price and a trader who was short that 105 call option and held it through expiration would sell short 100 shares of stock at 105 per share or if they already owned a hundred shares they would effectively sell their shares of stock so when you’re looking at expiration and this is why .
I recommended that you don’t hold options through expiration is that if they are in the money meaning they have intrinsic value of one penny or more those options if held your expiration will automatically be exercised and for that reason you will end up with a stock position corresponding to whatever option position you had so that is what happens at expiration and that is exercise and assignment in a nutshell but the reason and this is .
I’m gonna mention this really quick but .
I just did a full video that .
I really think you should watch on why options are not exercised most in most cases before expiration it’s because they have extrinsic value so a really quick example if .
I owned a call option with a strike price of $100 and the stock price is at 105 dollars and my option is worth $10 five of the option five dollars of the options price is intrinsic and the other five dollars of the options price is extrinsic and if .
I exercise my option .
I will essentially forfeit my option position and .
I will go through with buying 100 shares of stock at the strike price of 100 but since the option or the stock price is actually 105 .
I’m essentially buying a hundred shares of stock five dollars below the stock price which is a benefit to me of $500 but .
I just gave up a $1000 op to do that and by doing so .
I effectively just gave up five hundred dollars which is the extrinsic value for no reason so options that have lots of extrinsic value in their prices which means they have lots of time left until expiration and or they are at the money or out of the money or even slightly in the money those options will have lots of extrinsic value and because of that they will not be exercised because whoever exercises that option will actually give up the extrinsic value for no reason so for that options are rarely exercised before expiration and therefore since they are rarely exercised you should not worry about being assigned on an in the money short option before expiration in most cases so check out that link in the description below where .
I have a full video explaining an in-depth example and .
I go through all the numbers in great detail to explain why somebody would not want to exercise and in the money option before expiration if it has a lot of extrinsic value alright we’re almost done we’re almost done let’s go and keep going the last thing .
I want to talk about before actually getting onto the trading platform and doing these four basic options trades for you and showing you what they look like is to talk about a couple more specific things first is which stocks should you be treating when you’re trading options well not all stocks have options that you will want to trade in fact most stocks that have options you probably will not want to trade or you’ll want to trade them very carefully because you only want to trade options that have deep option markets or have a lot of market participants and trading activity in them because by doing so you will make it a very fluid process when entering and exiting your option positions if you trade options on the stock that does not have very much option activity meaning maybe there’s only you know five option contracts being traded a day or there’s very few open contracts or open interest which we’ll talk about in a second in those option contracts then you’re effectively trading with nobody that’s kind of like going and finding a bunch of food on the street and you’re trying to find someone to sell the food to you but there’s no market there so you’re just kind of standing there and there’s no counterparty to your trades so that’s kind of a weird example but it’s a good analogy nonetheless so when you are trading options you want to stick to stocks that are very active and typically if you stick to stocks with high stock trading volume or stocks that people are trading very actively if those stocks have options most of the time those options will also be very active or liquid as we as we say now there’s two things you can look at to see if an option market has a lot of liquidity or activity the first is volume which is option volume and that is the number of contracts that have traded on a particular day and every single expiration and every single option type and strike price will have its own volume since those are all separate contracts so you can look at the volume of option contracts on a stock and typically you’re gonna want to see in the hundreds if not thousands of volume but keep in mind that volume starts at zero every single day so if you’re looking at volume early in the trading session the volume could be low even though the option markets could be very liquid and active so the second thing you can look at is called open interest open interest is essentially the number of option contracts that are open between two parties so if .
I buy a call option as an opening trade and another trader shorts that call option or sells me that call option as an opening trade then open interest goes up by one so open interest tells you the number of open option contracts or existing positions in the market at a particular option type and strike price and expiration so here’s a list of just some example products with good or great option markets so we have s py .
IWM q QQ these are .
ETFs then we have .
Apple a MD C which is Citigroup .
Intel which is int C we have Tesla Facebook Netflix and the V.
IP these are all example products that have extremely active option markets and are very safe products to conduct options trades in because there’s such large markets for it there’s a lot of market participants which means the bid-ask spreads will be narrow and therefore getting in and getting out of your trades will be much easier than compared to trading and options that don’t have very active markets so you need to be careful about which stocks you’re trading and you need to make sure that you have volume and open interest but particularly open interest in the thousands if not the high hundreds close to a thousand when you are trading options on these stocks all right so we’ve talked about enough theory now .
I’m gonna actually hop over to my trading platform .
I personally trade with tasty works .
I’m not going to tell you which brokerage firm you trade with but to trade options you will need to open up a brokerage account with a brokerage firm and you will need ideally lots of option privileges to access the various strategies so some brokerage firms have a tiered privilege structure which means if you have Tier one you only get access to basic option strategies that are very conservative tier two is slightly riskier or option spreads and then tier three would be you have access to shorting stocks or shorting naked options which is basically short and call options as we discussed earlier in this video or shorting put options so a lot of brokerage firms will have the tiered structure but tasty works which is the one .
I trade with they have an all-inclusive margin account which is called the Worx and if you apply for that margin account and you open an account with them you will have full privileges so .
I’m not hard selling you here at all .
I think it’s phenomenal for everyone to do their own research and figure out which brokerage firm is best for them but just as a fair disclosure policy if you will if you do decide to open an account with tasty works and you enjoy my work and want to support me and the project option channel if you use the project option referral code you can get full access to one of the options trading courses that we have on the website that are not free but you can get access to one of those courses completely free no strings attached for life if you want to open an account with tasty works and use the referral code now .
I’m just telling you that because that’s an offer that is outstanding and .
I want you to be aware of it should you go that route but as .
I said no hard sell here at all .
I think everyone should do their own research and figure out which brokerage firm works best for them but just in case you do go with tasty works and .
I don’t mention it here and then a couple months down the line you see another one of my YouTube videos where .
I mentioned the offer and now you’re all mad because .
I didn’t mention it here and you wanted to use it .
I’m just letting you know about that here so .
I’m gonna hop over to the tasty works trading platform and we’re going to look at real option prices and everything’s going to look similar to the images that you saw earlier because that was on the tasty works trading platform so .
I’m gonna hop over to the platform and we will continue on from there and .
I will trade each of the four basic option strategies that we discussed in this video and .
I will enter the trades and then exit the trades and explain to you the profit or loss on those positions which for the most part are probably gonna be losses since .
I’ll be getting in and out within a couple minutes but we’ll see how it goes all right the final stretch so .
I’ve just opened up the tasty works desktop trading platform as that’s what .
I use every single day as .
I said .
I think you should do your research figure out which brokerage firm looks best to you and who you want an open account with if you don’t have one already but if you are a beginner this could look pretty intimidating to you and .
I will say that doesn’t matter which brokerage firm you go with there will be a learning curve but all it takes is a couple weeks to get used to the platform and you are going to be smooth sailing but really quickly if you are unfamiliar .
I just want to walk through a couple things with you on the very left hand side this is just a watch list so these are things that .
I have added to this list and you’ll probably recognize a lot of familiar symbols here such as .
Apple Netflix Tesla as we talked about earlier and then .
I have some futures on here and then the V.
IX index which are different types of products but the watch lists the watch list is just there to keep an eye on different things that are going on in the market and .
I can add or remove any symbols that .
I want to from that watchlist depending on what .
I want to be watching so that’s the watchlist plain and simple the main panel here which is where everything happens is going to be dependent on which stock .
I have pulled up so right now that we can see that it says .
IWM in this search box and right here it says the Russell 2000 .
ETF which is what .
IWM is so if .
I change this if .
I go to .
Apple now it’ll populate the platform with all .
Apple information and we can see that the chart changed when .
I clicked on .
Apple so .
I can change that back to .
IWM and this is the chart page simple enough but .
I also have a couple other tabs here such as the trade page and this should look familiar to you because we spent a lot of time looking at this exact page in this video and this is the option chain so to speak so these are all the different expiration cycles for .
IWM options because we are looking at .
IWM and that means that everything on the platform is going to populate for .
IWM so these options are all .
IWM options so these are the different expirations .
I can choose and in the middle here we have the amount of days until expiration as we have seen earlier in this video but .
I want to talk about a couple things really quickly before we get to actually trading options .
I want to talk about the bid in the ask price and then .
I want to talk about volume and open interest as .
I already kind of did before but .
I just want to go a little bit more in depth first the bid and ask price so every stock every future every .
ETF every option has a bid and ask price so the bid price is the highest price somebody is willing to pay to purchase something so right here we can see that the bid price for a share of .
IWM is 134 this means that the highest price a trader in the world right now is willing to buy a share of iw for is 134 and then we have the ask price the ask price is the lowest price somebody is willing to sell something for so right now the ask price says one 3407 and that means the lowest price somebody is willing to sell a share of buy WM for is 134 dollars and seven cents and the difference between these two is called the bid-ask spread so the difference between the bid price and the difference between the ask price is called the bid-ask spread now this is important because the wider a bid-ask spread is the more money you will lose from simply entering and exiting that trade at the bid and the ask price so if i were to buy a share of .
IWM i would have to go to those people who are selling the shares which means i have to go to the asking price so if i want to buy a share of .
IWM right now i have to pay one 3406 and then if i wanted to sell it immediately i would have to go to those who are buying it which means i have to go to the bidders or the bid price so therefore if .
I bought a share of .
IWM right now for one 3406 and then sold that share instantaneously .
I’d have to go to the bid price of 134 and because of that .
I would lose six cents for that transaction so .
I’m just one share .
I would lose six cents it’s the same for options except since an option is worth a hundred times more than the price meaning that if .
I look at this 134 call option on .
IWM the ask price says 564 which we know that is a premium of 564 dollars so if .
I bought this option for five hundred and sixty four dollars and immediately sold it at the bid price which is a premium of five hundred and fifty three dollars .
I would lose 11 dollars just from entering and exiting the trade now keep in mind that the market is actually closed right now and therefore these bid-ask spreads are going to be a little bit wider just because there’s not actual trading going on right now but when the market does open .
I will be doing the actual trades for you guys which will be buying calls buying puts shorting calls and then shorting puts but the first thing that we need to know is the bid in the ask price so when .
I want to go to buy an option .
I have to click on the ask price for that option so if .
I just click on the ask price right now we’ll see that it highlights this 134 call option in the June expiration cycle it says be 1 right here which means .
I’m trying to buy one contract and then you’ll also see that some information came down here so if .
I just do that one more time pay attention to the bottom of the screen so .
I click on the ask price of the 134 call and then it populates this information down here and the price that we were looking at is the mid price the mid price is the halfway point or the midpoint between the bid price and the ask price so since the bid price right now is 553 and the ask price is 564 the midpoint between those two prices is 558 so typically when you’re trading options you’re going to want to try and fill your trades meaning actually execute the trades and buy or sell an option near the mid price but in most cases you might not get filled on your trade at the mid-price right away and therefore you might have to adjust your order price to a price that is slightly more unfavorable for you so if you are buying something a slightly more unfavorable price would mean that you’d have to pay a little bit more so if .
I tried to buy this call for 558 and .
I didn’t get filled meaning that there was no other counterparty to that wanted to sell the option for 558 .
I would have to increase my purchase price to 559 or 560 but the prices will be changing in real time so it’s a little bit more complicated than that but that’s the general idea now on the selling side if .
I’m shorting something or selling something .
I’ll start at the mid price and if .
I can’t get filled then .
I have to go to a slightly worse price for me and when .
I’m selling something selling something for a worse price means that .
I have to sell it for a slightly lower price than .
I did before so the general process when trying to fill trades is start at the mid price and then if you can’t get filled meaning you route the order but that’s actually not filled then you will have to adjust your order price to a slightly worse price for you that price is going to depend on whether you’re buying or selling if you’re selling you have to decrease your price a little bit if you’re buying you have to increase your price a little bit and we’ll see exactly how that works when we actually get to buying and shorting the options next up .
I want to talk about volume and open interest these are important to look at especially if you are scouting out options on his stock that you’ve never traded options on before you want to make sure that there is a option market or a deep option market on those options and buy deep option market .
I just mean that there is a lot of trading activity in those options so volume is the number of shares or contracts that have traded today so there will be share volume as we can see up here .
IWM traded 30 2.6 million shares today but we also have option volume the option volume will be specific to the option type and the options strike price and in each expiration so if we look at the 130 call option in the June expiration we can see that the volume today was just over a thousand contracts but if .
I go to July and .
I look at the 130 call in July that was 212 contracts today so the 130 call is not as not a universal call option it depends on the specific expiration date of the option so typically the most amount of trading activity is going to be in what is called the front month expiration and since the nearest term monthly expiration cycle is June as we can see here this is the most near term expiration cycle in the monthly expirations is June this is called the front month and the back month is July so it’s the one after the front month now there are option expirations every single month with a third Friday of each month there will be an expiration and that is the standard monthly expiration cycle and lastly what .
I want to talk about is open interest open interest is different from volume in that open interest is the total number of open option contracts between two parties and to simplify that it’s just the open number of option contracts so right here on the 130 call option in the June expiration we can see that the open interest says forty seven point eight thousand now this means that there are just under forty eight thousand one thirty call options that are currently open meaning that there are a total of forty eight thousand contracts between people who own those calls and who are short those calls so basically between a person who is long the option meaning they bought the option and somebody who is short the option the total number of contracts right now between all of those traders is 48 thousand now the reason open interest and volume are extremely important is because it’ll make it much easier for you to enter and exit your trades and with increased trading activity and a lot more market participants in the options and in the shares the bid-ask spread will be narrower so if we look at a stock that has a ton of option activity meaning that there’s a ton of volume and extremely high open interest in just a ton of trading activity in general these options and the shares will have a narrower bid-ask spread compared to a stock that doesn’t really have a lot of share volume and has very little option activity so this is .
IWM and the open interest in this case is incredibly high as we can see we have multiple strike prices that have over 50,000 contracts open in the open interest meaning that there’s a total of 50,000 contracts or more that are open between two parties one being long one being short and on the put side we can see that again there’s many strike prices with open interest in the thousands so generally speaking open interest in the thousands is a good sign but not every stock is going to have open interest with tens of thousands that’s really uncommon it’s typically in the most active products so we go to sby which is the S&P 500 .
ETF we can see that again basically every strike price look at whoa look at this 183 thousand contracts of the 300 call option in June that’s incredible so all of these strike prices have open interest in the high thousands multiple thousands so if we go to a stock like the trade desk we can see that the open interest is pretty thin by thin .
I mean that there’s not a lot of open interest and therefore there’s not a lot of volume there’s just not a lot of trading activity in these options and if we look at the bid-ask spreads really quickly we can see that the bid-ask spreads are fairly wide and if we look at the 300 call option in the June expiration the bid price is 23 20 the ask price is 25 hundred they’re 25 sorry and that means that there is a one dollar and 80 cent difference between the bid and the ask and when we multiply by 100 that means that there is a $180 different between the highest bid price and the lowest asking price so basically if .
I bought this option for the premium of $2,500 and .
I immediately wanted to sell it .
I’d have to sell it at or near the bid and that means .
I would sell it for about twenty three hundred and twenty dollars meaning .
I would lose a hundred and eighty dollars just from buying and selling this option if .
I bought at the ask and sold at the bid and if we compare that again let’s go to sp why just because it has the stock price near 300 which is similar to the trade desk if we look at the 300 call the asking price is 507 and the bid is 502 so there’s only a five cent difference in the option price between the bid ask and therefore the premium difference between the ask in the bid is five dollars so if .
I bought it that if .
I bought at the ask of 5:07 and .
I sold the option at 502 .
I would lose five dollars just from getting in and getting out all right so we are about to buy a call option buy a put option short a call option and then short a put option and .
I’m doing that so .
I can show you how to actually execute trades how to get into the trades and exit the trades and how easy that process is and then .
I’ll walk through some of these other positions that .
I have that actually have options that have seen big movements because in the examples that we’re going to go through where .
I actually buy and sell the calls in the puts they aren’t going to move very much and .
I’m going to probably lose a couple dollars on those trades but .
I want to do that just because .
I want to show you how to actually execute a trait meaning put on a trade so the markets about to open in 10 seconds .
I’m gonna go to the .
AMD trade page first thing we’ll notice the volume for all the options is zero interest so the market just opened and now we can see that some volume is coming in for .
AMD options so typically right when the market opens is not when you want to be trading you don’t want to route orders immediately and when the market Bin’s you kind of want to let things settle down because the stock price could move overnight and if it makes a big movement overnight right when the market opens those options are going to be somewhat untradable and .
I wouldn’t recommend actually transacting in the options right when the market opens so .
I give it a few minutes .
I mean right now we could go for it and start trading but you don’t want to be putting trades on or routing orders right when the bell hits so now that the market is open we can start doing some trades so .
I’m gonna make all the trades in .
AMD and we’re going to start with buying options so .
I’m gonna buy a call option and then buy a put option and then on .
I’m gonna short options as well so .
I’m just going to buy and sell the at-the-money strike so right now .
AMD shares are at 54 85 and that means that the at the money option is the 55 strike so .
I pause there because .
I wanted you to try to guess so the at the money strike is the strike price near the stock price so since .
AMD is right around 55 the at the money strike is 55 so as you can see here 50000 open interest in the 55 call expiring in June a lot of volume the most volume in this contract so far today the bid price is $3 in the .
ASP raise to 3 10 so 10 cents wide we’re gonna try to get filled in between these prices so close closer to the mid price of 3:05 well it’s currently 3:05 right now but it’ll change so to start in order to buy a call option .
I’m gonna buy the 55 call you click on the ask price and that brings up an order to buy this option and it automatically populates the price as the mid price and this is a limit by order if .
I just clicked it and said bye so now these prices are changing and this is changing as well because the bid and ask are changing so let’s say $3 ask 290 to bid 298 is the mid price so .
I’m gonna go ahead and click review and send and it tells me my trade cost is a $298 debit that’s because if .
I try to buy an option for two dollars and 98 cents we multiply that by 100 to get the premium of 298 dollars so this is telling me .
I need 298 dollars to purchase this call for 298 but then there’s a 1 dollar Commission for entering the trade and then 14 cents and fees and when we close it there won’t be a commission so on tasty works $1 to enter free to closed so round trip it’s essentially 50 cents a contract so let’s see the ask price is now 295 the bid is 286 so this option is falling if .
I tried to buy this at 298 right now since .
I’m buying above the market so to speak .
I would be filled instantly so .
I don’t want to do that .
I want to edit the order and .
I’m just gonna route this really quickly at the current mid price of 291 so review and send send order and now it is a working order meaning that it is it’s sitting out there but it has not yet been filled so as soon as a counterparty can fill that trade at my price it will be filled but until then it will be a working order and .
I just clicked to the positions tab as we can see under .
AMD it says a working order to buy one of the 55 calls for a limit by price of 291 and since the option is higher than that .
I will not get filled so a limit by price this is what you always want to use if your buying options means that you will not get filled unless you get filled at your price or better so in this case a better price would be 291 292 89 lower than my specified price so by using a limit by order you can protect yourself from getting an unfavorable price so you never want to use a market order which means you’ll get filled instantly but at the most unfavorable price for you so this isn’t getting filled so .
I’m going to go back to the trade page actually .
I can just right-click on this replace order and then we can see that we have this thing down here that’s telling me the my order my current order price is below the market so to speak because .
I’m trying to buy at 291 and the mid price now well there we go so .
I got filled 291 so that is exactly how you fill a trait you try to get filled at the mid-price you work the order you let it sit there for a little bit and if the market comes to your price and you’re filled then you’re in the trade so now we can see on the trade page it says one around the ask price of the 55 call so this platform is telling me that .
I have a position in this 55 call and .
I own one contract so let’s take a look at this on the positions tab if .
I go to .
AMD now it says my position in this in .
AMD is .
I own one Jun option with 28 days to go the strike price is 55 and it is a call my trade price we can see right here says a trade price my trade prices to 91 when the option price has fallen to 274 so .
I’m currently down 17 dollars on this trade so let’s go and buy a put .
I’m gonna buy the 55 put just like .
I did before now that the stock price is 50 for 35 this 55 put is in the money so we can see 40000 open interest not a lot of volume today but that’s that’s okay we’ll deal with it open interest is the most important thing because this is just a general indication that there’s a lot of activity in these options so .
I’m not worried about it one bit so to buy a 55 put .
I click on the ask to begin this order process so the ask is 340 the bid is 330 it brings up my order price at 335 and as you can see max loss is 335 buying power effect is essentially what my available available amount of money .
I can .
Alec two trades will be reduced by three hundred and thirty-five dollars if .
I buy this option so the mid-price or the ask price is 345 bid prices 330 .
I’m gonna review and send and send this at 335 and let’s see what happens see right when .
I write when .
I entered this order the bid price changed to 335 which leads me to believe that my order changed the bid price so now .
I am the highest price that someone is willing to buy the option for at 335 now it’s at 340 or actually .
I’m at 335 sorry so it says working order on the positions tab the mid price of this options currently 345 and my limit by price is 335 this is why .
I’m not filled yet so .
I’m going to right click this replace order and now the market is higher than my price so now the mid price is 342 so .
I’m going to go to 340 345 let’s do 345 really quickly so now .
I cancel my first order now .
I have a new order with a limit by price of 345 so if .
I go to the positions tab yet again .
I have a working order to buy the 55 put in June 1 contract for a limit by price of 345 and the mid price is currently 350 so this will have to come down just a little bit for me to get filled on this trade come on give it to me see now it’s increasing because .
AMD is falling so .
AMD share price is falling remember when we first bought that call option .
AMD was closer to $55 now it’s at 53 54 so it’s fallen about $1 and that’s why this put price is increasing and my call price is decreasing so .
I’m gonna go ahead and .
I’m chasing this which is not good you usually don’t want to chase the order but since .
I’m trying to do this and show you guys how it’s done .
I am wanting to get into this trade so .
I just changed it to 355 mid prices 3:57 so let’s see if .
I get filled on this 355 to 365 mid prices 360 still below that uh replace .
I’m just doing this because .
I want to get filled on this so that we can move on 360 give it to me there we go all right so .
I bought this 55 foot for 360 and now .
I have an open position in the 55 call and the 55 put and .
I own these and we know that because it’s circling the ask price and it says 1 if .
I was short it would say negative 1 so .
I now have a position in the 55 foot and the 55 call in the June expiration cycle in .
AMD if .
I go to my positions tab we can see that .
I have two options in .
AMD my first is a call option that .
I purchased a little bit ago then .
I paid 291 for it’s currently at 258 so .
I’m down $33 on the call and .
I just bought the put for 360 the current mid price is at 355 so it’s telling me when now it’s telling me my loss on this position is $13 so .
I’m gonna close these now and the way .
I can close them well actually you can put on multiple positions at the same time so .
I’m gonna short options .
I’m going to short the 60 call and we do that by clicking on the bit when you want to sell you click on the bid to start the order process so .
I’m gonna click on the bid for the 60 call and look at this 877 contracts today in volume so this is look at this bid ask spread it’s very narrow so it’s gonna be very easy to execute this trade mid price is 95 .
I hit the bid and that starts the order to sell it or short it and we can see that it’s red it says s1 this means .
I’m trying to sell or short one of these options now the buying power effect actually says a credit usually if .
I did not own this call option .
I would need to put up a lot of money to short this call option but since .
I own the 55 call .
I don’t actually add risk by shorting the 60 call because if the stock price rackets higher then my 55 call will always be worth more than my short 60 call and since .
I own the 55 call if .
I short the 60 call and the stock goes to a million the difference between these strike prices is 5 which means this call will always be worth if the stock went to a million this call would be worth five dollars more than the short 16 so there’s no risk and adding this short call option so the mid price is 94 cents review and send and routing and there we go .
I just shorted the 60 call in .
AMD and we can see that it circled the bid price this time and it says negative 1 and that means that .
I shorted the 60 call option now .
I’m going to go to the 50 put and .
I’m going to short the 50 put click on the bid and that brings up the order to sell it mid price is 145 again it’s telling me .
I have a credit because this actually reduces my overall risk in this position because since .
I own the 55 put the stock went to 0 and .
I owned the 55 foot and .
I was short the 50 put the 55 foot would be worth 55 dollars if the stock price went to 0 and the 50 foot would be worth $50 so this would always have this 55 foot would always be worth 5 dollars more than this 50 foot if the stock price went to 0 so there’s no risk in shorting this option but if .
I did not own these options then shorting these options is incredibly risky and .
I would need to put up a lot of buying power or margin to short those options but since .
I own these options shorting options at further out of the money strike prices does not increase my risk and actually it reduces my risk and that’s why the platform is giving me a credit to my buying power equal to the amount of what .
I whatever eyes this form that’s a little bit more complicated but .
I just .
I just want to be thorough in the things .
I’m explaining but .
I’m gonna go ahead and short this 50 put now the bid price is 144 ask is 147 so let’s try to do it 143 that looks good send order so .
I have a limit sell price at 143 and .
I just got filled at 143 so now .
I have a short position in the 50 put a short position in the 60 call and a long position or .
I bought the 55 call and the 55 put so if .
I go to my positions tab we can check in and see how all of these four components are doing positions tab go to .
AMD and the 55 call .
I bought for 291 it’s currently at 261 .
I’m down $30.00 60 call .
I bought it for 94 cents or .
I’ve shorted it for 94 cents .
I’m sorry it’s at 91 cents .
I have a three dollar profit the 55 put .
I purchased for three dollars and 60 cents or three hundred and sixty dollars it’s currently valued at three hundred and forty-seven dollars .
I have a 13 dollar loss the short 50 put .
I shorted it for 143 it is worth 147 which means it has increased and that since .
I shorted it or bet it against its price an increase in this price means .
I am down money so 143 to 148 that’s a $5 loss so now .
I’m gonna go ahead and close these and the way .
I could do that as .
I could right click and hit closed position which will automatically bring up an order for one of the components but .
I’m gonna do it manually so since .
I shorted one of the 60 calls to close it .
I buy it back so .
I click on the ask and 92 cents looks good send order .
I’m trying to buy back the short 60 call let’s go to the 50 short put since .
I shorted it and .
I have a short position meaning .
I have negative one contracts to close it .
I buy it back click on the ask 146 is the mid-price review and send send order there we go so .
I got filled on the put .
I bought back to put so that .
I have no more position in the short 50 put and we can see that there’s no more box here which means .
I have exited that position let’s see what’s going on with my short call positions tab .
I have a limit sell price to sell this call for or sorry to buy it back for 92 cents current prices 93 .
I’m gonna drop this by one penny .
I right click replace order drop it by or actually starting up to increase it so if .
I can’t get filled trying to buy it back .
I have to increase my purchase price so now the bid is 93 ask is 94 .
I’m just gonna go 94 to get out of this there we go so .
I closed the short sixty call and now .
I have no more position in the short sixty call so let’s sell these options .
I’m going to sell the 55 call by clicking on the bid and since .
I own it if .
I sell it .
I will close the position mid prices to 62 looks good review and send send order let’s go to the put 55 put 345 bid 350 ask .
I own one of these so to close it .
I have to sell one click on the bid mid price will actually it’s 350 let’s see mid price is 345 review and send send order oh there we go .
I sold the 55 put my 55 call there we go so .
I’m out so what we have purchased a call option purchased a put option shorted a put option shorted a call option and then we closed all of those trades within a few minutes time so just because an option has an expiration it does not mean you have to hold until expiration you can close the trade whenever you want and .
I’ve just done that so if we go back to my positions tab and go to .
AMD we can see that it says zeros across the board there’s no more P&L information it’s because these positions are closed so .
I can go to my activity tab and we can see everything that happened so the 55 call .
I purchased the 55 call for 291 .
I purchased the 55 put for 360 i shorted the 60 call for 94 cents i shorted the 50 put for one dollar and 43 cents and then .
I closed the 50 put for one dollar and 46 cents so since .
I shorted they’ll want the 50 put for 143 and .
I closed it for 146 .
I lost $3 on the short put .
I bought back the short 60 call for 93 cents and since .
I shorted it for 94 cents and bought it back for 93 cents .
I made one dollar on that trade – commissions and fees which means .
I actually lost money and then .
I closed it all out .
I sold the 55 foot and .
I sold the 55 call so initially .
I bought the 55 foot for 360 .
I sold the 55 foot for 345 .
I lost 15 dollars on then .
I bought the 55 call for 291 .
I sold it for 263 .
I lost money on that so that’s all well and good .
I told you guys .
I was going to lose money and that’s what happens if you buy and sell within a few minutes time you’re gonna lose money unless .
I had the opposite positions .
I would have made a little bit of money but at the end of the day if you get in and you get out you are going to lose money if you’re just trying to get in and out in a few minutes time so .
I would not recommend trying to time option prices on a minute-by-minute basis because that is gambling the shorter the time frame the more options trading is like gambling so now let’s go to some other positions that have actually had sizable changes in the option prices let’s go to Nvidia so .
I bought one of the September 20 22 400 call options in Nvidia that has 850 days to expiration and .
I bought that call for 40 750 which if we multiply by 100 a entry price of four thousand seven hundred and fifty dollars currently the option is $80 and 72 cents for eight thousand 72 dollars so the profit on this is currently 33 hundred dollars in 16 days that was 16 days ago so this option has almost doubled in price because NV.
A has been screaming higher and .
I own this call option so this is a big increase in the options price and this is a little more exciting to look at because the .
AMD options only moved a couple pennies and that’s not too exciting so when you’re shorting when you’re trading really short term you’re not going to have big changes in the option prices usually unless you’re trading earnings but over longer periods of time you can obviously have bigger changes in the option prices let’s see what Facebook is so a Facebook .
I have the 225 300 call spread this is called a called debit spread or bull call spread and .
I did this long term as well this is in January 2022 .
I believe and .
I bought the 225 call for 1666 it’s currently at 45 17 so there’s a profit on that part of the trade of 28:51 but the second portion of that trade was shorting a 300 call for four dollars and 72 cents and this essentially reduces the cost of buying the option but since .
I shorted this 300 call for 472 and it is currently at 1860 .
I have a loss of one thousand three hundred and eighty-eight dollars on this option so this is a spread but as we can see the 225 call which has a lower strike price has increased far more than the increase in the 300 call so .
I’m still up money even though .
I have this portion of the trade that has lost money overall the trade is positive let’s look at something that’s not profitable let’s go to VXX VXX i bought for june 1:30 call options two months ago and .
I paid two dollars and sixty cents or two hundred and sixty dollars for four contracts which is let’s see if .
I can do my math one thousand forty dollars and now they’re currently at 15 cents so they’re basically worthless and this was more of a hedge meaning .
I bought these to protect against further downside movements in the stock market and more specifically .
I bought these to basically make a lot of money on this part of the portfolio if we remained in a ultra high volatility environment and since then we have been rallying back the volatility is much lower in the market right now so VXX has gone down significantly and because of that these options are essentially worthless but .
I’m not gonna sell them because .
I’ve already lost pretty much everything .
I can lose and they still have 28 days to go so maybe if something crazy happens they will protect the rest of the portfolio but at this point they’re essentially doing nothing they’re worthless but .
I’m not gonna close them because .
I’ve already lost almost everything .
I can lose so this is an example of a losing option so .
I bought them for 260 they are trading for 15 cents 4 times that’s a loss of $1,000 all right we have made it to the end of this video or basically the end congratulations to you if you made it this far .
I know this video was extremely long but as .
I mentioned earlier .
I’ve been doing this for seven years now and my goal with this video was to package up everything that .
I would put into a beginner course and give it to you for free and in a few hours time so .
I really hope you enjoyed all the information .
I shared with you in this video and that you have a pretty pretty decent grasp on how options trading works at this point obviously you should not expect to be fully comfortable with everything discussed in this video as it’s only been a couple hours and .
I probably did 300 hours of reading and research before .
I even made my first options trade so this hopefully is a great resource for you and getting to your 300 hours or whatever it is before you actually start placing actual trades so have you made it this far congratulations to you .
I really appreciate you watching if you have made it this far because this is my longest video ever for sure and .
I basically put everything .
I had into this video weeks planning the outline for the content that .
I wanted to discuss and actually sitting down and recording it actually took two days somewhere in the middle of the video .
I stopped because my eyes were hurting .
I don’t know if you can see .
I have this big light up here and it was just getting too much so .
I actually recorded this over the span of two days so .
I hope that you enjoyed everything that .
I shared in this video and .
I don’t know about you but .
I need to celebrate so .
I’m gonna pop open some wine .
I think you should get something too although if you’re watching this in the morning you probably shouldn’t do this and if you’re not 21 then definitely don’t do this a toast to you for making it this far Cheers so where should you go from here in terms of learning because we’ve talked a lot about different things in this video and .
I’ve explained to you some of the most important options trading concepts or ideas that you will have to encounter as a beginner options trader but there are certainly way more things that you need to learn because in this video we only talked about the basic building blocks of more complex option strategies so we talked about buying calls and puts and shorting calls and puts which will make up every single option strategy that you encounter in the future so from here .
I would recommend doing some research and learning about more complex options strategies complex in their construction but not complex and how they work or how they make our dues money so my suggestion to you would be to start with the vertical spread strategies so which would be buying call spreads buying put spreads and shorting call spreads and shorting put spreads .
I would recommend these strategies because they operate in very much the same way as buying options or shorting options but they have a limited risk so you will pay less when you buy a call spread or put spread as compared to just buying the call or put and with shorting options we talked about how much you can lose when you’re shorting calls without any protection or shorting puts without any protection but you can actually limit the risk of those strategies by shorting a call spread which is shorting a call and then buying another quality higher strike price to limit your risk or you could short a put spread which would be shorting a put and then buying another put at a lower strike price you also may have heard a strategy called an iron Condor which is essentially the combination of the two where you make money if the stock price remains in a certain range with that being said .
I would really advise against shorting naked options and these are going to be strategies such as just shorting the call as we talked about earlier shorting puts all by themselves mostly shorting puts on the leverage you can short cash secured puts meaning that you can actually buy a hundred shares of stock at the strike price if you are assigned or you want to buy the shares but also there’s going to be more advanced strategies that are incredibly risky which are the short straddle which is when you short a call and short a put at the same strike price and in the same expiration and then there’s the strategy called a short strangle which is shorting a call in shorting a put and you make money if the stock price stays in the middle but .
I would avoid those strategies because they do have immense loss potential and all it takes is one trait to go against you for you to lose significant sums of money and it is possible with these risky option strategies it is possible to lose more money that you have in your account if something really crazy happens and if you lose more money that you have in your account you will have a negative margin account balance and essentially that means you will literally have to pay back the brokerage firm you will be in debt to the brokerage firm and that is not a scenario that you want to be in so my advice to you would be to learn the limited risk option strategies which are the vertical spread strategies .
I do have videos on those but honestly the videos .
I just watched the other day .
I they make me cringe because .
I was so bad but .
I do have videos on vertical spreads if you want to watch them they are good with the examples and everything .
I just don’t like how .
I recorded it but then from there .
I would learn about the option Greeks which are measurements of expected option price changes given a change in the stock price given the passage of time and given a change in implied volatility so the option Greeks will inform you of how your options strategy or your option position is exposed to these various effects or various factors that we discussed in this video that can influence an options price and therefore influence your profit or loss on that position .
I would also get started on your brokerage firm and get into the actual trading software that your brokerage firm provides and .
I would track some options relative to changes in the stock price on a daily basis this could be as simple as looking at Netflix and looking at some options that have 30 to 60 days to expiration rating down the strike price and then writing down the option prices and writing down the Netflix stock price as well and then on the next day as Netflix stock has changed look at what happens to those option prices so that is going to help you understand how the option prices will change relative to changes in the stock price and also the passage of time so .
I would also write down how much time those options have until they expire so all of these things just observing observing is a very powerful learning tool in the options trading universe because simply observing option prices through time as the stock price is changing you can learn a lot about how options strategies perform and how the option prices will change in various stock price scenarios and through different stock price changes .
I would also encourage you to look at an earnings announcement so go and find a stock that is reporting earnings next and ideally it would be a stock like Netflix or .
Amazon something that is going to have a lot of hype around it and has good option markets and .
I would look at the very short-term options right before earnings go and look at the stock price record the stock price record the option prices in the very near term expiration cycle before the stock’s earnings and then look at it after earnings see what happens to those options particularly the extrinsic value in those options and through that process and through this whole general process of just observing you will learn a great deal about how options work and you will have much better expectations for how things will do or how your strategies will perform given various stock price movements so that’s going to do it everybody .
I really really hope that you got a lot of value from this video .
I certainly put a lot of effort into trying to go through the whole outline and explain things that could be confusing to you at the moment and trying to explain things very intuitively because unfortunately in the world of options trading it is very confusing to learn because there’s a lot of buzzwords and jargon that are thrown around so in this video .
I’ve tried to teach you a lot of those phrases and terms so that you understand what people are talking about when you hear other options traders talk my name is Chris Butler from project option and .
I really hope you enjoyed this video if you did please give me a comment down below letting me know what you liked about it if my pace was too fast or too slow and just any general feedback or if you just want to say thanks you know .
I learned X from this video that .
I didn’t learn from before and if you have any questions please leave a comment down below and .
I will get to you as soon as .
I can or .
I hope .
I would get back to you as soon as .
I can depending on how many comments there are so thank you yet again for watching .
I really hope you enjoyed this video and once again my name is Chris from project option