hey traders thanks for checking out this video my name is Travis from master the market and this
is going to be an intro to options trading video we're going to be going over the basics of options
i'm going to explain what exactly they are and how you can trade them and i'm going to be showing you
one of the biggest mistakes that new traders make in the options market which ultimately leads them
to taking a lot of big losses that hopefully you can avoid taking with your own trading
so anyway if you already know the basics of options like what exactly options are
you know the difference between calls and puts and those types of things feel free to skip ahead in
the video but for everyone else let's go ahead and get started with what exactly options are
now essentially by definition an option contract is going to represent 100 shares of some kind of
underlying asset whether that be a stock an etf or even an index and what this contract does is gives
that buyer the option to buy or sell at a specific price up to a specified date now for the sake of
this video in the sake of keeping things simple uh we're really not going to worry too much about
those things instead we're going to focus on the fact that most people are simply trading option
contracts the same way that you trade a stock you're simply looking to buy low and sell high
and the reason that you would want to trade these option contracts rather than the stock itself
is because what they do is really allow traders a more affordable way to trade high price stocks
and a lot of times these are going to give you a much better potential for a bigger reward
as opposed to trading that underlying stock itself so for example if we go ahead and take
the profitability chart of an option contract for apple over here on the right side of the screen
this is the percentage move that we're seeing in apple and the numbers that you see here in the
middle of the profitability chart is representing the percentage move in the option contract
so just for example if we were to see a four percent move in apple stock here
you could see that this option contract would go up about 32.7 percent which is one of the
reasons why so many people are being drawn to options trading because at the end of the
day if you're on the right side of the trade you can make a much bigger return on your investment
now when it comes to actually buying an option contract there are really two
types of contracts that you can buy those are known as call options and put options
and essentially what a call option is is the options market equivalent to going long
or buying a stock so in other words the goal when buying a call option is to see a rise
in the underlying asset which is going to cause your call options price to also go
up that call options price is known as the premium for that option and remember just like anything
else you still want to buy low and sell high so your goal with these call options is going to
be to buy them low when the stock price is also low and then as the stock price rises your call
options premium is going to go up as well and you can go ahead then and sell that at a profit
and essentially this is going to be the exact opposite of what a put option is
a put option is really going to be the options market equivalent to short selling a stock
so when you're short selling the goal is to actually see the value of that stock go down
so you can profit from the stock going lower the same is true for a put option instead of
short selling the stock though you would buy a put option and as the stock's price goes down
your put options price is going to go up so again you're going to be ideally buying those
put options at a low price and as the underlying stocks price falls down your put option is going
to go up and you can sell at a higher price and then profit from that move and if we take a look
at a profitability chart for a put option in this case you can see that all of this red is up here
at the top of the chart showing us that in this case if apple were to go up over time your put
option is going to lose value and that's because again when you buy a put option you want the price
of the stock to actually fall down in order for that put option to become more and more profitable
now when it comes to actually choosing the right contract to buy whether that be a call or a put
option there's going to be quite a few things that actually come into play that are going to
affect the way that your option is going to move and that's going to affect the overall value of
that option contract in general and the first of those things is going to be the expiration date
simply put the expiration date is the last day that the option contract can be traded
and the reason that this is very important when you're choosing your option contract
is because the closer the expiration date the more volatility that option contract is going to have
so in other words if you're trading an option contract that expires in maybe just a few days
there's going to be a lot more volatility and because of that it's going to be a much higher
risk higher reward trade than an option contract that is expiring in three months for that reason
unless you're doing a quick day trade with a small amount of money most people tend to avoid
these close dated expiration dates and look for something maybe three months to sometimes even
two years or more out from their expiration date those are going to have much less volatility than
the option contracts expiring in a few days or even a few weeks but they are still going to give
you a better potential return on your investment than you would get by investing in the underlying
stock itself now aside from the expiration date you're also going to have to choose a strike price
a strike price is simply the price that you would be agreeing to buy or sell the underlying asset
if you chose to exercise your contracts now again for the sake of this video and for the sake of
keeping things simple we're going to assume that you're not really exercising your contracts in
exchange for the stock instead you're most likely just buying and selling these contracts the same
way that you would a stock however regardless of any of that you are still going to have to
choose a strike price and that is still going to affect the way that your contract is trading
and to kind of understand that a little bit better we're going to have to break down
the options chain that we see over here on the right side of the screen into a few main sections
so first and foremost if we take a look at the left side of this options chain
you can see that these are all of the call options and over here on the right
we have all of the put options so if we focus on the call options first
this section up here in this box is going to be considered in the money if you compare the strike
prices of these in the money contracts to the current price of the underlying asset which is spy
you can see that spy is currently trading at 397 dollars and all of these strike prices
are below the current price of spot that's why they are considered in the money because
the price of the stock has already surpassed the strike price of these option contracts the next
section is going to be considered at the money and these are the contracts that are going to
be directly surrounding the current price of the stock or the underlying asset and then lastly we
have the out of the money contracts and these are going to be call options that have a strike price
that has not yet been reached by the price of the underlying asset and essentially you're going to
kind of just flip the in the money and out of the money contracts around when you're dealing with
put options so out of our money options in this case are going to be the option contracts that are
below the current price of the underlying asset again we're going to have at the money contracts
which are the option contracts with strikes that are directly surrounding the current price
and then we're going to have the in the money contracts in this case with put options those are
going to be the contracts that have a strike price above the current price of the underlying stock
so i know if you're new to options trading this probably sounds a little bit confusing but one way
to kind of just simplify this and keep track of these different sections in your head is to really
just think of the out of the money contracts as a target for your investment and what i mean by that
is if we take a call for example we know that when we buy a call we want the underlying price
to go up in order for our call option to also go up in value so if we were to buy a call option
right now at the current price we could think of the out of the money strikes as our price target
for the underlying stock so we want the price to go up to 405 we want it to go to 410 450 and 420
in order for our call option to go up and up and up in value and the same is true for put options
we're also thinking of the strike prices for the out of the money contracts as a target for the
underlying stock because if we were to buy a put option we would want the price to fall down to 395
to 390 to 385 and so on and so forth in order for that put option to go up in value and to
make us money now the reason this is so important when it comes to choosing a contract to invest in
is because the in the money contracts are going to be much less risky and they're going to provide
much less volatility compared to the out of the money contracts on the other hand obviously the
out of the money contracts are going to be a little bit higher risk and they're going to have
more volatility so those are going to be the ones that provide traders with a much higher risk and
higher potential reward so to kind of sum up what we talked about in the previous couple of minutes
at the end of the day when you're choosing an expiration date the closer that it is to that
expiration date the higher the risk is going to be and when it comes to choosing a strike price for
that contract the further out of the money the higher the risk is going to be for that as well
so the safest route you can take when you're investing into an option
whether that be a call option or a put option is to look for an option contract that is expiring
months or even years away and to buy a strike price that is already in the money
so to kind of help you understand why these contracts have such great risk especially
when they're out of the money it's important to understand a little bit about the option greeks
when you're doing analysis on option contracts there is going to be four greeks those are going
to be theta vega delta and gamma all these do is help us determine an option contract's risk
and each of them are going to provide us a little bit of information about that option contract
now for the sake of this video the one that i want to focus on is just going to be theta theta simply
represents time decay for that option contract and this is something that a lot of traders
don't understand when they're buying a contract over time whether it's a call or a put theta is
going to cause that option contract to lose value the closer that it gets to its expiration date
now because of theta all out of the money options are actually going to expire completely worthless
at zero dollars in zero cents making them again much higher risk so that's why if you've ever been
in an option contract that is out of the money and it's getting closer and closer to expiration you
may notice that your auction contract is losing value very quickly even though the price of the
underlying stock is staying exactly the same and again that's just going to be because time decay
since they're losing value as they approach their expiration date so if we were to compare these two
different contracts and the profitability of them they're both for apple and they're both
expiring on the same day the only difference is that the one over here on the left side is
an out of the money contract and the one on the right over here is in the money contract
you can see that in order for this out of the money contract to be profitable at expiration
it has to make a much larger move to the upside when compared to this in the money contract
that we have over here on the right side so this really just visualizes the importance of choosing
the right contract and of course understanding the risk of buying an out of the money contract
and by the way this is from a website called options profit calculator
it is completely free to use and there's a bunch of different tools on there for trading options
so i'll go ahead and link that down below in the description for you to check out and it's a good
idea if you're new to trading options to plug in the option contract that you're thinking of buying
before you actually take on the trade to kind of give yourself an idea of how that is going
to potentially play out if the stock moves with you or if it happens to move against you
but anyway that's going to be a wrap on this intro to options trading video obviously this
was really just the basics of options trading and it was a very simplified way of getting started
in the options market so if you're interested in learning a little bit more about options trading
and you want more detailed videos please make sure to let me know down in the comments because
most of my trading videos are based on stocks but if you guys are interested i'd be happy to
make more options trading videos in the future also if you don't mind please make sure to give
this video a like and subscribe to the channel so you don't miss out on future videos and if you're
interested in learning more about day trading swing trading and even long-term investing make
sure to check out my website master the market which will be linked down below in the description
but anyway thanks again for watching i hope you enjoyed and good luck with your
trading
you