Trading options for Beginners. In this video you're gonna learn some basic
terminology and definitions so that you can understand how to trade options a
lot of times in a lot of a lot of different industries though use
exclusionary jargon such as with doctors and lawyers and even as an investment
banker they will use definitions that will make other people feel like fuel
confused or feel as if they don't know what's being talked about when you learn
how to trade options you have to make sure that you understand a few basic
definitions about 80% of the money that I make from trading is by selling put
options remember when you sell an option you are
essentially the casino when you buy options you are acting as a gambler
now the casino doesn't make money if a hundred people come in the casino
doesn't make money from all 100 of those gamblers maybe the casino will lose
money on five of them but you make money on ninety five percent of the people
that enter your premises if you make money as a stock or rather as an options
trader on ninety five percent of your trades those are incredible statistical
odds so remember we sell options in about nine about 80% of the money that I
make is by selling put options so what's a put a put option obligates me if I
sell a put option and obligates me to buy the underlying stock at a specific
price if I sell a call option it obligates me to sell the underlying
stock at a certain price so for example if facebook is training right now 175 I
can sell a put on Facebook at a strike price of 160 now what that means is if
facebook trades below 160 dollars at the X on the expiration date then I will be
forced to buy Facebook at 160 dollars if Facebook is trading on the expiration
date at 140 then I will be forced to purchase Facebook at 160 about eight out
of ten times Facebook will not drop below your strike price if you choose
the correct strike price and also if you choose the correct expiration that's why
we always sell out of the money options so again you sell a put option an
example would be Facebook trade is trading at 175 you sell it with a strike
price now a strike price is your bottom coat worry price you don't really have
to worry at all if when you sell a put the underlying stock stays above your
strike pricing you don't really have to worry that much if when you sell a call
your underlying put state or your underlying stock stays below the call
strike price but really you have to pay attention to making sure that when the
underlying stock gets close to the put side or close to the call side that's
when you really have to start worrying and looking at the position but for most
of the trades I would say probably eight out of ten of them I just choose the
correct strike price and the correct expiration date and then I never have to
look at it again so again remember you're going to choose your strike price
which is the price that obligates you to buy if you sell a put or the price that
you're obligated to sell if you sell a call and in exchange for agreeing to
purchase when you sell a put or agreeing to sell when you sell a call you receive
money this money is called premium and it's also called your taking in a credit
so if you buy selling options you are receiving money and as a result you are
receiving the credit if you buy options which I don't know why you would but
some people do buy options then they are going to pay a debit as I mentioned
earlier the expiration date is the date at which the seller of the option is no
longer obligated to guarantee that the underlying stock will not fall below
that strike price so for example if you look at it from an insurance perspective
if you buy a car insurance policy for six months and then you have an accident
two weeks after your the expiration of that
policy that policy writer or rather the insurance company is no longer liable
for paying for that claim why because if it happened within the six months then
that person would be liable or that company will be liable but because it
happened beyond the expiration date and the contract expired then that person or
that company is no longer obligated to make do on something that expired so a
good example of this if we go back to the Facebook example where Facebook's
trading at once 175 if we sell a put with the strike
price of 160 I can have the expiration be three weeks and then I could receive
let's say a dollar or if I choose an expiration that is six weeks out which
means that I'm obligated for an incremental or an extra three weeks to
buy Facebook at a hundred and sixty dollars if it were to fall below that on
the expiration date then I would receive more money so instead of receiving one
dollar like I would for the three week option I probably receive around two
dollars and 20 cents for the six week expiration an underlying asset that's
simply the that's simply the stock that you sell the option on so this includes
something like Facebook or Amazon or Google or Netflix or Tesla or Nvidia so
all of these very large companies they have a lot they have a liquid options
market which means that the there's a very deep market is very easy for you to
sell options on something like Facebook because it's worth about five hundred
billion dollars and you want to deal with markets where there's a lot of
activity and a lot of liquidity because that means that the pricing is much more
efficient so the underlying stock you can sell contracts and that's how that's
what you're going to sell you're going to sell one contract let's say a
one-foot contract on facebook one contract is a hundred shares so going
back to the Facebook example you can sell one contract with a strike price of
a hundred and sixty and an expiration date
of August 20th and you can receive premium of $1 so as a result we are
permitting ourselves or forcing ourselves to buy Facebook if it drops
from its current price of 175 if it drops below that and it drops below 160
we will force ourselves to buy Facebook ad 160 as long as its trading below that
price 160 dollars on August 20th if it stays above 160 dollars on August 20th
then we collect the full amount of premium which we which we receive is one
dollar per share so if you sell one contract and you receive one dollar per
share then you receive $100 for making that trade if you sell five contracts
that obligates you to buy Facebook in the example that we use before to buy
yourself five contracts you're obligated to buy Facebook to buy 500 shares of
Facebook at a price of a hundred and sixty dollars and in return a $1 share
you will receive 500 dollars from making that trade and you will make that money
with about a 90 to 95 percent probability a few other definitions
buying power really just means the number of contracts that you can sell so
if your account has 30 thousand dollars in it then you can control 60,000
dollars worth of stock and because options the regulations are a little bit
different you actually have greater leverage so you can control sixty
thousand dollars worth of stock and you can probably control about a hundred and
fifty thousand dollars worth of options so yeah so options they they reduced
buying power and twenty percent whereas stock reduces your buying power at 50
percent but for all intents and purposes buying power is just the number of
contracts that you can sell a vertical credit spread means that
using the Facebook example I would sell the 160 and then I would buy the hundred
and 50 put it would have the same expiration the same underlined so
Facebook and it would be the same type of option remember there's only two
types of options puts and calls so if you wanted to do the trade that we spoke
about before you would sell one contract of Facebook with a strike price of 160
and expiration of August 20th and you would receive $1 if you wanted to turn
that into a vertical credit spread you can do that same trade where you choose
the 160 strike that you're selling and then you can buy the 150 and then the
efficient usage of your buying power because instead of Facebook having a
maximum risk of a hundred and sixty dollars a share if you sold if you were
on the hook and had to buy facebook at 160 and then Facebook went bankrupt at
$0 you would still have to buy facebook at 160 but if you sold a vertical credit
spread with a hundred and sixty you sold and 150 that you bought then technically
you would only have to you'd only your maximum loss would only be ten dollars a
few other things bid in the ask you're going to buy at the bid and the ask is
the maximum price that you can sell at usually I would say 95% of the trades
they get big they get filled at the mid-price
so it going back to that 160 dollar Facebook put if you could if it gets
filled at $1 the bid is probably going to be like 95 cents and the ask is going
to be $1 o five and then they're gonna meet in the middle and that that trade
is going to fill at one dollar a share or $100 per contract a limit order when
you enter your trades you should always use limit orders a limit order is simply
the minimum amount of money that you're willing to receive in order to execute
that tree so going back to the Facebook example if you say
limit order at one dollar that means that the minimum amount that you are
willing to accept is one dollar per share or $100.00 per contract and the
exchange cannot fill that order unless you receive at least one dollar per
share or $100 per contract and roll or manage that's the last definition that I
typically have to roll or manage a position about five out of a hundred
times and what that pretty much means is that I would close out the trade that is
problematic and then I would just extend in time extended duration so instead of
like using the example that we use before let's say the August 20th put
let's say it was August 10th and that put option that I sold expires on August
20th I can then buy back the August 20th with
a strike price of 160 push it forward into September sell a hundred and
fifty-five strike price put so I would get $5 and I would still be able to
bring in a small amount of credit or you can roll it forward from August to
September and keep the strike price the same at a 160 and you would be able to
collect even more credit so remember that when you sell options the
probabilities are in your favor and you are acting as a casino because an asset
just like an insurance policy is a depreciating asset that with time
eventually goes down in these worthless so that's why we make money every single
day that goes by where stock prices don't move or if they move in my favor I
profit from the time decay because an option an option is an expiring asset
and I also make money as the underlying stock moves further away from my strike
price and to be honest when you do something where you sell the hundred and
sixty dollar put you if Facebook is trading at 175 you have a fifteen dollar
cushion so I don't even care if Facebook drops all the way down to a hundred and
sixty two or a hundred and sixty as long as our one hundred and
161 as long as it stays above 160 on my expiration date then I make money so a
quick summary because I know that that was a lot of information and to be
honest I gave you about I'd say 10 or 12 definitions of them the most important
things to learn is to take away or that you always want to sell options you
never want to buy about 80% of the money is made by selling put options a put
option obligates you to purchase the underlying stock such as Facebook at a
specific strike price as our options are expiring assets that don't have any
value in so for example if the underlying stock trades above your your
strike price on the expiration date then you keep the entire amount of premium
the only time that the option that you sell has any value is if any intrinsic
value rather at expiration D is if the option that you sold is selling bull is
trading below the the strike price so in this example at the expiration date if
facebook is trading at 165 then that option that you sold that you collected
$1 per share is worth nothing if facebook is trading at 155 though that
means they would have to have fallen $20 or around almost 15% then then in that
instance it was trading at 155 then you would that option would be worth $5 but
you already received $1 so you would be out $4 so remember you sell options it's
the only way to make money you want to be the casino you don't want to be the
sucker you don't want to be the gambler 80% of the money is going to be
generated by selling puts and for all the other like technical information I
would not focus on overwhelming yourself because the most important aspect is
just to get started if you want more informational videos like this you can
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