Oh, what the?!
Hey, I’m Rachel, and this is Step Up to Options, where you learn the long and short of trading options
So is your brain still buzzing from that last video? Well I hope so!
Explaining selling calls took some work, and now we’re in good shape to finish up with selling puts
We know that when we sell calls, we can put ourselves in a position where time is working for us
and we can win when the stock moves two out of three ways
We learned that sellers want the call to be Out-Of-The-Money instead of In-The-Money, even all the way through expiration
Now, remember that selling calls was bearish both the stock and the call
We assumed the call price would go down with the stock price
The price of a put, though, moves roughly opposite of the stock
That means selling a put is bullish, even though you think the option price will go down
With that in mind, let’s head over to talk to Ryan for our fourth and final mental flip-flop
Ryan?
Hey everybody. Ready for the last one?
This time we’re going to flip puts around and sell them
We’ll start by picking a strike price that’s Out-Of-The-Money
Again, we’re placing a sell order to write the contract for anyone who wants to buy our put
And just like when we sold the call in the last video, we’ll see a credit when we open the trade to sell a put
The put price can’t go up to give us more profit
Since we’re selling, we want the put price to go down so we can keep some of the credit
For that to happen, the stock shouldn’t go down in value
We open this trade with the strike Out-Of-The-Money and 45 days left to expiration
The stock starts out moving down, which isn’t good for us this time since we’re selling something that increase on a downward move
The stock moving down causes the put price to go up, and now, at 40 days to expiration, it’s In-The-Money
Even though the time value’s decreasing, it’s still moving up overall, and the stock keeps pushing the strike deeper In-The-Money
With 35 days left to expiration and with the strike this deep in the money, we could cut our losses and buy to get out
It’s good to know that you can get out when you’re wrong, but for the sake of understanding the mechanics let’s keep it going and see what happens
Ryan?
Cool. So, we’re feeling really good about selling this put and sticking with it…
Now with 20 days to expiration, the stock price starts driving back up, pushing the put back Out-Of-The-Money
With 10 days still on the clock, the stock is way up
And the put we sold isn’t worth much now since there’s not much chance the stock will start falling enough in 10 days to push the option price back up
At this point, we’d feel good closing the trade with a buy order because we can keep most of the credit
Since this is well Out-Of-The-Money, we also have the option to try to squeeze a few more dollars out of it by letting it expire to complete the trade
So, just like when we were selling calls, we got to keep a lot of credit when we were right about the option price moving down
And also like with selling calls if the stock had stayed neutral, the put price would have dropped over time too because of time decay
So again, in two out of three scenarios, we won by selling
When the stock price moves up, we profit
When the stock price stays the same, we still profit.
Awesome!
I think we’re ready to review selling puts now
So first, selling puts opens the trade by receiving a credit
That credit is the most the put seller can make
Selling puts wins when the puts price goes down
A put seller wants the call to be Out-Of-The-Money at expiration
A put seller closes the trade by placing a buy order
And we also get that when we're selling puts
the upside to having no risk limit and having a profit limit is seeing a 2 in 3 chance of actually getting that profit
And we also get that when we're selling puts the upside to having no risk limit
and having a profit limit is seeing a 2 in 3 chance of actually getting that profit
And that takes us all the way through the Four Basic Option Trades, buying and selling calls and puts
Now, before we start combining them to make strategies in dough, we’ll recap Level 3 to really drive these fundamentals home
We’ll also check out a great way to remember which assumption belongs to which trade
And don’t forget, you can also learn so much more about buying and selling options at tastytrade and dough.com
Hey guys thank so much for watching I hope you enjoyed it
You can always click for more resources and uh check out whats next
you never know I might do a British accent you never know..keep you entertained.. keep you on your feet
see you next time