So today I want to talk about
options premium, what is it
and I'll show you, I want to show
you a very specific example.
Because many people are struggling
understanding how does
this options premium work and as you
know, I have been selling puts
recently during this the
stock market crash and have been
doing really well.
Now, I want to show you exactly what
I'm doing, why I'm doing.
So let's get started.
So first of all, today, I want to
use a specific example of
SPCE, because
that is an option that I'm currently
trading.
And I want to show you exactly how
it works.
Let me first bring up the chart of
SPCE.
It's Virgin Galactic.
It doesn't matter really what stock
it is, as you can see right now,
the stock is trading at $16.65.
So the current price is
$16.65.
Now, I want to do two things.
First of all, we want to consider
call option with a strike price of
$18, and I also want
to show you a strike price
of let's do $15.
As you can see the $16.65
right here.
This is the current price.
When we buy a call option
for $18, it means
that now we can buy this stock
for $18.
Now, why would that make sense
if it is trading at $16.65?
Of course, it does not make sense.
So this is why the real
value of this option
is $0, right?
Because at this point, why
would you buy a stock
for $18 if
you could buy it for $16.65?
Now a strike price of $15
is a different story here.
So a strike price of $15 means
that we can buy
this stock for $15
if we have a $15 call.
So this means the real value
here is $1.65.
Why?
Because we could buy the stock for
$15 and then sell
it right away for
$16.65. If thus far is this making
sense, do me a favor and click on
like really quick because this way I
know I'm not going too fast.
OK. So click like right now
and then we can move on and look at
the current option prices that are
in the market that's happening here
right now. And here we are looking
at an option chain for SPCE.
So right now we see that the
$15 call
right here, that expires
in 15 days from now,
is trading at $3
times $3.20.
Let's just say $3.
So right now, the current price
we're going back to the iPad is
$3.
OK. What does this mean?
Why right now, this
option is trading higher than
just the $1.65?
Well, because over the next 15
days, the stock might move much
higher. So as you can see, there's a
difference and the difference is
what we call the time value.
So the time value is the difference
between $3 and $1.65,
so that's $1.35.
What does this time value mean?
Well, this is where traders are
expecting that this stock might
move even higher over the
next 15 days.
Now this premium, this
time value will
disappear day by
day. And we'll talk about this
in just a moment. But so far so
good? Making sense?
If it makes sense give me a quick
thumbs up and then we move on to
looking at it.
So as you can see, the $18 call
is trading at $1.74
over $1.83.
In order for us to make it easy,
let's say a $1.80.
So the current price is
$1.80. So what does this mean?
Since there's no real value in
there at all, it means that
the time value of this option
is $1 80.
Now, just looking at these two
options, which time value
is higher?
Well, obviously, this one.
Of the option that is out of the
money, that has no real value
yet. So now I want to do it the
other way around and I want to show
you a put example so
that you know exactly why
I like to sell premium.
We're using an example for
a put.
Again, we are drawing some
basics here on the chart.
So right now we are trading at
$16.65. Good. And now we take a look
at two puts and we look at one put
of let's say $18
and we will take a look at put
that is trading at $13 because
that is the put that I currently
have. Now, when we are talking about
puts it means, you see
previously on this here
that we can buy the
stock. So call means that we can
buy the stock at the strike
price.
When we talk about puts it means
that we can sell the
stock at the price.
So, let's talk about it this way if
the stock is trading at
$16.65 and we can sell it at
$18.
So what is the real value
of this option?
It does have real value, because
think about it.
It is trading at $16.65 and
we could sell it right now at a
higher price at
$18 our profit would be $1.35.
Making sense?
OK. So then we also want to look at
the current market in just a moment,
and we want to take a look at
the time value.
So we will do this in just a second.
Now, also, for the $13
put, if the market is trading right
now at $16.65 and
we could sell the stock
for $13, would that make
sense?
No, we would lose money, so this
is why here the real value
is $0.
And also, we will take a look in a
moment here at the current price
and we will take a look at the
time value.
So let's do this, let's jump onto
the platform and take a look at
this. So here the $18
now we are looking at a put and you
see that right now the put is at
$3.15 over $3.30.
That's what it's trading at, so that
is the current price.
Now let's just say it is $3.35.
Let's do the math easy for me
here. So this means that the time
value here is $2.
OK? And now also we're looking
at the current price for the $13
put, it is let's say
$0.75.
$0.73 over $0.79.
$0.75. And since the real value
is nothing, it means that the
time value is $0.75.
Now here's the deal with this
time value.
Let me just show it to you on this
chart. So I'm drawing something
like this and you see that the time
value actually goes down
over time like this.
So what you see here is the DTE,
that's the days to expiration and
this here is the dollar sign.
You see in the last 30 days
this is when we see that the time
value is decreasing quite quickly.
OK? So this is when we talk about
the time value and this is
exactly where right now
I can make money when I'm selling
options, that's what I want
to do. I know it's a very
quick introduction, but it is super
important that you understand
that an option price always
consists of two things.
The real value and
the time value.
And when we are selling options,
what we want to take advantage of
is the time value.
Hope this helps you a little bit
better understanding of what
options premium is and
when it makes sense to buy options
and when it makes sense to sell
options.
I did a class it's called Options
101, a free class.
I'll put the videos up here on
the screen somewhere, so just click
on any of the videos that make the
most sense to you.