How to win 90% of your trades with options. (but there's a catch...) // trading strategies delta explained for beginners basics tutorial example video selling sell puts 101 coach thinkorswim theta for income david moadel
welcome to looking at the markets with David Modell first of all I just want to
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let's get into it how would you like to own 100 shares of
Apple at a hundred and thirty-five dollars per share that would be great
right or a hundred shares of Amazon at eight hundred forty five dollars per
share or a hundred shares of Netflix at one hundred and fifty dollars per share
without that would be fantastic right those are great prices and how would you
like to win 90% of the time in your options trading well don't just buy a
hundred shares of the stock no instead sell a put option with a delta of
negative point ten or lower okay if you ignore the negative
sign then you want this number if you're going to sell an option look at the
Delta and ignore the negative sign and you want this number here to be point
ten or less it could be point zero nine point zero eight point zero seven
whatever right just make it less than yeah point ten or less and so what is
the Delta mean just a quick recap strictly speaking Delta is how far the
option price will move with a one dollar move in the stock price all right but a
lot of people also use the Delta as an approximation it's not exact but an
approximation of the likelihood of that particular option expiring in-the-money
upon expiration that's the that's the approximation at that moment because
Delta changes all the time and it's just an approximation it's just what the
options market think thinks the likelihood of the you know option
expiring in-the-money is going to be and the options market is
not always right so it's it really is just an approximation but if the Delta
of the put option you're selling is you know take away if you remove or ignore
the negative sign if it's point ten or lower or if it's point ten let's say
it's point ten then that means there's a 10% chance approximately of the option
expiring in-the-money which you don't want and a ninety
percent chance of the option expiring out of the money what you do want
because then you get to keep the premium that you collected when you sold the put
option and that's pretty much free money if the option expires out of the money
so if the stock price doesn't go below the strike the strike price which is
approximately a 90% chance of that happening you win because you you've got
free money which is the premium you collected now here's the catch the catch
is if the stock price does go below the strike price upon expiration and there's
a 10% chance of that happening if if that's the Delta then you lose and I'm
putting that in quotes you lose because you have to buy the stock at an
unfavorable price all right yeah you would have to buy the stock
price at a price higher than the current price you'd have to buy it at the strike
price but it's not a huge loss because you're still buying the stock at a
pretty good price all right remember you know think about it right now buying an
app buying Apple at 135 per share would be pretty darn good okay so yes Apple
could go below 1 135 and you know if Apple is trading at 130 and you have to
buy it at 135 that's no fun but it's still a pretty darn good price compared
to where it is now because it's much higher than 135 all right and same for
Amazon and Netflix so let's take a look at some examples and this is the this is
the Schwab platform online platform here and but you can use your own platform
and you want to look up the Delta alright that's the column you're looking
at all right and these are put options and these are this is for Apple ok as
you can see the current price is 153 48 per share alright so you know owning
owning Apple at 135 heck even if it went down to 130 and I bought it at 135 a
slightly unfavorable price I'd still be pretty happy that I owned it at 135
compared to where it is now 153 48 all right
so let's look at the deltas and these are yeah I like to choose options that
that go 45 days out that's a pretty good amount of time that's when you get
plenty of theta or time decay alright that's when you get to maximize it when
you sell a put option all right so let's look for the one that's closest to
negative these are all going to be negative point 10 or maybe a little bit
less well this is a negative point 14 that's a little too that's a little bit
higher here we are negative 0.08 all right so that would give you this one
right here the 135 strike put option expiring at 45 days from now the
likelihood of it expiring in-the-money according to the options market at least
and this is just an approximation it's not perfect it's not a perfect indicator
would be less than 10% chance of it actually less than 9% it's it's around
8% chance or likelihood approximately of this one expiring in-the-money meaning
that it'll be you know at or below 135 Apple stock 45 days from now on November
17 2017 all right so what's the worst that could happen
well you sell it and you would immediately get paid per contract
somewhere between 56 and 60 dollars between $56 and $60 immediately that's
cash you get to keep no matter what all right - the Commission costs and any
slippage and any of that stuff so you know if Apple does not expire
you know in the money if it doesn't go below 135 upon expiration you just get
to get to keep this premium if that's free money for you okay the only cost I
guess is that you had to tie up some money in your account for that time but
really you got paid almost for nothing really all right which is kind of like
free money is that that's the way I view it so you win so what if you lose well
okay so if Apple stock goes below 135 upon expiration and then you get
assigned and then you have to buy let's say it goes down to you know whatever
130 or 125 or something like that so you have to buy it at 135 well that's not
fun at that moment but then you know so you still bought it at a pretty good
price again remember it used to be 153 dollars and 48 cents all right so you're
still doing better than a lot of people all right and if you're a buy and hold
long term type of investor it's not the end of the world anyway because if you
just hold on to it there's a pretty good chance that it'll come back up above 135
per share at some points unless I don't know I guess if Apple goes bankrupt or
something like that but that's pretty unlikely to happen anytime in the near
future at least as far as I see it there are no guarantees in this world though
so just be aware of the risks of selling a put option here's another example
Amazon okay remember we talked about how'd you like to buy Amazon and 845 per
share well that would be fantastic considering it's 965 and change per
share right now so let's find the delta of a put option and again we're going 45
days out that's how I like to do it and look at that this is this one's
right around right around 0.2 or negative because they're put options
alright and so that's the the 8:45 strike alright so as long as the stock
price over the next 45 days doesn't go you know upon expiration if it doesn't
go below Amazon doesn't go below 845 per share then you get to keep between four
hundred and eighty five and five hundred and five dollars per contract pretty
good right that could be free money the only cost
is that you have to tie up some you have to tie up some of your capital alright
but that could be free money what's the worst that could happen well Amazon goes
below 845 per share upon expiration you get assigned you're still buying Amazon
at a really good price alright so but again be able be aware of the risks
because it could just keep going below 845 could keep going down and down and
down and then you'll still have to buy it at 8:45 so be aware of that that's
the catch there and Netflix hey how'd you like to buy Netflix at 150 per share
right well here we go right now it's 180 for 45 so 150 per share would be a great
price right well look at this here we go look at the Delta if you sell and this
is 45 days out once again and if you sell the 150 strike put you would
collect between a hundred and ten hundred and twenty-five dollars per
contract alright that's money for you to keep no
matter what - Commission costs and so on and if the Delta here is negative point
zero eight - that means there's approximately a you know ninety two
percent chance according to the options market that
this is going to expire out of the money so the odds are definitely in your favor
here all right and what's the worst that
could happen well I guess if Netflix stock just tanks and upon expiration and
November 17th 2017 you you know the stock price goes below 150 and you have
to buy it at 150 that's no fun at that moment but if you're buying hold type of
person then maybe it's not such a bad thing after all because remember your
cost basis was lowered because you got paid over 100 bucks just to just you
know for selling that that put option contract alright so these are all things
to think about okay you you could win at least in theory or at least an
approximation according to the options market you could win 90% of the time or
more all right but no guarantees there but I think it's a really neat way to
buy a hundred shares of stock and put the odds way way way in your favor
alright so thanks a lot I really appreciate it thank you for clicking on
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