BEFORE Trading Options Learn How To Close Them! Options Trading For Beginners

what's up guys welcome back today we have to talk about how to close down an option how to exit an option how to get out of an option whether it's made a mistake whether you've taken a ton of profits and now you want to close it and get rid of it whether you've taken a ton of loss and you kind of want to mitigate losses it's incredible to me inside the comment section and it's it's fearful how many people are placing options trades without knowing how to get out of them so we have to talk about it talk about basic selling calls and puts cash secure puts and covered calls how to get out of buys how to get out of spreads i'll talk about everything so that if you're in a little bit of trouble you can get yourself out or if you feel like you've made enough profit and you want to get out that's fine too i'll jump into robinhood show you how to do it on that particular platform as well as some others and also show you what the premium value chart means and what it looks like because so many times people see that chart and think that they're in a ton of loss or in a bunch of hot water when in all actuality they don't really even know what that graph means so i'm going to show you that as well and this by the end of this video everyone will be able to take a deep breath and then we'll be able to move on and everything will be a-okay please guys understand that most options trades do not go in the way that we want it to go understand all the possible outcomes before entering the trade i mean i remember when i was playing lacrosse as a kid before the coach blew the whistle he would scream to everybody on the field all right what are you gonna do if you get the ball and you'd think okay i'm gonna run this way i'm gonna pass this way i'm gonna shoot i'm gonna all these things and if you play sports you know the person on the team that did not want the ball the reason they didn't want the balls because they didn't know what to do once they had it and i feel like right now there's a bunch of people trading options whether it's because of the gamestop amc debacle there's a lot of people running around that do not want the ball right now and they're looking for that edging strategy so guys please understand all possible outcomes before you make a trade it's as simple as that you know ask questions inside my discord there are a ton of people asking questions before but there's also a ton of people reaching out saying hey i'm in this position now how do i get out this that and the other thing so please understand all the possible outcomes and i'll talk about some of them not for every single trade but i'll talk about some of them understand your outcomes before making the trade so that if something were to go right or wrong you can get out and either take some profits or mitigate some losses that's the main focus of this video so you guys know i love the digital whiteboard i'm going to give you some visuals as well write some things out so that we could see everything here in real time so first off the back guys this is pretty basic but we need to understand that every option or option strategy is pretty much going to be based upon two things either selling calls inputs or buying calls or puts now some for some vocabulary and just so we can all sit on the same page when we say we are selling an option that means we are writing an option we are creating it we are putting that option into the ether that is options trading and oftentimes when we do so we are going to receive a credit we are going to receive money in premium from the buyer all right and this is shown inside options as a minus 1 c or p the opposite to that is buying calls inputs all right so when we buy a put this is often going to be a debit because when we buy things we have to give money away in this case we call it premium and this is going to be shown as a plus one call or put we have a minus one we gave something away when we buy something we get a plus one and this plus and minus one is going to be very very important when we try and close an option now in each one of these options are option strategies there's really only three scenarios that can take place we have to know our outcomes okay three outcomes that can take place number one the option expires worthless at expiration meaning the value of that option is now zero or really one dollar will see it but this means that regardless of what the value of that option was over time at expiration it is now worthless all right this is going to be out of the money and if we are selling options this is when we accrue max profits we get to keep that premium we keep our collateral and we repeat now oftentimes guys like i said the value chart may look like this and i'm going to show you that but what we're saying is at expiration it dives to zero and the option expires worthless this is great for sellers this is bad for buyers and really i keep wanting to use this value of the option because when i show you that chart right that's what the brokerage is showing you and that's when people get all freaked out by the current value and they don't think in terms of expiration and what that value really means in real time the other scenario is this option expires in the money okay and at this time you will either be assigned if you are selling options or you will exercise the option if you are buying options side note i just made a video like last week i'll link it down in the comments guys if you are buying options you do not want this to go to expiration you do not want this to be exercised all the reasons why you don't want the two exercise options are inside that video there are a few rare cases but at assignment you are either going to have those shares called away from you you are going to be required to purchase 100 shares if you are selling calls and puts and if you are exercising you are buying calls and puts now you're going to be required to do the same you're going to have to buy 100 shares at that strike price that you chose now as far as who's this good for guys if you're selling covered calls like i love assignment you should never be fearing assignment if you're selling calls and puts because you are going to pick a strike that's either above your basis for a covered call and you're like all right i lose that share i'm not married to him but i'm gonna get that or if you're selling a put you're going to buy those shares at the price that you determine in the strike when you are writing this option you get to create the terms so you should never fear assignment it might suck sometimes but you should never be like oh man i'm going to get a sign on my option that means that you were either greedy or did not know your possible outcomes and the last and really what i'm going to focus on for the remainder of this video is how to exit or close a position you're going to want to do this for one of three reasons number one you're going to want to lock in profits right now maybe the value of that option is in your favor and you want to lock in profit and you want to wash that away exit and close that option the other one is to cut losses and this is the one i'm seeing a lot right now maybe you're in a trade and you don't think it can go well and it's just diving in value and you want to get out you want to exit it before stop the bleeding if you will this would be another reason you want to exit or close your option so we don't always do it for bad reasons i've made videos about why how i close for profit i'll leave that video down as well but like some this is not all bad sometimes we close for good reason and number three like i said sometimes we want to roll our options further out in expiration or up in strike so you can roll to do either one or two you can roll options to cut losses and you can roll options as well to lock in profits so now how the heck do we do this for calls puts and spreads well let's first understand what's happening when we start a contract when we enter an options agreement okay so the first option agreement that we can get into is we can sell to open now this is gonna be with your covered calls and your cash secure puts i'm not gonna talk about naked calls and puts in this video that's for another day i'll mention them quickly when they come up but really this is going to be covered calls and cash care puts for a majority of my audience right selling to open now remember sell is to right so here you are and you're like all right i'm going to write up this contract and this contract is going to have the strike that i want it's going to have the expiration that i want and i am also going to make the premium that i want to collect now say i say all right i want that to be 12 i want the value of this contract to be 12 you scream out into the world hey i got this contract with this strike with this expiration and i'm looking to get this premium does anybody want it and you wait and you wait and then there's somebody over here that's going to be the buyer and he says i'll take that contract for 12 bucks and you say sweet so he sends over 12 to you in premium that you collect right away and you send to him back the option worth 12 at the current moment that's what we are doing when we sell to open when we buy to open now we are saying hey i got this 12 does anybody have a contract that has a certain strike price has a certain expiration and will and you'll take 12 bucks for it and then there's somebody over here that wrote that option that says hey i got a contract for you so now you take this contract it comes over to you and you as the buyer you now debit and you pay that person 12 for the contract that's in your hand so that's what happens when you sell to open and when you buy to open a contract so that's going to start the options value graph that we are going to see and over time that options value is going to vary so you sold a covered call so right now inside your brokerage it says minus one call and the value that you got it for was twelve dollars so your chart is going to start right here at twelve dollars now over time to expiration that is going to do something like this hopefully we want it to stay down because we want this call to expire worthless but now when it's way up here at twenty dollars the value of that option is twenty dollars so it's going to show that you lost eight dollars minus eight dollars because if you would have sold here you would have gotten twenty dollars as opposed to twelve at the opposite of that when it dips down to here at say ten dollars it's now going gonna say that you profited two dollars and you're in the profit zone because the current value of that option is less than what you sold it for this is when we might want to buy to close so now what we did was we started with a 12 option it is now worth ten dollars so now there's somebody out there saying hey i got this ten dollar contract anybody want it you're like i'll buy that i'll buy it for ten dollars so what you're going to do is you are going to buy to close and what's going to happen now just like here you are going to get debited ten dollars now you're going to receive that contract back and this is a little counter-intuitive the contract is essentially with yourself so you can't like profit or loss with yourself so that contract is closed and what will happen is you will now lock in two dollars of profit that will be yours and this can happen all the way up until expiration and when you do it how much profit you take in is really 100 up to you it's personal preference but we're never going to buy to close a covered call or cash secure foot when the value of that option is more or greater than what we sold it for we are going to hope that theta eats away and then maybe when it's down here at eight dollars we can buy to close we give back eight dollars but now we net and keep four dollars profit and as a seller you don't want time to be able to screw you over you get in you place that option you lock in whatever profit you want for me it's 75 with my covered calls 40 and my poor man cover calls and then i get out just personal preference and then i repeat that's what buying to close means for a simple covered call and cash secure put but now how do you close it all right now on robinhood when you're on the desktop they make it really easy and i think this is where it's kind of hurting people because they just have a buy to close and people don't know what's actually happening and then they get to the app and they have no idea because there's no buy to close on the app guys to close all you do is the opposite contract at the same expiration so if you have a minus one call that expires on 322 what you're going to do is simply buy a call with the expiration of 322 and if the premium you pay is less than the premium you collected you are going to win in that situation now if you need to cut your losses you might buy to close but the premium that you pay is more than the premium that you collected that is a loss now what does that look like on the buy side well on the buy side it's still a 12 premium right but we want when we are the buyer of options we want the value of that option to go up due to extrinsic value due to implied volatility due to share price we want this to go up so now maybe over some time maybe now it's trading at 15 well now you can say hey i got this i got this contract it's worth 15 and you're trying to sell to close you're trying to sell this contract that's now worth more than what you paid for it to somebody else so we are going to see a sell to close so it might say now we bought an option with an expiration date of 322 now it's at 15 when it wasn't 12. so we debited 12 dollars when we bought this option but now we can sell it back for 15 worth of premium now we will net three dollars and to do so we will do once again the opposite we will do minus one expiration of three 222 for this underlying stock that's how we are going to get out and like i said for covered calls when you sell options you want the value of the option to be less when you do so right when you sell a covered call essentially you want this to go all the way down to zero at expiration when we sell an option we want the premium value to increase over time so that we could sell it back at a higher price than we bought it let's talk about spreads real quick now guys there's many different types of spreads vertical spreads diagonal spreads horizontal spreads that really calendar spreads so what we're doing with this spread right is we are spreading out a buy option and a sell option and depending on the premium you will either receive a credit for a credit spread or a debit for a debit spread now there's sometimes we combine them together like the iron condor is pretty much two spreads but closing them is fundamentally the same exact as before but there is a little bit of a caveat with spreads let's take a look at what a spread might look like i might buy a call and i might pay a premium of 20 so this is going to be a debit when we buy now maybe i want to sell a covered call against that and what happened here was i received 35 in premium right so this is going to be a credit spread this is going to be plus 15 dollars worth of profit that is the value of this spread well maybe sometimes later now the value of that spread has gone down to 10 so now the value of this option is worth ten dollars and now you can close this spread and keep the difference of five dollars how do we do that we have to close them with a minus one and a plus one at the exact same expiration date now here's the warning guys you cannot close these one at a time with most brokerages if you do not have extreme margin because that's called being naked the reason that we do spreads is because it lowers our collateral it lowers the amount of buying power we need as collateral or the shares that we need as collateral so you're going to have to close these at both times so we have to think about liquidity spreads are great for getting into if you have small portfolios but they are very very tough to get out of sometimes depending on liquidity and how are you going to kind of mitigate against this you're going to look at the bid ask spread which i think i need to do a video on coming forward if you want me to do a bid ask spread video just let me know in the comments below because i think that one needs to come if there's a really really wide bid ass spread that means liquidity is low and it's going to be hard to fill this because like i said you say hey i got this spread i'm selling it somebody has to buy it back from you and vice verse you can't just create it's not automatically going to get fulfilled so sometimes we have to vary that bid ask price uh that bid ass spread price and we're going to lose money by giving up some money or taking some money like there's always going to be give and take with that bid ask so with spreads super easy to get into they're great because they have low collateral they have low buying power like things like that but if you get yourself into trouble they are very very hard to close because of liquidity if there's a big bid ask spread on them be very very careful and make sure your spread is in a position where you're almost positive it's gonna work out and if it doesn't your collateral is low enough where you don't lose the whole house and this would become even more difficult with an iron condor which was four legs if you don't know what that is i did a video i'll post it but let's say you have a plus one and a minus one spread here this is going to be above the share price right so this is the share price and then we have a minus one and a plus one down here below the share price to close this we need to do the opposite plus one minus one and up here minus one plus one same expiration same strike prices now i said with liquidity it's hard to close two legs at a time guys closing four legs at a time is even more difficult and these are scenarios that you need to understand all right i'm making this iron condor liquidity is pretty low it might be pretty tough to get out of let's make sure i make my short my short positions really really wide so i don't have to worry about getting out of them if i really need to things like that and i get asked can i close one spread at a time yes depending on your brokerage it really matters on who you're working with like say you want to take this spread and you want to move it further as the share price started to drop yes but you can't close one of these at a time because like i said then you'll be naked that's not going to be a good thing let's jump into robinhood look at these guys but before i do if this video is giving you some value youtube doesn't really push out options videos so please give it a thumbs up just leave me a comment or something you know let youtube know that you're getting some value from this i really really appreciate that so that more people learn how to exit these strategies right now this is my options uh portfolio pretty much right now inside robin hood i have a bunch what i'm gonna do is i'm gonna look at one of my dropbox calls so i bought dropbox so here's that plus one that we were talking about i have a plus one contract here is the cost that i paid uh 790 or 7.90 in premium the current value so this chart that's going up and down over time the current value of this chart is at 980 over here on february 8th that value of 12 that 12 that means nothing right now all that matters right now is this so we don't have to worry about what this graph is doing throughout the timeline but what does it tell me well it tells me right now its current value is 980 i paid 790 so i could sell this right now for the current market value of seven of 980 what that would do is right now that would give me a return of 190 so let's look at this chain right now i have an expiration of 120 20 23 at a 17 strike so i go to my expiration all the way down to 2023 i see the 17 strike of a plus one if i wanted to close this option all i would have to do is i would go to the opposite sell i would click this button one option order that would close it i would receive a credit because i sold for 980 if that got fulfilled bingo bango that would be the end of the day but i really really wanted to drive home this value does not matter until you are going to use it at that particular point let's look at a covered call so right now this avenue showing me 39 loss right and i see people and they're like oh man i thought my max loss was i'm going to get my shares covered away where am i going to come up with this 39 my portfolio is screwed i'm going to lose all my buying power that's not the case let's go and look at abby and why it says that i am minus 39 because i got credited 44 i sold this option for 44 now what the value chart is telling me is that i screwed up should have waited a little bit i should have tried to time the market because if i would have done so right now i could sell that option for 83 right i could get a credit of 83 right now so what it's doing it's showing my total return as a loss but i didn't lose anything i lost what i potentially could have got if i waited now what does this mean to me well what it means is i am not going to buy to close this option because if i were to buy to close i got to pay 82 in premium but i only got 44. that's not a good deal for me so that's why it's showing me at a loss so i have a couple options keep waiting till the value goes down and theta eats it away or just let it keep going hopefully it gets expiration right now it's at a share price of 108 i have a call 111 so right now this is worthless i'm still at max gain right now of 44 even though the value is telling me i'm at a loss of minus 38 let's look at a call right now that's currently profitable for me so when i look at this dropbox covered call minus one i sold this option i got a credit of nineteen dollars sweet action but right now its current market value is fifteen dollars so right now i could buy this option back for fifteen dollars netting me four dollars a twenty one percent gain like i said if i was happy getting 21 on this option maybe i did this today i probably wouldn't do it because you'll use a day trade maybe tomorrow if it's 20 i'm like wow i just made 20 of my money in one day boom i'm gonna buy to close i'm going to get back 15 and that's going to be it and it and you can see during the day it got back up to 24 so that was not good for me all right so these are the things don't worry so much about this worry about what the value of the option is and what you either paid for it or what you did i'll show you uh a call option that's at a loss right now let's take a look at this apple buy that's just getting crushed right now so i bought this for two thousand one hundred and seventy dollars all right it's gonna expire in september so i have plenty of time but the value all right what's going on with tech right now is it's plummeting so the current value of this option is 1 343. that is right now the value of that option has lost 38 percent i've not lost 38 the value of the option has i still have plenty of time and expiration for this to rebound but if say news came out at apple and i was like oh man apple's going to go bankrupt tomorrow or the share price is going to keep diving and diving diving i mean the value of this option is going to be diving diving diving i might say to myself i'm going to sell to close this option i'm going to get 13.43 back i know i paid 21.70 for it i'm going to lose 827 dollars in this trade but i'm going to mitigate that loss because if it stays below the share price and expires worthless i'm going to lose 2100 so i might in this case sell to mitigate loss now i'm not going to do that because i think that apple's just having a bad week and i think before september they'll do the things that i want them to do but this would be a situation where you would sell to clothes to mitigate some loss i really do hope this video helped guys if you know somebody that's in hot water and they need to get out please i beg you share this video with people i'll keep making educational videos like this youtube hates them but i know they're really valuable for you so please share give the video a thumbs up and until i see you guys in the next one stay positive work really really hard always please be kind to other people hope you have yourself an amazing day and an even better tomorrow

Channel: Brad Finn

Views: 141,736

Rating: 4.9598236 out of 5

Keywords: Brad Finn, passive income, the wheel strategy, how to close options, how to exit options, how to buy to close, how to sell to close, buy to close and option, sell to close and option, how to get out of an option

Id: 8vwMayXWRxQ

Length: 23min 14sec (1394 seconds)

Published: Thu Feb 25 2021