Buying Call Options Explained By A Pro Trader

what's up you guys my name is henry if you're new i'm starting a series on options because that's my area of expertise when i was working at goldman sachs and in this video i'm going to explain to you what are call options why they are important how they work and the benefits so make sure you stick with me before i jump in and flood your pockets with money make sure you like the smash button for uncle henry and subscribe to the dopa's youtube channel i'm going to start off by explaining buying call options and in the next video i'm going to cover selling call options so first of all an option is an agreement between two people buying a call option is betting on a stock rising so a call option is just a contract that allows the buyer to purchase 100 shares of stock at the call options strike price so a call option is used to buy stock specifically 100 shares but what is a strike price a strike price is the price which you are betting on the stock reaching or in other words a strike price is the price at which the option can be converted into shares of the stock if it is being exercised and if it's above the strike price you will be exercising because it makes a lot of sense exercise besides sounding like we're going to be lifting some weights or jogging refers to the action of converting the option contract into shares of the stock let me do an example on the whiteboard so you can see how this actually works visually since we learn visually and i specifically learned with examples alright so i drew this example on the board right here basically we have a stock which is a hundred dollars okay and then we have a call option with a strike price of a hundred and ten dollars the reason we're buying call option is because we think that the stock is going to go above 110 dollars so this stock if it reaches above 110 gives us the opportunity the right to actually buy the stock at 110 what happens below 110 is well we don't have the right we're not gonna actually exercise because we are not making money at 110 we are at the money or we're beginning to make money so essentially when a stock rises to 110 or above the point of a call option is we buy the call option and we bet on this strike price here's why this is important buying a stock that is 100 costs one hundred dollars buying an option betting on a stock going to 110 may cost something like two dollars so instead of spending 100 you can control 100 shares of stock by buying a call option that is like two dollars or something very inexpensive two dollars versus one hundred dollars you have much more leverage and you control the same amount of shares so henry you're telling me that i can control stock for just two dollars well yes essentially you can just one thing though since each option represents 100 shares if an option is worth two dollars that really means it's worth two hundred dollars and since it is one hundred shares that means two hundred dollars can control ten thousand dollars worth of money where am i getting ten thousand dollars from well one hundred shares times one hundred dollars is ten thousand dollars so in this scenario to have one hundred shares of stock it's ten thousand dollars here to control 100 shares of stock betting on going to 110 dollars is 200 that's literally a 50 difference i mean it's 50 times cheaper to be buying call options versus owning stocks outright of course i will get into the negatives there is some negatives and risks but let's keep going here so the main element about buying call options which attracts so many people is important to understand for you is that one call option is always going to be less expensive than owning the equivalent of 100 shares of a stock because call options are just always going to be cheaper and they're going to have leverage they're going to allow you to control 100 shares for a lower price now what we do have to talk about here is that there's going to be a premium on the option options are not free so you don't get to just bet 110 strike without paying some type of premium so we're going to go over example of paying a premium and we're actually going to pull up a real life example of apple stock we're going to be looking at apple call options and i'm going to show you exactly what a call option on apple looks like versus just owning outright shares of apple by itself without having the call option all right guys so check it out i'm looking at my screen right now and basically we have an apple call option here as you can see it's a 120 strike and we can pay 207 dollars to buy basically the rights to 100 shares of the stock i'm going to explain to you exactly what this means and what the break even is because it's important to know what you're paying for and what your outcome is going to be i'm going to explain that right now so basically if you're going to buy 100 shares of apple stock right now it's 118 and 72 cents right now so if you're gonna buy a hundred shares you're going to have to pay this amount right here 118.72 and because we're buying 100 shares we're gonna put two decimal points over there we go 11 872 is what you will have to do to buy apple stock right now 100 shares okay now with the call option we're going to be betting at 120 strike okay guys and this costs a cost right here 207 dollars notice here that it says break even of 122.07 the reason it's a break even is because we're adding the strike price which is 120 plus our premium so our break even is 122 okay 120 207. once the stock reaches this price right here everything above it is yours call options have unlimited upside potential they continue to go up because it's essentially similar to owning shares but you have that initial break even points where you have to pay a premium plus you're betting on a strike price higher than the current strike price essentially i can draw you guys a graph right now all right so essentially we have apple right so let's say this is 118 okay 118 72 okay here's apple stock it goes up and down right as the price here this is the price okay this is we've made zero dollars if apple goes up 10 bucks to this area right here you earn 10 times 100 which is 1 000 okay you can earn a thousand dollars when apple goes to this is going to be 128.72 okay that's apple stock it's pretty simple right it goes up a dollar you make a hundred dollars because you have 100 shares now let's talk about the call option with the call option we talked about having a strike price of a hundred and twenty dollars so we need to go to at least one twenty to start making money now we also have to pay two hundred dollars two hundred and seven dollars but let's just call it two hundred dollars okay with the car option you start out right here right away you're losing money because you have to pay a premium so you're paying two hundred dollars you start out at negative two hundred notice that your maximum loss is negative two hundred dollars you cannot lose more than what you put into a call option okay so here we have a call option we we spent negative two hundred dollars and regardless of how low the stock goes you see a stock investor can go down all the way to negative 118 dollars times a hundred shares you can lose 11 grand here or over 11 grand with a call option you're stuck here no matter how low you go you're always at negative 200 okay and your break even again guys it's the strike price plus the premium so the strike price was 120 okay and the premium was two bucks okay our break even is 122. so somewhere here okay 122 called here is our break even price what happens is between 120 and 122 it starts to go up it starts to go towards breakeven boom we have broken even and now you have unlimited upside just like the stockholder and you're going up essentially one for one okay here you are so let's see what actually happens here is when a stock goes up ten dollars as a stock investor you earn a thousand dollars okay a thousand bucks as an option investor when it goes up 10 bucks okay this right here 128.72 we'll just call it 128. 128 minus 122 that is going to be six dollars guys so six dollars you make okay i'm gonna draw it right here you make six dollars as an option investor and you make ten dollars as a stock investor okay so who made more money well the stock investor made 10 bucks and the option investor made six bucks but how much did the option investor invest and by the way since it's 100 shares this is actually 600 and this is actually 1 000 okay this is a thousand bucks and that's 600 because again each option contract is worth 100 shares of stock so you know the stock investor made a grand but how much did he have to put in he had to put in 11 000 how much did the option investor have to put in he put in 200 bucks and got 600 bucks so you can triple your money as a call option buyer you can absolutely triple your money and even more it can go unlimited it can keep going but essentially i'm trying to paint you guys an example that buying calls you have a little bit of an initial break even price it has to go up by the amount of premium that you pay plus the strike price you can play around with the strike price that's beyond the scope of this video but essentially a call option gives you the rights to buy 100 shares of stock you can leverage your money because you put in so little and you can get out so much and this is a better way than just owning stock outright in many scenarios however we do have to talk about risks i'm about to get into that right now okay now that you have seen why call options can be so lucrative i need to explain what expiration means expiration like the old milk in your fridge is when the contract expires it is no longer valid either as a buyer you made money or you lost what you paid for the option which is called the premium which i just mentioned now the good news and a big benefit to the call buyer is that they can only lose what they paid in to the option in the case of an apple call option as you can see on my screen you can only lose 207 when you buy calls your maximum loss is just a premium whereas if you own 100 shares of apple's stock at the current price of 119 you can lose 11 900 of course apple isn't likely to go to zero but it was 70 on april 17 2020 literally this year and that was just six months ago so you can lose thousands of dollars in fact three thousand nine hundred dollars to be exact if apple falls back down to seventy dollars per share as a stock investor as an option investor it's literally just two hundred dollars now because all options have a limited time frame and expire every friday at least for most stocks in s p 500 some stocks expire once a month which is the third friday of each month on less traded stocks you have to be right about a stock's direction and it has to happen before the expiration date due to a limited time on the option itself we don't have the benefit of unlimited time frames just like we do with stocks with options you have to be right and you have to be right within a certain time period and that is one of the biggest risks so we have some takeaways we don't have the luxury of unlimited time frame with stocks with stocks you could just own them for as long as you like if they go down if they go up it is okay because you can hold them for an indefinite period whereas with options they literally have expiration dates so not only do you have to be right about the direction you also have to be right on when the stock does a certain activity for example call options can be fantastic for stocks before earnings however beware that before earnings implied volatility is very high basically that's a fancy way of saying that investors are aware that the stock is likely to go up or down a whole lot due to earnings so there's something called an iv crush where implied volatility is very high options are very expensive therefore they could be a good idea to buy before earnings if the stock really does run up and technically speaking usually it's quite profitable however they are quite expensive so you do want to be careful before buying a whole bunch of call options because you could lose your entire premium that you paid as well as these guys are pretty expensive before earnings however i think a great strategy and certainly a strategy that i was looking at at goldman sachs i've done research on buying calls before earnings especially on high momentum stocks is a fantastic idea so if you're an investor and you're interested in options buying call options is one of the best ways to get started as an investor however buying call options is oftentimes not as profitable in months or weeks where there is no earnings because stocks are not likely to always be skyrocketing or moving a whole lot during non-earnings dates so you do want to be aware of buying call options however if you're a new investor you don't have the capital you don't have eleven thousand dollars to buy 100 shares of apple stock you could buy one or two shares of apple stock or you can do your research and buy your favorite stocks for a lot less money and control a whole lot of shares this is a fantastic way to leverage your money however it is risky and i personally do not buy a whole lot of call options what i personally do is i sell call options that's what i cover in my course that is what i'm going to be teaching and in the next video i'm actually going to show you guys an example of selling calls however in this video i hope you enjoyed it if you have any questions my email is uncle invest withhenry.com i'm sending people an email on call options very soon and i explain a lot of options functionality and i help stock investors learn more about options because you can definitely make a whole lot of money investing in options and is way more fun and less boring than just stocks because options allow you to control your income a bit better they have very defined risk parameters and they also allow you to aim for specific rewards i'll show you a lot more of that in the course but for now i hope you enjoyed this video and i have some takeaways for you takeaway one call options rise when a stock rises it's a bet on a stock going upwards it is a very bullish strategy and you do it on stocks that you like or you think are going to be going up in the short term if you're picking a short term expiration date on the option number two buying call options and not options in general are more risky because you can lose your entire premium and it is a significant risk because oftentimes options will expire out of the money and that may happen to you more than 50 of time especially if you're picking options with a strike price that is above the current strike price by definition that means the option is likely to expire out of the money it is less than 50 chance that you're going to make money however that is okay because oftentimes you can make a ton of money as i proved here you can double you can triple your money however you do have to be careful number three buying call options allows you to buy 100 shares of the underlying stock at or above your strike price number four you pay premium when you buy calls and the longer the expiration date the more premium is on the call option because more stuff can happen with more greater time think about it guys if you have a tesla call option one week from today maybe the call option might be pricing in about five or ten percent move but what if i said you buy a tesla call option that is two years away obviously the stock can double or triple within two years so that option is going to be a lot more expensive because options traders understand that time is the biggest factor when it comes to investing and options are priced more the greater the time period is so that's your takeaways i'm an options expert but i'm definitely not an options expert at presenting the material if you have any feedback or you just want to learn more do send me an email follow me on instagram here's my handle and i'm only two weeks away from the course launch so i'm very excited to teach you guys a lot more and in the next video i'm going to show you guys selling call options because i think that is equally or more important to my strategy of making money than just straight up buying calls themselves thanks for watching peace people be aggressive in learning but be safe in investing i'll see you guys in the next video [Applause] you

Channel: Invest with Henry

Views: 197,849

Keywords: Call option, calls, buy calls, sell calls, finance, trading, trading options, options trading, option trading, option trading for beginners, option basics, investing, invest with henry, stock market, buying calls

Id: PaPQ_WZ6lHg

Length: 16min 41sec (1001 seconds)

Published: Mon Oct 19 2020

Reddit Comments

[u/mwdasilva]

So you buy and wait for it to expire ? Lol or did I miss something in this video where you need to sell your call before expiring ?

[u/mwdasilva]

Thanks for posting this 🙏🏻