Early Assignment in Options Trading (Why You Shouldn't Worry!)

um say hello once you're in here what's going on everybody see money i like that one actually my friends used to call me well not it wasn't a sticky nickname but i have been called c-money in the past many years ago what's going on jake happy friday everybody gonna try to go through a not a big presentation but we're gonna talk about early assignment today so i'm just going to wait for people to file in get some viewers going and then we will start but today we're going to talk about early assignment i know i've done a video in the past which was helpful to a lot of people but also annoying to many others due to my repetitive nature so today we're going to talk about early assignment what it is why people worry about it and why you should not worry about it in most cases we'll talk about when to exercise options and when to not exercise options which will make up the bulk of it what's going on evan sorry i haven't replied to your email yet but i'm getting around to it don't get my expiration dates messed up this time that's a good piece of advice last time i sent everyone into a tizzy bj says thank you for the work you've done i've learned 90 of all that i know about options through your content glad to hear it and thank you for being a viewer i appreciate it tesla what's tesla doing in the dumps tesla's been having a rough ride recently but that's the overall tech market as well the interesting thing is i don't know if you've ever done this but everything is very correlated so if you look at if you look at qqq which is the nasdaq 100 etf and then you look at tesla just look at this chart really quickly the end of this chart the past couple months and then i'm going to switch to tesla it looks very similar because technically well technically tesla's in the s p 500 but it's technically a technology company in my opinion but the overall market is well the technology side of things is kind of struggling recently so that's why we've seen a big dump in a lot of these tech stocks but yeah how's everybody's day going happy friday let me know if you have any questions that you'd like to actually let me know if you have any questions about early assignment since that's what we're going to start to talk about in a little bit do you have any questions about early assignment or any concerns about early assignment hello how's it going for those of you just joining we're going to be talking about early assignment to start that's going to be the first portion of the live stream and then we'll go to the general q a sean holmes asked if you buy a deep in the money call can you sell covered calls against it without needing more collateral yes so if we go to apple let's say he's talking about a deep in the money call so let's go to may 2021 and a deep in the money call could be let's look at this 90 delta option so this 100 straight call in apple let's say you wanted to buy this if you owned this call option then you could sell a higher strike call against it and it would actually reduce your margin requirements so you would not have to put up any more collateral to sell or short a call option against a call that you already own given that it is in the same expiration cycle and you are selling the same or less in new short calls than you already own so for example if i owned 10 of these call options at the 100 strike i could short up to 10 calls at a higher strike and it would reduce my overall margin requirement so you wouldn't need to put up more money to short the calls against the calls that you already own because a short call position is only risky if you don't have it covered by anything and what i mean by covered is if you short one call option and you buy 100 shares of stock then it it is a covered call position because the risk of the short call is covered by the shares that you own the hundred shares specifically that you own and so if you bought a deep in the money call option you could short a call option against it and not put up any additional collateral in fact it would reduce your margin requirement so i can kind of simulate this to you if we just look at the buying power effect in the bottom hand corner here if i wanted to buy 10 of these 100 strike call options in apple they're trading for twenty dollars and sixty cents a piece which is two thousand sixty dollars a piece and to buy ten of these my buying power effect would be reduced by twenty thousand six hundred dollars and so if i just go ahead and short a higher strike call against these calls we will see that it reduces this buying power effect from twenty thousand and let's say i short the 120s then now we can see the buying power effect is 14 750 dollars so that kind of simulates what would happen so if i initially just own these 100 calls and i didn't have a short call position and my margin requirement was 20 000 and then i came into the market and shorted 10 of these 120s for 5.90 a piece or collect five hundred and ninety dollars for each of the ten contracts then i would collect just under six thousand dollars and that would actually reduce my existing margin requirement by six thousand dollars so to answer your question if you buy a deep in the money call can you sell covered calls against it without needing more collateral yes in fact it will reduce your margin requirement on that position brave dave says hey cb love your stuff thank you i learned so much sometime this stream would you go over pros and cons of in the money versus out of the money leap calls and your preferences yes i can do that but i would like to start with the early assignment discussion that i have advertised on this video and so i'm going to go ahead and first i'm going to check how many people we got all right 100 people whatever let's get into it so let's talk about early assignment so today we will explore the concept of early assignment which in my opinion is the number one most common worry among options traders that i have talked to over the years so with my youtube channel i have seen thousands and thousands of youtube comments come in on my videos and people have also emailed me lots and lots of questions over the years and one topic that always keeps coming up is early assignment if you don't know what early assignment is early assignment is when a trader exercises their option that they own before expiration and that means a person on the other side of that trade meaning a trader who is short that same option will essentially be forced to buy or sell shares of stock therefore converting their option into a stock position so as an example if i'm short the 135 call in apple and i get assigned on that 135 call what that means is i will be forced to short 100 shares of apple at 135 dollars per share and that's because if somebody owns the 135 call and they exercise the 135 call they will purchase 100 shares of apple at 135 dollars per share now there's always a balance to every single trade or transaction that happens in the market and if a trader exercises the 135 call and purchases 100 shares of stock at 135 dollars a share then that means there is someone in the world who will have to sell or short those 100 shares of stock on apple and in this case the strike price is 135. so if i was short the 135 colin apple and i get assigned that means that i will have to sell or short 100 shares of apple at that strike price of 135 dollars per share now why is early assignment such a big worry for options traders i think the simplest explanation is because if you are assigned on a short option then your option position is forcefully converted into shares of stock long or short and traders don't like the idea of their position changing suddenly without them having control over that change in the position so what i want to do today is go through some options and talk through why i would or would not want to exercise that option so since we're looking at apple let's go ahead and use an example on apple so let's go to the may 21 may 21 2021 options and let's look at a call option so first of all let's go to let's go to this 115 call option here and i'll tell you why i'm going to choose this in just a minute but let's first record some of these metrics here so apple is at 119.50 that's the stock price let's go ahead and record that one 1950 and we're going to look at the may 2021 115 call option and this option is currently trading for 8.50 let's just make it really easy with the math so with the stock price at 119 dollars and 50 cents and since i am looking at a call option with a strike price of 115 sorry i'm just reading the chat if we are looking at a 115 call option and the stock price is 119.50 then how much intrinsic value does this option have say it in the chat this is a quiz the intrinsic value of this call option with a strike price of 115 and the stock price at fifty anybody any answers the answer is four dollars and fifty cents there you go nice job and what this means is since the call option that we're talking about has a strike price of hundred and fifteen dollars that means if somebody owns this call option they have the ability to purchase a hundred shares of apple stock at one hundred and fifteen dollars per share that's the strike price of the option since the stock price is a hundred and nineteen dollars and fifty cents the intrinsic value of this option is four dollars and fifty cents because if you own this option you can buy a hundred shares of stock 50 cents lower than the current stock price because that's what the 115 call represents so if i exercise this option i will purchase 100 shares of stock apple stock at 115 dollars a share now with the stock price at 119.50 if i exercise this call option i will purchase 100 shares at 115 per share and with the stock price at 119.50 then technically i would have a gain or a benefit of that transaction of 4.50 because if i wanted to i could sell those 100 shares in the market for one 1950 and based on my purchase and sale price i will make 450 on 100 shares because i'll have a 4.50 gain since i buy at 115 sell at 1 19.50 and if we multiply that 4.50 gain times 100 shares we get a profit profit of four hundred and fifty dollars so buying a hundred shares at 115 and selling them you don't have to sell the shares but i'm just going to i'm just going to say selling the shares so we can deal with a realized profit and sell at 119.50 i make 450 on 100 shares but what did i give up when you exercise an option you are essentially trading the option that you have and you are converting it into the share position and in this case the share position would be buying 100 shares at the college strike price which is 115 dollars per share now the option price right now is eight dollars and fifty cents so what does that mean so if i exercise this call option let's say i bought it right now i bought it for eight dollars and fifty cents and since it was in the money i decided that it was a good idea to exercise the option if i buy this option for eight dollars and fifty cents i will purchase it for a total premium of eight hundred and dollars since we have to multiply that price by 100 since it can control 100 shares and therefore i would pay 850 for this call option if i immediately exercise this option then i will be trading the call option in exchange for buying a hundred shares at the call options strike price which is 115 dollars per share and with the stock price at 1 19.50 i make 450 but i gave up an option that was worth 850 dollars so the reason that this option or exercising this option doesn't make sense is because exactly what people are saying the option extrinsic value is four dollars and when you exercise an option you only get intrinsic value because you as i said when you exercise an option you are trading that option in exchange for the stock position that you can get through whatever that option benefits you by so if you have the 115 call and you exercise it you're saying that you want to buy 100 shares at 115 per share but you give up your option in exchange for using that ability and so since this option has four dollars of extrinsic value that's included in the value that you're giving up so basically by exercising this option i i trade an 850 option in exchange for a 450 gain on the shares and so basically if we were to do all of these things right now at the same time so i buy this call option right now for 850 dollars and then i immediately exercise that option then i will give up that 850 option i will purchase 100 shares at 115 and with the stock price at 1 19.50 technically i'll have a 450 gain on that transaction however i traded that situation for an option that was worth 850 and therefore i actually lost 400 on this so i lose the extrinsic value of 400 and so where this brings us is people will worry about early assignment immediately when an option becomes in the money so let's say i'm short the 120 call option here people will have a position such as let's say they're short the 120 130 call spread and as soon as apple gets above 120 dollars uh traders will often start worrying about early assignment because the only time you'll be assigned on an option is if you are short an option that is in the money meaning it has intrinsic value as we discussed in this apple example however as we've explored when you exercise an option anybody who does that will lose the extrinsic value that exists in that option and so if your option is barely in the money then it will mostly consist of extrinsic value and that's the case if we look at this 115 call so we can see that the 115 call while it does have an intrinsic value it has close to four dollars of extrinsic value and when you exercise an option you trade that option's entire value for the share position that you get when you exercise that option and so a trader would never make a decision on purpose that would result in an unnecessary loss and so if an option has any substantial amount of extrinsic value the likelihood of an option being exercised is extremely low and if the probability of that option being exercised is extremely low then the probability of being assigned is extremely low because you can only get assigned if somebody exercises that option so if we were to look at these call options on apple i have open extrinsic value in one of these columns which is ext and this is a very quick way that you can gauge whether or not you are at risk of being assigned early on an option position is to look at the extrinsic value that exists and the option that you are short so if we've already covered the 115 call what about the 105 call well the 105 call it has just about 15 of intrinsic value but it still has 1.50 cents of extrinsic value and that means if somebody were to exercise this 105 call then they would effectively give up and forfeit 155 dollars of value for no reason whatsoever and so there would have to be some strong incentive for them to give up that value otherwise they're not going to do it and so if we go to a more extreme example let's say you are in the april expiration cycle and one second let's say you're in the april expiration cycle and you're short the 95 call right here this 95 call has uh just about 24 dollars of intrinsic value and the remainder of that value as is extrinsic so this option here only has 20 cents of extrinsic value and therefore the cost of exercising this option is much lower and for that reason it has a much higher likelihood of being exercised by a trader who owns this call option so really what i'm trying to get across here is your option needs to be super deep in the money or it has to be in the money with very little time left until expiration for you for you to be in a situation where you would be at risk of early assignment because the only way an option is going to have very little extrinsic value and by very little let's just say less than 25 cents the only way an option will have that little extrinsic value if it is in the money is if it has very little time to expiration and it is pretty deep in the money or if it has more time until expiration but it is even more in the money so if we go to let's go let's really quickly compare two options in different expiration cycles that have 25 cents of extrinsic value so by looking at this ext column here in the may 2021 expiration cycle with 56 days to go let's see what option we have to look at that has 25 cents of extrinsic value so right off the bat i can see it is the 75 or the 70 call option so with 56 days to go until an option expires we need to look at a call option that is basically fifty dollars in the money before we see any substantial assignment risk early assignment risk so you'd have to be short one of these options to be at risk or at high risk of early assignment but let's go into the april cycle which has 21 days to go so a lot less time until expiration and then let's find the option with about 25 cents of extrinsic value and now we can see that basically that's the let's just call it the 100 strike so with only 21 days to go your option only has to have about 20 dollars of intrinsic value meaning that you'd have to be short this 100 call as opposed as opposed to being short the 75 call to be at severe risk of early assignment and so basically to summarize it if you are short and in the money option unless it is super deep in the money or it has very little time until expiration and it is in the money then in most cases you will not have any worries of being assigned early on that option and that's because once more when you exercise an option you give up the entire options value which includes extrinsic value but your benefit is only going to be equal to the intrinsic value so using our example from earlier what i mean by that is this intrinsic value based on these prices is four dollars and fifty cents so if i own the 115 call and the stock price is at 119.50 this option has 4 dollars and 50 cents of intrinsic value and if i exercise this option this is what i will get this will be my benefit is the intrinsic value that's why it's called intrinsic value because it's technically the real value that an option has so if i buy shares at 115 and they're currently at one 1950 that's a 4.50 benefit for me as compared to simply buying the shares at the current stock price of 1 19.50 but when you exercise an option you give up the entire value which is not just intrinsic value you also give up extrinsic value and for that reason based on this particular example a trader would never exercise this option unless there was a stronger incentive than 400 to exercise that option so based on all of that does anybody have any questions based on everything that i just dumped on you because i know we moved pretty quickly there and i covered a lot of information so if you have any questions about early assignment and what i just said there then please go ahead and ask those now read approves thank you for the five dollar super chat what's the pitfall of selling call spreads on expiration date with high probability to expire worthless especially with high iv too good to be true well i wouldn't say it's too good to be true but you're basically going to take a lot of risk for very little reward so an example would be these options right here are expiring today apple stock is at 119.35 so if i wanted to sell the 120 121 call spread this this call spread is essentially at the money so if i were to short this 120 121 call spread expiring in a few hours an hour and a half from now then i will only be able to make 10 cents on this trade but i could lose 90 cents so my max profit is 10 my max loss is 90 and the only thing that needs to happen is apple needs to go from 119.50 to 121 which is a 1.50 increase over the next hour and a half and essentially i will lose nine times more than my maximum potential profit in this trade so the reason that you wouldn't do it is your risk to reward is going to be really poor and you're going to have to get really close to the stock price so notice as i mentioned apple's at 119.50 and if i wanted to sell a spread at these prices then i would essentially have to sell the 120 that be the closest out of the money option i could sell and if i wanted to create a spread i could buy the 121 or the 122. but see right here like it still doesn't make sense because my max profit here is is ten dollars my max loss is ninety dollars so there's really no reason that i would make this trade given that apple only has to increase a dollar fifty over the next hour and a half for this position to achieve its maximum value and therefore i would lose nine times more than my best case scenario and for me that's just not a good trade you could also go to like if we look at the 121 122 you can sell this spread for two cents but it doesn't really your commissions are going to be more than that so if i sell this spread for one penny i can make one dollar but i can lose 100 and that's just not a sustainable way to trade options in my opinion now if this were earlier in the day because these options are expiring in an hour and a half and so they're going to be trading with very little extrinsic value and as i said you're going to have to sell options very close to the stock price to get any sort of premium but if it were earlier in the day say this was 9 a.m then you would be able to sell and at the money spread for a lot more but still in my opinion it's just not worth it because you're going to have a lot more risk than your potential reward and since it is expiring today you're basically going to have a very binary situation where you're either going to make money really quickly or you're going to lose a lot of money very quickly because the stock price only has to make very small movements for the spread to change in value by a huge amount and so for me it's just not worth it i don't like to put on trades i don't like to put on trades where i have way more lost potential than profit potential especially if it is a zero day trade where i'm going to be trading in and exiting that same day it can just go wrong very quickly especially like what if i were to sell a straddle or something right here let's say i sell the 119 straddle i can only make 70 dollars and that's if apple stays right around 119 but what if in 30 minutes some unexpected apple news comes out and apple goes to 120 dollars per share well then this 119 straddle if apple goes to 1 123 then this straddle will be worth 400 and i'll essentially lose 330 on this in just a few minutes and so based on the max profit of 70 and the potential to lose more than that if there's some unexpected movement it's just not worth it for me so yeah saturday night saturday night is that how you say it caturday night he's saying it's like gambling and that's what i would say so in general my belief is that the shorter term you go with your trades the more it is like gambling because the more you need things to work out in your favor and in a very short amount of time when you go with shorter term trades as opposed to longer term trades so for example if i went to just a 21 day spread and i sell let's say i sell the 125 130 call spread the risk reward still is pretty poor but at least in this case if apple goes from 119 to 123 over the next couple hours or the next hour i should say then this spread it will gain value but it's longer term which means its value will will move more slowly as compared to a shorter term spread because shorter term options are extremely sensitive to changes in the stock price which is which is shown by the greek gamma gamma tells you essentially how fast an options delta will change based on changes in the stock price and delta tells us how sensitive that position is to changes in the stock brace and so a high gamma position will have very sensitive directional exposure when that stock price changes and that's typically not what you want unless you own options then gamma works for you omar asks so are short verticals safe from early assignment no whenever you have whenever you have a short option component in your spread or in your option position you can be assigned on that short option so anytime you have a short option you can be assigned the purpose of what i was talking about earlier is to show you that to be assigned on a short option typically it needs to be really deep in the money so getting back to this may expiration in apple with 56 days to go i have extrinsic value plotted on this column right here so this just quickly tells me how much of this options value is extrinsic now generally speaking the more extrinsic value an option has the less likely it is to be exercised because if you exercise an option that has lots of extrinsic value you're essentially giving up that value for no reason so we talked about earlier if i were to buy this 115 call right now for 850 dollars it has four dollars and 20 cents of extrinsic which means if i exercise it i would effectively just give up half of this option value for no reason but with a short vertical let's say you're short the 110 120 call spread with your short call spread here you are short the 110 call which means you have assignment risk or you could be assigned on this 110 call if someone exercises the 110 call but it's extremely unlikely for someone to exercise the 110 call unless it has extrinsic value close to zero let's just say less than 25 cents but we can see that this 110 call has extrinsic value of two dollars and fifty cents so you would not be exercised on this option it's extremely unlikely for you to be exercised on this option if you were short this call spread now another thing to point out what if you did get exercised on the short call portion of a call spread well let me actually just illustrate this for you because i i actually like drawing in powerpoint so i'm going to draw this out for you so let's say we have one second so we have our stock chart here now let's say this is the stock price and here is your short call so the dash line is your short call the solid line is your long call so let's say short call and then let's do the long call is up here now if you get assigned on this short call you will sell or short 100 shares of stock at this strike price if assigned on the short call you will short 100 shares of stock at the calls strike so let's say you get assigned on this short call now you have a short stock position right here and that short stock position is more specifically going to be shorting 100 shares of stock so if you get a sign on this short call then you will have a unless you own shares already you will have a share position of negative 100 shares right here but your long call still serves as protection against that short call position because remember with your long call you could buy 100 shares at the strike if you wanted to and so if you're short 100 shares of stock here and you have a call option that allows you to buy 100 shares here it doesn't matter if this stock price is where it is or if the stock price hold on or if the stock price goes to a million because it doesn't matter if the stock price is here or if the stock price is here you still have this long call right here which allows you to buy your short stock position at this fixed strike price so the long call even though you got a signed on the short call and now you have 100 shares of short stock at this price level since you still own the long call the risk of your position doesn't change okay so if we go back to this apple position let's say i'm short the 110 120 call spread now let's just say for simplicity's sake let's say i sold it previously for three dollars and fifty cents let's just say in a hypothetical world what let's say in a hypothetical world you sold this 110 120 call spread short and you initially shorted it for three dollars and 50 cents based on that your maximum profit is 350 but your maximum loss is 650 dollars and that's because the maximum value of this ten dollar wide call spread is the width of the strikes which is ten dollars so if we sell something for three dollars and fifty cents in option terms that means we collect three hundred and fifty dollars in premium and the most that this spread can be worth that expiration is one thousand dollars so a ten dollar spread value times 100 gets us a maximum value of one thousand dollars and so if i short something for three hundred and fifty dollars and its maximum value potential is one thousand dollars my maximum loss potential is the difference between those prices which is six hundred and fifty dollars now let's say i'm in this short call position short call spread i'm sorry and i get assigned on the 110 call what this means is that i will short 100 shares of apple at 110 per share but i will still own the 120 call option so what that means is let's say apple goes from 120 all the way to 200 per share okay and i'm short 100 shares at 110 per share let's go ahead and do some math here so i need to delete all this just give me one moment here no so one moment just gotta delete all this garbage whoa all right so shorted 100 shares at 110 dollars a share i still own the 120 call option if apple goes to two hundred dollars then my short share position will lose nine thousand dollars okay because if i short a hundred shares at a at one ten dollars per share and the stock price goes to two hundred dollars per share i will have a 90 loss on 100 shares equals 9 000 loss because i shorted 100 shares at 110 a share and the stock price went to well you guys got it this is too much too much text but as i mentioned i still own the 120 call so value of the 120 call how much would the 120 call be worth if apple was at two hundred dollars what is the intrinsic value of the 120 call if apple goes to two hundred dollars eighty dollars of intrinsic value equals eight thousand dollar option value and so what we get from this is a total p l if we combine these two i have a nine thousand dollar loss on the short shares minus an eight thousand dollar value that i can sell the 120 call for so i can sell the 120 call for its 80 of intrinsic value let's just say it doesn't have any extrinsic since it's so deep in the money since i still own the 120 call i can sell the 120 call for 80 therefore taking in 8 000 in cash in my account and so what we get is a loss of 1 dollars minus eight thousand dollars um value in the call long call is a total loss of one thousand dollars okay and so if i lost nine thousand dollars on the short stock position and i closed that out so i buy back the short shares and i realize that nine thousand dollar loss but at the same time i sell the 120 call and collect eight thousand dollars into my account then what i'm left with is a one thousand 000 loss however we can't forget about my entry credit here my entry credit i said was in a theoretical world let's say i sold this 110 120 call spread for 350 my entry credit was three hundred and fifty dollars so if we if we take that one thousand dollar loss and subtract the credit that i initially received then one thousand dollars minus three hundred fifty dollar entry credit equals six hundred and fifty dollars and so if we compare this 650 dollar loss because i just i shorted this call spread for 350 the stock price went up i got assigned on the 110 call and then apple went to 200 so now i have a 9 000 loss on my short share position and i still have the 120 call because i didn't exercise it or anything and you can't get assigned on an option that you own and with apple at 200 the value of the 120 call is there for 8 000 so when i take my loss on the short stock position and then i sell that 120 call my total loss is 1 000 but since i initially entered that overall position and collected three hundred and fifty dollars for it my total loss is six hundred and fifty dollars if we look at the maximum loss potential of this spread the 110 120 call spread if i short it for three dollars and 50 cents it says my maximum loss is 650 so it doesn't matter if the stock price goes up and you don't get assigned at all and you take the full loss on that spread your your maximum loss potential will still be the same if you get assigned on the short call and the stock price goes to the moon your risk isn't higher after you've been assigned your risk is the exact same after you get a sign it's just that the structure of your position changes somebody asked what if absolutely nobody buys your 120 call on a stock like apple that is not a legitimate concern because basically if you own if you own a call option on a very actively traded stock like apple you will have you should have no problem exiting that position so if you're trying to get out of the well let's just go to options that are expiring today let's say you own this 100 call option and you want to sell it because expiration is in an hour and you're basically holding this option we can tell by looking at this price and by looking at the ext column this option has basically no extrinsic value so all this options value is intrinsic so i would want to go and close this option that i own and a person is asking what if you want to sell that option and nobody wants to buy it and this brings up a really good point so up until this point in the video we've talked about why exercising an option is usually not a good idea because if you have a lot of extrinsic value in that option you're going to give up that extrinsic value and lose it if you do exercise an option and you would never want to give up value unnecessarily and that's why it is extremely unlikely for somebody to exercise an option that has a lot of extrinsic value so my first thing would be that i think you would have a very easy time closing an option position that you own in a stock like apple since it is very heavily traded but let's say you try to sell this option that you own and nobody wanted to buy it well then you would have to reduce your price and i would say that there would be some scenarios where maybe you have to sell the option for less than the intrinsic value so for example with apple at 1905 or 119.05 this 100 call option has 19.5 cents of intrinsic value so if i were not able to be filled at this value of 1905 then what i would do personally is i would just reduce the price by a couple pennies and you would definitely be able to get filled a couple pennies less than intrinsic value which technically means that you would be giving someone else risk-free profits on the other side but it would only be a couple pennies on an option that's worth two thousand dollars so it wouldn't be a huge deal for me but at the very least if you wanted to capture the intrinsic value then you could exercise the option because as an option owner you have full control of when and if you exercise that option and one scenario where it would be advantageous to exercise an option is if you owned it and you could not sell it for intrinsic value so let's say i couldn't get filled at 19 apple is at 119 so that means this 100 call basically has 19 of intrinsic let's say you tried to sell this option for 18.70 you'd basically you'd basically be selling for 30 less than intrinsic if you could not get filled at this price and you didn't want to give up any more value and and basically lock in a negative trade against you meaning that you're essentially giving up free value if you don't sell your option for at least intrinsic and if you couldn't get filled on this then what you could do is you could exercise the option and therefore you would forcefully take the intrinsic value of that option because if you buy 100 shares at 100 per share which is the strike price of this call option and then you immediately go and sell those shares at 119.15 then you will capture 19. and 15 cents of value since you would buy 100 shares at 100 and you could sell them right away at the current market price of 119.20 and by doing so you would capture all of the intrinsic value in that option because that's what intrinsic value represents what gain could you make by purchasing at the strike price as opposed to the current stock price so to make a long story short if you owned a call option that was in the money and you couldn't sell it for at least intrinsic value then an option available to you is to exercise that option and by doing so you would forcefully take intrinsic value that exists in that option so i know again i just dumped a lot of information on you but basically i don't think you would have a difficult time selling an option for intrinsic value on something like apple um and worst case scenario i would say is that you'd have to sell maybe five cents or 10 cents less than intrinsic value and i would say there is a very good chance that you would get filled on that because whoever takes the other side of that is likely a market maker of some sort and they will they will facilitate your transaction in exchange for giving them a small risk-free profit so if you sell an option for less than intrinsic value technically you are giving the other party a risk-free profit so we got another question jude asks what if you have a small account enough collateral to open a spread but not enough money to cover if the short leg is exercised price lands between the short and long leg so i think you're asking first of all if we're talking about this may spread here so let's go back to the 110 120. first of all you would not get assigned on this 110 call with 2.50 of extrinsic value existing in that option it's highly unlikely however if you were assigned on the short option portion of a spread and for some reason you had margin issues then what you would have to do is you would have to buy back to short shares and sell the call that you own which is a 120 call and you'd have to sell well at the very least you would have to get rid of the short stock position because that is what is causing the margin issue because a short stock position is a highly risky position and owning a call option is much less risky because you don't have unlimited loss potential technically the long call that you own covers the risk of your short stock position so i think it depends on the brokerage platform i wonder if i wonder if apple will actually cover the margin well let's see if we can let's see if we can construct a position that's short stock and a long call and let's see what it's margined at so if i short 100 shares and buy the 220 call okay so tastyworks is saying that i still have to put up eleven thousand dollars in a margin requirement um but the maximum loss of this position is technically 750 that's because if i short 100 shares here at 217.50 and i own the 220 call then technically my risk is capped at any price above 220. so if the stock price goes to a million i can still buy a hundred shares or cover my short shares at 220 which means i wouldn't have that massive loss associated with simply having a short stock position as we can see here has an undefined max loss limit so there's no limit to how much you can lose if you short 100 shares of stock and it is not covered by something so if you do get a sign on a short call or a short option as part of a spread and you do encounter margin issues then unfortunately you're going to have to unwind that position and i would recommend starting with the riskiest part of it first and that would be a short stock position so if we go back to our apple example if i have the if i have the 110 120 short call spread and i'm assigned on the 110 short call then i will short 100 shares of apple stock at 110 per share but i'll still have the long 120 and the risky part of that position would be the short stock even though technically the risk is covered by the long 120 call but what's causing you margin difficulties is going to be that short stock position and not the 120 call and so basically you just have to cover the short shares that you got assigned and that would be really easy because you could just if you got assigned 100 short shares on apple all you'd have to do is go up here you'd click buy 100 shares and you could cover the shares that you're short and you just send that off and since apple's such a liquid stock you would effectively get filled on that right away and you would close out your short stock position in just a couple seconds but then you'd be left with the long 120 call and then it becomes your choice what you do with that so you could continue to hold it but if you continue to hold it and apple is below 120 at expiration then you're gonna lose another 580 whereas if you initially entered it as a short call spread and you did get a sign on the short call and for some reason you had to unwind that short stock position due to margin difficulties then i would probably close the 120 call and just get out of that entire position and then start all over again yeah time writer says if you have an option and there are people bidding and you meet the bid price it will be filled so what they're saying is if i own this 120 call option the bid price is 575 the ask price is 5.85 so if i sell this for 5.75 i'll get filled instantly sorry that what i was just queuing up was buying it if i were to sell this i could get filled instantly by hitting the bid at 5.75 so the bid price here is the highest price someone is bidding for this option i mean the highest price they're trying to buy the option for and if you sell something right at the bid price you will get filled instantaneously so i can just go ahead and and show you guys really quick i mean do i really want to do this so let's just go let's trade in and out of this and just do this very quickly so when you queue up a spread what this price on the bottom is this is the mid price this is 3.45 cents as the mid price and that's being calculated by taking the midpoint of the short call which is the short 120 call and it's taking the midpoint of the long 130 call if i look to the left here we see that there's this nat price this is the natural price and that's 337 so basically if you try to sell a spread at the natural price you'll get filled instantly and that's that's a worse price for you than the mid price so notice that the mid price is 350. if i sell this spread here i will collect 350. but if i go to the natural price of 337 then i will only collect 337 but on a stock like apple um typically you'll be able to get filled right at the mid price so let me just go ahead and try to execute this spread at the mid price and let's just see what happens my suspicion is that i will be able to get filled here instantly or i could get filled pretty much instantly at 3 45. so let's go ahead and just send this so it didn't go through the mid price is well if we go to apple here i'm underwater on some of these apple positions um the mid price is 349 my limit price is 350. if i go ahead and cancel and replace this and go to 345 i'll probably get filled on this there we go so i had to reduce my price a little bit to get filled on this and if i wanted to unwind this position i could do it in a spread or i could do it one by one i don't really know why i'm doing this i'm just kind of showing you guys trade execution but basically we were trying to discuss is that you can get filled instantly by going to the bid or the ask so if you're buying something back in the case of buying back this short 120 call if i go to 590 which is the ask price i will be filled instantly there we go and so i got out of that now i still have the long 130 so i need to get out of this um this is two pennies wide so i'll probably get filled on this instantly at 2 38 it's taken a second here but if i go down to the actual bid price of 237 this will fill it instantly see now i just moved it though so i went down to 237 and now it actually moved the bid price one penny lower so there we go so it's that it's that easy when you're trading a very liquid stock like apple um but yeah to make a long story short a lot of people have that question where they are fearful of not being able to fill their trades and what i say to that is first of all if you stick to really liquid products like apple or if you're trading something like spy or iwm these option markets are so active that you really should not have any problem getting out of the position and the worst case is that you just have to go to the bid or the ask so and like i said if you own an option and you're unable to sell it at the bid price or i should specify not the bid price if you are unable to sell an option for its intrinsic value and you try to go a couple pennies less than intrinsic value and you still can't get filled which would probably be the case if you were trading a very illiquid stock then i would say exercising that option is a good play because by exercising an option you always capture the intrinsic value and so if you're unable to sell the option for intrinsic value you could forcefully capture intrinsic value by exercising that option yo al lusak what's going on dude how's it going my friend those of you don't know i went to high school with al alright where are we at here throw me your questions whatever you want to know we've gone pretty heavy into early assignment already and selling options for less than intrinsic if you can't get filled exercise the option thank you al i gotta come out and visit you i've been to i've been to nashville once but i was with my dad so we didn't we didn't really let loose icee says hey chris guess who made money on gme again where is gme jeez gme is an absolute gambling vehicle in my opinion but this is why this is exactly why traders love gme is because it's extremely volatile volatility is good for traders that's also why people that's why traders love the cryptocurrencies too because the cryptocurrencies are incredibly volatile got put 11.5 on gopro what'd you think about that buy gopro you got put you bought shares at 11 50. oh sorry brave dave is every time i try gambling on gme i lose money i'm done and i'm not trading it anymore hey that's a good strategy i think if you are unsuccessfully executing trades in something like gme then just throw in the towel it's okay it's it's extremely volatile so it's you know you have to be very ready for big movements and that's why i think if you're actively trading short term you have to have some sort of a system so that it's less stressful on your body because otherwise if you're just winging it then it could be tough brave dave had some leaps questions let me go back brave dave asks out of the money in the money leaps and when do you consider closing your risk-free positions when underlying is falling so in the money versus out of the money leaps personally if i'm gonna buy first of all if i'm buying a long-term option then typically that's a pretty directional position um so let's go to nvidia for example so nvidia's trading at 500 a share i do own some leaps on nvidia which are in the january 2023 expiration almost two years out if we look at the prices of these so if you go out of the money so nvidia is at 500 right now if you want to buy the 600 strike call option let's see where is the high price so nvidia's high price over the past few months has been six hundred and fifteen dollars so if you buy the 600 call in nvidia with just under two years to go then you're gonna pay seven thousand two hundred dollars for this option and if we compare that to an in the money option so let's go to the 400 strike if you go to the 400 strike you're going to pay 16 000 so the question becomes do you want more leverage or do you want less extrinsic value and what i mean by that is if you buy the 400 strike call option in nvidia you're buying a hundred dollars of intrinsic value because the stock brace is at 500 if you buy the 400 straight call then you're buying an option that already has a hundred dollars of intrinsic value and so that dramatically increases your entry cost so we look at the total cost of this option is just less than sixteen thousand dollars but the extrinsic value is fifty two hundred dollars and so if i buy this 400 call option for 16 grand and nvidia stays right at this current stock price through the expiration then at expiration my 400 call option will still be worth a hundred dollars or ten thousand dollars in premium and so if i buy this 400 call for 16 grand and at expiration nvidia is at 505 then this call option is going to be worth 105 dollars and therefore i'm only going to lose 30 percent of the value as opposed to losing a hundred percent of the value if you buy an out of the money option so if i buy the 700 call or the 600 call i am going to lose a hundred percent of that value so if i buy this 600 call and after nvidia is at 500 in two years then i'm gonna lose a hundred percent of this calls value because if nvidia is at 500 dollars per share when this expiration arrives then this 600 call is going to be worth zero dollars and therefore i'm going to lose 7 200 now let's compare the delta values because this is what really it comes down to is how much leverage you can get if i buy 15 000 worth of options i can buy two of the 600s or i can buy one of the 400 okay so if i can buy two of the 600 call options and i spend just under 15 000 my delta is 94. so that means if nvidia goes up one dollar i'm expected to make 95 dollars if nvidia falls by one dollar i'm expected to lose 95 dollars and also the total potential delta of this position is 200 because if i own two call options each of those options could get to a delta of positive 100 and if i own two of them that means in the future if nvidia is higher than 600 dollars the best case scenario is that my delta will get to 200 which would be a good thing if nvidia continues to go up because if in if nvidia goes up and my delta is 200 then i will make 200 for each dollar that nvidia's stock price increases but if we compare that to buying one of the four hundreds if i buy one of the four hundreds for fifteen thousand dollars my delta is seventy five so right out of the gates i have less profit potential if i buy this 75 delta call option and nvidia goes up by one dollar i'm expected to make 75 as opposed to the 95 dollars that we already discussed in regards to buying two of the 600s and then also the maximum delta value of buying one call option is 100 so if nvidia continues to go up and this delta goes up the max delta of this one call option position is going to be 100 which means in the future if nvidia is at 700 and my delta of this call option is 100 then i will make a hundred dollars for each subsequent increase in nvidia's stock price so that's why traders like to buy out of the money options is because you can get a higher quantity of contracts and with the higher quantity of option contracts you have more potential delta values in the future so if i own two of the 600s in the future i could be making two hundred dollars for every one dollar increase in nvidia but if i only own one call option then i can only make a maximum of one hundred dollars for each one dollar increase in nvidia so to make a long story short when you're considering out of the money versus in the money leaps it really comes down to how much leverage do you want so do you want to favor buying more option contracts for the same amount of money or do you want to spend the same amount of money and buy fewer contracts and potentially give yourself a lower loss if the stock price does not move in your favor is that health does that help brave dave jeez we got a lot of stuff coming in here man lynn thank you for the five dollar super chat what is the meaning of cut the delta by 50 um the meaning of cut the delta by 50 well what that would mean is that you reduce your delta position by 50 um so to give you an example if we look at if you own the 500 well actually let's make this math much simpler if you own the 580 call option in nvidia in this expiration your delta is 50 and if you owned this option and you wanted to cut your delta position in half then you would short an option with a delta of 25 which would be shorting the 820 call option so by doing that you would reduce your delta from 50 which is what you'd have if you only own the 580 and you would reduce it to 25 because since you own a 50 delta call if you short a 25 delta call 50 minus 25 gives us an overall delta of 25 so that would be cutting your deltas in half and i've talked about that in past live streams with some of the positions that i have one of the benefits of shorting calls against calls that you already own is that you reduce the delta exposure of that overall position which is helpful if you've seen a massive increase in the stock price and you want to protect against decreases in the stock price so the stock price goes up and then you reduce your deltas then if the stock price goes back down you're going to lose less money compared to if you didn't put on that adjustment so brave dave is asking what about closing your risk-free spreads so if we go to tesla i have so i have this this is one of the risk-free spreads i have so the 700-800 if we look first of all if we look at the trade prices we can verify that this is a risk-free spread because if we look at the 700 i bought this for 118 and then later i shorted the 800 call option which is a higher strike call and i shorted it for the same exact price so eleven thousand eight hundred dollars if i select both of these and i click close position this will just quickly show me what this spread is actually trading for and so we can see that the spread is trading for 25 dollars so if i was able if i sold this right now tastyworks is actually telling me that my profit would be exactly what i sell this for so if i sell this for 25 dollars i will make twenty five hundred dollars and that's because i entered this position for a net zero entry cost and if i sell it for twenty five dollars i will collect twenty five hundred dollars into my account and if i sell it for twenty five hundred dollars and my entry cost is zero then my profit is twenty five hundred so the reason i'm continuing to hold this is first i don't have any risk in this position since i entered it for a net zero debit which means my entry cost on the 700 call and my entry cost on the 800 call nets out to zero dollars so i don't have any risk on this position and since the strike width is 100 wide and also since this has 450 days to expiration i have a lot more money that i could make on this spread so if tesla goes to over 800 per share by the time of this expiration then this call spread could be worth a hundred dollars and if we multiply that by one hundred the maximum value of this position is ten thousand dollars so right now it's at twenty five hundred dollars so it's only worth 25 of its maximum value in terms of when i would look to close this i would base it off of when the spread gets over 50 then technically my risk to reward starts to diminish significantly so for example let's say that this spread gets to seventy five dollars if it gets to seventy five dollars i could sell it and realize a profit of seven thousand five hundred dollars and i just mentioned that the maximum potential value of this spread is ten thousand dollars because it's a hundred dollars wide and if tesla is above eight hundred dollars at expiration then this spread will be trading based on the width of the strikes its value will be the width of the strikes so if the value of the spread gets to 75 dollars and the max potential value is 100 that means that i can only make another 25 dollars but i could lose all seventy five dollars that i that i currently hold if i were to hold it and tesla stock were to fall so if the spread were to get to seventy five dollars then i have seventy five dollars to lose and i only have another 25 dollars to make and therefore risk to reward would suggest that i should close that position since i've made a majority of what i can make on the spread but i can lose everything that i've made up to that point and that decision would be even easier if let's say the spread got to 90 dollars so if i own this spread and its value gets to 90 dollars then i can only make another 10 on it or another thousand dollars in terms of the overall value but if i continue to hold it and tesla stock craters then i could lose nine thousand so in terms of closing spreads a general rule of thumb is to consider how much more you can make and compare that to what you could lose so right now i can lose twenty five hundred dollars if the both of these things go out worthless then i basically lose the unrealized profit but if things go well over the next couple years then i could make another seventy five hundred dollars so i can lose twenty five hundred dollars in unrealized profit or i can make another seven hundred seven thousand five hundred dollars so that's a good risk to reward for me especially considering that i don't technically have any risk in this position other than the unrealized profit that's because i entered this spread for a net zero cost which means i don't really have any risk based on where the account was when i entered the trade and so that's how i that's how i think about closing this position is i'm going to look at how much more i can make versus the maximum potential loss that i could have if things go wrong and if i can make a lot more than i could potentially lose and if i also have very little skin in the game in terms of actual risk then i'm going to continue holding it so in this case i'm going to continue holding the spread because i can make another 7 500 and i can only lose 2500 of unrealized profits but at the end of the day as i said my entry cost on this entire spread is zero dollars and so i don't really have any risk because it is a risk-free position since i didn't really pay money to enter this the spread based on the entry cost of each component if we look at the 900 1500 call spread we can see that this is also a risk-free position since i purchased the 900 call for a hundred dollars i shorted the 1500 call initially for 230 dollars and then i bought it back for 117 and then i re-shorted it for 117 so my actual my overall credit on this call spread is like twenty four thousand dollars so worst case scenario if tesla is below nine hundred dollars per share at expiration then i will technically still make 24 000 on this trade but if we do the same analysis as before this option spread has 660 days to go and if tesla somehow gets above fifteen hundred dollars per share by expiration then this spread could be worth fifteen hundred minus nine hundred that gives us a spread width of six hundred dollars if we multiply that by one hundred the maximum value of this spread at expiration is 60 000 so currently i can sell this spread for 70 but its maximum potential value over the next two years or so is sixty thousand dollars so if i continue holding this and tesla continues to increase the most that i can see this spread appreciate by is another fifty three thousand dollars and again it's very similar to the other position where i don't really have any risk in this trade and so for me the only real risk is losing the unrealized profits which at this point are not too significant compared to what i could make if tesla does increase over the next two years and this spread appreciates in value immensely but again tesla doesn't necessarily have to go to 1500 let's say tesla goes to 1200 over the next two years which isn't an insane thing that could happen if it goes to twelve hundred dollars at expiration this spread would be worth three hundred dollars because the 1500 call will go out worthless but the 900 call would be worth 300 and that would mean that this position has an overall value of 30 000 so compared to the current value of seven thousand dollars um if tesla goes to 1200 over the next two years then this spreads value will slowly appreciate by another 23 dollars to 20 or thirty thousand dollars so if it goes from seven thousand dollars in value to thirty thousand dollars in value then i'll make another twenty three grand on this and that's if tesla goes to twelve hundred but again i entered this trade for a big credit and so even if it goes out completely worthless i will still make over 20 000 on that particular trade brave dave thank you for the 10 super chat i appreciate it so he says he has a free 400 except 21. so he's got the 400 510 call spread and he's saying so yes this spread is actually pretty far in the money and that's why it is trading for almost not almost but it's trading for more than 50 percent of its total potential value so if tesla remains above 510 a share over the next six months or 180 days then this spread will appreciate from seventy three hundred dollars to eleven thousand dollars so as i was mentioning before since this spread is at seventy three hundred and its maximum potential value is 11 000. then this spread is getting to that point where it's closer to the max potential value than it is to being worthless and for this reason as this spread gets closer and closer to eleven dollars like if this spread gets to ninety dollars i would probably look at closing that spread because if it's at ninety dollars and it can only be worth a hundred and ten you can lose all ninety dollars if the stock tanks but you can only make another 20 and so the risk to reward naturally suggests that you should consider closing that position because it doesn't make sense to hold a position that you can make very little on but you have a lot to lose on so that's how i think about it why why is in the money calls extrinsic value the same as out of the money put so that gets to put call parity let's try to find an example technically they should be they should be very close let's go to ext so i think though there will be a bigger discrepancy if you're looking at well at the money options are pretty close but let's go to something that's pretty deep in the money and doesn't have too much time left so let's look at this 375 call option the reason that these so these extrinsic values are very very close so we're seeing first of all the prices are jumping around a little bit because the market is rallying but we can see that the extrinsic value of the 375 call is right around two dollars and the extrinsic value of the 375 put is right around the same value so they're kind of hovering around 190 195 so they're asking why is the extrinsic value the same and it's because you can create you can synthetically create the same position in two different ways so to explain this we're going to compare two different strategies so the first strategy is buying the 375 call so if i buy this 375 call then i have nineteen hundred dollars and fifty cents hold on let's just lock in this price at 19.50 so well actually i'm going to keep it floating so if i buy the 375 call here i have unlimited profit potential and around two thousand dollars in loss potential we're just going to round these numbers to make the math a little bit easier the extrinsic value is 1.95 which means if i buy this 375 call and spy stays right where it is over the time before expiration or through expiration then i will effectively lose that extrinsic value of just around 200 so the risk profile of this 375 call purchase is that i have unlimited profit potential to the upside but my loss is capped at 375 and lower so if the stock price goes to zero i will only lose and fifty 1950 i can create this same exact risk to reward profile or basically the same exact position by using long stock and a long put so a long call can be synthesized where you can basically create a synthetic long call position by purchasing a hundred shares of stock and then buying a put option at the same strike price so if i buy 100 shares of stock here and i also buy the 375 put look at my max profit potential my max profit potential is uncapped because i own shares of stock there's no limit to how high the stock price can go and therefore in theory my maximum profit potential is unlimited my maximum my maximum profit potential is unlimited sorry i don't know if i misspoke there my maximum loss potential is the exact same as that call position that we just looked at my max loss here is nineteen hundred and fifty dollars and that's because first of all if i buy a hundred shares at 392.66 and the stock price goes to 375 then i'm going to lose that difference that's going to be about 750 dollars that i'll lose on the stock position but i paid just under 200 for the put position and if the stock price goes to 375 and stays there at expiration i will lose the full premium that i pay for that put option so my and fifty seventeen fifty loss on the shares plus a two hundred dollar loss on the option gives me a net loss of nineteen hundred and fifty dollars so buying a call option is the same exact thing as buying 100 shares of stock and buying a put option at the same strike price as the call option that you were initially looking at and so that's why the extrinsic value of the 375 call and 375 put is supposed to be the same is because technically you can create the same exact position in different ways just using different components so you can always synthesize an option position using the opposite option and shares of stock and you can also synthesize a stock position by using by using options and so that's that's my long-winded answer to why is the extrinsic value in and out of the money or in the money option why is the call and put extrinsic the same and it's because you can create basically copies of each option using different components nobody asked any questions while i said any of that it makes me worried jane kaufman thank you for the super chat if i have 20 grand and i want to make a hundred thousand dollars in six months time can you suggest a strategy um well i'm not going to recommend any specific strategies but what i will say is if you're trying to turn twenty thousand dollars into a hundred thousand dollars then that means you're trying to 5x your account in six months and the only way to 5x your account in six months is to be buying options so i'm not going to make any specific recommendations just because i don't want you to hold me liable or anything but what i will say is the only way to turn 20 grand into a hundred grand in six months is to yeah you could trade futures because you get a lot of leverage but i think trading options primarily buying options is going to be is going to be a much more doable thing than actually trading futures and the reason i say that is because when you're buying options your downside risk is limited to what you pay for that option but your upside is uncapped because if you buy an option for one dollar and then it goes to five dollars then you basically 5x your money but the most you could lose is that one dollar that you initially purchased that option for when you get into the world of futures trading you don't have that risk to reward profile your risk to reward profile is one to one because if you buy a futures contract or if you short a futures contract you're going to make the same amount of money if es goes up 100 compared to what you'll lose if it goes the other way by a hundred points so if you bought this if you bought this es futures contract at 39.35 and it went up 100 points to 4035 then you would make uh you would make five five grand right because there's 50 a point in es futures and if it goes up 100 points then you will make 5 000 now if you buy at 39.35 and it goes to 38.35 then you're gonna lose five thousand dollars and so you don't have asymmetric return profiles meaning that you don't have limited risk and huge upside when you trade futures but you do have that when you trade or buy options and so that's why based on your target of making a hundred grand with 20 grand in six months it's a lot safer to use options to do that and basically what you're gonna have to do is you're gonna have to make specific directional plays so for example you could think that apple's going to go from 120 to 150 over the next six months and then maybe based on that prediction you go out to the let's say january 2022 options and then you're gonna have to buy something so let's go ahead and look at we can actually plot the changes of this option of these option prices on a chart so let's go ahead and look at what the 150 call in apple has done over the past few weeks knowing that apple stock has gone from 145 to 120 over the past couple months let's go ahead and look at the 150 call so if i right click on the 150 call and click view option and chart then i can see the chart of this option and i think this is this is factoring in a stock split so just kind of ignore this but over the last couple weeks this option which is the january 2022 150 call option in apple it's currently trading for five dollars but a few weeks ago it was trading for twenty dollars and so basically what this means is if you if you put your money into this option here at five dollars and if apple went back to 145 or let's just say it goes to 150 over the next couple of months then it's safe to say that you'll you will like 4x your money on this 150 call but that's just an example that is not a specific recommendation i'm just telling you that based on your goal of taking 20 grand and turning it into 100 grand you're gonna have to make a directional play like that by purchasing options and if you do that i would i would go to a longer term expiration and not try to trade weekly options because if you go to weekly options you have a very high chance of just incinerating all of the money that you put into that play so by going to a longer term option cycle such as the 300-day expiration cycle that we just talked about it's unlikely that you will just incinerate all of your money because since you have 300 days to go the option is going to hold its value even if apple goes against you by 10 or 20 dollars so but i should say that 20 grand to 100 grand is very very aggressive and ambitious and just be very careful with that and you should only go into that if you're completely comfortable losing all 20 grand if you're talking about 20 grand that's your entire life savings then i would be very careful with the strategy that you're proposing but if you have five hundred thousand dollars in net worth and you're going to take 20 grand and try to turn it into a hundred grand that's a different story but i would say with the aggressiveness of what you're trying to do um you should be very comfortable with it working out disastrously and that means losing all your money so that's my honest answer to your question man i wish we had tasty works in canada i think they're going to be available in canada as soon as as soon as they get through all the regulatory stuff yeah they said don't shoot for such a high target um yeah and another another important thing to talk about there is if your goal is to take 20 grand and turn it into 100 grand then that means if you were to get to 100 grand then that implies that you put 20 grand into a position and you actually held it through all the profits that you would need to get to actually get to that 100 000 profit target so that basically what i'm saying is if you put 20 grand into an option position to get you a hundred thousand dollars you're gonna have to watch that position get to sixty thousand dollars and you're gonna have to also not sell and so it's kind of a it's a tricky psychological situation because you would basically have to sit through and hold a 60 000 gain like if you put 20 grand in and you turn it into 60 grand the only way you get to 100 is if you don't sell and you still watch it get you 100 grand but at the same time if you turn 20 grand into 60 grand then you kind of have to ask yourself is it being greedy to continue holding and go for a hundred grand or should you just take the 40 grand profit that you have and therefore you triple up on your account so just another thing to think about but then in that scenario if you take the profits and you're at 60 grand then you're out of the position and maybe the position does go to 200 grand and you exited way early and you actually didn't get that return so there's a lot of psychology as well that plays into your strategy of trying to take 20 grand and turn it into 100 grand in six months i was gonna i was gonna talk about something but i've slit my mind are you still bullish on tesla yes i am i am bullish on tesla but if we look at so if we look at the breakdown here if i uncheck well if i just look at this 43 000 of the overall 73 000 is in stock and so i don't really have to do anything with these shares of stock there's no time limit here so i can just hold this forever and since the majority of the position is in a non-time sensitive position i'm not too worried about it but obviously you know you've seen a big decrease in tesla over the over the past few months and we're going to have to make up that ground to make a lot more money on these positions that i have oh what i was going to say is there's a link in the description tastyworks is doing tastyworks is doing a a offer right now and if you open a brand new tastyworks account as a new customer it's only for new customers you can get up to two hundred dollars in crypto when you fund with two thousand dollars or more if you fund with 200 then you'll get 50 worth of crypto and this is just free it's a free bonus they're giving you for signing up and it says it's through june 30th 2021. so if you do want to take advantage of that then there is a link in the description below and you can use that link to sign up and you can take advantage of that crypto offer if you are so inclined but again as i always say don't just sign up just to get that bonus um i would do research on brokerage firms you want to use and if you learn that tastyworks is a brokerage platform you want to use then go for it and they do have that offer standing right now through june 30th so just wanted to point that out you can get some free crypto you can choose you can choose what crypto you get to so if you use the link in the description of this video [Music] you can choose which cryptocurrency you want to receive so you could select bitcoin bitcoin cash ethereum litecoin personally i would choose bitcoin as part of that offer when is tastytrade coming to canada i don't know i don't work at tastytrade i don't know the information on their day-to-day operations or when they're planning to launch in canada but generally speaking i do know that as a u.s based brokerage firm opening up a brokerage firm or servicing canadian residents as a us-based brokerage firm you have to go through a lot of regulatory hoops and i think that just takes a while so tastyworks definitely understands that canada wants them there bad but unfortunately they have to go through the same regulatory hoops that everybody else goes through so yeah so yilmaz asks never be greedy he says never be greedy i made that mistake he bought 80 contracts seven dollar neo options and they got up to 49 so he had 80 contracts of an option that was worth five thousand dollars a piece so that's 400 grand and now they're only 1740 so yeah that was uh getting back to what i was saying earlier is that at some point if you do have a massive unrealized gain on your option position then at some point you got to think about exiting that position because unrealized profits are not real are not real profits and as i said earlier if you take 20 grand and you're trying to make a hundred grand then that implies even if you did get to 100 grand that implies that you turned 20 grand into 40 grand and then you saw it go to 60 grand and you held through all of that as opposed to taking your profits when you were up 100 or 200 percent on your account overall and so it's a very very difficult thing and i know naseem talib talks about that in one of his books about kind of that fallacy like the way he describes it as um he basically says if you risk five thousand dollars to make a million dollars and your probabilities are x then you could break even over time but he says that's kind of a fallacy because if you take five thousand dollars that could turn into a million and let's say the first hundred trades you lose so you lose half a million and then you put on that five grand trade that does end up turning into a million then that implies that you held it through that five grand turning into 100 grand and then eventually turning into 250 and then 500 and it's very unlikely that you would actually hold through all of those movements so just saying that even if you lose 500 grand over 100 trades but then on that one trade at the very end you actually make a million that's kind of a fallacy because if you lost half a million on 100 trades then on that next trade that does get to a million maybe you would be incentivized to close it when it got to half a million just to break even and there's actually no guarantee that you would actually hold until that position got to a million dollars so it's kind of a a psychological fallacy to to say it but i understand what you're going for ben asks do you have any long-term options call options that you like right now like the example you did with apple actually apple is a good example so yesterday if we look at this option position that i have in apple um six months ago i purchased five of the 200 strike calls in apple for nine dollars and fifty cents a piece these are currently down fifty percent in value so they went from nine fifty now they're trading at four dollars and fifty cents so i'm down fifty percent on these calls yesterday what i did is i bought five more and basically what that does is it kind of it averages down my per strike cost to about seven dollars and fifty cents an option so before i had five of the 200 strike calls at 9.50 a contract and then yesterday i bought five more for five dollars and 40 cents each and so now i have 10 contracts total that i've spent 15 um actually hold on so i bought five five grand 7 500 so i have 10 contracts total the total outlay is 7 500 and so if we divide that by 10 we get to essentially 750 premium paid per contract which reduces my effective cost for each of these calls even though they are in different expiration cycles because yesterday i did go to the march 2023 which is 720 days away and the reason i did that is because i i think apple is one of those stocks that anytime you see a sizable decrease in the share price there's a really high likelihood that you're gonna eventually meet a lot of demand from investors because apple is just one of those stocks that just has such good sentiment and i also like apple because they are going to benefit from the 5g revolution so to speak and so i think apple it's not one of those stocks where it has you know 10 or 100 x upside but it is one of those stocks that i think will at the very least hold its value and trend higher and so what i did recently was just added some more call leaps but keep in mind that even though i own the 200 strike calls it doesn't necessarily mean that i believe apple is going to go to 200 what it means is that i just want leverage and apple to the upside and one of the ways i can do that is by purchasing long dated call options so these are just these are ways that i can allocate some money and have leverage to the upside but limited risk to the downside and in the grand scheme of this account if all these options were not worthless that would be okay because as we can see here there's much larger positions in this portfolio than the five thousand dollars in value of this apple position so if apple if these options go worthless then i'm only going to lose five grand in those which is not really a lot of money in the context of the overall portfolio so i'm comfortable with the risk but as i showed you earlier you can plot the price of these options and so if i pull up the chart here we can see that these 200 calls in march of 2023 in late june or late january they were trading for dollars 17 piece so seventeen hundred dollars a piece i bought them for five hundred dollars a piece and so basically what my upside is here if we were to say that apple goes back to 145 or 150 to 150 over the next few months the sooner that happens the more i'll make on those calls but basically my upside my estimated upside if apple goes back to 145 is about 3x on these calls and that's because they're currently trading for 500 a piece they're five dollars a piece but a couple months ago they were trading for 15 a piece but obviously if it takes a few months then there will be some time decay that does kick in for these options because even though they are long-term options that decay very slowly over a multi-month period they are going to lose some of their extrinsic value because of that passage of time and so my upside might be a little less than 3x if apple goes back to 145 over the next few months but regardless i'm comfortable with buying a little more here and adding to my long-term apple position but i should mention that this is a speculative play and if you are going to enter some options in apple just understand that that's your decision i'm not telling you to do so these are just some of the positions that i have and like i said i'm comfortable losing all five grand here if that's what it comes to what happens to options and strikes if stock is split it's a good question let's uh let's go through some math here if a stock splits what happens to options in a stock split if a stock splits the number of shares outstanding increases but the share price decreases so for example let's say xyz stock is one thousand dollars per share and they do a let's say they do a five to one split this is exactly what tesla did um basically this means that there will be hold on shares outstanding um let's just say a hundred million well let's just say um let's make it easier here a thousand times a thousand okay so market cap equals one million dollars market capitalization is the share price times the number of shares outstanding so if you have a thousand dollar stock price and you have a thousand shares outstanding a thousand shares times one thousand dollars per share gives you a market capitalization or public market valuation of your company of one million dollars so let's say that this company wanted to reduce their stock price to make it more accessible to smaller investors and just bring down the stock price overall which could also improve the liquidity of it what they could do is they could do a stock split so let's say they do a stock split a five to one split that means they're going to basically reduce their stock price by a factor of five so this means that the share price will become two hundred dollars a share so that's a thousand dollars divided by five um but the number of shares outstanding will increase by i don't know why it's doing that increase by a multiple of five so if the new stock price is 200 a share the new number of shares outstanding goes up by a multiple of five so the stock the stock price comes down by a multiple of five the number of shares outstanding increases by a multiple of five so we'll have five thousand shares so if we have five thousand shares outstanding and then we multiply that by two hundred dollars per share market cap the new market cap is still one million dollars so look at this so the stock price is 100.1 thousand dollars per share and initially they had a thousand shares outstanding if we multiply those we get a million dollar market cap now they did a five for one split so the new stock price is 200 per share but the number of shares outstanding increases by a multiple of five and we still get that same one million dollar market cap so let's say initially we have hold on let me go to a new slide um if you do a five for one split the options the strike prices will divide by five and your contract quantity will increase by five so let me go ahead and just delete all this really quickly bear with me so pre-split let's say you own the one thousand dollar call option one contract so pre-split you had the 1000 call and you had one contract ignore post split you own the 200 call with 5x contracts yeah the market is pumping into the close so when you own options through a stock split when you own options through a stock split the strike price changes by whatever the split ratio is so if if the stock does a five for one split that means the stock price will come down will be divided by five and that means for options the strike prices will be divided by five but the contract quantities will increase by five and so let's say that um let's say that initially this pre-split you had one of the 1000 calls one contract and let's say that was wow that's terrible i can't i can't write in this um was a ten dollar option and then after the split basically you would have two dollar option five contracts so you'd still have ten dollars of value but you just have a different strike price and more contracts so that's what happens when he stops what happens that's what happens to the options strike price changes and your contract quantity changes the market is absolutely ripping into the open or the close i like it i wonder if there was any news that came out but anyways the market is closing so i'm going to wrap up this presentation thanks everybody for tuning in i hope you learned a lot today covered a lot of material a lot of stuff on early assignment earlier and if you were wondering or if you joined this live stream late i will be uploading or there will be a version of this live stream that will get uploaded after we finish this stream so just stay tuned for the uploaded version of this live stream and i will also add timestamps to the description so that you can skip through this live stream and you can find specific sections of the live stream and you don't have to watch all two hours of it just guessing you know where you could find some interesting content so i will add time stamps so that you can clearly see where different sections of this live stream start and end so yeah stay tuned for that for the upload it might take a couple hours and then if you do if you do start watching the live stream when it's posted to the youtube channel and there are not time stamps in the description then refresh the live stream every few minutes because i could be working on adding those time stamps while it is already uploaded to the channel so if there aren't time stamps and you're watching it post upload and you want to get those timestamps to see where the different sections start and end just refresh the live stream every few minutes because i could be updating those timestamps while you're watching all right everybody enjoy their weekends happy friday and i will see you all soon

Channel: projectfinance

Views: 24,899

Rating: 4.9099097 out of 5

Keywords: early assignment options trading, early assignment options, options trading explained, options trading, short option assignment, shorting options, exercise and assignment options, options trading for beginners, chris butler, tastyworks

Id: eTloZYohmjo

Length: 118min 34sec (7114 seconds)

Published: Fri Mar 26 2021