If you're looking
to trade options, or even if you're just curious
about what options are, you've come to the right place. By the end of this video, you'll
understand how options work, and know how to place
your first options trade on the thinkorswim
trading platform. We're going to walk you
through step-by-step on how to place your
first options trade. Options aren't for everyone,
but for those with the risk tolerance and time
to learn, they're a highly customizable
and powerful instrument that can allow
you to potentially profit in any market
conditions-- up, sideways, or down. With options, you can do
things like speculate, hedge, or generate income. You can also place trades with
a wide range of risk levels and probability of success. Here's what we'll cover
when it comes to options. First, we'll dig into what
options are and how they work. Next, we'll walk through
a basic option trading strategy: the covered call. And then, I'll show you how
to place your first options trade on the
thinkorswim paper money platform: a powerful
trading simulation tool that allows you to practice
without the use of real money. As we talk through
these concepts, keep an eye at the
top of this video. We'll share links to videos
with more information. We're going to cover some
technical terms and definitions here, but stick with me. Getting this foundation
will make it clear why options can be so powerful. So what is an option? It's a contract that gives the
owner the right, or the option, to buy or sell a specified
number of shares of a stock, ETF, or another predetermined
underlying at a certain price on or before a certain date. But why would you
want to do that? Basically, it can
give you more ways to potentially profit from
stocks, whether you own them or not. An option is what's
called a derivative. That means the option
derives its value from what's called an underlying
security like a stock. There are two types of
options: calls and puts. Calls allow the
option buyer to buy the underlying at a certain
price, so buying a call is bullish. You want the stock to go up. Puts allow the
option buyer to sell the underlying at a certain
price, so buying a put is bearish. You expect the stock to go down. But you can also sell options. So selling a call is typically
bearish, while selling a put is typically bullish. Each option contract usually
represents 100 shares. This is known as the
options multiplier. That's a lot of
information, so let's look at an example of buying a
call option to help show how it actually works. Let's say a stock, XYZ,
is trading at $49 a share, and trader a is bullish on it. She thinks the price will
go up over the next month. Trader a could just buy
some shares of stock, but she could also
buy a call option if she's not interested in
actually owning the stock. So a call option
lets her speculate on the stock's future
movement, without actually having to own the stock. Trader a buys a
call from trader b who doesn't think
the stock will go up. Buying this call earns
trader a the right to buy the shares of
the stock from trader b at an agreed upon
price, called a strike price, by a certain
date, called expiration. For this example, let's say
the strike price is $50, and the expiration is
one month from now. Trader a is hoping
the stock will go above $50 in the next month,
which would make the right to buy $50 valuable. But we'll talk about potential
outcomes in a minute. In exchange for the right
to buy shares at $50, trader a pays trader b
what's called a premium. Premium is just another word
for the price of the options contract. In this example,
we'll say it's $2. Because a standard
option contract controls 100 shares of
the underlying asset, the total premium is $2 times
the option multiplier of 100, or $200 per contract. This does not include
transaction costs-- typically a contract
fee paid to the broker. So as the seller of the
call, trader b collects $200. But they're obligated to sell
100 shares of XYZ at $50 each, if trader a exercises
a right to buy, which could happen at any
time in the next month before expiration. Notice the difference. The buyer of the call has
the right to buy the shares, and the seller of the call has
the obligation to sell them. Trader a doesn't have
to exercise her right. If she doesn't, trader
b won't have to sell. But if trader a does
exercise her right, trader b must fulfill
his end of the deal, and sell the shares at $50 each. The option seller having
to fulfill their obligation is called assignment. Looking at different
ways this trade could go will help us see how
this all fits together. Let's say the stock
price jumps to $53. This would make the option be
what's called, in the money. That means trader a
could exercise her right to buy the stock at $50,
a $3 discount per share. You can see why buying a
call option is bullish. If the stock goes
up, the call buyer has the ability to buy the
stock for less than it's worth. Trader B, on the other hand,
would have to sell the shares, though they would keep
the $200 of premium. But what if the stock
drops to $48 per share before the contract expires? In this case, the
option would be what's called, out of the money,
and would expire worthless. Why would trader a want
to buy a stock at $50 if she could buy it for
$48 on the open market? Trader a loses the premium
she paid for the option. This is the desired outcome for
trader b, who sold the call. The seller hopes the contract
will expire worthless so they can keep the full premium. In this case, $200. And there's a crucial
thing to note. The example we just
looked at shows what would have
happened if trader a wanted to exercise a
right to buy the stock and waited until
expiration to do so. But many options
traders don't actually intend to buy or
sell the underlying. Options contracts
fluctuate in value, and can often be bought
or sold before expiration for a profit or loss. So option buyers
often buy the option hoping it will
increase in value, so they can sell to close
the position for a profit before expiration. And option sellers
often sell the option hoping they can buy the
close at a much lower price, or let it expire worthless
and keep the full premium. The other important
thing to understand is that the price of
the underlying stock is a big factor in
the options value, but it isn't the only one. Time to expiration in the
underlying stock's riskiness, known as implied
volatility, matter too. To help clarify how
these factors work, we'll look at put
options, and compare them to something you may be more
familiar with: car insurance. With car insurance, the
underlying asset is the car. The more valuable the car,
the higher the premium. If you insure a Porsche, you'll
have to pay more than you would with a Honda Civic. Time is also a factor. Some choose to pay car insurance
every month, while others pay every six months. The longer the time,
the higher the premium. And don't forget about risk. Insurance companies look
at certain characteristics of drivers to determine
how risky they are. For example,
teenagers are usually considered riskier
than say, more mature, responsible drivers,
much to parents' dismay, and the insurance
contract will likely be more expensive for teenagers. These factors are very similar
for an options contract. The price of the
underlying asset is the most significant factor. Options tend to be more
expensive when the underlying stock costs $700
rather than $10. Also, time is an
important element. The more time
between now and when the option expires, the
more expensive the contract. And lastly, there is
implied volatility. Some stocks and ETFs
are riskier than others. Some stocks like
biotechs, for example, could be considered the
teenagers of the investing world, while blue chips,
with healthy dividends, are more like mature,
stable elders of the market. So now that we've covered the
basics of how options work and how you could
potentially profit from them as a
buyer or a seller, let's dive into one strategy
in particular: covered calls. The covered call is a common
starting point for new options traders, because it
combines call options with stocks you already own. So what is it? Generally, the goal
of a covered call is to generate income by
selling out of the money calls on stock you already own. As the option seller, you hope
the option decreases in value, so you can buy it back for
less or let it expire worthless so you get to keep the premium
and the shares of the stock. But remember, as
the option seller, there's the possibility
of getting assigned and being obligated
to sell the stock. The stock you own can limit
risk and serve as collateral. If you get assigned, the
stock will automatically be sold to fulfill
your obligation. Because of that assignment risk,
don't consider this strategy unless you'd be OK with
selling those shares of stock if the trade
doesn't go your way. In fact, some traders
use covered calls as a way of exiting a
stock position they already plan to sell,
because it can earn extra income along the way,
thanks to the option premium. But for now, we're
going to focus on using a covered call as an
income generating strategy-- selling contracts we
hope expire worthless. Let's look at an example. Suppose a trader holds
100 shares of stock XYZ, which she
bought at a share. Let's say she sold
a call with a strike at $48 that expires in 30 days. She earned $100 in
premium on the trade. Since she bought
the shares at 46, the break-even point is 45-- 46 minus $1 for the premium. The stock falls anywhere
from $46 to $45, the premium will
offset the losses, and the trade would
still be profitable. But if the stock
drops lower than 45, she would start to lose money. Let's say the stock goes up
to $49 a share at expiration. The option would
be in the money, and there's a good chance
it would be exercised. That means she would be forced
to sell those 100 shares. She'd keep all of the
premium, $100, and the profit from the stock sale
at the strike price. Remember, she agreed
to sell the stock at $48, which is $2 above
where she bought it at 46. That's another $200 in profit,
for a total of $300 gain. One thing to keep in
mind is that there is a risk of missing
out on further gains if the stock goes
up even further. What if the stock only
goes to 47 at expiration? In this case, the option
is out of the money and would expire worthless. Why would another trader
buy the stock at 48, when they could buy them
at 47 on the open market? In this case, she'd keep
the full $100 of premium plus $100 worth of
price appreciation in the stock she still
owns, for a total profit of $200 minus any fees. So now that you've seen
how covered calls work, let's break down how
you actually trade them. Trading a covered call comes
down to a few key decisions. First, choose an underlying. Some stocks may be better suited
for covered calls than others. Next, choose an
options contract. This has two parts, one,
choosing an expiration, or how long the
option will last, and two, choosing
a strike price. Once you've chosen
a contract, you need to determine
your position size. How many contracts
will you sell? This depends on how
many shares you own, or how many you would be willing
to sell if you get assigned. To walk through these
decisions, let's log onto our trading software,
thinkorswim paper money. Here, we're taking a look
at the thinkorswim platform by T.D. Ameritrade. We'll notice up at
the top left, It says PM for paper money
in simulated trading. This allows
investors to practice a covered call, or
any type of strategy, in a paper money account. It's not real trading, so
it's nice to be allowed to really learn strategies
where there's not the pressure of real money. In this example
today, we're going to look at the monitor tab,
which is the first tab, and we're going to
go down, and we're going to look at what's
called the position statement. The position statement
just simply states the positions that are in
this paper money account. And we can see down below
we have Boeing, J.P. Morgan, PayPal, and also a company
called Zoom, ticker ZM. For our first
example, we're going to take a look at J.P.
Morgan, ticker JPM. And you'll notice, in
this paper money account, there's 100 shares of stock. And what you'll
notice is you can click on that little
triangle right there, collapse or expand, and
show what is the position. The position has
100 shares of stock. Now, if you remember,
to do a covered call, the investor needs 100 shares. The trade price was $98.88,
and the current price, known as the mark, is at $102.03. So you'll notice if you
go over to the right, we're going to see in this
column where it says profit loss open, this stock is up
an unrealized gain of $314.70. So if the investor
has 100 shares, and the stock is above
support in an upward trend, that investor can consider to
do a covered call position. Second, the investor
would want to go look at the charts tab,
where we can visually see what that trend looks
like, and if that stock is above support. So here, we can go to the
top left, we can type in JPM, and if we do that
and press enter, we can see the chart
of J.P Morgan Chase. We see down the bottom
that this is really a chart looking in the last
couple of months since January. What we will notice is on the
chart we do see support levels. Think of support like a floor-- maybe right around about
the $80 level, maybe about another level-- let's say about $90 or so,
and then even recently, maybe right around 95. It is a bullish
strategy, so the investor needs to see proof that
the stock is actually holding above its support, and
the stock has actually even been recently making
some higher highs. So if the investor
considers to do a covered call on J.P.
Morgan, they can now go to what we'd
call the trade tab. The trade tab is just found to
the right of the monitor tab, where we were before. We can now type in the
symbol J.P. Morgan. Now we're going to
actually take a look at right underneath
J.P. Morgan, the ticker JPM, we see underlying. Underlying is just
another word for stock. We can see the stock is trading
at $101.91 today, up $0.58. And this up top is really
the stock information. But we're looking at
applying a covered call. So when we talk about
doing a covered call, we're going to now go down to
what's called the option chain. The option chain is
really going to give us a variety of different strike
prices and expirations. First off, on the
left hand side, we're going to see
two different colors. One kind of a goldish
color, and another color, this white color. The golder, yellow
color really represents what we call weekly options. And this is really
reading that this option expires the 4th
of September 2020 has zero days to expiration. If you put your
cursor right on that, it will tell you how many days
there are to expiration-- today is expiration. This has 100 shares
in the contract, and like labeled, we can see
that these are weekly options. The ones that are
in this white font, we actually see that
these are what's called the monthly options,
and we'll start here. But you'll actually
see that these expire on the 18th of September 2020. It has 14 days
left to expiration. And again, you can put
your cursor on that. The investor could click on
that triangle right there, and if we click
on that triangle, that will expand it so
we can see which strikes this option expiration has. First, so we can
see what's going on, we can see on the
left-hand side is calls, and on the right-hand
side is puts. And what you'll
notice is the investor can also pick which
strikes they want to see. This is now showing
four strikes, and the strikes are right
down the middle of the page. We can see the 101, the
102, the 103, et cetera. Now what the
investor could do is if they wanted to see a couple
more strikes for their picking of which strike they want
to sell, they can now maybe click on the dropdown, and maybe
even go to, let's say, six. So now what you're
going to see is, when we look at
the left-hand side, again we're told
about a covered call, we're talking about
selling calls, we're going to focus our eyes
really on the left-hand side. And now what you're
going to really be seeing is a little difference
here between why are some options
shaded, and then why are some options not shaded. Well the ones that are shaded,
the 99 strike down to the 102, those options are shaded because
those options are in the money. That just means the stock price
is above those strike prices. The strike such
as 103, the strike such as 104, those options
are out of the money. That means in that case,
the current stock price is below that strike price. Now that we've looked
at the option chain, let's actually now take a look
at the decision making process. Number one, looking at
the option expiration that you want to sell. Number two, which
strike is the investor going to actually sell. So let's first tackle,
which expiration month. If the investor
decided they wanted to have less chance of the
stock to close above the strike, they could pick the
option expiration that has the shorter number of days. If they do that, the
investor is actually wanting the time
to be on their side where there is less time for the
stock to get above the strike that they sell. If the investor
were to say, hey, I want to actually try to sell
more time, well clearly, that would be more time for the
stock to go up and potentially get above the strike
that they sell. So if the investor wants to
have a greater chance of keeping the stock, they
probably sell an option that is closer to
expiration, like 14 days. If the investor said, I'm
OK with actually having more time for that
stock to potentially get above the strike,
and I don't mind if those shares are
assigned to somebody else, they could actually sell an
option that was farther out. Also remember, when the
investor sells an option that is shorter dated, the premiums
are going to be typically smaller, because there's
less time than if someone were to actually sell an
option farther out in time. So when we pick an
option expiration month, we typically look
for options that have 20 to 50 days to expiration. And the rationale
behind there is we want to make sure that there
is enough premium, but not too much time for the
stock potentially to close above that strike. So it's a balance between
the premium and time. Number two, we want to now talk
about the strike selection. So when an investor really
looks at the strike, we're going to go up over on the
left-hand side to where it says calls again, and right below
where it actually says calls, we're going to click
on the dropdown. We're going to drop
down to where it says option theoreticals and Greeks. The option Greeks are really
measurements of sensitivity. The option Greek delta can also
be used as a proxy, or a way to find out the probability of
a stock to close in the money. So what you'll now notice is
with each one of these strikes, there is a probability
associated with the stock closing above the strike. Let's stay with the 18th
of September right now. What you'll notice is,
if the investor were to sell the 102
strike, the probability of the stock closing above
that strike by a penny is 52. If the investor were
to sell the 103, 47% chance to close
above the 103. And if the investor were to
sell the 105, what you'll notice is it's a 38% chance. So what you'll notice is
there's a correlation here. Higher probability of closing
above the strike price, there's also a higher premium. Lower probability of closing
above the strike price, lower premium. Remember, we said
in rule number one is taking a look at the
option expiration month. The investor could start
with looking at options 20 to 50 days. So these options
only have 14 days. Let's go ahead and close that
by clicking on that triangle right there, and let's go down
to the option expiration that has 20 to 50 days. The 16th of October has
42 days to expiration. And second, when the
investor is actually considering which
call strike to sell, the investor is typically
looking at the strike that has a delta, again
think probability, the delta of 30 to 40. Now remember, what
does that mean again? If this delta says
31, that's saying the likelihood of the stock
closing above the strike price. So a 31% chance to close
above, which means a 69% chance to close below that. Now when the investor actually
goes and also looks at the bid and ask, how does the investor
know what to click on? Well remember, if the
investor is buying an option, and as we hover our
cursor right there, you're going to see right
below that arrow it says buy. Well we're not buying
a covered call, we're selling a covered call. We're selling the call. So we're going to go over
to where it says the 264. Right below that
arrow, it says sell. If the investor, number
one, picked 20 to 50 days to expiration, that's
the expiration month we're in with 42
days to expiration. Number two, if the investor
were to pick an option strike with a delta of 30 to 40,
which is in this case the 110, and the premium in the
big column shows $2.61. Remember, as we talked about
before, it's not just $2.62, we need to times
that $2.61 by 100, because the investor
has 100 shares of stock. So this is actually $261. Now if the investor
wanted to sell the call, they click on the big
column, on the strike price that they want to sell. If the investor were
to click on that, you're going to notice that down
below, a red horizontal line appears. That red horizontal line
is an order to sell. It's in red. We know it's also to sell
because it says minus 10. Now, this is not the
number of shares, this is showing the
number of contracts. And remember, if the investor
had 100 shares of stock, they would not be
selling 10 contracts, they would only be
selling one contract. So we could simply just
adjust this up or down, and we're just
going to change this to where it says minus one,
because the paper money account has 100 shares. Now if we read
across, we're going to sell minus one J.P. Morgan. The option expiration
is the 16th of October. The strike is 110. Now remember what
that really means. That means that this
paper money account is obligating itself to
sell those shares from now until expiration at 110. That means the investor can make
from about 102ish up to 110, which is $8, and also get
the premium of that $2.61. You'll notice also where
it says order limit. Limit is saying you want that
price or higher, but not lower. Could be filled
for higher though. Before we actually
send this order, let's remind ourselves of what
the paper money account really bought the stock for. You're going to see
that right above here, it's going to say position. Let's click on
that, and it's going to show the position that's
in the paper money account, just like we saw before
on the monitor tab. Where we want to go with
this is we want to really be able to see what is
the maximum gain what's the break-even, how much
can the stock go down? Well in this case, remind
ourselves that in this case, the trade price was $98.88. So let's think this through. If the investor owns
the stock at $98.88, and they have an obligation
to sell the stock at 110, that's about $11.12
of stock appreciation. But the investor
also gets the $2.61. So the investor gets the $11.12,
and they also get the $2.61. And so in that case, the
investor would get about $13.73 of maximum gain,
which is actually pretty good for a
stock that's only $98. Now in this case, let's
say the stock were not to close above 110. Well if the stock were
not to close above 110, and let's say the stock
stayed exactly flat from where it is right now, the investor
only would get the premium. And why is that? Well remember, the
investor agreed to sell the shares at 110. But if the stock price in the
current market is not 110, it is highly
unlikely that someone is going to want to buy
the paper money account shares if the stock is
trading below that strike. So if the stock were not
to close above that strike, the investor gets to
keep all of that $261. Lastly, if the stock
were to go down, that down move in
the stock can be offset by some of the premium. So if the investor bought
the stock at $98.88 and got a premium of $2.61,
the break-even on the stock is at $96.27. So what's nice is if the
stock goes up quite a bit, the maximum gain
would be $1,373. If the stock were to go sideways
and stay completely flat, nothing happens, the
investor gets $261. Why are they getting
paid that $261? Because of the obligation for
selling those shares at 110, and for their time. Wouldn't that be
nice to actually get paid for that obligation? That's why investors like to
consider selling covered calls. Because sometimes that stock
doesn't close above the strike, and that allows the investor to
also reduce their average price in which they own the stock. And lastly, if that
stock were to go down, the break-even to the
downside is $96.27. Now if the investor went down
to the bottom right and said, let's confirm and send this
and read the order together. Let's remind ourselves that this
is a paper money demonstration. It's a simulation,
not a real trade. The one thing that this
does not take into account is that the paper
money account already owns the shares already. This is thinking that the
paper money account is selling not a covered call,
but a naked call, which is where the investor
doesn't own the shares. This is a covered call
because the paper money account has the shares. We can now look at this where
it says the credit, the $261, and what is the commission? The commission is
$0.65 per contract, and you're going to see that's
debited from the credit leaving a credit of $260.35. If that's what the
investor wants to do, they can now come down and
click on the send button. And if the investor
clicks on the send button, it's going to go out and
try to sell that option Now notice what's happening below. Remember, a covered
call is two lines. The first line is the
100 shares of stock. The second row is really
the call, which just filled, and it says minus one. Why does it say minus one? Because it's a sold call,
42 days left to expiration. So we can see that the premium
is $2.61, but remember, we need to times that by
100, the option multiplier. So that's $261. And the mark value
right now is $2.55. And remember, what
the investor would like to do is sell that
call when it's high, and potentially buy
it back when it's low. This is our first covered
call, so well done. So we can see on
the 16th of October, we have a position in our first
covered call at the 110 strike. It says P.O.S. for position. But where do we really see
the position in the entirety? Well what we could do is we
can go up to the monitor tab. The monitor tab
monitors the positions and states the positions
in the account. So we can now see the JPM by
simply clicking on the triangle to the left of the
ticker symbol JPM. Here's J.P. Morgan. We see that we have the
stock and the sold call that we just did. But what about other covered
calls that have already been going on for a while? Let's take a look
at another position where we can see what
happens after a while in some of these positions, and let's
start with the ticker BA, also known as Boeing. So as we go up to the
left-hand side of Boeing. We can again click
on the triangle. That will expand, and we'll
be able to see the shares. We'll also be able to
see which call was sold. So again, let's really
walk through what this is really showing. So number one, 100
shares of stock. The trade price was $176.22,
and the current stock price-- and sometimes this happens-- it's lower than
where it was traded. It's at 167, and
what you'll notice is, all the way
over to the right, we can see that the stock
position is down $837. That's not great. How to covered calls
play into this? Well, if the investor maybe
thought that the stock might not close above
the strike price, and they decided to
sell a covered call, well in this case, that's what
the paper money account did. The investor sold, the 11th
of September, the 185 call. We know we sold it
because it says minus one. And what you'll
notice is here, we see that there's seven
days left to expiration. Now what I want you to recognize
is, what is that strike price? It's 185. What is the current stock price? It's 168. Now remember, when an
investor does a covered call, any time from the time the
investor sells the call until expiration--
not just expiration, but anytime up to
expiration-- someone can buy the shares of the
stock, even though it's prior to expiration. So if the stock is at 168, and
the strike or the obligation is at 185, do you
think someone's going to want to buy these
shares at 185 if the stock price is $17 below
that strike price? Pretty unlikely, right? Now what you're
going to notice is, when the investor
sold that call at 185, the premium that was
received was $11.32. But it wasn't just $11. Times that by 100 again
for the option multiplier, it was $1,132. That's quite a bit of premium
for just 100 shares of stock. Now what you'll
notice is, the mark price, or the current value of
the option right now, is $1.31. Now what you'll notice
is, the option was $11.32, and now it is $1.31, or $131. So what causes the value of
the call the change in price? Well in this case, if the call
option value declined in value, that means the stock probably
went down, and it did. Number two that would
actually cause the option value to decline in
value is the time decay. And what you'll notice
now is, over to the right, we can see the profit loss
open for this option: $1,001. Now remember, when the
investor sells a call, they can only get
a certain amount of premium that was received,
the $11.32 or $1,132. Currently, right
now, this position is sitting in a profit
of 88% of the premiums. So what that really means is,
if the paper money account were to exit this option,
it has about 88% or $1,001 of the $1,132. So in this case, the
investor now could decide, do they want to
stay in this option? Well what would
make them consider to maybe potentially stay in? Well one question is, how
much option premium is left? Well, how does the investor
get that last $131? Well, the investor would
have to wait the next seven days to see if the stock were
to close below the strike. And if that stock were to
close below the strike, the investor would not
get some of that $1,132, they would get all of the $1132. If they think that there's a
good chance the stock won't close above that
185, they could just let this option erode in
value, and want this stock to close below
that strike of 185. Now remember, where's the
current stock price right now? It's at 168. So that stock, in
the next seven days, would have to go
from 168 to 185. If it doesn't do
that, the investor could pick up another
$131, and that could be at a potential full
maximum gain of that $1,132. So this is an example
of an option that is out of the money, meaning
the current strike price is above the current stock price. And there's probably
a high probability of this stock not closing
above that strike price. But what happens if the
stock is above the strike? Well, let's go look at an
example together of the ticker ZM. Now first off, let's take a look
at where did the paper money count buy the shares? Well, the paper money account
bought the shares at $242.56, and the stock price is
way higher than that. Now you know that in the
COVID-19 environment, a lot of people have been
using Zoom technology for their conference calls. So the stock has had a
big move to the upside. Now what you're going to notice
is that stock profit and loss is up $12,169. But what you'll notice is
here, when we go take a look at, let's say, the
call that was sold, the call that was sold was
the $277.50 strike price. But wait, where's the
current stock price? Well the current stock
price is at $364. But what happens
in this situation? Remember, when the investor
sells a covered call, they obligate themselves to
sell those shares at $277.50, and with the stock so much
higher than that strike price, we probably know there's a very
high likelihood that this paper money account is going to be
losing these shares of stock. And let's kind of
talk about that. If, for example,
someone did not care in selling these
shares of stock, they could just let this trade
close above the strike price. And if that stock were to
close above the strike price, then the 100 shares that
are in their portfolio would be sold at the
strike price of 277. What does that mean? Well, that means that the
investor gets from $242.56 up to $277.50. Guys and gals, that's
about $33ish or $3,300. But remember, that's not all. The investor also gets
the premium on top. So they get the stock
appreciation from $242.50 or so to $277.50, $35, and
the investor also gets seven additional dollars on top. So the investor gets about
$3,500 of appreciation, and $710 in premium for
a total of about $4,200. So don't feel bad for the paper
money here, the paper money account is still going to walk
away with about $4,200 or so. So option number one, if the
investor was OK with that, the investor does not
need to do anything. They could just let the stock
close above the strike price. If that were to happen,
the paper money shares of those 100 shares would
be gone at any time from now until expiration. But wonder if the investor
actually said, no, I do not want to sell
those shares at $277.50. Well let's now talk
about the option premium. Well remember, the trade
price on that option was $7.10 or $710. The mark value, or the current
value of the option now, is $86.50. This is different than
what we saw before. The option value appreciates
when the stock goes up. So if the investor were
to let this close here, and let's say today
was expiration, these shares would be taken. But if the investor said, I
don't want these shares taken, they now have the choice
to buy that call back. Now if they buy the
call back, they're not doing so for a gain, because
that call is losing $7,940. But wait, did the
overall covered call position make or lose money? Well remember, the stock
position is up $11,800. The call is actually down
$7,940 for a net of $3,887. If the investor
decided they did not want to sell those shares of
stock at the strike price, they could simply right click on
that line, on the strike price, right click anywhere
on that line. They could then go to
create closing order, and what this is really doing
is, it's buying the call back. Now when they buy the
call back, they're releasing themselves
of the obligation to sell the shares at 277. So why would an
investor do this? The investor that buys the call
back is thinking that the stock could likely go
higher, and that way, they don't have to sell
those shares at $277.50. If the investor picked
that top line right there, buy that Zoom call it $277.50,
they're buying the option back at a higher price, noted. And now, once that does that, it
now takes us to the trade page. The trade page is where
the investor can see buying the option plus one contract,
because it was sold initially, and now what you can see in this
case is the investor is buying the price, buying that call
back, for a price at $86.20. Now in this case, we
would want to go look at, what's the mid price? The mid price is really in
between the bid and the ask. Now if the investor just
wants to hurry and get out of that call, they
could probably have a higher chance
of being filled at the higher price, of course. But if the investor
said, you know what, I don't want to
pay that much for it, I want to try to get a
little bit better price. The mid price again is just
between the bid and ask on the option price, the
investor typed in $84.80, and again limit, that says
that's the most the investor is willing to pay to
buy this option back. If that's what the investor
wanted to do, remember, this is not $84.80,
this is $8,480. Remember the option multiplier. And the investor might
be shocked by that, but you have to remember
that the gain, also, is coming from the stock. So the stock gain is paying
for the loss in that option for a net of about $4,000. If the investor is
OK with that, they can go down to confirm and send. Remember, the cost
of the trade is what the investor is buying
that option back for, $8,480, and add $0.65 per contract
for the commission. Now if that's what the
investor would like to do, they can now send
this order, and when they do that, what it's
actually going to do is, it's going to try to go out
and buy that option back. Let's go back to
the monitor tab. So in this example on Zoom,
some things to note here. Is it a good idea
that the investor waits until maybe the last
second or the last day to buy the option back? Maybe not necessarily. Typically, investors would
look inside four to 10 days prior to expiration, and
make the decision if they want to buy that call back. If they buy the
call back, they're really saying they want to
keep the shares of stock, because they think
the stock could go up. So we looked at an
example of J.P. Morgan about placing a covered call. We looked at the
example of Boeing, where that's an example
of something that was out of the money, meaning
the stock price was not above that strike. And lastly, we looked
at an example of Zoom, where we said, hey, this
stock has gone up a lot, and is quite far above
that strike price. And what could the
investor consider? We said, two options. If the investor is
OK with maximum gain, the investor had to do nothing. Just let the stock
close above the strike. If the investor decided no,
I want to keep the shares, the investor does
add the option-- key word prior to expiration-- to buy that call back. If the call has appreciated
in value, that tells you the stock has also
gone up as well. So very important to
remember those things whether the option is out
of the money or the option is in the money. And there you have it. Those are the basics you need to
trade your first covered call. The next step is to download
the thinkorswim paper money platform to start practicing. Keep in mind, to trade
options in a real account, you need to have options
trading approval. We've got a video to help
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