How to Trade Options on Robinhood for Beginners | Comprehensive Guide by InTheMoney

my name is Adam otherwise known as in-the-money and today I'm gonna teach you how to trade options in Roman hood I know firsthand how frustrating it can be looking all over the internet trying to like piece little parts of the puzzle together trying to form the bigger picture of what options are but not being able to do so so if you're trying to get the full picture in one go in one spot and by golly you've come to the right place this video is all chopped up into sections and at the end of each section there's going to be a list of questions and those questions are there just to make sure that you're fully tracking with the important topics of each section so if you want to make sure that you are fully track and everything that's going on you can kind of quiz yourself and the answer to those questions are in the description below grab a pin grab a paper grab a snack highly encouraged let's jump into it so to get to a page like this you're gonna want to search up a stock you can do AMD if you want to follow along so search up AMD and Robin Hood and tap on trade then trade options it'll pull you up to I think it says discover go up to the top and tap on any of the dates up there and it'll take you to a page that looks very very similar to this one the numbers are gonna be different but the layout itself is gonna look very similar and what we're looking at here is four different call options so there's a forty nine five call there's a forty nine call for a five call and a forty eight call so these are four separate call options and if you have your phone up and you can scroll up and scroll down you'll see there's a lot of different call options they're not the only four there's a lot of other call options but these are all that we need to learn and understand the basics of these options what does they call well it is a contract between a buyer and a seller and in pretty much every example today where you're gonna be the buyer of these call options so we buy these call options from somebody we'll discuss how you do that in a little bit but when you have this call option in your possession it gives you the right to do something it gives you the right but not the obligation in other words you can but you do not have to buy 100 shares of the underlying stock at a strike price and I know that might sound a little confusing so or break it down here so AMD is our underlying stock it's called the underline when you're trading options on a certain stock so it gives us the right to buy 100 shares right loses the right to buy 100 shares but not only that it gives us the right to buy 100 shares at a strike price so let's say we have this for $48 call here 48 dollars is not how much you for the call $48 is this calls strike price so if we have this call option in our possession we can buy 100 shares of AMD for $48 each okay not you don't it's not $48 for all 100 calls as 48 dollars each so great we buy 100 shares at the strike price in this process of buying those 100 shares of the strike price is called exercising your call option you're exercising your rights to buy those 100 shares so we have just exercised our call option now this is pretty sick because the current training price is 48 dollars and 75 cents so we are buying shares for a cheaper price and everyone else is buying it so if we wanted to we could buy 100 shares at the strike price and immediately sell them back to the market for the current trading price where it's just like trading stock it's like you got in that 48 dollars and now you want to get out at 40 at 75 you're gonna make a profit so we bought a hundred shares at $48 now we're gonna sell a hundred shares at 4875 so if you think about it we're making a 75 cent profit per share of those hundred shares so we make a profit of 75 dollars so this process of exercising your call option and making a profit is the case for any call option whose strike price is less than the current share price if you think about it if your call option has a strike price lower than the share price you're buying at a cheaper price than everybody else's so you can buy it a cheaper price and sell it a higher one so if it has a strike price below the share price you can make a profit and the lower the strike price is relative to the share price the larger that profit is going to be so call options who strike price or lower than the current share price where if you exercise you and make a profit those options are called or gun those options are called in the money options call options specifically regarding calls we get to put sear in a little bit we're going to talk about calls first so these are in the money call options and in fact everything lower down below that would also be in the money but what about options where the strike price is a share price so let's say there's a call I don't know nothing is possible but there's a call that has a strike price of 48 dollars and 75 cents will you buy a hundred at 4875 and you sell immediately all those hundred at 4875 you gain that nothing you've lost nothing so you just break even so those kind of call options these ones right here are called at the money or ATM you'll see it abbreviated and how about these ones that are above the share price you can see the 49 dollars just higher than 48 75 well you're buying 100 shares at a higher price and you can buy out at the market why would you want to do that you just buy it at the market it's cheaper so if you exercise did we buy up 49 so at 48 75 you'd actually be at a loss so you never exercise this kind of call option and this is the case for any call option whose strike price is higher than the current share price you don't want to buy at a higher price and the markets already trading it that's stupid you lose money so these options that you would most certainly never exercise are called out of the money options out of the money so otm you can see I kind of color-coded it here and the money are there awesome super cool at the money who cares out of the money no good garbage okay so now we understand that a call in the money call option is great you can buy a hundred shares of the strike sell the current trading price you make a profit alright so I'm just gonna highlight this a different color here we're gonna keep looking this $48 call so how do we get these call options in our possession well you have to actually buy them from the seller you have to buy the right to exercise and you can see how much you have to pay down here if you're looking at this $48 call you can see we're 48 strike call we can see that says two dollars and 74 cents but that does not mean that you're paying two dollars and 74 cents to buy this call option not at all it is two dollars and 74 cents per share of the hundred shares of the contract controls so if you remember you have the right to exercise 100 shares you're paying two dollars and 74 cents per share of those hundred shares for that right so more realistically just cutting through the jargon there more realistically you're paying two hundred and seventy four dollars for that call option so if you want this call option in your portfolio the ability exercised at $48 you have to pay two hundred and seventy four dollars to get in your portfolio we pay a debit it's called paying a debit when you pay something out of your accounts always a debit when you receive funds into your account into credit so now we have this $48 call in our possession which is Fanta stick this $274 is going to change it will not stay constant you can kind of see how it will change with the other call contracts that are less in the money so this one's a little less than the money it's 247 dollars total this one's out of the money its 224 201 so you can kind of see the pattern the further out of the money or the less and the money you are the cheaper those call options are going to be and this is because it's the further end the money you are the bigger profit you can exercise for so they're going to be worth more the lesson the money they are the cheaper they're going to be because you can either exercise for a smaller profit or no profit at all so as the share price moves around making these coops in less or more in the money the price right here is going to shift around just like a like a share would if you're trading in AMD shares it's gonna go up and down and you're gonna buy at one price and sell at another so in this case let's say that we bought this $48 call for two hundred seventy four dollars but then all of a sudden this stock price and we'll change it to blue could keep it kind of so consistent there this stock price it jumps up to let's say even further than that let's say it jumps all the way up to $50 alright that's a current trading price this 274 is not going to be 274 anymore it's going to change it what you will not see it like that it will not be 274 it'll change - I'm kind of making up a number here it'll change to something like let's say four hundred dollars so that now people are buying and selling this call option for $400 and you can sell this call option for $400 so if you paid a debit at 274 but now you can sell this call option back to the market for a credit of $400 you paid 274 but you receive $400 that's going to give you a total profit of 126 if I'm doing that math right so you can see that even though we have the ability to exercise we didn't and we can buy and sell options for the price that they're worth and make a profit or make a loss you never have to even exercise it and there's a real good reason why you would never want to really exercise them in any way and we'll get into that in just a second alright we're going to call that we're gonna call it for this section so I want you did yourself here make sure you understand a few things well you understand what a call contract or call option gives you the right to do I want you to understand what a strike price is and how that relates to that definition I want you to understand what premium is why it's written as two dollars and forty seven cents for example as compared to two hundred forty seven I want you understand what in the money at the money and out of the money is and which ones are good and which ones are bad and why and then I also want you to understand just what underlying means if you can understand all those concepts you are well on your way to getting a grasp on call options let's go ahead and look at this $48 call today I like the $48 call because it's in the money so we're gonna be looking at this two dollars and 74 cents of premium this premium we've talked about how it makes sense this option is more valuable because you can exercise it for a larger profit as compared to like the 48 five call of the 49 call but we can actually tear apart this premium and figure out exactly what why it's price like this we're not gonna look at the formula like the black Scholes model that would just very specifically mathematically describe why it's price like this but we're gonna look at it from a very conceptual standpoint and this conceptual perspective on how premium is priced is very very useful when you're actually trading options so this is not just some theater it's not a theory we're not studying the theory here it is very practical I promise you all right let's take a look at this two dollars and 74 cents remember that's per share two dollars and 74 cents this can be divvied up into two different categories one is called intrinsic value the other is called extrinsic value intrinsic value is a portion of the premium and it is just whatever profit you can exercise it for so we are looking this $48 call right we buy 100 shares at 48 when we exercise we sell at 40 at 75 we make a $75 profit just like we said earlier in the last section okay so we can say that 75 cents of premium is due to intrinsic value which is how much profit you make when you exercise the option so 75 is intrinsic value for this call option this 48 strike call and will will write it here and how about a extrinsic value well this is whatever is left over so we have 75 cents for intrinsic value so we subtract that from 274 and we are gonna have one dollar in 99 cents worth of extrinsic value and this extrinsic value what that is is value given to the option because there's time left to maturity in other words there's time left to expiration there's time for this option even if it's out of the money or in the money it there's time left for it to get in the money or for it to get deeper in the money remember the more in the money it is the more valuable it is so there's some value given to this call option because there's more time left it doesn't have to stay at it doesn't have to be you know a dollar seventy-five in the money it could be much much deeper by the time we reached January 31st theoretically you know the share price could jump up to $55 and then it's way in the money so there's some value that's given to it based on time to maturity in addition to this this extrinsic value is not just time to maturity but it's also implied volatility and I'm just going to briefly gloss over it we'll get to it more in a second when implied volatilities but you can think of it as the volatility of the underlying stock there's a bounce around a lot or is it very calm if it bounces around a lot that's great for call options because your loss is limited to the amount you paid for it but your upside is uncapped it can theoretically go up forever so volatility is very good for options so that volatility of the underlying stock is also priced in two options you can think of implied volatility volatility is only important if there's time for that volatility to act okay so hopefully you can see that how that's kind of combined together so this is extrinsic value so it's popped back over to intrinsic value here this 75 cents that is intrinsic value is going to change and it makes sense why would change because this call options not going to always be only a dollar seventy-five it might be more it might be less so it'll it'll change it could be it's just whatever you can exercise it for whatever profit you can exercise it for and that number is going to change out of the money options you cannot extras for a profit so they have no intrinsic value and I'll write that here and intrinsic values IV a lot of people use IV for implied volatility but that's not really correct add the money options have no IV they did not no intrinsic value at all because you cannot exercise for a profit so this part of the premium is going to fluctuate this premium over here is also going to fluctuate based on if implied volatility increases or decreases and we'll get to that more in a moment again but think about it as if implied volatility increases implied volatility increases extrinsic value increases they are positively correlated if implied volatility decreases extrinsic value decreases and again will very well get into implied volatility and here in a sec I just have to mention it here time to maturity on the other hand it has a different effect on extrinsic value and we're gonna say extrinsic value decays as time passes so as time passes this number is going to shrink literally every day you pay to play every day you buy in at set 274 and ignoring implied volatility if this stock trades sideways you were gonna lose money if the stock trade sideways you know for a little bit this looks going to drop down to 198 which means this is gonna be worth 273 and you're gonna lose a dollar maybe a little bit later it drops down to 197 this will just keep bleeding off bleeding off all the way up until expiration date at which point it's either you've either got a make-it-or-break-it you're either in the money or you're not and this process is called we'll talk call it time decay you know it's also called theta decay but we'll touch on here in a moment moment but just know that when you buy options the stock and trade sideways and you're losing money okay so just kind of recap in what we have here part of this premium is literally whatever you could exit whatever profit you could exercise for so $75 worth of that 274 you pay is the amount you could exercise for the extra 199 that's left over is due to time to maturity and implied volatility as a function of each other the more time you have till expiration the more time you have for that volatility to take effect the more valuable your option is going to be so both time to mature to maturity and imply ball tillie are good for options you want more time they're gonna be worth more it also means you're gonna be more expensive so if you flip between January 24th February 7th February 14th you will see that these numbers increase the further out your expiration is because there's more time to maturity you can actually see what we're talking about be shown on your app when you select that further out application so they're gonna be more expensive because it's more time for them to get in the money which is a good thing but that means there's also money or more money to bleed off so if you bought an out of the money option with a far out expiration date that will just bleed off bleed off bleed off so if you never get in the money it'll bleed off to zero on expiration date you're done there's no money left but of course that's with a call option sets the max you could lose you can never lose more than the amount of money you put into it so at expiration date nothing terrible happens the worst thing that can happen is that it expires worthless and you don't have any money left if it expires in-the-money and you have the capital set aside it'll exercise automatically so those are like the two options you can think of happening this is why you would never exercise this $48 call or very rarely would you exercise before expiration day when you have all this intrinsic extrinsic value left you may get up to expiration day and all this extrinsic value is gone and you have intrinsic at which point you might as well just sell the option but you could exercise it as well if you just have an intrinsic value left on the last day of expiration because if you exercise you'll make 75 bucks or you could just sell this option which is now worth 75 bucks and make 75 bucks there's really no difference but let's go ahead and just so you get the idea in your head let's go ahead and exercise this option so we actually we have this $48 call we exercise it we make our intrinsic value we make 75 bucks because they're equal to each other this 75 dollars from actually the profit the 75 dollars profit you make from exercising is built into the premium and we call that part of premium intrinsic value so they have to be equal so 75 dollars when you exercise it however you lose the extrinsic value you lose one hundred and ninety-nine dollars once you exercise there's no more time you just gave up all your time if there's if you exercise now and there's still a few weeks left until January 31st you gave up all that time so you give up extrinsic value there is no time to maturity as a function implied volatility because there's no one more time for time to maturity the contracts gone you've used up your right it's disappeared so extrinsic value this is a disappears so you lose $199 so if you gain 75 but lose $1.99 you're going to be at a loss of what 75 - 100 99 you were going to be at a loss of will do in parentheses 124 this is why you can't just buy the $48 call and exercise it immediately you would be at a loss so why exercise it you wouldn't you would only ever just sell the contract back to somebody else don't exercise you give up all that extrinsic value there are certain examples where you will exercise they're so rare that it's not worth talking about right now summertime boys and girls so when you buy a call option you were paying this premium right here this two dollars and 74 cents per share so you're paying two hundred seventy four dollars to buy this option that premium of two dollars and 74 cents can be divvied up into two separate categories one is an intrinsic value the other is extrinsic value intrinsic value is whatever profit you would get when you exercise the option if you have a ticket that says get ten dollars use right use at the snap of your fingers and get ten dollars that ticket is going to be worth ten dollars so that's essentially what's happening here this call option is a ticket to at least 75 bucks so it's going to be built into the price of that call option so whatever profit you get when you exercise without the money options there is no intrinsic value because you cannot exercise it for a profit extrinsic value is a premium built into a call option based on time to maturity and implied volatility as a function of each other the longer the more time you have till expiration the more valuable your call options going to be because it can has more time to get more in the money and in volatility is going to determine how likely that potential is that it gets deep in the money there's low volatility it's less potential so the options not gonna be worth as much if there's higher volatility and there's more time there's a higher likelihood it's going to swing deeper in the money so it's gonna be represented as a more expensive call option most the time you would not want to exercise your call option because when you exercise you do technically give up all of your premium but you also make $75 just by exercising it so you really all you're giving up is the extrinsic value and you don't want to throw that money in the garbage that would just be throwing it at the sellers pocket you don't want to throw it away so you almost would never exercise but exercising options is where this premium comes from the ability to extra size is what drives the value behind call options Mamma Mia and lastly while we're here I want to touch on where you see to break-even percentage this just means the stock price has to increase by 4.80 eight percent for you to break even here's the dealio I just went on a rant that was just too much it's too much information I think but I was talking about the to break-even percentage and I'm just gonna tell you what it is if you want to learn more about it I'm throwing a video up in the corner that I went into great detail about it what it is go away thank you what it is is the percentage the stock price has to move up because you have calls you betting on the stock going up for you to break-even by expiration date when you buy this calling you are at breakeven essentially you buy at 274 you could theoretically we're kind of glossing over some things but you can see roughly just sell for 274 and so you're at breakeven but as time goes on the extrinsic value to case off and that option becomes less and less valuable you better hope the stock price goes up so that the value of the option increases to counteract this extrinsic value decaying off okay so today your breakevens right where you bought in on expiration day your breakeven is going to be four point oh eight percent in the upwards direction which is going to be the stock price of 50 dollars and 74 cents I don't go any more than into that because it's a big it is kind of a big topic I guess my questions to you now to check yourself are what is extrinsic value what is intrinsic value why do out of the money options not have any intrinsic value when there's more time the maturity or contracts more or less valuable and when implied volatility increases or decreases does the value of the options increase or decrease alright I think that covers it for this section [Music] let's take a look at why volatility is good for options and how you can use it when you're trading so let's pretend we're looking at a stock chart here okay it's wiggling around it's doing its thing and let's say we're just kind of breaking the rules a little bit here but let's say at this point we would be at our max loss or we'd be our contract would be worth $1 it's never going to be worth less than a dollar before expiration you know at expiration of its atom out of the money it'll expire worthless definitely want to sell before expiration it'll never be worth a zero before expiration so let's say we hit 0.01 so it's worth a dollar and we'll say that this area the white area is low volatility and all the sudden volatility really picks up and we get some massive swings right huge swings all over the place well this is good for options because your losses are capped even though volatility increases once you hit this point right here your options gonna be worth 0.1 no it's gonna be worth $1 so we're happy worth a buck down here what's it worth it's worth $1 down here it's worth $1 if the stock went down all the way to like 1 cent it would be worth $1 okay it's never worth zero until it expires but what about when it goes up so let's say at this point let's say when we bought it right let's change our color here let's say when we bought it right here it was worth 250 bucks when it swings up here it'll be worth $400 when it swings up here it'll be worth $800 when it swings up here it's worth a whopping $1600 so even though volatility increases and the potential for things to go down increases you once it hits this point anywhere below that it doesn't matter it's gonna be worth $1 however when it goes up to the upside the further up it goes the better your potential profits are uncapped so that's why volatility is a good thing and so when people expect stocks to be volatile options are going to be more expensive that's what that's a sin in the simple terms what implied volatility is and why it is good for options and it's also worth noting that implied volatility is extracted from options premiums think about it in this way so options prices are based around how much people want these options there's high demand for them options premiums are going to be inflated and that's what implied volatility is if people buyers of these options if they expect that in the future this stock price is going to be very volatile they're gonna start buying up these options because they really want them because of the reasons we just discussed and all these buyers are going to start moving in and that's gonna push the options prices higher so implied volatility is just that its volatility implied by the options premium so when all of a sudden the options premiums get inflated but it's not due to changes in stock price and it's not due to time to maturity or any other reason then you can be attributed to this idea of implied volatility people anticipate the stock being more volatile in the future so how can you use this in your trading so these math there's mathematical models that will extract implied volatility out of options premium so and they'll extract the volatility that is implied and it'll be described as a percentage point between 1 in 100 where 1% is very low volatility 100 cent is very high volatility this percentage is gonna move over time and it's gonna be graphed out and I'm gonna draw it down here I'm sorry so we graphed out it'll look kind of like a stock chart something like something like this a big drops at certain points with earnings plays which is why you never buy options on earnings do not buy options on earnings please don't implied volatility collapses after earnings and so does your options premium so never ever buy options as an earnings bet I'm telling you as your mom right now don't do it you're gonna lose your money so it changes over time so your options premium is going to change over time which means that if you buy an option when implied volatility is down here and then you hold it and then you hold it and hold it and hold it up to this point till you're right there everything else held constant you're gonna make money because maybe you bought this option at $2 they're two dollars and 70 cents worth of premiums to $270 stock to trade sideways you don't have that much time decay it hasn't been that long so that extrinsic value has not decayed off really just high pathetically up here it might be worth to 290 in premiums terms to $290 so you would make 20 bucks just from implied volatility increasing so the idea here is you want to buy one implied volatility is low because those options are going to be cheaper and then hopefully in the future implied volatility will be higher because people find demand for those options your options premiums are going to increase due to that increase implied volatility and you can benefit make some profit off of that so it's not just stock prices that's why if you buy an option and even excluding time decay the fact that your premium decay is off due to the passage of time excluding that if you buy it an option and the stock price stays flat but implied volatility drops your options premiums are gonna drop and you're going to lose money that's another reason why if it's trading sideways you still might lose money people ask that a lot so a real key way how you can use this in your trading because you want to buy with implied volatility is low and sell an implied volatility high is high is this idea of mean reversion when you look at a historical implied volatility chart it's gonna look not exactly like this but we're gonna say it's something like this you could really kind of put where the averages on this graph it would probably be somewhere right in here and there's this idea in all of nature and all of mathematics and in options trading that things will revert back to the mean so when implied volatility is low when it's down here it's going to have a tendency to revert back up to the mean when it's high relative to its history relative to its average it's going to revert back down then it's gonna go back under it revert back up revert back down revert back up revert back back down and where you want to buy are going to be at these lows because then you're going to experience this inflation of your options premiums because the implied volatility increases and so again we're just looking at implied volatility being graphed out as a historical chart of the percentage I was talking about you don't really need to know what the percentage is specifically just think of it as low or high volatility as a percentage between 1% and 100% you can buy options would imply volatility is high but you might actually experience a contraction in your options premium and you might have a worse loss if stock prices go down and you have a contraction in implied volatility premium will collapse very quickly and you will lose money pretty fast so the best place to find an implied volatility chart would probably be market chameleon calm at least as a beginner there's better and slightly more advanced ways to do it but for your sake as a just starting out just learning this is perfectly fine so market chameleon calm let's look up AMD and go to volatility in the left and implied volatility so here we are you can kind of see that idea where it goes down and up and down and up and you can kind of see at what points are low just by all eyeballing it what points are low what points are high you might even look at this and say that's kind of high so if you want to give yourself a real extra edge look up these charts on market chameleon calm see if implied volatility is relatively low compared to its history and if you think that the stock price is going to go up in the future maybe using tactical analysis maybe with a little bit of fundamentals tossed in then go ahead and buy and then now you've given yourself an extra edge so that not only do you make money when stock prices increase but you also make money when implied volatility increases got it cool so at this point you don't have to know a whole ton about implied volatility okay so there's a lot to learn about it but you don't have to know a whole bunch as a beginner what I want you to know or the questions that would ask you to make sure you're keeping up are why is volatility good for options what happens to options premiums when implied volatility increases or decreases why is it called implied volatility and to think about that in a little bit it's a little bit tricky why is it called implied volatility really I think those are the only three questions I'd really want you to have down to understand applied volatility to actually trade them success trade with it successfully keep in mind when you're looking at this idea of the reversion to the mean you're looking at its own historical chart there is no there's no perfect percentage is it higher is it low you're looking at is it higher low relative to its history because you want to have an idea of what the average is so just keep that in mind implied volatility is gonna tie in to one of our following sections but for now I think this covers it pretty good so if you can understand those three questions good on you if you've made it this far in this video you are getting an edge above all a lot of other traders out there so keep it up I'm proud of you [Music] it's a new day somewhere in a new shirt areas looking fresh we're gonna look at some options statistics that are very very important to trading so to get to this page which is a list of statistics that pertains to a specific call option what you're gonna want to do is you're gonna select a specific call option so you'll tap on it and then towards the left side you'll see a bit and an ask price and they almost look like they're a hyperlink they're kind of highlighted to color so you're gonna tap on those guys and it'll bring up these statistics and so we're gonna break these down for you and they're very important for trading so you'll break down most of them you're gonna ignore chance of profit and implied volatility you just don't really need to know that right now plus we've already covered implied volatility they're just gonna this the implied volatility pertains to individual options but you can really just think of it as almost averaged so implied volatility like we said is extracted from options prices and so you can see the implied volatility that is implied by this options price and each option is in a very little bit but you can think of it as just applying to the overall stock almost like averaging all the options implied volatility so you don't need to get to the details of that okay so we're gonna start off by looking at the bit in the ask up at the top here the bid represents the buyers the ask represents the sellers sellers want to sell at a higher price buyers want to buy a lower price it makes sense right dissin to ative lee and you can see that represented here where this bid price is 224 and this ask price is 227 so this represents where people are buying and selling out you can see how many people are buying and selling it because you can see the number right next to it so there are 58 orders at the price of 224 those are by orders there are twelve orders at the price of 227 those are sell orders that difference between the bid and the ask that difference there the the the really three cent difference in premium that is called the bid-ask spread so a seller has to either meet a buyer at the bid price because that's where people are buying it or the buyer has to meet someone at the ask price or maybe they smeet somewhere in the middle but regardless someone's giving up someone so if I want to buy this option immediately I have to buy it the ask price because that's where people are selling it that means I'm buying for two dollars and 27 cents and that bid-ask spread that 3 cents that goes to the exchange the people who are meeting these buyers and sellers together get the BS spread as compensation for uniting those two parties so that goes to the exchange so either the buyer meets the person at the ask price the ask meets person at the bid price so they give up 3 cents and those three cents go to the exchange or they meet somewhere in the middle so you could to buy and exit immediately you would have to buy the ask and sell at the bid and you would lose three cents overall because you're paying to 27 and then selling for 224 you're selling for three cents less and then premium stands that's three dollars so you'd give up three dollars to get in and out of this trade immediately but these two this this happy little couple here can meet somewhere in the middle so for example maybe the buyer puts in a order for two dollars and 26 cents well the seller might be willing to move from two dollars and 27 down to 226 and then all of a sudden you have this match together where they someone to buy in a price and someone's willing to meet them at that price and the seller is giving up one cent he's this person is selling at a cheaper price and the buyer here is giving up two cents because the the buying price of bid price is two dollars and twenty four cents so altogether they give up three cents in that three cents like I said goes to the exchange sorry it's white on white so let's get rid of this a little bit so really all you need to think about is the closer you are to the ask price when you're selling a limit order to buy an option the closer you are to the ask price the more likely it's gonna be filled because then you're paying a higher price for it sellers don't have to meet you at such a low price so if you want to get and immediately buy it the ass but keep in mind that if you buy it the ask you're likely gonna have to sell near the bit so if the bid-ask spread is wide which it can be and we'll get to that in a second you're gonna be giving up a lot of money by buying immediately at the ask so maybe set in order somewhere in between the bid-ask spread and wait for a seller to meet you in the middle now when you buy an option in now time to sell it you want to get rid of it you have to sell so closer to the bid you have to sell it more cheaper price just like I said so don't go trying to sell at the ask price you're gonna have quite a hard time doing that you might set somewhere in the middle and you can see what prices in the middle because it's called the market price and that is listed right here and that's going to be the price that Robin Hood displays on all of their options so sometimes you might buy an option where the bid-ask is really big and when bid asks are very wide they can tend to jump around a lot and Robin Hood will continually show the mid price so even if there's like no buyers so let's say there's no buyers at all it's going to be zero point zero zero on the bid side and then on the ask for right bid here on the ask side there might be one seller but the selling at a ridiculous flat price of like two two dollars two hundred bucks well Robin Hood even though there's no buyers Robin Hood's gonna show the price as one hundred bucks and so maybe at one point your option was worth you know it was showing the market price at like 50 cents because I saw they were selling out 100 but now a seller selling at 200 and there's no one buying it's gonna show 100 in the middle on the Robin Hood platform it's gonna say you made $50 that's a little confusing that's okay I'm just saying the bid ass is going to jump around and sometimes the Marke price which is not really a realistic price all the time it's going to be the price that Robin Hood shows so you might see an instantaneous profit but it's not real because you still have to sell at the bid and there's no buyers there anyway so the market price is in between the bid and the ask and it is what Robin Hood shows as the price for the option even though realistically you may not be buying at that price or selling at that price you might be buying closer to the ask are selling closer to the bid the high and low that's the highest price for the day and that's the lowest price for the day the volume the volume equals number of contracts traded the higher the volume the better because if there's people buying and selling throughout the day you want to be able to buy and sell with them you want to maybe get be able to get in and out of a trade quickly so if there's higher volume like this kind of volume is good a thousand four hundred fifty five that's a good volume there's higher volume you're gonna be able to have people that are willing to buy from you when you want to sell an option and people willing to sell to you and you want to buy an option if volume is very low there may not be many people wanting to buy and sell options you might have a hard time getting in and out of a trade open interest which we're just gonna call oh i and you can see that open interest is right here open interest is number of contracts open so this is saying currently there are four thousand one hundred and fourteen of this exact call in existence and they will go in and out of existence as a buyer and seller agreed to create a contract and then a buyer and seller swap sides and destroy that contract this open interest is going to fluctuate it's going to grow and shrink the more open interest there is it's going to be probably going to be higher volume and the higher volume there is the high titer the bid-ask is going to be so that's why it's really nice to be trading options when they have high volume because that people buying and selling a lot it's going to push that bid ask price closer and closer together and when that's closer and closer together you're giving up less to get into the trade because remember you have to buy it the ask and sell at the bid if you're not if people aren't willing to meet you in the middle so a tight bid asks like this which is like three pennies is great it's not that big of a deal giving up three bucks if you have to get in and out very quickly but if this bid ask is very wide maybe fifty cents or a dollar wide because of the volume is so low you're giving up $50 to $100 to get in and out of the trade quickly so you always want to check this when you're gonna buy an option you want to make sure that the bid and the ask is tight that's a real that's a real biggest part of all of what I've said so far is look at the bid ask is it tight are you willing to give up that much money if you have to get in and get out quickly think about it alright let's get rid of some of this okay now we're moving down to the Greeks and the Greeks are what is affecting the price of the options and we've covered basically all of this as far as what you need to know but this tells you how much certain things are affecting the price of the option it all makes sense here in just two seconds we're just gonna write it out here so Delta this represents how much your options premium is going to change given one dollar change in the underlying so if this stock if AMD goes up one dollar that means that the value of your contract is going to increase by 50 cents so you were gonna make $50 if AMD goes up one dollar now you see how that's a lot of leverage and that's the appeal of options that is that they can give you a lot of leverage this is almost like having excluding other things it's almost like having 50 shares of AMD but you're only paying $227 for it so that's leverage and this kind of leverage might not be suitable for you me you may not be willing to lose $50 if AMD goes down $1 okay so it's up or down it's positively correlated which is why this number is positive it's how much premium changes with a $1 move in the underlying name D goes up the dollar you make 50 bucks MD goes down $1 you lose 50 bucks gamma which we're not going to get into too much today is how much Delta change is giving it $1 move in the underlying so Delta is not constant it does not say it stay at this 50 cents which is why if you buy further out of the money or for their in the money option they're gonna have different deltas in fact those deltas are going to change between 0 and 1 so the further in the money you are the higher your Delta the more leverage you have however if you buy maybe an end the money option for $100 but you buy 2 out of the money options for $100 so those out of the money options they're worth 50 cents each and premiums terms those 2 out of the money options are going to give you an overall higher Delta so in other words if you buy a couple out of the money options they're gonna give you more leverage than a single in the money option that's worth the same in premium so just kind of writing it out as an example here you might have out of money options they're worth 50 cents each you're gonna buy two of them so you've paid $1 in premium in the money they might be worth a dollar each so you can buy one of them so you're paying one dollar of premium however the Delta of each of these just for example is 0.3 the Delta for each of these is equal to 0.5 however you bought two of these you bought one of these so your overall Delta is 0.6 your overall Delta here is 0.5 so even though you paid the exact same amount if you buy two out of the money options you're going to have more leverage than buying one out of the money option for the same price however time decay which we're going to touch on here in a second effects out of the money options much faster and you're going to have a higher break-even by expiration day so there you're less likely to in the end of things make money there a more risky bet if you're right you can win big but if you're wrong you're going to lose big and fast even if the stock does trade sideways these two are gonna melt away so gamma how much Delta changes given a $1 move up or down the underlying and gamma will change as well so but we're not gonna get into that too much theta is how much you pay to play every day so this is and it's negative so that means as each day passes you were losing seven cents or you know rounding up eight cents of premium every day and that is actually going to increase so every day because of that extrinsic value that evaporates off that value that's based on time to maturity is a function of implied volatility that that premium is gonna start evaporating off as time goes on and you can see exactly how fast it evaporates off right here in theta this is all theta decay so you lose in real terms seven dollars every day and this will ramp up in speed as you get closer to expiration in fact the curve of if you could say if we could we'll graph it out here let's say you bought in here and this is a premium you paid its $2 and right here is expiration day the value of your options gonna look something like this where initially when you have a lot of time left to expiration the theta decay is gonna not very have very much effect on the value of your option it's gonna you know stay relatively flat might bleed off a little bit but as time gets closer and closer to expiration it's gonna really really ramp up and you can see cuz the expiration of this AMD option I have selected expires in like a week so you can see how as each day passes a large portion like seven dollars of that bid at that $227 that you would pay for now evaporates every day and that's gonna ramp up ramp up ramp up until expiration day and then all that extrinsic value that value based on time to maturity and implied volatility is gone and your options either in the money or it's not it's either worth something or it's worth nothing it's out of the money it'll expire worthless so keep that in mind that's another reason you might buy an option that's further data it out is because you're gonna not be paying as much to play every day it's gonna be trickling out very slowly so when you combine buying out of the money options with a near expiration you are giving yourself a lot of leverage they're very cheap so you can buy a lot of them and you're giving yourself a lot of leverage if things move big fast but if they don't move big fast all the sudden you're gonna be down a lot of money because that extrinsic value which is all that constitutes out of the money options is going to evaporate very very very very fast towards the end of its lifespan okay so Delta how much the options premium change is given a $1 move up or down in the underlying stock gamma how much Delta changes giving that same $1 move so Delta changes by a factor of gamma the more in the money as with a call option the more closer to 1 Delta is going to be the more out of the money the closer to 0 it's going to be with puts you'll see that it's going to be negative 1 in 0 because with puts you're gonna be betting on the stock going down so when you're betting on the stock going down it's negatively correlated so if the you know if if Delta is 0 point negative 0.5 for a put that means that the stock goes down you are going to make $50 the stock goes up you are going to lose $50 so they're inversely correlated stock goes up you lose $50 stock goes down you make 50 bucks are inversely correlated negatively correlated but what touch on puts more in a minute once you get calls down puts this easy I promise you Vega Vegas how much your premiums going to change based on a 1% move in implied volatility so if implied volatility increases you were going to make $4 so Vega how much premium changes given a 1.1 percent move in the implied volatility so almost like how Delta is to the stock price Vega is to implied volatility so you can see there's a positive correlation and that's going to be positive for both calls and puts implied volatility is both good for both calls inputs Rho is a tiny little baby guy that barely moves the needle it is whoa Rho has to do with changes and interest rates when interest rates change they're going to affect the value of your options but it's so insignificant and not worth even bothering with that I'm not going to go into it so don't worry about Rho so these are the questions it's kind of a beefy section here even though we went through it pretty quick it's not like the concepts I think are not terribly hard there's just a lot of information here so these are the questions that I would ask you to make sure you're keeping up what is the bit price what does it represent what is the ask price what does that represent what does the bid-ask spread and why is it important what does Robin Hood display as the boxing sprites the bid the ask or the mark what is volume and open interest and how does this volume affect the bid-ask spread in other words if volume is higher does a bit a spread get smaller or bigger and vice versa and then basically run through all the Greeks what is Delta what is gamma what is Theta and what is Vega all right you if you have those down good Anya I'm proud of you let's move on to the next section so in this section we're gonna describe a lot of what we've already gone over but in a visual kind of way and then we'll also look at a certain type of diagram that is often used when explaining options strategies so you'll see this diagram in the future when you move on to things like bull call spreads or credit spreads or whatever you're going to see this diagram that we're gonna talk about so it's important to know on the left here we have a premium diagram it's a diagram of premium it's not like a very fancy diagram and on the right we have a profit loss diagram so on the left side this y axis is going to be premium and we're talking about calls so it's gonna be called premium and that's me denote it as C so we have call premium on the y axis and then on the x axis we have stock price and we're going to denote that as S sub zero so essentially this blue hockey-stick looking guy is your call premium given different stock prices so basically any stock price below this point your call premium is zero there's there's no call premium you're at your max loss once you hit whatever this stock price is you start making money and your call premium goes up such as that maybe right here it's a dollar maybe up here it's something like two dollars okay we're gonna leave one of those there cuz we'll need it here in a minute and this is all on I guess I should say this is all on expiration day every bit of this this is all at expiration so we're looking at if you remember this is after all that extrinsic value is gone so we are looking at intrinsic value so what is the intrinsic value of this option what is the value of this option on expiration day given different stock prices and on expiration day if the stock price is below your strike price that means your call is out of the money you can't exercise it for a profit it's worth nothing and has no intrinsic value it's out of the money you exercise it you'd lose money so there is no intrinsic value so when it's below your strike price that means your calls out of the money so it's gonna be worth nothing on expiration day there's no intrinsic value so we can choose a strike we'll say strike Google's 20 so that means that this stock price right here is 20 dollars and after that point you start making money and if we're talking about intrinsic value we know exactly what the stock price would be when you're making $1.00 in premium it would be 21 because if you're $1 in the money you exercise that you would make a hundred bucks one dollar gained per share of those hundred shares so if you make 100 bucks and you exercise it that means that the call must be worth one dollar in premiums terms so we know exactly the stock price ISM the call option is worth $1 on expiration day so this is all a lot of what we've been talking about just kind of drawn-out but any day a prayer out prior to this and this is at expiration remember any day prior to this it's not gonna look like this hockey stick right here it's gonna look a lot different so let's say maybe a few months back the premiums gonna look something like this so that instead of it being worth a dollar when it's at 21 and the stock price is at 21 it's gonna be worth something like what kind of estimate here we'll say it's something like $4 what kind of scribble this out now bring it up here so strike is 20 so there's all that extra value given to this call option based on time to maturity and implied volatility whoa and we call that extrinsic value so the difference between these two is that extrinsic value which is three dollars so it has one dollar of intrinsic value because that's we can exercise it for and it's now worth four dollars of that stock price when it's two months earlier so there must be three dollars worth of value based on time to maturity and implied volatility so basically any of the area underneath this curve is extrinsic value it is this value given to the option based on time to maturity and implied volatility which will slowly decay off so over time as time passes and time goes on this curve is not going to stay the same it's gonna slowly start going shrinking down so like maybe after another month it's gonna be right there and you'll see that your call options value is gonna decrease so maybe now it's at 350 I'll get rid of that just to keep things nice and simple and then maybe a little bit later it's looking something like this until on the last day of expiration it just is that blue hockey stick graph all the extrinsic value is gone you can either exercise it for a profit or you can so this process of the options premium decaying away the extrinsic value of the option scream and premium decay away until all that is left is intrinsic value the blue hockey stick that process is called convergence so there's intrinsic value at the bottom if it's in the money there's some intrinsic value in send we at the bottom on top of that is extrinsic value the value for time to maturity and implied volatility and that's going to be decaying away as time passes so it'll shrink down shrink down shrink down until there's no extrinsic value left all that's left is that intrinsic value if it is in the money if it's out of the money then there's nothing left there is no intrinsic value you cannot exercise it for a profit so that process of extrinsic value converging on intrinsic value is very appropriately named convergence on top of that this extrinsic value is going to shift based on implied volatility like we discussed so it might shrink down if implied volatility decreases and you'll see that that causes a decrease in your options premium so now it might be three dollars down there if implied volatility increases then maybe this line will increase like that and now it's going to be worth more than it would otherwise so maybe it's worth something like five dollars so that kind of that yellow line is going to bow in and out based on expansion and contraction of implied volatility and it's going to shrink overall as time passes inwards until it becomes that blue hockey-stick in that process is called convergence got that out of the way so that's basically the concept we've been talking about just kind of drawn-out so over here on the right we have a little bit of a different diagram that you see often when you're learning new options strategies like I said before on the y axis instead of having the call premium you have your profit or loss so this blue hockey-stick is the exact same over here except for instead of looking at call premium we're looking at how much money you've made and how much money you've lost so we're gonna say that when you bought this call we're gonna say the call premium was $1 so you paid $100 for this call in addition like we said our strike price is 20 so we're gonna put 20 right here if you're out of the money on expiration day you have lost everything if you're in the money there's a certain area where you make less of a loss and then you start making a profit right over here well so if you're out of the money on expiration day your max loss is going to be whatever you paid for that option and you paid 100 bucks so you lose out 100 bucks if you're below your strike now right here in the middle right at the x-axis it's not good or bad you are at your breakeven you neither made money nor lost money and you can see that because your profit and loss as the graphed out crosses the x-axis right there so you've neither this is your breakeven right there's your breakeven you've never made money or you're lost money and I know exactly what the breakeven is because the breakeven is equal to your strike plus the premium you've paid because let's think about it it's kind of not super intuitive but let's think about it if we are at $20 and we exercise that option what's going to happen well we're gonna buy 100 at 20 right we're gonna sell 100 at 20 because that's a current share price we know that we'd neither make a gain or loss we're at zero but we give up the call premium we paid when you exercised that option the value of your premium goes to the to the seller you don't get to keep that money so you get zero but you also lose the money put into it so you're at a hundred dollar loss okay so let's think about that then how do we make up that $100 well we have to hope that the that this gets $1.00 in the money because think about it if we can exercise that $20 but if the current share price is 21 we can sell for 21 dollars each and we are going to make $100 profit so if we make $100 profit but we give up the call premium it goes to the options seller when we exercise then that means that we are going to lose a hundred and we are at breakeven so we're talking about this in the context of if you exercise or not but you have to also think about the value of your contract on expiration day is what if whatever you could exercise it for so your breakeven right here at $21 is that's gonna be the value of your call contract it's gonna be how much you put into it so if you paid $1 for this call contract at $21 on expiration day that's your breakeven price you are going to neither have made any money nor lost any money you would sell it for just break even you could also exercise it for breakeven but what's the point you might as well just sell it and this is where the math on expiration is very easy if the stock price is 22 we draw a line up here it doesn't rot another line and here over here we've made $1 in premium I guess I make a green huh we've made $1 in premium I don't have any questions to make sure you're tracking this is like this is like extra like if you get this then you really have a deep understanding of what we've talked about so far if you don't really get what's going on here but you have a more a practical conceptual understanding of what we talked about that's totally fine too so this section in the following section will be tying a lot of the stuff we've learned so far together and learning a couple new things along the way we're starting to move into the area of putting the bigger picture together putting everything together and see what it looks like in the big picture and how it looks like when you're actually trading these things so we're assuming out a little bit here what we're looking at here is option to profit calculator comm which is where you can like enter an options trade and see what your profit or loss would be given certain dates and different stock prices so you'll kind of see what I'm talking about here when we put one together so if you didn't catch me there I clicked on long long call because we're talking about calls here so we're bullish on the underlying stock you're gonna do AMD again and we're gonna buy an option so it says buy and the option we're gonna be buying is a call so we're gonna choose an expiration date that's a little bit further out if you look at these at the money calls right here so this one's worth 77 cents in premium if we move it out to march 20th it's now worth 458 in premium so that extrinsic value has expanded because of the time to maturity and as a function of implied volatility so you can see the bid mid and ask in the mid is the same thing as saying the mark it's the middle of the bid and the ask so we are gonna buy at the ask price because we want to get into the trade very quickly so we're gonna buy at four dollars and sixty five cents of premium so we're buying the March twentieth call there's a 48 strike we're paying four dollars and sixty-five cents in premium which is four hundred sixty-five dollars total so you can see the total cost is four hundred sixty-five right there and we're gonna hit calculate so on the y axis this time we have stock prices so right now AMD's trading between forty eight fifty and forty nine at the top we have different dates so here's January February March April so at one what stock price and what date what is your profit and loss going to be so on the first day of things bump up roughly fifty cents or so you hover over that will be at forty nine dollars to stock price Li forty nine dollars and we will have made fourteen bucks pretty nice you go up further if today things really go up like crazy go up to fifty four you make three hundred forty nine dollars which would be awesome so you can play around and kind of like where do you think the stock price is going to be you know when you buy this call option what's your profit lots going to be but notice how see this black line right in the middle that's the current stock price notice how this red starts bleeding up into the upper half so that if right here when you're making $14 today if the stock price stays at 49 through January through February through March all the sending me down three hundred four dollars you're me down a lot of money and that is because of that convergence that premium decay while your option right now is worth four hundred sixty five dollars as time passes it's going to be worth less and less and less and less so that if you sold it you would be at a loss so you're losing money losing money and losing money and that premium decay decay is the case the case all the way up until expiration day where you're either in the money past your breakeven or below your breakeven and you can see what your breakeven here is it's fifty two dollars and sixty five cents which is the current stock price plus the premium you paid so if we look at our breakeven you know it's in between these two stock prices but remember that little region where we I told you about where it's not you're not at your max loss but you haven't made profit yet that's this whole area right here you haven't hit your max loss until you hit that minus 100 which just means what - 100% so that's that whole area there we could exercise it or you could just look at the intrinsic value of the value of the option and you could sell it for not a total loss but for a significant you know potentially significant loss you won't really reach your max loss until you hit the strike of your option which is $48 see how it's 48 we hit our max loss when we are at $48 we must be above that to have less of a loss and we have to be past our breakeven to start making a profit on expiration day but remember at the very beginning the very first day your breakeven is right where you started you know you buy in you sell immediately you would only lose whatever the difference between the bid-ask is but really you're at your breakeven but as time goes on and as that state of decay happens in that extrinsic value of operates off that process and convergence occurs you are going to have to hope that the stock price starts moving up quickly now we chose an option that's somewhat at the money let's choose one that's very in the money so we chose a 48 strike one let's choose one that's all the way at $40 so it's much much more expensive because it has more intrinsic value built into this premium so we're gonna ahead and click on the sky nine hundred ninety bucks is how much it would cost us hit calculate notice how the green doesn't leak up so much into this because so much of that premium is made up of intrinsic value and it's not as much affected by theta decay as we spoke about earlier the options that have the highest amount of extrinsic value which is the value that evaporates off are going to be at the money so if you go in the money it's gonna be significantly less you know damaging theta is going to be a smaller percentage of the overall amount you paid for this option so it's gonna have a less significant effect on the option so our breakeven is much lower in our max loss is also going to be much lower because we're deep in the money we had our max loss when we hit our strike price so in the money options are a lot less risky in that sense that their breakeven is much lower but they are also much more expensive so you have to keep that in mind or you will in the fork up that much cast cash look at the deltas how much is the options premium changing based on one dollar of the stock price moves your risk tolerance in line with that you have to be thinking about this sort of thing now let's also play around with implied volatility which you can do by hitting manual inter entry options if we change implied volatility from 53 up to something crazy like 80 notice how the green starts dropping into the lower half so if all the sudden nothing else changes but today implied volatility whose spikes like crazy which is good for call options and put options you are going to make money even though the stock price hasn't changed so right where a break-even normally would be we're up 173 dollars the exact opposite would happen if implied volatility decreases the red would start seeping up into the upper half however you have to keep in mind that your breakeven stays the same everything on expiration day stays the same because remember on expiration day there's no extrinsic value left which implied volatility affects it's only intrinsic value that's left can you exercise it for a profit yes no now let me tell you guys what a lot of people doing they first start trading options they're gonna choose an expiration that's very close to us so a couple you know a couple days out they expire this week and they're gonna choose them that's way out of the money so we'll do 50 strike which is way out of the money and they're gonna buy a bunch of them so they'll buy 25 of these which is $475 it's pretty cheap and if you look at it if things bump up just a couple bucks you've made a grand you've over doubled your money however they have to go quick it has to move very fast you only have a few days before all that extrinsic value which these options are completely made of the evaporates so they has to move very fast and people do that all the time and the problem is the stocks don't move that fast most of the time so you can get lucky and you can't make a bunch of money very quickly but if you try this trading strategy then is not a strategy you will lose money because you're gonna always going to be trying to outrun the stock and you're not going to be able to do it and not only that people do this before earnings because they think well hey if we I want the stock price to move quickly then I might as well do it around earnings calls where there's usually big stock movements price movements in the stock price however leading up to earnings implied volatility is increasing increasing increasing because there's an expected volatility in the stock because the earnings is going to cause a pretty significant movement movement in the stock price so that's being priced into the options people are paying more and more for them because they expect this large move in the stock price due to earnings however the day after earnings implied volatility drops because that binary event has already occurred it no longer is in the future it's already happened so implied volatility drops in other words people start paying way less for those options that they were paying for literally just a day ago so let's go ahead and simulate that we've bought all these out of the money options so we're thinking okay and the stocks and moved 10% on earnings but then all the sudden implied volatility drops in half when we're down near let's say 16 hit calculate now look at us look at that the next day it drops down even if the stock price goes up we've lost money and that's why options are so complicated sometimes and that's why you don't want to do these stupid kind of things if you want to be safer learn about spreads which will you can find on my channel but also buy in the money options even though they're more expensive don't put all your portfolio in it if you can avoid it but even though they're more expensive they're gonna have a lower break-even they're gonna be less affected by theta so time decay is not going to be as substantial and overall they're just gonna have a higher probability of profit alright let's actually do a real trade here so you can see the whole process let's do spy which is the S&P 500 ETF talk about a bullish trend so let's go ahead and look that one up this ETF has insanely liquid options so the bid-ask is going to be pretty much always one cent wide which is terrific so we're gonna buy it for a month out roughly February 21st and just cuz I don't have that much money free on this account let's go ahead and tap on a 3:29 call and tap on it statistics so we're looking at it bid ass is tight it's 1 cent which means we'd lose a dollar getting in and out immediately and which we're about to do volume is of course high it's always high on this ETF Delta is 48 so we make 48 bucks if the stock goes up 48 if it goes down this ETF I mean so we're gonna buy one contract which is for 100 shares you can see that underneath there and the bid-ask is 389 to 391 let's go ahead and see we can put it in for 390 which is the bid right now and hope that the price of the option drops down so that 390 becomes the ask which it just did so let's go ahead and enter it 390 is the premium were paying which is the ass so we're gonna get it filled immediately that max cost is 399 $90 hit review swipe it up or 2 received we'll wait a second see if it gets filled and it got filled look at that so if we go back to our home menu you can see this option is going to pop up here hopefully in a second there it is alright a spa spike call has popped up and we have not made money we have not lost money yet it's just at $0 as a total return and you can see what the last price was is 390 how much money I put into it 388 never got a total return we're down to bucks all right so let's say you know what I'm having to change your heart let's go ahead and sell and we want out as fast as possible well we can tap on that call hit trade hit sell and we're gonna sell one of them and we have to sell near the bid price or we have to hope that it pops up the price pops up a little bit so it's dropping a little bit so let's go ahead and sell it so I'm not spending too much money on this example so let's do 384 I think that's fine and we'll send it off so that's not super near the bid but it's or it's not it's not exactly the bid but it was close enough to the bid that someone either met me there or the price change enough so that it became the bid price so there you go we went in and we went out and I think we're down like 6 bucks you know whatever is worth it for this example so that's what you're gonna do when you buy option that's kind of what it feels like to buy and sell options that's basically it you take a look at options profit calculator take a look what you think the stock price would be if it goes up or if it goes down are you comfortable with your risk and you think you'll make a good enough profit then great go for it go on Robin ahead select the column by near the asker at the at the mid or above or if you want the stock price to move down to you a little bit you can enter a price a lot lower than the bid-ask spread and hope that spread moves down over time and that you get filled but because options provide you with so much leverage I definitely want you to check out my videos on vertical spreads which I will put in the description below as well leverage isn't always a good thing because Hume lever yourself straight into the center of the earth at this point I'm hoping that you have your brain wrapped around calls for the most part and if you at this point how many questions about calls you should ask me in the comments below we're gonna go on to puts really quick not a whole lot is different the only difference is you're betting on the stock going down as compared to going up really there's a few other tweaks but once you have calls down and you have a down pat then puts or just kind of come like a breeze so here we are looking at a list of puts on the md notice i have buy puts selected you want to buy a put or a call you can sell by choosing sell call or put and selecting the put that you bought but it's easier just to do it from your home menu it's also possible to sell puts and calls when you don't even already own them and that's creating a contract you're creating a contract and selling it to somebody that's a whole nother deal and you have to have quite a bit of money in your account to do that but it is part of doing spreads where you actually don't need that much money your account so check out those videos that i have they'll make you a better trader and you'll make more money if you learn so if by put selected we're looking at four puts here one two three four notice the similarities they do have strike prices 50 49 48 47 the only difference is if you remember calls give you the right but not the obligation to buy 100 shares at the strike price the only difference is with puts let me write that out actually so this is for calls to give you the right to buy 100 shares of the strike price but four puts this gives you the right to sell 100 shares at the strike price now you could own these shares already or you may not own those shares already so let's take a look at a put here so we are gonna take a look at this 50 strike put and remember the current share price is down here at 48 42 so if we can sell 100 shares for $50 each and then we could buy those so we'd be selling short if you do not have the shares already you would borrow those hundred shares automatically your broker and you would sell them and then hope to buy them back at a cheaper price so if you exercise this put option you would sell 100 shares at the strike price and if you don't own them you're borrowing those shares from your broker which is called selling short but if you already own the shares it's the same deal of those shares just disappear from your account so you are now let's say you don't have them you're short 100 shares for $50 each and you can buy back those 100 shares immediately at 4842 since you sold at a higher price so you received a lot of money and then you bought back for less than you received you're going to keep some of that money so that's a good thing and the money you're going to keep is going to be the difference between these two times 100 which is what $1 $1 58 remember that's in premiums term so you actually make a hundred and fifty eight dollars so in that sense these it's a little different than before these ones are in the money this is still at the money these guys are out of the money so it's just flipped when you're in the money you hope the stock price is going down it's below your current strike price you're out of the money to stock price goes up so it's just flipped you're betting on the stock price going down you'll still see if you look at the options Greeks that's theta theta will be negative you'll see that Delta will be negative remember for calls theta is also negative for cos Delta is not negative it's positively correlated because when I with a call you're betting on the stock going up so as the stock goes up the premium increases so that's a positive correlation with puts when the stock goes up your premium decreases so it's a negative correlation and vice-versa besides really those two factors calls and puts operate very much in the same way it's just betting on the opposite direction when one's one other small difference of those worth noting is that their breakeven is below their strike price because you're betting on the stock price going down so instead of it being instead of your breakeven being strike plus your call premium it's going to be strike - your put premium because if you think about it when you exercise you're giving up that premium that you paid you better hope the stock price has gone down enough to make up for that that loss of your premium that you paid when you exercise so with puts just think of it it's the same as calls only different is differences you're betting on the stock going down thank you for coming along on the ride with me you definitely if you made it this far god bless you you are a soldier check it out dude we've made it like through this candle was brand new yeah we made it almost you know three quarters a half of the way it's recorders in the way through candle so good on ya I'm proud of you I love you catch you guys later [Music] [Music]

Channel: InTheMoney

Views: 3,840,855

Rating: 4.9446993 out of 5

Keywords: robinhood, options, trading, robinhood app, options trading, trading options, trading options robinhood, options how to trade, options to trade, how options are traded, robinhood investing, robinhood options trading, stock options explained, stock options for beginners, stock option trading for beginners, robinhood trading options, robinhood options, options tutorial, options explained, stock trading, inthemoney, in the money, investing, swing trading, trading strategies, option

Id: SD7sw0bf1ms

Length: 71min 16sec (4276 seconds)

Published: Wed Feb 05 2020

Reddit Comments

[u/MFalcon95]

Been watching this, amazing

[u/anondisposable1]

Happened to watch one of your videos the other day, made me jump into a call option. Now I want to jump off a bridge, but it was a good video 😂🤷🏻‍♀️

[u/borderline_dad_body]

Good find 2K! Been watching it through the day, seems straightforward, tendies here I come!

[u/2KTHEPRODUCER]

By the way for anyone who wants to say thanks for sharing - please visit MY YouTube channel and watch a video or two. I make music, and would love some feedback. Rap Beats https://www.youtube.com/playlist?list=PLXO703zhK1ApXnM8gW-3yfTkd5D3EGj2N