How to Trade Options on Robinhood for Beginners in 2020 | Part 2: Puts | InTheMoney

welcome to part two of trading options on the Robin Hood we're gonna cover puts in great detail in this video I only gave it five minutes of attention in the last video and I just don't feel like that's quite enough and I don't think many of you guys do either now if you haven't seen part one where we cover calls and other very important concepts you have to go watch it for any of this to make sense so it's gonna pop up in the corner here and both in that video and this one make sure you check the pin comment for important Corrections and information towards the tail end of the last video I started discussing puts but I kind of just glossed over it however I'm not gonna repeat what I've already said so if you don't remember what it's like to exercise a put option go back to the last video skip to one hour 6 minutes and 45 seconds and then that's when I start discussing put so I'm not gonna repeat what I've already said for those who do are coming straight from that video ok now we're gonna take a look at this 43 strike put that has a premium of four dollars and fifty cents so you'd be paying four hundred and fifty dollars to buy this put option and have it in your possession now this premium much like with calls can be divided up into two sections which should sound very much familiar so and be intrinsic value and extrinsic value our friends but you missed them as we've discussed intrinsic values whatever you could exercise the option for whatever value you could get out of this option through exercising so if this option is 60 cents then the money which it is the current trading price is 42 40 the strike price is 43 it is 60 cents in the money that means if we exercise we're gonna make $60 so however deep it is in the money times 100 is the value you would extract through exercising this option so we would extract $60 whatever is left is going to be extrinsic value which is going to be 390 extrinsic value it with puts is time to maturity kind of combined with implied volatility with calls implied volatilities good with puts same deal implied volatility is great your your risk is capped too however you much you paid for this option which is $450 the worst that can happen is you lose $450 the best that can happen is you make an absolute crap ton so you want to have a lot of volatility because it has a higher potential of making you more money with a defined amount of risk which is the exact same for calls inputs implied volatility is high the options gonna be expensive if it's low the options going to be cheap as time passes extrinsic values the portion of the premium that is going to decay so even though this numbers going to increase as implied volatility increases it will disappear by expiration we talk about the ability exercise because it is what drives premium but most of the time you won't exercise the vast majority of the time it is not cost-effective to exercise because you're going to give up extrinsic value more realistically when you exercise you're giving up the entire premium but you're gonna make that 60 cents through exercising that option anyway so you're just giving up extrinsic value so we look at exercising because it drives premium but really how you trade options is just buying an option at one price hoping to sell the option for a higher price and get a profit out of it so I don't have any questions at the end of each section instead I'm just gonna tell you what's different between calls and puts because a lot of its gonna be very similar what's different here almost nothing the only thing that's different is what's in the money what's out of the money because it's flipped when your strike prices above the share price now it's in the money where what's calls that be out of the money so intrinsic value is gonna be given to puts where a call with the same strike price would have no intrinsic value because it would be out of the money so here we're taking a look at options statistics of a put if you forgot how to get here what you're gonna do is tap on an option and then I'm gonna tap on the bid-ask spread those two prices that look kind of hyperlinked and it'll pull up this page for you the bend the ass operate very much the same you're gonna be buying the ask to get in and immediately selling at the bid to get out immediately and the rest of these are all exactly the same as calls so we are going to ignore that there's no reason repeating ourselves too many times so we're gonna focus on the Greeks and the most notable difference between puts and calls as far as the Greeks go is that Delta is negative if you remember Delta is the change in premium given a $1 move in the underlined with call options Delta is positive that means that when the stock price goes up we'll say s Sub Zero increases your call premium increases and it's kind of increased by a factor of Delta so in that sense you're betting on the stock price going up you're hoping that the stock price goes up because as it goes up the value of your call is going to increase with put options Delta is negative that means as the stock price goes up your put premium goes down and vice-versa so as the stock price goes up your put premium goes down it's the wrong way as it goes down your put premium goes up so in that sense it's a bet on the stock price going down because as the stock price goes down the value of your option you put option increases and you could hopefully sell it for a higher price than you bought it for now theta is also negative that's because as time passes the less time to maturity there is time to expiration the less time for it to get in the money or deeper in the money less time for implied volatility to take effect so the less valuable your option is going to be and this is how much your extrinsic value is decaying each a day Vega is also positive it's positive for both calls and puts Vega saying how much your options premium is going to change by giving a 1% increase in implied volatility so it's positively correlated with implied volatility from five volatility increases by one percent you're gonna make five bucks or five cents in premiums terms and again gammas how much Delta changes given a $1 move the underlying so Delta is going to change so if we're call options Delta is between one and zero we're a very very deep in the money call it will have a delta of one and a very very deep out of the money call is gonna have a delta zero or very close to it with put options between negative one and zero same deal though the deeper and the money you are the closer to the negative one your going to be the more out of the money you are the closer to zero your going to be so in this sense if you're buying just a single option you're gonna have technically more leverage within the money options because they're gonna have a higher Delta however if you buy a bunch of out of the money options maybe even this for the same price of one in the money option you could potentially have a higher Delta so out of the money option to do provide you more leverage when spending the exact same amount on them even though an individual one has a smaller Delta a bunch of them will have a higher Delta than in the money option for the exact same price so that's really Appeal between out of the money options for a lot of people is that if things move quickly in the direction you anticipate you can make a lot of money because your Delta is gonna be very high the overall Delta of your positions gonna be very very high for a relatively cheap price but if things don't get moving your premium melts away quite quickly it's also worth noting that both for both call options and put options Vega is highest at the money what that means is you're gonna have the most exposure to implied volatility when you're at the money that's because there's a lot of uncertainty without the money options are they gonna get in the money are they gonna get out of the money there's more emphasis put on the implied volatility and volatility as a whole for at the money options because that's what predicts or determines their future trinsic value is also higher as a whole at the money but we'll get into that in just a moment so what's the difference between calls and puts as a whole then the only difference is that Delta is negative with puts your bet is going the other direction so Delta's between negative 1 and 0 while with cause that's between 1 and 0 now Rose a little different it's negative 4 puts positive 4 calls but we really don't care about Rho and trading it's not worth bothering with so it's just Delta that's the only thing that's difference between calls and puts as far as their Greeks go now of course a call and a put with the same strike price is gonna have very different looking Greeks but the way in which they operate is gonna be very much the same now we're gonna take a look at how convergence effects put premium it will also help us really evaluate the differences between calls and puts when you're looking at these premium and payoff diagrams and you'll see what I mean here in just a second so on the left here we have a premium diagram which is just gonna describe what our premium is over different strike prices or stock prices we're going to show our payoff diagram as well which is not going to look like this I don't know I drew like that there you go so on the y-axis here we have our put premium and on the x-axis we have the stock price and up here you can see that our strike price is 20 and our put premium is $1.00 so all the way down here our output premium is 0 and you can see we're in a hit 0 which is when the stock price is above our strike price when we can't exercise for any value and I should say that we're looking at intrinsic value here the blue is IV which means we're looking at the value of the option at expiration so when you can't exercise for any value when there is no intrinsic value that means that the stock price is above our strike price our put option is out of the money and you can see our put option is out of money in this section because that's when things start going flat when your premium is 0 so right here is going to be your strike price of 20 after this point once you start getting lower than your strike price you're going to be able to exercise for some value or you'll have some intrinsic value where maybe at this point you'll have intrinsic value of $1 now we know exactly at what stock price you'd have one dollar of intrinsic value because for every one dollar you're in the money you can exercise it for a hundred bucks to extract a hundred dollars worth of value which is $1.00 in premiums terms so we know that this is 19 if we have a strike price of 20 and the stock price is 19 we can sell 100 at 20 and buy back for a cheaper price of 19 for each of those hundred shares making a $100 profit so we have $1 worth of intrinsic value and that's going to be the case for every dollar in the money so over here might be 18 that would mean we have $2 worth of premium now any day prior to expiration and things do not look like this they do not look like this hockey stick they look a lot different in fact your premiums gonna look something like this we're now given the same stock price your premium might be something like four dollars and this is because there's at time to maturity as a function of implied volatility aspect built into this you have some extrinsic value and that's what this yellow line represents an it represents an extra premium for time to maturity and implied volatility so right here we know that the difference between these two is three points which is our intrinsic value the total value of the option is four dollars we have one point of intrinsic value what's left over is all extrinsic value which is three dollars worth now if implied volatility expands extrinsic value expands so it'll look something like that maybe not quite but something like that we're now your premiums gonna be higher than it otherwise would be given the same stock price and the same date just because implied volatility expanded now if in five volatility contracts the exact opposite happens your premium is gonna contract and now your option is gonna be worth less given no change in date or stock price but just to change an implied volatility now over time excluding implied volatility as time passes this yellow line is gonna start caving in on this blue hockey stick here so eventually extrinsic value will decay away over time and your premium will decay becomes smaller and smaller over time until all that is left is this blue hockey stick just like we discussed with calls so convergence is what this process is called and it's the exact same process for both calls inputs but also explains how implied volatility acts similarly on calls inputs as well as the passage of time but you can see just by looking at this how this is bowed out like this that we have the most extrinsic value when we are at the money like we kind of mentioned earlier this is because there's so much uncertainty with at the money options implied volatility and time is going to determine whether or not this option ends up in the money or not so there's a lot of emphasis put on extrinsic value and right here is also where vega's highest switch makes sense because if we have a small increase in implied volatility over here it doesn't change the premium a whole lot but in the middle is gonna have a bigger distance from where once was while on the tail ends it's only going to be a small change so because extrinsic value is highest at the money and because in five volatility is what decides whether or not he gets in the money this is where Vega is gonna be highest this is where you're gonna have the most exposure to imply volatility or to changes an implied volatility now if we think about what calls look like just to just remember when we're looking at a premium diagram of calls it looks very similar it's just going the other direction so it looks something like that and you can see how our premium is cap because of the stock price goes to zero this is where we end up we can't go any higher as far as premium goes when you're looking at intrinsic value down here your profit is uncap because the stock price can go up as far as possible if they irreverent premier again but the way it convergence acts on both of these is very similar with calls it's gonna be extrinsic values gonna be highest at the money and over time it's gonna decay as implied volatility increases this increases as it decreases this decreases okay over here we're taking a look at a payoff diagram so we're looking at a profit and loss given different stock prices the stock prices on the x axis profit and loss on the y axis and redraw something like so all the way down here we lose what we've put into the trade 100 dollars this is if the put options out of the money and expire was worthless but once the stock price starts going lower below our strike price we start making money so we know our strike prices right here and our strike is 20 we have to first make up the hundred dollars to be spent before we actually start making money so to make up that hundred dollars we have to at least be one dollar in the money because we don't get to keep that hundred dollars when we exercise that stays with the options seller in fact it stays with the option seller throughout the duration that trade technically but it's easier to think of it as when you exercise it stays with the option seller so if it stays in the option sellers pocket technically from when you first buy the option then we have to make up that money because it's already gone so once it's $1.00 in the money once you get 21 dollars we can exercise it for a profit of $100 which compensates our loss of $100 for paying for this option so we have hit our break-even so we first have to make them up the money we pay before we can actually start making a profit however any day prior to expiration it's going to be way different you break them in to be way different because of that extrinsic value our breakeven might be somewhere over here and as time passes our breakeven is going to change until it ends up right there on expiration day when there's no extras value left so to calculate our breakeven in more realistic terms our breakevens gonna be equal to the strike price minus the put premium who paid I'm so sorry this is supposed to be 1919 because I'm so used to looking at calls one dollar in the money means that the stock price goes down one dollar I'm so sorry so strike price minus or put premium so 20 minus or one dollar premium gets us to our breakeven of 19 on expiration day but any day prior to that our breakeven is gonna be a little bit higher so over time I say two grades your premium you're gonna have to hope the stock price keeps pushing downwards because our breakeven is gonna start getting lower and lower and lower as time moves on as extrinsic value of the case now if we think about a call option what does that payoff diagram look like well if you excuse me drawing it right in here it looks very similar it was just going the other direction but the exact same concept still apply so here you can see really as in a broader picture how calls and puts are so darn similar they're very very similar everything's just kind of flipped the other direction so what's really different here between calls and puts the process of convergence is the same the payoff is basically the same the concepts the way they work as far as in the money how the money convergence and payoff works is almost identical obviously then the money and out of the money is flipped which is gonna cause our breakeven to be different so normally with calls is strike plus the premium you paid but what puts a strike - the premium you paid because everything's flipped but the process of convergence in the idea of profit and loss based on in the money out of the money and how much he paid for the option is very very much the same just kind of mirrored in the future there will probably a part 3 where I cover spreads and if there is one already you will find it at the end of this video if it's not there I haven't made it yet thanks for watching guys I'll catch you in the next one [Music] you you

Channel: InTheMoney

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Length: 15min 21sec (921 seconds)

Published: Thu Apr 09 2020