How To Trade Options with $1000 (Debit Spread Tutorial)

in today's video we are going to go over one of the best option strategy that i have used to more than 5x my money it's called the debit spread and it is very easy yet super deadly when used correctly so go get your trading apps ready and let's get into how we can make the most amount of money possible using the debit spread strategy welcome everybody back to pandrea finance i am alex pandrea and oh i am excited about this video many of you have asked me how can i trade options with a small account right i have a few thousand dollars and i want to be able to multiply that what should i be doing say no more i got you covered now i've done a lot of videos on selling options and it is my preferred method of passive income when it comes to investing there's only one problem with selling options it's boring the gains are very boring they're very small in comparison to the potential gains of buying options right but also to sell options you already need a decent size account for those two to five percent monthly gains to be of any significance now selling options does however take a lot of risk out of the option trading game but let's say you have a small account and selling options isn't really attractive to you as of yet or say you the type of person that doesn't mind taking a little bit more risk as long as you can profit more well then you are in luck because the debit spread is your new best friend we are going to learn what the debit spread trade consists of how to set it up properly and go through some examples on robinhood and break everything down now at the end of this video we are going to put the strategy together with a plan of attack that you can follow and hopefully turn that small account into some real money so hit the like button to begin and let's get started one of my favorite books on trading is this one right here market wizards now it's a whole series of books but there is a whole chapter in this particular book about paul tudor jones who is one of the greatest traders alive today and jones uses a concept that has recently stuck with me over many years in which i was growing my trading account and that is the concept of asymmetric returns the idea is as follows how can i invest or trade where i risk one dollar to make five dollars this risk reward way of thinking will allow you to take very little risk for very high rewards if i risk one dollar and lose it then i have another four times to risk that dollar to make the five dollars right so let's take this concept and apply them to options since the derivatives market is a leveraged market and therefore would be our best chance of making this type of profit okay so now let's talk about buying options right when you buy an option you are paying a premium to buy that option contract and hope that the stock moves in your favor and the option contract becomes more valuable and then you can sell the contract further for a profit right now here's the problem a lot of the times the contract that you want to buy will cost a lot of money in relation to a small account an apple contract for example with an expiration date of one month away can cost you close to 500 now if you have an account of one thousand dollars that's 50 of your account very risky right tesla options can run you into the multiple thousands of dollars and putting all that money in one particular trade with a high probability that the contracts will expire worthless might not be something that you would want to do maybe you know this from personal experience i sure do so we want to solve the problem of paying a lot of money for these contracts while at the same time limit our risk in relation to the potential profit that we can make again going back to that asymmetric return concept so let's break down the debit spread so the debit spread will consist of two trades put together you are buying an option and then at the same time you are selling an option at a further out strike price the idea is that the credit that you take in from the second trade of selling the option will lower your cost of the contract that you buy so remember when selling options you are collecting a premium when buying options you are paying a premium so in this case i want to buy an option but oh this is costing me quite a bit of money and quite a bit of percentage of my portfolio so let me sell an option that's further out and collect some premium to reduce this cost now debit spreads can be broken up into two categories call debit spreads and put debit spreads if you think that the underlying stock that you are trading will go up you will want to use a call debit spread right calls and if you think that the stock will go down you will want to use a put debit spread the word debit means that you are debiting your account to put on this trade debit means paying out right so you are net paying out a premium remember when you're collecting a premium that is a credit right so don't confuse this with credit spreads which would be the opposite of a debit spread okay so here is an example let's assume that you have a stock trading at 50 and you think that the stock will trade up to hit 55 dollars by the expiration date you will put on a call debit spread by putting on the following trades you will buy the fifty dollar call option and then you will sell the fifty five dollar call option you will pay out a debit for buying the 50 call option but because you are selling a further out call option you will get some of that money back reducing your total cost say the contract that you bought cost a premium of three dollars and then the option that you sold gives you a credit of two dollars this means that you will pay a total of three minus one two dollars per contract and because each contract controls 100 shares of the company you will pay a premium times 100 of 100 this is one-third of the amount that you would be risking if you were just to buy the call option by itself right so the total loss of this trade will be the amount that you paid for that premium you obviously cannot lose more than this if the stock stays below 50 dollars the strike price that you bought then you will lose 100 of what you paid to enter this position which in our case would be a hundred bucks now the total profit that you can make off of this would be if the stock reaches the strike price which is the 55 call and the amount of the profit will be the difference between the two strike prices minus the premium paid okay in our case we bought the 50 call and sold the 55 calls so the difference in strike prices is five dollars or times 100 500 total profit but minus the premium which we already paid which was a hundred dollars right so this gives us a potential total profit for this trade of 400 now you can see the risk reward more clearly for this trade you are risking 100 with the potential of turning that hundred dollars into five hundred dollars netting you a four hundred dollar profit pretty good now the only way to get better at investing trading or anything else in life is to learn and my favorite place to learn new things is today's video sponsor skillshare skillshare is an online learning community with thousands of online classes and members across the world it is a place to get inspired and learn from industry leaders that are willing to help you advance your skill set now whether you have a side hustle or a full-blown business or are just looking to develop yourself there is a course for you to take and improve your skills which in turn will improve your quality of life and make you more interesting right because let's be honest who wants to be boring i am a huge fan of lifelong learning and skillshare has created a way for you to have a more interactive experience in how you learn it's one thing to click on random youtube videos with no structure it is another thing to go through a structured course with skillshare i found immense value in learning from the course how not to suck at stock investing one and two so if you have a specific skill or you're interested in learning something skillshare is the perfect place to start your journey and maybe one day you can become an industry leader as well then i will be learning from you now the first 1000 people to use my link down in the description with my code pandrea finance will get a one free month trial of skillshare that is code pandrea finance thank you to skillshare for sponsoring this video go sign up and let's get back into the video all right let's open up robin hood and take a look at some live examples this example we're going to take a look at apple we're going to hit trade and trade options now because this is a net debit of our account that means we are buying options now usually when you buy options you want to go out further in time you don't want to buy weekly options or anything like that you know at the very minimum think a month out two months out uh usually three to six months should be your minimum of where you're buying options because again that theta decay will work against you and it's just never a pretty picture when there's nothing left in your option and you say to yourself oh i should have went out further in time and then you never learn but anyway we're gonna go out to let's say just for this example uh one month out right we think apple is going to move pretty quickly in this month so let's go to a may 6th expiration date so we're going to click on may 6 and then the option chain will pop up now i'm going to think where do i think apple will trade up towards um so right now the share price is 175 and let's say i think that it will get to 185 190 around that area okay so we're going to use that as a benchmark to buy and sell some options so we're going to buy a call first of where we think that at least at the very least that this stock can reach and let's say it's going to be 185 so i think apple is going to move seven percent if you see their seven percent to break even it's gonna move to 185 by may 6 and i'm going to click on that the little plus sign which will indicate we are adding more options to this trade okay i believe you need to update the app if it's showing uh if it doesn't show this little plus sign then you can go in the top right corner which say select and you can select multiple options but if you update the app then it'll have this new interface and then we're going to sell a call above the one that we bought okay completing the spread so we are going to sell a call i'm going to say okay where do we where do we think that it can get to we said 190. so sell a call above and in this case we're selling it for 190. so we're buying the 185s and we're selling the 190s we're going to click on that and then we're going to click review now you can see call debit spread is selected already in your brokerage which is really good uh and and what does that mean so breaking it down by option trade apple 190 dollar calls we're selling those and we're we're collecting a 1.40 premium right you can see there and now apple 185 calls we are paying 2.36 premium so all in total it's going to cost us 96 cents to put on this trade and if we would have just bought this contract straight up the 185 dollar calls we would have paid two dollars and 36 cents for it okay so quite a difference uh and now if we can click down here right above the break even price we can see how this trade has a break even uh risk reward scenario so obviously here with the red section the red section is all going to be your loss right so if we click and hold around the red section you can see our max loss is 97 which is the amount that you are going to pay for the premium right so you can't lose more than this now how are we going to have a max loss well we're going to have a max loss if the stock stays below the 185 strike price okay so if we click and we go to this first point over here you can see that if the stock at expiration will be below 185 anytime below that we will have a max loss for this trade okay so at any point even if the stock is at 182 or even if the stock is at 171 it'll be the same max loss and again the max loss is your premium paid for the contract now if we go further to the right you can see the break even price now the break even price is going to be represented as your strike price the 185 that we bought plus the premium paid so you add the premium on top of that and you're going to get the break even price and now if it stays above the break even price right you're going to start to get profit all right so once it starts going above 185.97 in this case we're going to start seeing profit profit profit profit and now you're going to get max profit all right so the most that we can make off of this after it hits our our strike price that we sold so we sold the 190 call and you can see here at 190 dollars we have the max profit that we can get with 403 dollars now no matter how far further higher we go with the stock price it's going to be the same exact gain the same exact profit all right so no matter where it is above the 190 calls we will have the same profit right so you can still have profit in between your two strike prices from with the 185.97 to the 190 okay and a little bit of loss if you get from your breakeven price down to your first strike price over here um but uh you can see that you need to get to 194 the full for the full profit that you would profit off of this trade but now let's take a look at what the actual risk reward is so we're risking 97 in this case per contract and our reward our max profit is 400 all right so now you can see how the asymmetric returns plays in to this strategy losing 97 so almost 100 bucks here's 100 bucks the most i could lose is the 100 bucks the most i could gain is 400 right now this type of risk reward should be in your favor right because you're risking a little bit to make a lot now just an interesting thing here if we were to clear this out and go to a further out so i think it's going to go to 195 right i think it's going to uh trend up more than 11.91 right so now we're going to set this up as follows say we're going to buy the 185 and we're going to sell the 195 okay so now that is there's one strike price in between so now we have the distance between strike prices is ten dollars rather than five watch what happens i'm going to click over here and now let's take a look at what happens to your risk reward so now we are risking 153 at a max loss per contract but now we can gain at a max gain of 847 okay so by playing around with the different strike prices and how far the two strike prices are from each other it can adjust your risk reward to your risk tolerance and how you want to put on this trade okay so there you go so let's hit review and let's see what we can do with this trade let's say we want to buy two contracts you can see that our max loss if we click over here is going to be 306 dollars the premium paid and the max gain is 1 694 but we have to have apple hit 195 okay we can make profit in between but that max gain is what we are looking for right so let's go back and put in let's say 20 contracts because we want to risk three thousand dollars uh for our risk reward and let's see what the break-even price is so our max loss is three thousand dollars we're putting at three thousand dollars and our max gain is sixteen thousand nine hundred forty so you can see how the risk reward asymmetric returns plays very well when you have a certain amount of you know in this case buying power i have a buying power of 114 000 currently right now in my robin hood so you can see 3 3 000 is less than 3 percent of my account so i'm risking a very small amount to make sixteen thousand seven uh sixteen thousand nine hundred dollars okay so is that worth it well that's going to be depending per individual but for me maybe it's worth it maybe i put on this trade maybe i readjust but there you go that is the call debit spread it's a very powerful tool so use it wisely okay so let's put together everything into a plan of attack so that you can best put your chance of profit in your favor as much as possible the first thing that you have to do to make this a winning strategy is to not over trade okay so this is a risky strategy and although we are tipping the risk reward in our favor you should not use this as an excuse to trade more than a small percentage of your portfolio so the idea is not to go all in on this and to try to 3 or 5x your entire portfolio you want to be able to take a small amount maybe it's 5 percent of your portfolio depending on your risk and use that to make a calculated asymmetric bet if you three x that five percent that means that you have made a fifteen percent profit for your overall portfolio which i in my opinion is very good if you lose that five percent then well you only lost five percent and if you feel five percent is too risky then okay great scale it back to a lower amount or if you're a little bit of a risk taker scale it up maybe for you two percent might work better or twenty percent might work better if you have a small account of a thousand dollars and you know that you can make that thousand dollars back somewhat quickly you could be more aggressive now number two on this checklist would be to risk what you are willing to lose in terms of time now i've mentioned this in one of my first videos that i've done here on this channel but the idea is when you are taking bets like buying options especially where the overall odds are not in your favor you want to be able to make that money that you are risking back in a relatively short amount of time when you start thinking about how long it takes you to make the money back that you are putting at risk from your income or your business or wherever you get your money from then that would put a dollar amount that you are risking into a better perspective when i initially grew my robin hood trading account i took the risk of betting one month profit that i took in in my business and risking that with leaps options knowing that if i lose all of it then it would only take me one month to make that back and i was willing to take that risk so that's very important right i wasn't betting my entire life savings on something risky the next step is to let your winners rise so this is another important lesson from paul tutor jones and derived from the trading strategies of jesse livermore now if you've studied him very very interesting right the idea is that you don't want to buy contracts with a very close expiration date because you won't have enough time to let that trade do its thing if we are using the momentum of a stock market move to push your trade into profit then we need to let the market do that on top of that you don't want to take profits too early and really try to let that stock price reach that outer strike price to profit fully so let those winners ride out so that you could collect the most amount of profit possible remember risk reward right so you want to try to get that full reward knowing that your risk is limited on the downside if you follow these guidelines i think you can better manage this strategy and have better chances of profit now if you want to see the trades that i am making and investing in you can check out my personal patreon page linked down below i would also recommend you watch this video next which lays out seven basics that you should know when trading options thank you so much for watching the video hit the like button subscribe if you haven't already and we'll see you on the next video

Channel: Pandrea Finance

Views: 62,708

Keywords: option trading, how to trade options, invest with options, debit spread, credit spread, stock market investing, pandrea finance, pandera finance, robinhood tutorial, how to trade on robinhood, options for beginners

Id: isJcgq7zrG0

Length: 20min 9sec (1209 seconds)

Published: Mon Apr 11 2022