Learn How to Buy Calls and Puts l Options Traders MUST know

okay good afternoon and welcome back everyone to our options education webinar series my name is tony zhang i'm the chief strategist here at options play and today we're going back to the basics we're actually going to talk about a beginner strategy that we're actually going to compound and build on during the month of april now we're going to talk about buying calls and puts today which are the two basic strategies for buying an option giving you leverage while doing doing so in a way with limited risk now while this may be a beginner strategy i tend to find that even experienced options traders will learn something about the foundations and basics of options trading that encourage and enhance their ability to understand more advanced strategies and that's exactly we're going to do here in the month of april we're going to build upon what we learned today into debit spreads next week and the following week looking at calendar spreads so being able to build on top of this education is what i'm trying to do here for the month of april now before we get started what we're going to discuss here today is purely for education and demonstration purposes it is not a solicitation or recommendation to buy or sell any specific securities and just to give you a sense for the educational calendar coming up tomorrow morning we're doing a members rapid fire symbol session a lot of you have enjoyed this session by submitting the symbols that you want to look at i've really enjoyed doing them by looking at a very wide swath of symbols based on what you're interested in doing the technical and fundamental research and showing you my views i've learned from it i've received some ideas from from it so i really hope that many of you are able to join me tomorrow morning on that like i said this month of april on the thursday afternoon sessions we're really building week after week on what we learned today we're going to learn the basics buying calls and puts next week we're going to build on that to look at more advanced strategies a debit vertical spread which deal with some of the drawbacks that you have when you buy a call or a put we'll talk about what some of those drawbacks and challenges are and how debit spreads help can help eliminate some of those drawbacks and then next friday we're going to do an earnings season kickoff earnings season kicks off a little bit next week but you know we start to see some early reports next week but really the following week so next friday we'll do an earning season kickoff talk about where we currently sit what our expectations are what is going to be a fairly strong quarter and then the following thursday we're going to talk about the the more advanced the the most advanced strategy within buying which is trading calendar and diagonal spreads which are quite interesting because they can allow you to trade some pretty uh interesting strategies in terms of neutral or slightly bullish slightly bearish strategies that you normally cannot trade when you're buying an option being able to leverage that using spread so really excited to build upon this foundation here for the month of april so for today what we're going to do is we're going to cover basically just to first start with just the understanding of stocks versus options the difference between it then we're going to take a look at buying calls we're going to look at best practices for the strategy what you should be looking for when you're buying a call option how to look at how to analyze a call option and understand what you're truly trading when you're buying a call then we'll take a look at buying puts for the bearer strategies we'll take a look at trading outcomes for both calls and puts try to go through as many examples as possible before we open this up for q a here at the very end but the primary thing that i want to help investors walk away from today's session is an understanding as to how options can provide you with leverage but do so in a way with limited risk because we usually think of leverage as this double edged sword that works against us if the trade goes south so options can provide you with that leverage but also protection if the trade goes south and that's what we're going to explore here today as to how options trading allows you to do that now my name is tony zhang i'm the chief strategist here at options play and i want to share with you my knowledge of options trading and how i view buying calls and puts in my portfolio and when i decide it is a reasonable strategy to trade for for a specific outlook that i may have so let's first just talk very quickly about stock trading how many of you currently trade stocks if you could please bring up your chat window at the bottom of your screen and please type one into the chat window if you currently trade stocks okay i see a lot of ones so excuse me so for all of you that trade stocks you're familiar with what we would call buying a stock and shorting a stock now excuse me the reason i want to bring up these two strategies is because buying a stock is what we typically as investors would call a bullish exposure now the reason it's considered bullish exposure is because this strategy gives you immediate gains if you get the direction correct all you have to do is get the direction correct doesn't matter whether it moves a penny in your favor or a ten dollars in your favor or twenty five dollars in your favor as long as you get the direction correct you'll be profitable that is what we typically consider as bullish exposure bearish exposure same thing if you short a stock as soon as the stock even moves lower by a penny you start b you you become profitable if it moves five dollars you make five dollars if it goes down ten dollars you make ten dollars it's symmetrical exposure which makes it really easy to understand you know exactly how much money you should make if the stock moves up ten dollars or if it moves down ten dollars how much you lose uh and the the best thing about options about stock trading i would say is that there's no time horizon so whether the directional view that you have maybe you think the stock's going to go from 100 to 110 whether that happens in a single day a month a year it doesn't matter you make the same amount of money regardless of how long it takes for you to reach that price the only limitation that you have when you're trading options is the fact that there are no neutral options so the the reality here is is that when you trade uh when you trade stocks it's very easy to understand it's symmetrical it's you get immediate exposure um and there's no time horizon meaning you can really get the timing wrong and still be profitable on the trade your only limitation is that you can't make money if the stock doesn't move if it moves sideways or moves slightly lower and slightly lower um you don't make any money from that trade so simplicity is what you get um immediate bullish and bearish exposure with a few limitations so when we talk about call options the call options really give you a world of options and so right now let's just talk about a basic a a basic example here let's take a look at microsoft microsoft recently has been fairly strong here recently breaking out above this 240 level breaking out above all time highs and starting to trend higher here the one month and six months trends are quite bullish here the technical rank is starting to become stronger here as it recently is still neutral here at the very moment but as it starts to break out above some resistance levels this is one that we might want to take a look at so a call option is the first option strategy you learn that is a bullish strategy now when you look at buying a call option the i would say the the benefit or or the attraction that many investors have to buying or call option is the fact that it has limited risk while doing so in a way with unlimited reward so you have limits how much you can lose you have unlimited potential reward if you get the directional view of microsoft correct so if microsoft continues to move higher and higher and higher the higher it moves the more you make similar to buying a call buying a stock but if you get the directional view wrong and the stock drops substantially when you buy a call option you have limits as to how much money you could lose on a trade that is the the the attractiveness or what we call asymmetrical risk of a call option now when an investor looks at this for the first time many investors ask themselves why would i ever buy a stock you know why would i ever yes stocks give me unlimited gains to the upside but it also gives me substantial risk to the downside if i get it wrong why wouldn't i want to take on the same risk profile unlimited profits the upside while only limiting my losses to the downside it's a really good question and that's what we're going to explore here today but before we get into that i'm just going to talk a little bit about best practices because this is one of the most common questions that we get from investors is there are a lot of call options you can buy you can buy uh short dated options long dated options which one do you choose so as a general starting point we usually start with about a 60 to 90 day expiration cycle is usually our starting point when we're looking at expiration dates and we're going to take a look at as to why and then we look at strike prices we look at slightly in the money call options as a good starting point so microsoft's currently trading at 253 right now so the trade that i would typically look at is something like a june option which expires in this particular case about 70 days from today as you can see 71 days from today that's in the 60 to 90 day range and we buy a slightly in the money call option so when microsoft's trading at 253 i'm looking at buying a 250 call a call option that's just slightly in the money and we're going to talk a little bit about as to why but those are general best practices for when you're selecting a a call option where you want to start your research that doesn't mean you can't make adjustments as you look at the options as you look at the underlying security as you look at your outlook whether you have a slightly longer dated outlook or a shorter dated outlook you can make adjustments but this is generally your best practices for a starting point so in order to understand this asymmetrical risk profile the best thing to do is just take a look at the trade itself so microsoft's trading at 253 right now i'm looking at buying the 250 call option that's the mon that's the call option that's the first in the money call option and let's say this option in this particular case cost 12 now when you first learn about call options you learn that it's a bullish strategy it's a strategy that will profit if the stock moves higher however and similar to how we say that a stock buying the stock is a bullish strategy however it's not a fairly accurate statement in my opinion to say that buying a call option is bullish because as we look through the trading outcomes and we look at how far the stock needs to move in order for these strategies to be profitable you're going to see that just calling it bullish is not in my opinion sufficient enough in terms of describing the strategy but let's look at the strategy for one second so a 250 dollar stock normally if i wanted to buy 200 shares of this i would need 25 000 here when i buy a call option i only need 1200 so call options are always quoted in terms of premiums per share the same way we quote the stock price per share a dollar call option is a twelve hundred dollar contract because each contract of a call represents one hundred shares now the benefit here is that if i bought a hundred shares of this stock and i paid twenty five thousand dollars my risk is twenty five thousand dollars meaning if the stock was to decline to zero which is somewhat unlikely but if it did uh i would lose twenty five thousand dollars if i bought this call option even if the stock went to zero i'm only risking twelve hundred dollars my max risk is just twelve dollars per share which is roughly in this particular case just shy of five percent of the underlying stocks value that is part of the leverage factor that we refer to the fact that you can control a 250 stock for just 12 a share and if you flat out get the directional view on this trade wrong the most you lose is 12 dollars a share it's a very good way for investors who perhaps are concerned about buying a stock at all-time highs maybe you think that there's a very good chance that momentum will carry the stock higher but you're also concerned that you know when stocks trade at all-time highs they have a large there's a there's a um a higher chance or perhaps a larger fall for that particular stock to get back to normal so for those reasons many times when you see the stocks trade at all-time highs this is an interesting time to leverage a limited risk strategy like a call option and this strategy while risking only twelve dollars gives you unlimited max rewards so as the stock keeps going higher and higher and higher the higher it goes the more profits the call options provide now the reason that i say calling this strategy a bullish strategy is not sufficient is because a bullish strategy implies that as long as the stock goes higher you're going to make money now when you buy stock that's true when you buy a call option that's not entirely true because with each call option that you purchase there is what's called a break even price the break even price is calculated by the strike price plus the premium that you pay so 250 plus the 12 gives you a break even price of 260 what that means is that the stock has to get above 262 in order to break even that means that the stock has to rally 4.8 percent just for you to break even you're not profitable at 4.8 you're just breaking even the stock has to get above 4.8 in order for the strategy to be profitable so to call it a bullish strategy in my opinion is not entirely accurate because if the stock moves let's say two percent higher right if the stock moves two percent higher am i right in my bullish view i would say yes i'm right the stock moved two percent higher but guess what i'm still losing money on this trade and that is the biggest challenge of learning how to trade a call option is that not only do you have to get the directional view right you also have to factor into what's the breakeven cost of my call option and do i believe the stock is going to exceed that breakeven price if anyone here on this vid on this call today has bought a call option got the direction right but still found themselves in a losing position where the call option lost money please type two into the chat window how many of you have bought a call option got the direction right and still lost money on the trade and i see so many twos flying on the screens and this is because of this break-even cost that you have to overcome so to call it a bullish strategy is not entirely accurate it's a bullish by a certain amount meaning you have to believe the stock's going to move by a certain amount before it makes sense for you to buy that call option and that certain amount is two two parts your strike price plus your the premium that you pay so that is how you calculate the break-even price and you have to believe the stock is going to exceed its break-even price before it's profitable now your max loss of 12 is going to happen if the stock is below the strike price so whenever you buy a call option if the stock is below your strike price you're going to have the max loss of 12 but you do have unlimited profit potential here to the upside so many times investors you know like i said when you at first when you look at a call option you think of this and you say wow i found the holy grail to trading i can leverage my capital and be right when i'm and make unlimited gains if i'm right and if i'm wrong i only risk a small percentage in this particular case five percent of the underlying stock price i'm going to trade a call option every single time i'm bullish and what you do is you quickly find that many times you get the direction right but you still end up losing money on the trade and that is a very disheartening thing to learn so what you have to factor in is not just the fact that you're bullish but how much premium do you have to pay the more premium you pay the more the stock has to move and you also have to factor into time as well so let's take a look at an option chain here's the option chain here for microsoft here before i have two options i have two expiration dates i have may which expire in about 43 days and i have june which expires in 71 days so we're gonna look at the two dollar and the 250 call option for may we're going to look at the 250 call option for june so as you can see here in may the options are cheaper about nine let's just call it roughly ten dollars here uh and then in june as i was showing you before roughly twelve dollars here for june so think about this for one second because when you're because the one of the primary questions that i get from investors is which call option do i purchase do i purchase and add the money out of the money so let's first just talk about expiration dates for one second right so let's just call this a ten dollar option uh roughly ten dollars here it's it's 9.85 by 9.95 the strike price is 250. so the breakeven price is the strike price plus the premium so let's just call this 260 that's my break even price for the may calls and then i look at the june calls it's twelve dollars for the two fifties so that's two hundred and sixty two dollars now why do i tell investors to use a longer dated option when i buy call options a lot of investors what they like to do is they like to buy really short dated options and how many of you have bought one week options or two week options because they're really cheap the reality here is that the longer time frame that you have the more time that you have for the stock to br to achieve that break-even price the time decay factor is going to work against you and what you want to do here is as you can see here in 43 days if i bought the make 250 call options i have 43 days for the stock to move effectively uh seven dollars or so so remember the current price of of microsoft is two hundred and fifty three dollars the current price of at microsoft is 253 dollars so i can have the choice of either expecting a seven dollar move in 43 days or i can have a roughly nine dollar move but i have 71 days so as you can see by giving myself uh of almost 30 extra days i only have to have the stock move two dollars higher in order for that to be profitable and the question becomes what's more likely is it more likely that the stock moves 7.43 days or 9.71 days and what when we talk about what is the optimal uh call option it's not to say that the microsoft can't move seven dollars in 43 days it's just saying that there's a higher probability that it will move nine dollars in 71 days by almost doubling the amount of time and only requiring the stock to move two dollars higher you have a slightly higher probability of that happening does that make sense everyone please type three into the chat window if that makes sense to you now this is just to teach you a concept this does not say that you have to buy the june options right it's just saying that if you're comparing april versus may or may versus june or june versus july this is just teaching you that if you buy the longer dated option it's going to cost you a little bit more but likely what you're going to have is substantially more time for that trade to work in your favor so if you're bullish on the stock do you want roughly 43 days for the stock to have to move the amount of of or do you want 71 days now the reality is that largely um the these price of the stock of how far it can move is kind of priced into the option so that's one of the challenges that you have here so this is microsoft chart here as you can see what we're seeing before here was the breakout here above this 240 let's just call it a 245 resistance level that we had a few days ago and maybe you think this is going to continue to run up remember the 262 was the uh was the break even price that we had here at 262. that was the break-even price that we had so we want to take a look at how this plays out here so the first scenario that we'll say is let's say it does break out above 252. in this particular case if it rallies above 252 262 the higher it goes the more profits you can make so unlimited profit potential here to the upside but it has to break above 262 in order for that to happen now in my opinion that requires a pretty substantial move here to the upside in order for that to happen that may not happen the stock maybe gets in the directional view that you get but maybe doesn't go all the way reach up to 262. so that's one thing that you have to be considerate of now let's say the stock does reach 262 but it just reaches 262. so you get the direction right and the stock gets the 262 at expiration guess what you have no net gain or loss so think about that for one second that means that whenever you're thinking about a call option you can't just say i'm bullish let me buy a call option you have to ask yourself what's the break-even price and do i think the stock is going to exceed that break-even price because if it doesn't exceed that break-even price you're either just going to have zero net gain or loss or worse if the stock doesn't reach 262 whoops if the stock doesn't reach 262 you're going to be unprofitable on this particular trade so if it goes up if it goes sideways if it goes lower all of these scenarios you lose money on this trade if it gets to the break-even price you break even only if the stock breaks out above your break-even price are you profitable and that's not always easy to trade and that's not always easy to do so it's actually a pretty low probability of success strategy because again as you can see if it goes sideways you lose money if it goes a little bit higher you lose money if it goes lower you lose money if it goes significantly lower you lose money only in the in the scenario you know let's just call this one two three four five only in one out of these five scenarios are you profitable in the other four scenarios you're going to lose money on this particular trade that's why buying call options is difficult to do despite the fact that it's very attractive on paper you leverage your capital if you're right you get that unlimited upside and there are some success stories right there's plenty of people that have made a lot of money buying call options but in the long run if you buy call options all the time you're going to see more losers than winners that is the reality of buying a call option does that make sense everyone please type 4 into the chat window if that makes sense to you now i will talk a little bit about greeks in a different video here someone asked about delta the higher the delta that you purchase the more they cost the reason that you don't go for a higher delta is because the higher delta call options what you want so as you can see as the stock gets more and more in the money right so if let's say i bought a 240 call option and the stock starts to rally that call option will start increasing in delta but as it increases the the rate at which it increases starts to slow down it's the rate it increases actually accelerates as you get closer to 50 delta and above 50 delta it starts to decelerate again so that's why we want to buy something around this area because you want something that still has a fairly high amount of acceleration here to the upside now if you buy an out of the money option and this is something that we get a lot from investors that will say why not buy an out of the money option it's cheaper well so as you can see the break-even price of this was and sixty 2. dollars right uh that required the stock to move roughly nine dollars in the next 71 days well if i bought a 265 option that cost five dollars and fifty cents now my break even price is about 270. now the stock has to move what roughly 17 in the next 71 days what's more likely the stock moving up to 262 or the stock moving up to 270. the further you go out and out of the money because remember you have to add the premium to the strike price the higher you go out of the money the more the premium cost the faster the time the faster the the premiums are going to decay so and and more likely that the delta never helps overcome the the decay that you actually have so that's why when we talk about options pricing um you know that's why these at the money or slightly in the money options are the sweet spot that you want to start with that doesn't mean that you can't buy an out of the money option right because out of the money options do give you that gamma acceleration so as it starts to move in your favor you actually get a little bit more leverage and once you get 50 it starts to slow down in terms of how much the leverage increases by that is one uh you know area that you can buy but that is reserved in my opinion only four when you expect a very quick and fast move and you're expecting that you're going to get out of that trade within a very short amount of time so if you're trying to if you're anticipating that this is going to break out of this range and you think it's going to go from 237 to 253 in a very short amount of time in this particular case that is the only time it makes sense to buy a call option so this is perhaps a good time this is perhaps a good time uh this is perhaps a good time for a put option this is perhaps a good time for a very short dated call option but as you can see these do not happen very often and these are very difficult to time so unless you you are very skilled at timing the markets which it's very possible that some of you are that you're very astute in technical analysis and you see that this is a breakout here and you're anticipating a big move to the upside those are you know those are really the only time where it makes sense to buy a slightly out of the money or out of the money call option all other moves that you see in the moves to the upside if you bought an out of the money call option you would have lost money on that trade because this simply the trade did not accelerate or you know go parabolic the way that you see in these types of quick fast moves to the upside that's the only time it makes sense for you to buy a call option and it's easy to say in hindsight oh this would have been a great time to buy a call option but when it first breakouts when it starts first starts to break out like this there's really no indication that's going to run this far this fast that's the challenge here right when you get a breakout here you don't really have an indication until after the fact that you see that it was a pretty strong rally because it very well could be a rally because if you look at this right this particular breakout here where it starts to break out here looks no different than this particular breakout so you know if you bought an out of the money call option there you would have lost pretty much 100 of your your money as this as the stock traded sideways here this time it did work out here but that's only in hindsight are you able to tell that so keep that in mind i get a lot of questions from investors saying why don't you just buy out of the money call options you get the most amount of leverage you can really leverage your capital and if it trades works out it's easy to say that you know if the trade works out but many times it doesn't so next let's flip this on a dime let's take a look at a bearish strategy here so bear strategies buying a put option is very very similar to all the things that we just described here from a put option pers from a call option perspective it is just the mirror image of it you basically get the unlimited upside or in this particular case downside all the way down to zero in exchange for limited uh losses now here's the thing about puts the puts are a little different from the perspective of they truly give you unlimited um they truly limit your losses in a short position because if you were to short a stock and we all have seen what happened in gamestop if you short a stock you truly have unlimited risk i never recommend investors to take short positions that have unlimited risk because you never know what could happen a stock can rally substantially on news it could get acquired by another company and instantly jump a hundred percent in in price overnight and everything that you thought oh there's no chance the stock is going to get that high it's not it's you know you never know what can happen and that's never a position that you want to be in waking up the next day seeing those huge losses in your portfolio so whenever you're talking about a bearish position unlike a call option where you have plenty of other you know potential alternatives like simply buying the stock shorting the stock in my opinion is not a valid um strategy because you truly have unlimited risk i much prefer using a put option that gives me unlimited downside in exchange for limited unlimited upside in exchange for debt limited downside now same thing with puts it's a bearish strategy with limited risk and we call it unlimited reward but technically there is a limit because stocks cannot go below zero but it would have to get to zero in order for you to reach that limit rarely do we see that as far as an expiration date 60 to 90 days here as well is a good starting point doesn't mean that you can't trade shorter dated options it's just that's where you generally want to start your research as far as strike prices buying a slightly in the money put option here so here i have ibb the nasdaq biotech etf one month and six months trends are bearish recently turned bearish here breaking below some support and resistance levels here starting to trend lower here both the trend and technical score are weak so maybe i'm looking for a directional view here to the downside black uh ibb currently trading at 149 so i'm going out to june which is the 71 day option buying a 150 put option which is the at the money put just slightly in the money put here that costs currently six dollars and 60 cents so let's take a look at this so you have limited risk in exchange for substantial reward just like a call option so if i'm i'm sorry this should say bearish if i'm bearish on a stock i can use a put option and in this particular case i'm buying the 150 puts uh it cost me six dollars and fifty cents and remember i'm controlling a hundred and fifty dollars etf here 149 etf for just six dollars and fifty cents and that's the most i can lose no matter what happens i'm only risking four point three percent of the etf that's the value that i am uh risking and my max reward again we call it unlimited but technically there is a limit but for ibb to go down to zero by june i would say is very unlikely um especially because you need every single company in the ibb index to effectively go bankrupt by june um and the strategy the breakeven price here is 140 350. um so that is the strike price whoops 150 minus the 6.50 cents 43.50 i apologize this is a typo 43.50 uh which requires the stock to do the etf to decline 4.3 in order for this strategy to be profitable so again just like the put just like the call option you have to first calculate the break-even price and see for yourself do i think the stock is going to exceed the break-even price or lower and as you can see i have some support levels here around 144 or so so maybe it gets down to 144 maybe it doesn't break through maybe it just bounces off and continues to trade around this 144 level if that's the case guess what i shouldn't buy this put option because it requires me it to break below 140 350 here and you on a put option you have a max loss if it stays above the strike price which is 150 and you have substantial profit potential all the way down to zero so let's take a look at this trade here as well i have the may options and i have the june options here so we're looking at the may 150 puts which would cost me uh roughly let's just call it five bucks or so the june 150 puts cost me about six dollars and fifty cents or so so think about this the break even price here on the june 150 puts are 145. so if i think the stock's gonna the etf's gonna move lower this the etf would have to move below 145 in the next 43 days versus here it has to move uh down to 140 350 which is six and a half dollars but i have 71 days for that to happen so do i think the stock's gonna make a five dollar move in 43 days or a six and a half dollar move in 71 days and the further you go out in time the more you're gonna see this more apparent right so if you go out to to september you're gonna see that it doesn't cost you substantially more it might only cost nine dollars so then your your break even prices may be 141 but you're going to find yourself maybe with 120 days worth of time for that to happen and and this this gets stretched even further and further and many investors for that reason like to buy those longer dated options those leaps because really you don't have to have a big move in a short amount of time in order for the strategy to be profitable the shortest dated strategies you really have to have that big move in a very short amount of time if it doesn't make that big move in that short amount of time you're not going to be profitable on that particular trade so here's ibb here you know many times it's so easy to say well if you had just bought a put option and out of the money put option you know bought it up here sold it down there you would have made a ton of money it's so easy to say that in hindsight not very easy in practice because many times you could buy an out of the money put option make a lot of money very quickly in two days and then see all of those gains evaporate just the two days later as the stock starts to bounce higher and and maybe starts to move a little higher here so that's the reason why buying a slightly in the money put option gives you that benefit so that even if you get that big move to the downside and a few days later you get that bounce higher you're still going to be likely still going to be profitable on that trade versus if you bought that out of the money put option uh you know any quick bounce here to the upside would largely mean that you would lose a lot of the gains that you have so let's say this is ibb here right now around 4 149 or so we calculated our breakeven price here to around 143 so again the ibb would have to get back below let's say these uh recent lows here um so this was the lows that we saw back here in um early march it would have to get below those levels just the break even that's not always easy to to target right because very well i could say that okay it's bearish i think it'll hit these targets to the downside but it very well could just bounce off those targets and hold as support so if that's the case guess what buying this put option is not the best strategy because it has to break below the support level and i just simply don't have enough evidence to say it's going to break below that support level i probably have enough evidence to say that it'll likely reach these 143 support level but the break below it is a whole another thing and that's the thing that you really need to account for when you're thinking about buying a put option because if it declines below one below 140 350 you do have substantial profit potential but if it just gets to the 140 350 you're just breaking even and if it's above that 140 350 breakeven price you either have a small or max loss so remember just like the put option just like the call option example i showed you here before you know out of a lot of different possibilities you know what the stock can move sideways it can move a little bit lower it can move a little bit higher you move substantially lower substantially higher or substantially lower you know out of the five possible scenarios four out of those five you're going to actually have a loss only in this fifth scenario are you going to be profitable on that trade so be very careful when you're thinking about buying these calls and puts as to do i actually think the stock or etf is going to make a large enough move in a short amount of time in order for my strategy to be profitable it's not always that case you're not always going to be able to find that so make sure that you understand your risks before you place that trade so with that you know what i'll do is i'll quickly go over to options play i do want to show this to you within the platform um because the thing that you want to think about is you know and some investors will say well if you buy a call option you don't have to hold it to expiration if it just makes a quick move you can make a profit and that absolutely is true there's no doubt about that because if let's say the stock uh moves even if it doesn't get to my breakeven price so here's that june 250 call option i'm paying roughly 12 dollars for it my breakeven price is 262. even if it doesn't reach 262 even if it gets to 255 or no let's say 260. let's say it gets up to 260. oops that's not it two six zero even if it gets some 260 but it doesn't in a short amount of time as you can see i'm still profitable and i can very well just take my profits and run right so if let's say by next week or let's say uh the 15th here the stock has reached its 260 target to the upside and moved seven bucks higher i'm going to make a 30 return on my capital and you're absolutely right you can it doesn't have to reach your breakeven price in order for you to profit that is a true statement but the question is would you want to risk twelve hundred dollars to make roughly three hundred and fifty dollars on this trade betting that the stock's going to go higher because if it doesn't you have twelve hundred dollars worth at risk and are you going to risk that for 350 400 in profits the answer is that that's not a very strong risk to reward ratio and that's certainly not a very attractive trade that yes maybe this time this works out but there is going to be plenty of other times where it may not work out and the risk that you're taking does not outweigh the potential rewards that you have many investors will tell me well i don't think it's going to break the breakeven price but i also don't have to hold it to expiration and i say that you're absolutely right but is the risk reward worth it many times it's not so that's really what you have to factor into and the p l simulator here at options play allows you to simulate that you know and it simulates how time value is going to decay so if it reaches that 260 level and then it just kind of sits there and doesn't really move much higher here each day you hold on to it you're going to start losing money on that trade so as you can see as if you keep holding it to expiration you're actually going to lose money on that trade at expiration the stock has to be above 262 in order for you to be profitable and you can ask yourself how far do i think the stock's going to go maybe you think it's going to go to 265. so you can ask yourself okay if it goes up to 265 how much profit do i have to make on this particular trade and you can see only 290 dollars you can ask yourself is 290 of potential gains worth taking on twelve hundred dollars worth of risk and you're going to likely answer that question with a resounding no but this is the type of tool that helps you understand your potential risks potential rewards before you place a trade and figure that out now the one thing that you also can factor into is earnings because that is the potential catalyst that could drive stocks significantly higher over a short amount of time that is one thing that we can consider so it reports earnings on april 27th so let's say on april 30th by the friday after we report earnings the stock is at uh 265 or maybe 270. well in this particular case it does it might make sense where you have a thousand dollars a potential profit and you're willing to take on twelve hundred dollars worth of risk to do that because maybe you're very bullish on apple on microsoft going into earnings these are all valid points that people make about you know this is not the only way to trade and you're absolutely right buying those 60 day slightly in the money call options is not the only way to trade there are variations and modifications that you can make but over the long run many of the modifications of buying these out of the money short dated options it just doesn't work for you in the long run there are certain you can certainly point to some some scenarios where they are better but many of those scenarios i will tell you there's no way to there was no way to have predicted that this particular breakout would have resulted in a 30 move in a few days versus i can point to you many other what looks like strong breakouts here that don't move at all so those are the things that you have to consider like this breakout that failed very quickly this breakout did move very quickly but that's a failed breakout and that's a failed breakout so there's lots of failed breakouts here and you and you and you have to get lucky in order for those out of the money call options to really work out otherwise you know you can find yourself in a position where you buy an out of the money call option because you think it's going to break out here and then a few days later you've lost 100 of the premium that you pay within slightly in the money call option you know if the stock doesn't really move very much and so let's say it only moves from 253 to 255 as you can see i don't have much at risk here when you buy those in the money call options here i'm only losing 171 dollars out of the 1200 that you pay if i had bought an out of the money call option here let's say instead i had bought this um let's say i bought a short dated and many of you like to trade these really short dated out of the money call options because they're really cheap and i get it but as you can see if if it doesn't move in a short amount of time and let's just go to april 20th so let's say by april 20th a few days before expiration you did get the direction correct but it doesn't move fast enough guess what you've lost a very large percentage of the trade that you've placed so hopefully this gives you a better understanding of you know the the pros and cons of buying calls and puts and gives you also some understanding as to how you can leverage the options play tool to analyze it and understand the different um the different um aspects that you can factor into to decide which call do you buy do you buy a slightly longer data call do you buy an out of the money call at the money call in the money call hopefully this gives you some sense for how to go about thinking about that but it all comes down to your directional view and how quickly you think a stock can move because the if you do think the stock can move very quickly you can make those adjustments to buy those slightly shorter dated out of the money call options that are going to be cheaper and give you a better rate of return but like i said those are always easy to tell in hindsight to say oh this made a big move very difficult to tell uh before with that so with that thank you so much for your time here today i hope that this was helpful in giving you a better understanding of call options and put options and buying those and again this is not the end this is just the beginning next week we're going to show you how we can overcome some of these challenges that you have with buying a call option by talking about debit spreads and then we'll take it even one step further with time spreads how you can further reduce the cost of that call option by trading calendars and diagonals and even achieve risk profiles that you that you normally wouldn't be able to achieve without taking on unlimited risk using a calendar spread taking a fully neutral view on a stock using a calendar spread with still limited risk so a lot to to unpack here for the month of april i hope many of you are able to join us here for that so with that what i want to do is i want to thank our members for supporting us and allowing us to continue to do this so if you are on a free trial and you want to sign up for a membership right now it's just 75 dollars a month or 500 a year um the one thing i do want to i do want to tell investors about um is the recent uh changes that we've made to the platform we recently added iv rank and liquidity to the platform so you can actually type in any symbol and get a sense for what the current iv rank and whether the symbol is liquid or not just by typing any symbol here on your screen we're going to send out an email here tomorrow to let you know more about this feature but this is a feature we just released here this week i know many of you use iv rank and you want to know whether a symbol that you're trading is liquid or not we have those liquidity reports we used to offer them here and they're still there for you but they've now been integrated directly into the platform so look forward to that um being able to see the iv rank and liquidity on your options play platform so with that what we'll do is we'll open this up for q a there's a q a window and a chat window so please bring up your q a window and i will answer questions out of that q a window donald we are working on that score here uh many of these do have scores if you click on the on the symbol you'll see that they have a score they're just not showing up here in the trade ideas section but that is something that we are currently working on fixing we should have that out by later tonight um does does options play factor into earnings in presenting the score and three recommendations so when you say do we factor into earnings so in every option premium accounts for earnings and it accounts for the fact that implied volatilities on options will get more expensive going into an earnings event uh option prices is largely factoring into that so yes that's factored indirectly because the options price reflects the fact of an upcoming earnings event being an options play paid member do you also get access to swing options too no you get access to is just options play you get access to all of our tools all of our reports all of our education and access to our platform as an options play member um aggie right now you cannot modify the premiums the premiums are based on the market prices we are um working on it on a technology integration that allows you to bring in your portfolio at the moment we're targeting that for the end of may to release that functionality so that you can see your trades within the portfolio uh section what does iv mean what does iv rank uh mean great question so one of the things that we did do or that i did is i wrote a blog post recently on iv rank so you can actually see it on our blog post and i will send you a link to that um so i just sent everyone a link into the chat window with uh the blog post that we recently just wrote on iv rank what is iv rank how it's calculated is all available to you here in the blog post i also talk about how we how you use the liquidity metric here within options play so that is all available to you in that blog post and i just sent it to you in the chat in the chat window um do you think a stop loss is a good idea for a naked call or a put sanjeev if you're talking about buying a call or a put yes uh we usually take we usually set a stop loss of 50 percent on on a call option that we purchased so if we purchase a call option for roughly 12 we would want to set a stop loss at about six dollars because once you lose 50 percent of the premium that you've paid for a call option your chance of success drops to about 20 percent um so it's better to save the other 50 percent uh for the next trade than to risk the other 50 with just 20 percent chance of breaking even on that particular trade what is your rule on taking profit on calls and puts so we just talked about stop loss taking profits once we reach about 75 profits that's when we start to either close out the trade or roll the trade uh either to a higher strike or to a further expiration what about intrinsic and extrinsic values so the value of an option is made up of intrinsic and extrinsic values so that's why i like to buy slightly in the money option because i'm not just paying all extrinsic value that i know a hundred percent of it is going to evaporate unless the stock makes a big move when you buy an option with some intrinsic value even if the stock doesn't move that intrinsic value part will stay put that's why we prefer buying a slightly in the money call option or put option uh brunell currently if you have the pay uh version the prices are not in real time that is something that we are looking to add here this year is real time pricing for paid subscriptions uh schmidt is saying in credit vertical spreads what are the chances of being in signs so schmidt i've been a trader of cr credit spreads for a long time and i do not know the last time i have been assigned early now the reason that i have never been assigned early on a credit spread is because of one very important rule and that is closing out your credit spreads 21 days to expiration never let your credit spreads get into that three week window before expiration because in that window that's when the chances start getting higher they're still pretty low but they get higher especially if you have an option that's deep in the money so but if you roll your options 21 days from expiration it almost makes zero economic sense for someone to exercise a call or put early that far in advance because as someone was asking before about extrinsic value when you exercise a call or a put you lose the extrinsic value you effectively give up the extrinsic value when you exercise a call or put early now three weeks from expiration there's still quite a bit of extrinsic value left that's effectively free money that you're giving away and people generally are not in the business of giving away free money so for those reasons if you sell a credit spread buy them back 21 days from expiration because there just simply is no economic sense to ever exercise a call or a put even if it's in the money that much that early does daily play give the daily range of a stock so ram g we don't look at daily range we look at ranges for expiration dates so if you want to look at the expiration the range for let's say the april options you can tell you the range for each expiration date daily ranges really isn't a very accurate um measure you know you can only go so far down into the rabbit hole when you're trying to calculate probabilities and daily ranges a directional trend what's the best way to figure that out ken i suggest that you watch some of our webinars on directional views you know i'm a big proponent of using two indicators trend and relative strength trend and relative strength gives us a pretty complete picture of how is the stock doing against its own history and how is the stock doing against the rest of the market a strong technical score means it's outperforming the market trend is obviously bullish or bearish if you're looking for bullish opportunities you generally want to find stocks with relatively higher relative strength so a higher technical score and one month and six months trends that are bullish vice versa if you're looking for bearish opportunities uh you want something with a bearish trend and underperforming the broader market so relative strength and trend are the two indicators that i use to quickly identify bullish and bearish candidates now i also do other forms of analysis i always look at price action what's currently going on is it near a support or resistance level is it breaking below a support and resistance level and i never take a trade without having a rough understanding as to what the company fundamentally uh does for for a business you know you never want to invest or you know either buy into or short a company without knowing what the company even does and it's always good to have some sanity check also around you know our revenues growing our earnings growing meaning if you're along a company you want to see revenue growth you want to see earnings growth if you're short a company you want to see earnings or growth that are starting to decline that's the type of because at the end of the day that's what you're buying you're buying future revenue of a company so if you're long that company you better think that there's going to be an increase in that revenue if you're short that company you believe there's going to be a decrease see if the fundamental data matches with that or at least aligns with that those are all the things that i look at before i decide whether i'm a bullish you know what my directional view is but the first quick one quick and dirty way is looking at the one month trend and the technical score do you think it's most prudent to just do the in the money options just because you can never be sure of the right direction um if you're not sure of the right direction i don't think you should buy any options you know to be perfectly honest you might be better off taking more of a neutral strategy like a credit spread but if you don't have a right directional view you largely should not be trading options because the biggest exposure that you have is direction delta is your biggest exposure the stock moving higher or lower is going to have the biggest impact on your option price so if you're not sure on direction i wouldn't suggest that you trade options at all there's no option in my opinion that's suitable for not having a directional view what is the number represented in the three options scenario so the option supply score is a probability weighted risk reward ratio because risk for reward in itself doesn't mean anything because for example uh you know buying uh buying a put option has a max reward of fourteen thousand dollars doesn't that sound great i'm only risking seven hundred dollars to make fourteen thousand dollars but you quickly learned that for in order for you to make fourteen thousand dollars ibb has to be at zero by june meaning every single company in the ibb etf has to effectively go bankrupt and that is unlikely to happen so you have to weight the risk to reward ratio by the probability of it even happening and the probability of it going down to zero is effectively zero so you have to also factor into this third thing prop pop probability of profit your probability of making money on this trade so the options play score is basically weighting the risk reward ratio by the probability and then giving you a single risk metric so that you can compare the risk to reward of each strategy lester you're very welcome dennis thanks for the presentation today my question is can you explain why i see enormous call volume of major stocks like tesla on the day or the day before that's like asking me why other people are buying a specific stock dentist i simply do not know why other people are buying or selling other stocks no one knows you can make a guess but at the end of the day no one knows i can i sent an email yesterday about paypal alert that you sent out can you review um i don't know where you sent it to if you want to send it to info optionsplay.com then my team will take a look at it and they'll pass it on to me if it's something that's directed at me uh so do you buy into buying calls below four percent of price to premium um tony so you know you know i never like to use a percentage because you know there are you know for example if you buy a tnt there's gonna be a lot of stock call options that you can purchase for less than four percent of the price of the stock but if you're trying to buy options on neo or some you know arc it's going to be impossible to find options that are below 4 because you never want to use a percentage of the stock price because that's just a factor of volatility so you have to look at you know how it is in comparison to history and that's where iv rank comes into play so you want to buy when iv rank is relatively low now i also encourage investors to not just follow iv rank blindly because i do tend to find that there are some investors that just say oh iv rank is low let me buy options iv rank is high let me sell options without understanding how iv rank is even calculated so i highly recommend that you go and read this this this blog post that i have written on this because iv rank only looks at the past year and this past year has been a pretty weird year in terms of volatility you know we had the pandemic things were really really high for a long time and now we're at the lower end of the range so you're going to see a lot of stocks with very low iv rank just because we're coming off of a crazy year so you have to factor those things into into your mind into your your decision making process things are going to get skewed to the downside right now because this past year has been crazy it doesn't necessarily mean that options are that cheap they are cheap compared to the last year but they're not necessarily cheap compared to prior to the pandemic so those are things that you really have to think about as your as you think as you look at these metrics [Music] harley the best email would be info at optionsplay.com and wardo if you're confident in the move of a stock is it a good strategy to buy deep in the money calls or puts as they are cheaper than buying the stocks so in wardle i would say that if you're very confident in the move you then you don't need to buy deep in the money you're better off buying an at the money call option because the whole point is to leverage your capital with the least amount of risk if you buy a deep in the money option you're putting more risk and you're getting less cal leverage so i would say that if you're very confident then buying at the money that's really where you want to be if you're very confident when can i use options play tool for my own portfolio so uh yeah so the new portfolio tool is slated to come out here at the end of may tony in the bold call vertical when does the theta peak in your favor if stock price moves past the break-even price um tyler as soon as you move past the break-even price theta starts to move in your favor um you know if you if you move past the break-even price before expiration theta starts to shift in your favor so as you hold on to it it starts to actually you actually start to make money on each on on the trade as you as you hold on to it but really as you get closer and closer to the upper strike that's when theta starts to switch what is your 21 day rule my 21 day rule is whenever you're selling an option or whenever you have a short option in a spread or short option that you don't want to be assigned on close it out 21 days before expiration or roll it out to the next month if you want to stay exposed to that particular symbol would buying and or selling at the money calls or puts a good way to day trade or scalp um would buying or selling at the money calls um you know options is really not a scalping strategy just because the spreads are so wide if you want to scalp there are far better vehicles to do that trade futures trade stocks those are much you know the transaction costs on those are much much smaller if you're scalping you know the success of scalping strategies comes down to how how how minimal can you have trading how how much can you minimize your trading costs is the biggest factor in success in the success of a scalping strategy options have the almost the largest transaction cost of any asset class so that's why options is really only suitable for long term longer term and longer term meaning at least a few days in in trading strategies if you're scalping futures are far more liquid with lower transaction costs stocks are effectively free to trade these days you know your transaction cost is fractions of a penny per share and you know there's really nothing better than those markets for scalping because again scalping strategies need very very very low transaction costs to be successful any videos and resources on how to build the diversified portfolio using options um so i would say that the the video that we have on leaps you know buying longer term portfolios using options is probably the best one for that stops on debit spreads are the same on stops on on calls or puts 50 we're gonna cover that here next week but when you're trading debit spreads stop loss at 50 percent um steve if you're trying to join from the uk i i mean i would say that the the only thing to do is is to use a credit card you don't need to send dollars steve you can send us an email at info optionsplay.com is the best way to reach us i'm not sure how you're contacting us but info at optionsplay.com what is your feeling about trailing stops with options um i suppose that you can i've i've never really used trailing stops with options i've never been a huge fan of trailing stops uh you can i i just personally don't have a lot of experience using trailing stops and options what is the best way to access your hub services uh the hub services is right here on your platform so you can just click on the link here on the upper right hand corner education resources and will take you to the options play hub so again right on your home screen at the very top right there education and resources what would you recommend a good stop loss on a stock so stop loss on a stock should be based on a support level so if you're buying a stock because you know let's say i buy ibb because it's above here i would set my stops right below that support level you know so it really is not based on necessarily a percentage but more based on support levels so if i'm buying ibb here because the thing's going to go higher i would set my stops below these support levels because if it breaks below the support levels then i'm no longer bullish on the stock so that's how i typically like to think about stop losses on a stock is there a difference between iv rank and implied volatility and implied volatility percentile so implied volatility is what we use to calculate implied volatility rank and apply volatility percentile now implied volatility rank and implied volatile percentile are largely measuring the same thing they're just using slightly different calculations iv rank is a simpler calculation implied volatility percentiles are more complex calculation but the only difference is what thresholds you use but the two iv rank and iv percentile are measuring the same thing which is where is volatility in comparison to the last year it is not explained in my article because we don't use implied volatility percentile we only use implied volatility rank which is more commonly used the score on the bullish bearish ideas on options play uh sanjeev yes i know that's something we're looking at fixing so no the score is not conviction the score is just relative strength the score is telling you what the relative strength of the stock is what do you set as a profit target on debit spread same thing roughly 75 percent as a starting point for taking profits or rolling a debit spread um ali uh it sounds like you're buying a lot of out of the money call options if you're constantly uh losing the premium so that's why ali we do a lot of options selling um you know because option buying is that that's a challenge with buying is that you have you constantly have time decay working against you so notice how most of the trades that we have in our portfolio are short options we're short uh you know premium like an amd and active and activision and jetblue we do have some long positions like we have here in 3m but they're they're relatively light that we have you know these types of trades in um uh in in options so we tend to find that we are far more likely to sell options than buying options and you're absolutely right it's difficult to to to make money buying calls and that's the whole point of this session was to tell you about the challenges with buying call options and be aware of those challenges next month for the month of may we're going to talk about option selling strategies we'll talk about cover calls we'll talk about cash secured puts we'll talk about credit spreads we'll talk about you know meet more advanced strategies like straddles and strangles um but uh selling strategies you know the premium is working in your favor but there are also risks with doing that so you know it's not it's not just hey you everyone should be selling selling does have other risks and challenges with that the same way buying call options have risk and challenges with doing that how would you handle setting stops on option prices i've been stopped out on profitable trades early with volatility strikes do you spikes do you watch or close out manually rather than sending good till cancel on option prices so bill you know i do a combination of both but i do a lot of good till cancel option uh you know um good till cancels uh bill i tend to find that this is the reason why i only trade very liquid names because in the less liquid names you do have these kind of spikes that cause option premiums to get really wacky and out of out of um you know out of line so you know you generally don't see that very much in very liquid names so that's why you know you'll see pretty much all of the trades that we make are going to be in very liquid names for the most part one time from 100 time i barely profit in one option why should i go through all this parameter um ali i'm really not sure i understand your question what parameters are you referring to do you recommend very short-term expiration days on credit spreads so donald i don't because of this the same thing i'd never hold a credit spread in the last 21 days because of the early assignment risk also you have gamma risk that starts to accelerate as you get into that last 21 days to expiration so you're taking on you know limited of reward in exchange for gamma risk that you you know gamma risk is working against you when you're short an option you don't want gamma risk so selling those seven to ten day credit spreads in my opinion not worth it uh you're gonna find that you're not going to be as profitable selling short shorter dated options as you are going to be longer dated options when you roll a call do you still go with an at the money option or in the money so you do the exact same method that you would as if you weren't rolling a call if you were establishing a brand new call position what strike would you choose that's what you roll to a lot of people feel that rolling you have to some special strategy you don't rolling is just closing out your existing trade and establishing a new one as if you weren't already in a trade but doing so in a single order that's it that's all a role is but you should really think of them as two separate trades you're closing one trade that you're profitable on or you're losing a position on and you're establishing a brand new position so the rules for establishing a brand new position don't change just because you're profitable on your last trade or not profitable in your last trade the rules are still the same so when you select a strike price for when you're rolling you should see that you should use the exact same strike price as if you weren't rolling a a call option so yes the answer is the same in the money option what about trading a credit spread on a european style option do you still close three weeks ahead of time yes because again because of gamma risk it's not just the assignment risk that you're concerned about but also gamma risk that starts to accelerate as you get closer and closer to expiration what is the number by the side of the liquidity one it's just it's just a an easy indicator one is the most liquid two is somewhat liquid three is not very liquid um we also have it on the earnings calendar right so when you go to the earnings calendar the earnings calendar has those liquidity rankings on there here as well uh so on the earnings calendar you can easily see which ones are most liquid in green uh two in yellow or somewhat liquid anything that's that's um three is there's no color to it so that's how i during earnings season i generally um know which ones i'm going to focus on researching and trading and researching on because i'm not even going to bother researching some of the names down here because the options are not very liquid i'm only going to research the ones in green first see if there are any opportunities that i like if there's none that i like then i'll move into the yellows anything in the whites you know you're really clawing at you know whether you're not gonna you know i i don't want to work orders during earnings season especially when volatility is high so it's very very important that when you're trading earnings season that you focus on liquidity so the one two and three reflect most liquid somewhat liquid and not very liquid so now you have that also on your platform here as well uh delta gamma theta it is really looking like gambling i would prefer to own the stock that way whatever time passes i still own the stock not expired worthless i really lost huge money and options so ali i understand and if you prefer to trade option stocks by you know i'm not here to tell you that you have to trade options i'm just saying that if you're going to trade options these are the best practices you should follow so that you don't lose huge amounts of money in options yes you can lose huge amounts of the money and options but there's also plenty of ways to trade where you limit the amount of losses so when you buy a call option you cannot lose more than what you pay so if you buy 176 dollars into this call option no matter what happens even the stock goes to zero you cannot lose a hundred more than 176 dollars that prevents you from losing huge amounts of money because you can control how much money you can lose that is the value of options if you're telling me you've lost huge amounts of money in options what that tells me is that you over extended yourself and bought too many contracts you have to buy a certain number of contracts within your risk limits so nothing stops you from buying 20 contracts of this right you could have maybe a 5 000 portfolio and load up on 20 contracts with this call option but that means that you could lose 3 300 in one trade so if you do that then unfortunately that's the risk that you're taking my suggestion is that you control your risk so if you have a five thousand dollar account maybe only trade one contract so that no matter what happens you only risk a relatively small percentage of it even if this trade doesn't go in the direction that you expect it to ramjeet hi tony sorry i meant does op give the daily trade range of the price of a stock uh i think i just answered that um i recently discovered your site and materials and really like your platform training videos investment approach and very helpful attitude thank you so much donald when my 30-day trial ends in a week or so i will become an annual member thank you for your excellent resources donald again thank you so much and thank you so much for your support uh nina for the trade ideas why does it always show the long call vertical for bullish instead of a short put vertical so nina this is something that we are working on in having a strategy that will automatically show you the short put vertical i will say that if you're looking for short puts spreads i suggest that you look at the credit spread section here on the bottom of your screen or if you go to the options play hub we have the credit spread opportunity report this will allow you to look for short put opportunities um so we actually scan the broader markets for the best short put opportunities and send it to you in a spreadsheet and in the end of april we're going to be linking this to your options play platform so you can basically click on a symbol and be able to see it within options play this is actually the best credit spread opportunities that we see in the broader market so my suggestion for you is to use these opportunities at the top of the list because this is where you're going to collect the most amount of premium for the um most amount of premium for the trades that you're going to be making so airbnb interesting one here right now selling the 180 155 collecting 9.85 cents on the 25 wide credit spread that's 39 percent of the width and it doesn't report earnings here for another 47 days so you know those are the types of opportunities that i look for with selling credit spreads i have found myself rushing to place a trade can you talk broadly about the steps you follow to plan a place a train um schmidt i guess that depends on if you're referring to the order execution part or if you're referring to like the steps that i take to to decide whether this is a good trade or not why sometimes delta 0.5 is out of the money um it comes down to the volatility of gamestop you know the the question is what is the expected future value of gamestop and gamestop is just very very volatile right now so that's why you know on 50 delta is out of the money off the topic why is tesla not moving despite good sales and all good news again you know i i don't know i'm i'm not in the i'm not in the business of why i'm in the business of what what's happening not why something's happening you know you could go on all day long arguing why something happened um and i just don't see a need for that i just look at what's happening you know what's happening to me is that despite the fact that tesla has reported great sales the stock hasn't moved that tells you more than anything else that just tells you investors are not impressed by it investors are largely had expected that and that's not anything new that's not materially impacting their outlook of the stock so just because good news comes out doesn't mean the stock has to react but this is why you know you can go all day long wondering why and asking why and figuring out why but that doesn't really get you anywhere look at what happens what happens is that news came out stock didn't move that tells you something uh so a score of 84 which is 36 pop is good or bad uh 86 percent i would say is uh 84 is simply just not good not bad it's on average that's what you're expecting um you know and and the reason for it is because of the fact that you have a relatively higher pop with a relatively equal risk to reward um so with that that covers what i wanted to share with you here today i do want to thank everyone for taking the time out here this afternoon i hope that this was helpful in giving you a better understanding of the fundamental building blocks and it's very very important that you understand this before you move on to more advanced strategies so with that thank you so much have a great afternoon and we'll send you the recording as soon as we finish this here today have a great night and i'll see you guys tomorrow morning on the rapid fire session

Channel: OptionsPlay

Views: 17,246

Rating: 4.8755555 out of 5

Keywords: options trading, options education, OptionsPlay, Tony Zhang, technical analysis, trading, trading education, CNBC

Id: eesnjHB8lMU

Length: 78min 21sec (4701 seconds)

Published: Thu Apr 08 2021