Option Trading for Beginners (When to close position and take profit)

what's going on everyone i'm going to help you understand options in this video and regardless if you're brand new or you're already trading options this video will help you solidify your knowledge and it'll make you a better trader i've been asked this question by a lot of students and i see over and over comments are asking when should i take profits so what makes this video different from the rest is that i'm going to cover when to close your option positions and take profits after i explain everything that you need to know to have a very strong foundation with options if you're new my name is henry i have a finance degree from drexel university have traded options for eight years now and i used to work for goldman sachs as well as two different hedge funds in new york when i was in college my mission is how to teach you how to trade options properly and make a lot of money and before i jump in and flood your pockets with money make sure that you smash that like button for uncle henry and also you might as well just subscribe to the dopest youtube channel out there alright so let's discuss some basics and work our way up an option is a contract between two parties basically two people both are betting that a stock will do something it'll either go up or it will go down and you can create positions that make money when stocks stand still as well which i have a video on called iron condors below but i suggest that you watch my full option playlist first just learn calls and puts because those are the preliminary things that you need to know about before you really get into more advanced stuff with trading options now the people buying and selling options are betting on a stock doing something and that is going to be on the strike price they're betting on a strike price the easiest way to understand this is let's say apple you think that apple is going to go to 200 per share well what you can do is you can buy the 190 strike call option that way when apple does rise to two hundred dollars you'll be making ten dollars on the option not counting what you paid for the premium in this simple example you actually made one thousand dollars because each option is worth 100 shares that is always true so 10 times 100 shares is a thousand dollars and then you just subtract what you paid for the premium and that is your profit people use options for income some people use it to speculate and other people use it to hedge risk most people buy options to speculate very few people use options for income and even less understand how to hedge their portfolios with options i focus on producing weekly income with options and that's what i teach my students to do options are powerful because they can enhance an individual's portfolio in many different ways unfortunately most use options to just leverage and try to get rich quick but i encourage you to mix in selling covered calls for example which i will cover later in this video there is four basic types of strategies that a beginner should learn the first is really just buying call options it's the most simple form to use options to your advantage you can buy call options that expire soon or expire months away if an option expires a year away that is called a leap option for call options they give the holder the right to buy 100 shares of a company at a specific price known as the strike price i mentioned earlier up until a specific date that's what makes options really unique you have a strike price you have a specific date known as the expiration date here's what a call option looks like on a chart in this picture you're down two hundred dollars because that's the cost of the option you do have to spend money to buy options the break even here is when a stock hits a hundred and two dollars per share as you can see after 102 the red arrow continues to rise a call option rises just like a stock after you have broken even with the amount of money that you paid for the option the benefit of buying call options is if you were to buy 100 shares of a stock for 100 let's say that would cost you a total of 10 000 however with a call option in this example that we just went over you just spend 200 for the premium and now you have full control of 100 shares of stock this strategy is so powerful and many more experienced investors end up buying call options that are deep in the money and replacing stock with call options what that means is if a stock is say 100 they will buy an 80 call option which is a deep in the money call option it has a high delta and they just hold the call longer term just like they would a stock because that call option moves in a very similar way because it has a high delta and that option moves similar to the stock so that person gets all the benefit without having to fork up all of the cost up front so that person doesn't need to have all the capital tied up as you would if you were holding the shares out right without the option there's a popular misconception that 90 of all options expire worthless now this saying frightens investors and future options traders into mistakenly thinking that options are just not worth it and they believe that if they buy options well they're just going to lose 90 percent of the time well the reason that this myth goes around so much is because it is kind of true but only for beginners beginners end up making a very big mistake when they start option trading now beginners usually buy calls that are very far from the money and the strike of the option is usually 10 or more away from the current price of the stock they also buy options that are expiring very soon and that is a huge mistake because that means you need a stock to move upwards by a lot and you need to happen very fast can you see why that gets into a little bit of the gambling territory no wonder these investors keep losing money instead if you buy an option i really recommend that you buy options with higher delta delta is available on any platform not yahoo finance and it tells you how likely an option will expire in the money it also gives you very crucial information and tells you how much an option rises when the stock rises by one dollar so a 50 delta option will rise by 50 cents for every dollar move in the stock for example the stock goes up a dollar the option will move 50 cents it also means that you have a 50 chance to make money on the option so delta has two different definitions one is the percentage chance that it will end in the money and two it tells you exactly how much the option moves when the stock moves by one dollar now isn't that better than buying a call option with a 20 delta and 4 to 5 times you end up losing your money now that you understand call options i want to discuss one of my favorite strategies i think all beginners and even experts need in their options trading toolbox that strategy is called covered calls that's what i promised i'm going to tell you about earlier some investors use call options to generate income through a covered call strategy these are investors that understand the power of income that's one of my top trading strategies and what i post for my students to follow in my live private trainings on discord i'm going to tell you how to make this strategy work for you but if you did want my daily trades and an ability to work with me and my coaches i have a free call that you can schedule to learn more about the weekly option income academy in the description now covered calls involve owning an underlying stock it could be any stock right that has liquid options cover calls are also often referred to as writing a call option or giving someone else the right to buy your stock the investor collects the option premium in hopes that the option expires worthless or basically below the strike price at the call option that they sold this strategy generates additional income for investors but can also limit profit potential if the underlying stock rises sharply and that is one of the downsides of covered calls but i'm going to tell you exactly why i basically never care about this and none of my students have ever had this affect them this strategy is a win-win and i'll explain why when you sell a call option against your shares the call option is always going to be higher than what you paid for the stock for example let's say a stock is trading at 20 bucks now you buy for 20 but you sell the 25 call option so regardless what happens you collect and keep the option premium from selling that 25 call option now you basically just sit back and relax because at expiration if the stock is below 25 you keep the stock and you can sell another call option and make more money again and you can do that week after week after week now if the stock is above twenty five dollars you have to sell it at twenty five dollars even if it's at thirty dollars you must sell it twenty five dollars some investors get upset but if you think about it you either collect income and keep the stock or you collect income and sell the stock for 25 which is much higher than what you paid for the stock to begin with covered calls work because if the stock rises above the strike price the option buyer will exercise the right to buy the stock at the lower strike price however the lower strike price is above your average cost so you do not care in one case you either collect income and the stock stays below 25 or it goes above 25 and you still get to keep the income by the way but now you just sell the stock at 25 so the person buying the call option takes all the risk and you're getting paid either way and at the worst case scenario you just sell the stock at 25 and you still make a profit selecting stocks for covered calls is really easy you just pick your favorite stock that you can afford for those small accounts you can also just buy 100 shares of a stock that's trading at maybe 20 therefore you only need really two thousand dollars to begin the strategy and as soon as you have 100 shares you go ahead and sell a call option that gives you some upside i usually personally go for a call option that is about 30 delta and i like to have about 5 percent upside or more that way even if i do get exercise and lose my shares i still make about five percent and maybe a week or two weeks whatever time period you go for is still a very significant upside move for you this strategy helps you generate income from existing stocks that you own it makes your stocks work for you which is why it's one of the best strategies and it's easy to implement for a beginner expand your understanding of the relationships of strikes to deltas and expirations is really all you need to get great at selling covered calls it's not that difficult and the lower the delta the better because you have little chance of selling your shares now the lower the delta that also means the lower the premium so you really just want to pick a sweet spot that little juicy sweet spot so you can make enough money consistently without really taking too much risk and for me that's about 20 to 30 delta the bottom line is this strategy is used by millionaires and billionaires and i've seen their portfolio as well working for so many big institutions and the rich love this strategy so you should really try it too now that you're armed with the information about call options to make money let's put some more tools in your toolkit and tips we're now going to discuss put options a lot of people get really good at call options but less people are good at put options i think that's a shame because puts offers so much opportunity to make money in fact once i cover selling puts you'll have the ability to run the wheel strategy which i have for a very long time and i recommend that you check out the video in the description below after you finish this video about running the wheel strategy for yourself put options are the lesser known cousin of call options but they can be every bit as profitable and exciting as their more popular relative a put option is a contract that gives the owner the option but not the requirement to sell a specific underlying stock at a specific predetermined price known again as a strike price within a certain period of time again that's the expiration date so same story with calls and puts they always represent 100 shares and they have a lot of things in common if you think the market price of an underlying stock will fall you can consider buying a put option compared to selling the stock short short selling as you guys have probably seen is very dangerous and so many hedge funds and other funds have blown up shorting gamestop and amc amongst other stocks but if you see a stock that you really don't like and you think that it's going to fall then you can just buy put options and bet on it declining buying puts is superior because you can only lose what you pay for the put option you have a limited risk but your reward is potentially very big you will make money all the way from the stocks current price to the stock going to zero if it ends up going that far usually it won't but often what happens is my students and people will buy a put option say at 90 and when the stock falls to 80 they close their position and they make 1 000 because ninety minus eighty is ten bucks and again ten bucks times a hundred shares is one thousand dollars so most people end up just making short term trades and betting on a stock falling within a given week and usually if they are right they have a very handsome reward so it's really just a tool to bet against a stock and when they do end up falling you end up making money on the stock going down also so i can give you guys as much knowledge as i possibly can i'll mention hedging real quick put options can function similar to insurance policy a stockholder can purchase a protective put on an underlying stock to help hedge or offset the risk of the stock price falling because the put gains from a decline in the stock price this is a very popular strategy amongst funds that have very large holdings in a single stock and want downside protection for example if you own apple stock and you buy a put option for 130 per share well you're guaranteed no matter what no matter how low apple actually goes you are guaranteed at least 130 dollars per share so if apple declines to 100 bucks or maybe even 95 bucks you have the right to sell your shares for 130 even though the stock is 100 or 90 so you'll end up saving a lot of money even if the stock declines because your put option will offset that loss so put options can be used to bet on a stock going down or they can be used to protect a position i recommend new investors experiment with little amounts of money if you're going to buy put options because if the stock does not fall or if it falls but it does not go below your strike price you will end up losing the amount of money that you paid for the option so be careful when you're buying puts just like buying calls whenever you're spending money on options you can lose what you spend but the good news is you can't lose more than you spend and the last thing you really need to know about as a beginner or even intermediate trader is selling put options this is another strategy i absolutely love if i had to put put selling on a tier list i would say that's on an a plus tier list it's one of the most solid ways to make consistent income many people don't even know but warren buffett sells a lot of put options but the reason so many people don't know this or maybe they don't even believe it when i say that is because hedge funds and funds in general don't have to report their derivative positions usually and that includes options so many funds out there are trading options they're hedging their positions they're using protective puts they're using covered calls they're buying calls but nobody knows because they don't have to report that position so it's not so popular in the media put sellers or writers as they sometimes refer to as have an obligation to buy the underlying stock at the strike price the put seller must have either enough cash in their account or margin capacity to buy the stock from the put buyer however a put option typically will not be exercised unless the stock price is below the strike price in fact it will never be exercised if it's not below because it makes no sense that is unless the option is in the money that is the only way that you will get exercise now put sellers generally expect their underlying stock to remain flat or move higher so this is a fantastic strategy for a sideways moving market or even a slightly bullish market that's perfect because even a stock stays flat you can end up making a lot of money by just selling put options even if the stock goes down you still end up making money because it did not fall below your strike price so isn't that such a fantastic position to be in the stock goes up you make money the stock is sideways you make money and if the stock goes down slightly but doesn't reach your strike price you end up keeping and collecting the premium so in three different scenarios you end up being in a very good position to make consistent income put sellers make a bullish bet on the underlying stock and or want to generate income either way is totally fine if the stock declines below the strike price before expiration the option will be in the money and the seller will be put to stock and must buy it at the strike price so essentially if you really think about it you get paid to buy a stock in a company that you like that you decide on and if the stock stays at the strike price or above well you don't have any obligation but if it's below you get to buy your favorite stock for a very good price that you get to pre-determine and if it doesn't go below your strike price well the seller which is you can write another put option and make another profit i actually have a phenomenal put selling video in the description for you which everyone has told me has helped them understand selling put options really well and i show live examples in that video so you should check it out now before you click off let me first tell you a couple proven ways to execute and make a lot more money with options i'm not some mindset guru with options but the first rule is options should really be thought of as an extension to stocks and i'm going to tie that into taking profits at the right time as a trader have you ever been put in a position where you weren't sure if you should be holding a stock or you should be letting it go anyone who has traded before has surely been faced with the position in that question and oftentimes having options at your disposal allows for much more flexibility when your investments have faced some setbacks with stock trading alone you're limited to initially bullish exposure by just buying shares and bearish exposure by just shorting shares your avenues to winning trades really lies in your ability to correctly guess the direction of a stock whereas with options you can bet long or short with less overall risk and lower capital outlay but there's more options allow you to hedge your bets so anyone that says that they know exactly when to get out is really just lying to you we can guess when a stock is near its peak but nobody not your favorite youtuber or your ad telling you to buy a course can teach you where the peak is because stock market is not a science or a math equation i studied this stuff and there was no specific equation to tell you when a stock is at its very peak however with options when you sell a cover call you protect your downside because you collect premium up front and give yourself a margin of safety and the covered call actually serves as your exit point i bet that's something that nobody ever told you on youtube or anywhere else but when you sell covered calls you pick that strike price and that is actually the strike price that you're happy to sell the stock at so that's actually your exit price and also very similarly if you want an optimal entry point you can just watch my video on selling puts because when you sell a put that gives you the exact strike price that you're ready to enter into a stock so now you know with covered calls that's your optimal price to exit and if you watch my put selling video that's your optimal price to enter into a stock and a lot of people ask me henry how can i follow your trades your live portfolio how can i be part of the options group and for that all you have to do is just click the link below and you watch the free trading video you put your email in and then you book a free call with my team the reason why i do that is so many people were getting scammed through my comments on instagram on discord and now i have an american team they're option traders they're coaches and they help people understand exactly what i'm offering from my live trading my portfolio access the training videos that i have the insights that i have on the market and everything else i offer in the weekly option income academy that's the only thing that i have i don't have a patreon i don't have sponsors i don't have affiliate marketing i don't do anything except for focus on my student success and for that you get to talk to someone live which is something i'm very grateful for because it allows me to just teach option trading and now my team is able to actually explain and get to know you guys before you join the group and see if it's a good fit and that is a free call that you have with someone on my team all right guys let's go out there let's make some money and let's get stupid rich give me that fist bump [Music]

Channel: Invest with Henry

Views: 23,221

Rating: 4.9707494 out of 5

Keywords: options, how to trade options, option trading, options trading, call options, put options

Id: zUv-O_ImomY

Length: 19min 45sec (1185 seconds)

Published: Thu Aug 05 2021