Option Trading | How to Pick the PERFECT Option Contract

why is option trading so dang confusing we have calls and puts we have strike prices we have expiration dates all of these things can lead trainers to lose tons of money if you pick the wrong contracts so if somebody runs a professional option trading group I'm gonna tell you how to pick an option contract like a pro to maximize profits and minimize risk stay tuned so please subscribe to the channel I'd greatly appreciate it I put out content every single week to make you a better trader so here's four simple steps that you can just go to review this and understand how to pick the right options number one who want know the volatility of the option because that helps us know if this is an idiotic move if we should be buying things with way way way way further out expiration or if we should not touch it at all for example I'm not touching Tesla options with the $200 account I'm not touching Tesla options with a $500 account so no the volatility of the stock before you can decide if you can afford it the next thing is decide the budget are we spending 200 bucks 300 bucks on this option very important we have a budget in mind our risk tolerance on that trade because if you have only $30 allocated to every single trade it's gonna cut you out of a lot of things you could be trading the next thing is you want to know the predicted move so the predicted move is just based off of what you think is gonna happen so if you think it's gonna move in one day you're probably going to be wrong by a factor of three or a factor of seven so you want to multiply your predicted move by a factor of three seven or ten based off your risk tolerance for me personally I always multiply by a factor of three to five that's just something I'm a little bit more risky a play options closer to expiration that's just me number four is you want to maximize your budget so if you're spending $200 what's the best option you can buy when it comes to delta theta and expiration let's run through these four steps with one more quick example because right now we are pretty bearish on one single stock up some guys making money as it count nice chump so this one's super super simple this is uber and I know a very cheap option because it's a cheap stock so I want to play if we break down lower or if we break higher because we're range bound for uber we've been this way for a long time so guess what everyone calls me a setup wizard I'm gonna give you 29 of my best setups just head to Amazon a three dollar ebook that's all it'll cost so we break under 25 I want to play a move to let's say $23 so let's say that happens tomorrow how long do I think it's gonna take to move to this level $22 very simple we're on the daily chart always look at whatever chart you're looking at daily chart and I'm predicting a move lower I think it can happen in 1 to 2 candles probably the next day or the day after that so my rule if I'm thinking it's happening in two days multiply that by 3 to 5 so that's gonna be 6 to 10 days I should be looking at the 7 to 14 day options and now we want to maximize our Delta to theta so let's go to ooh BRR let's check out what those are trading at and let's see which options we should be choosing again the more expiration you can put on these options the safer you're gonna be so for me let's say I have a 200 dollar investment for this option play and I'm gonna be buying puts so we look towards the puts and again it's gonna be 7 to 14 days out so we got to go to the April 9th and we see a lot of things around $200 so it looks like I might have to be going a little bit out of the money these $25 puts right here so the theta is 11 and if I go a little bit more out of the money let's see if it goes up or down theta is still 11 so I could be buying the 24s and not really worried about the time decay that much theta is still 11 so as we go further and further down the theta really doesn't change which means I can buy maybe two contracts of this one one contract doesn't really matter because as long as it's within my budget and theta and Delta are maximized then I'm good to go but the other thing we want to check out is like I said Delta so this is Delta this is 30 they sorry theta is 10 that's a 1 to 3 ratio we want to maximize that so we want to get the most possible this is one two three point five and then we get one to four so depending on your investment you can control more we obviously want to control as much as possible so let's scroll back one more expiration date just to see if we can save any more money and get the best risk to reward get the best delta theta so these $200 options for twenty four point five are now 42 seven so we're losing less money per day and our deltas at forty so I would say that's probably one to five now so with a two hundred dollar investment we're looking at a one to five delta theta let's scroll down one more so we got seven to thirty six again one to five and the previous one was around one six so let's go back one more expiration date let's just see with more time on it do we get more leverage to theta here we go thirty three to five so that's gonna be about one to five again one to six very similar to the past one so there's no reason for me to go out even further than this because I'm just paying for more other things on my contract you really want to own a contract it has the most Delta because that's gonna give you the most returns but you also just want to be very aware of how much you're losing per day so ideally this is the contract I choose two hundred bucks control thirty nine dollars per dollar move and I lose seven bucks per day so I maximize this contract with that expected move in a nutshell this is basically when my concept is and what my strategy is I'm gonna go more in depth in this video to teach you exactly what I look at when I get this stuff so if you're new to options you really need to check out my free option trading course on the website hit the link in the bio I'm a hundred percent convinced option trading is worth every second of your time invested and I'll show you that with just these two pictures right here's my small account on a week one of my small account challenge where I took my account from $250 to hopefully infinity on a week one we sync the account about seventy bucks not so great week number two three hundred and twenty bucks almost a hundred percent returned from that first week so again option trading even with small amounts of money is a great way to bring an income and grow that money long term so I want to teach you how to properly pick the right contracts because it's very very confusing if you don't know this is Robin Hood you get a free stock for signing up but the way you trade options on Robin Hood is first you got to apply it's in your account settings if you apply then you love this option trading button right here boom trade options and on your cell phone it'll show up above the buy sell button so once you have option trading capabilities you'll have this button which basically leads you into option trading gnarnia this is very confusing this will throw off every single trader watching this video and trust me guys when you have this many options for your options you can actually make a lot of bad decisions you know if I see something that's worth eight dollars I say wow what a cheap discount why would I not just buy that and leverage that for huge gains but here's the problem guys and gals all these options below or above because this is calls all the options above this orange line are going to expire completely worthless that's the power of options on the downside every single one of these options $400 $100 $60 $30 they're all going straight to zero if the price of the stock doesn't change so it's very risky to buy cheap options just because they're cheap doesn't mean you should buy them so that leads me for the next question if I shouldn't buy out of the money that far should I buy in the money should I buy the right expiration dates should I buy a month out 60 days out I'm going to answer all these questions in this video because I've been trading options professionally for five years and I run a professional options trading group where you gonna have seven days for free with the link below but I'm a teacher this one strategy I use to pick out the best options every single time but the very first thing I truly want you understand and if you don't understand this you're gonna lose tons of money every single time you lose tons of money trading options we are at the money on this orange line at the money is the line if the line moves up anything underneath it is in the money everything above it is out of the money this is for calls it's reversed of its puts so as I scroll up you see the price of the option gets cheaper and cheaper and cheaper if I click one of these let's just go with a round number of 250 if I click it and I see theta is 10.1 that might not mean anything to you but that's horrifying to me that's one hundred and ten dollars you're going to lose every single day holding this option this option only has two days left more of its life so you're gonna see a lot of decay so what theta is you multiply this number by a hundred this is the money you're losing every single day this is gonna help you decide which option you should choose whenever you're in a trade obviously you know this option is trading at three hundred and fifteen dollars so you multiply this by a hundred three hundred fifteen dollars but it's losing a hundred and fifty dollars per day 115 that's about a thirty percent loss just by waking up in the morning having your coffee and looking at your computer next day wake up have some coffee like your computer thirty percent down and then you get to the day of expiration or you can't really hold these too long because they go straight to zero like I was saying so again if we are out of the money these options are super super sketchy to hold here's the thing if I scroll even further up the chain if I go further out of the money as they call it these options are twenty theta they're almost 90 percent of decay in the next day this option cost fourteen bucks so you tell me is there a good idea for me to buy this option if I'm losing twenty dollars it costs fourteen I could lose twenty over time decay obviously you're not losing more than your investment but my point is clear the further you go out of the money the more riskier it gets to hold these options so the safest thing you can do if you're an option trader if you have the capital is go in the money far far far in the money if you have the capital which most people don't you gotta go in the money so as I scroll down we see the orange line orange line above out-of-the-money below in the money we scroll in the money let's click this time decay this is still a hundred and twenty three dollars per day but again we look at the option now it's not thirty percent now we're looking at fifteen percent loss in one single day keep scrolling keep scrolling guys two twenty three this option costs $2,300 let's see how much it decays holding it one single day theta I don't think that's right zero I think Robin Hood is making a mistake though try one more so this one decaying fifty dollars but as you see the Delta gets higher so that's the number of shares you're basically controlling you obviously control hundred shares but every time an option moves you're not getting that hundred dollars for every option this optional you're only getting ninety two dollars per dollar move but look at that theta is a lot lower we're only losing fifty dollars per day and the option cost is eighteen hundred dollars which is about one three percent just something very minimal you get the point hopefully you get the point further we go in the money the less you're paying for decay the more you're controlling so it's safer and safer to go in the money for option traders so the whole point of this is if you're picking options the risky thing to do the cheaper thing to do is go out of the money the safer thing to do if you have capital is go in the money me personally what do I do as a professional options trader I'm going right around the line so sometimes I go in the money most the time I'm going slightly out of the money because here's the thing you can actually beat time decay if the option moves at a certain rate so this theta is one hundred and fifteen dollars I'm controlling about thirty eight shares of the stock so for me to beat time decay I have to have this option move and again this for every dollar move you're making Delta for every dollar move in the stock you're making Delta as a turn so 30 0.38 times $138 so you need to make about $3 move just to pay for your theta so if I'm confident that tomorrow we're gonna move more than $3 I'll hold this option overnight I'll hold this option throughout the day if I'm day trading I really don't care I really don't give a if we're in the money out of the money because there's less time decay if you're holding it for less time so if you're holding it overnight the one thing I tell all my traders to do is make sure you look at theta because if you're holding it overnight you have to overcome that with your Delta and let's just review what we talked about so far so further and further in the money is less risky for traders because you have less decay on those options further all the money is more risky more decay day traders don't really have to worry about decay if you're holding it for about 560 maybe even two hours but you're still gonna have some type of decay even if won't be that large swing traders have to be more careful because they're holding it for longer it's the King longer now let's talk about expiration dates longer expiration on our contracts again the same thing as in the money is less risky less time decay less volatility drops shorter expiration more risky more time decay and subjected to IV drops or pops so let's talk about that expiration date what should we be choosing and like I said before in the ideal world if you have all the money possible you will be using ones with the most expiration so more time on the contracts so these April six options even if you want to go to like next year 2021 I'm gonna show you what happens so obviously every day you're paying for that in the option contract we have those option contracts expiring in two days from now trading at two hundred three hundred dollars guess what those same option contracts or Twitter trading at twelve hundred dollars so that's the price of the time decay you're buying basically so this is actually decaying per day twenty two dollars compared to the options earlier that were decaying at 115 dollars per day so 22 is very small compared to your overall investment it's less than 1% so this option not too bad to buy because you have more time on it it's the king less it's not so bad for people to hold traders to hold but here's the thing if you go further out of the money that's gonna get more and more expensive so just like we said previously further and the money it gets cheaper but if you go even further out on the options that's where you can completely reduce that time to cake to almost zero so we're looking at the March or the September 2020 ones and these are treating it again double the price of previously now we're trading at $3,000 for the option and I'll go to the 250s just to show you exactly $3,000 almost double of what we had previously now you're losing 3 bucks per day so I hope you see the pattern here the closer and closer and closer we get to expiration date the more it decays the faster and faster the option to case the more you're losing percentage-wise which I'm pointing out here for rule number 7 for choosing the right option contract again there's no wrong choice if you know what you're doing if you know you're gonna have a very quick move it's gonna happen in a matter of a couple days if you pick the right option there's really no wrong choice as long as you can beat the factors that pass decay so all we really want to do is beat the decay of the options and earn more than that so I'm going to walk you through an actual setup I had with my trading group and we're gonna talk about which options we should be looking at what's the safest ones what's the more risky ones and the whole process of how we think this through first I want to show you the actual proof of us putting out this trade and the setup so I put it in everything called the Matt charts section on discord and this is one we actually typed up so I'm gonna pull up the PDF of this setup and show you the actual options I told my group to grab so we were hoping to grab the April 15th put strike 2:20 entry point to 62 to 65 which we touched multiple times we never went above it which was per so here you know I was expecting maybe 300% return if we went to our full target as well as our stop loss for a possible loss there but as you can see you know we called out that 260 top you know what we want to do is you want to look at these April 15th options so April 15th right here and what we did call out was the two 20s so the strike price of 220 so that's very sketchy guys what I told you to be scared of is what I'm telling my group to do so although the safest option or we could have done is not what we actually did we end up going way way way out of the money here so we are at the two 20s and these options aren't actually a choice for some reason okay there we go holy moly can't believe it just disappeared so those are trading at three hundred and twenty seven dollars just check this out today alone throughout 50 percent so these options and one day move fifty percent from our entry point so why did I pick these what's the risk of it if I scroll down you see that theta is $30 per day so every day you're holding this option you're losing about thirty dollars and I'm actually going to show you the movement of this option so this is the option price actually on a stock chart so you can see how the option price moves as the market moves so what I'm going to show you here is the top the first day we touch two sixty I'd never tell traders to buy in the first day of a touch we always want to confirm a top and this happened over multiple days unfortunately so it's very hard to play things like this but the first day we touch to sixty was the 26th of March so if I go to my picture here the 26th of March the option was trading at about $400 so as we kept touching 260 just the fact that it was decaying every single day turn that $400 to the lows of a hundred and sixty dollars so from that low if you end up buying there luckily you could have made a hundred percent just holding the very next day but if you ended up buying on the first day of that 260 touch you would have been a break-even when we finally got the move so that's the one unfortunate thing trying to pick options and again this market is incredibly hard because options are so expensive but that's the problem right now if we're going too far out of the money and you're buying into early and holding over long periods of time you're not gonna make that money back even if you are correct about the direction so as you saw this 220 put I personally picked for my group did not work out if you bought it on the 26 it still might work out long-term but hopefully those traders took a stop-loss when they were down to 50% on this option but when a trader should have done and if they did have the right capital for this is go and the money obviously so what I would do personally if I have the money is go in the money and I would be buying puts just a little bit safer like this because they're just decaying a lot less so here's another example of a different option these are the 260 puts same exact expiration date these ones were trading at the lows of probably $1100 they didn't drop quite as much as the other options during those 3 days where we're touching 260 but the good thing is we actually surpassed the highs of the previous time when we were at 260 so if you bought these options when it hit 260 in the long run you would have made money compared to that last option that we showed you the two 20s these puts were so far on the money even when it did started moving you didn't make your money back if you bought it too early so that's the problem because if you're too far out of the money you might not make your money back if you're holding too long we're in a very tough market where volatility it's just very very hard to hold things and be profitable the other thing you can do and you have to be aware of is what you're trading if you're trading highly volatile things that are decaying you're just gonna make this game harder for yourself I'm going to show you one stock that is just super easy to trade for options and one that doesn't the case so much so let's check out snap this is something everyone can afford and they can afford when they go longer out for expiration and they can afford when they go higher in the money because snap calls in the money as we see right here are trading at about two hundred dollars so as I scroll up out of the money they get cheaper and the money they're all about two hundred dollars it looks like so if I click this to is ten point five we're seeing a theta of two dollars per day and again this one is in the money and it has only a month of expiration so some options you can get away with basically murder and hold them forever and you don't have to worry about time decay so it's very particular on what your training so I really hope you understand that that leads me to success rule number eight more volatile options equal more decay so just depends on what you want to trade in your risk tolerance but in certain markets when the markets not volatile you can hold things a lot longer this market you really don't want to it's gonna be a losing game a hundred percent of time if you're doing that so let's look towards GLD this is the gold trust this is a stock that's trading at a hundred and fifty dollars let's do the time decay on these options and let's see how much they are further out so as an options trader I would be trying to play something further out for safety if I thought the move was gonna happen faster like in a day or two my general rule is multiply the time expected by seven to ten and those are the options you should be looking to buy which is success tip number nine so again if I think the moves gonna happen in a week multiply that by seven that's gonna be fifty days seventy days if you're more risky you can go three to ten but again the safest thing I do is seven to ten if I think it moves gonna happen in three days let's go out for the monthlies but here we are I'm GL D and one month out for May first you're seeing the options around four hundred bucks that's not bad that's not a bad option price a lot of people can afford four hundred dollars and if you go further and further in the money they don't go up that much you go from 400 to about five hundred so let's choose these one forty in calls and the theta is only seven bucks per day so that's really small it's about one percent loss per day but your Delta is so high that it's gonna be 60 bucks per dollar moves so that is a very good option to choose and again if you think the moves gonna happen tomorrow maybe choose the options expiring seven days out so these options eight days out for the April ninth options and here if I go further in the money our time decay is fourteen so that's the problem guys instead of losing three or four dollars now our losing fourteen just gets a little bit riskier but again that's a $300 option we were looking the $500 budget so let's go to $500 options still 11 bucks per day so just gets riskier and riskier the closer you get to expiration but here's another tip so if you're losing 14 bucks playing in the money and you're losing 14 bucks playing out of the money maybe it's not that bad to go out of the money because you can buy these contracts at a cheaper price 170 bucks and you're still losing just as much as the other contracts but the other price and the option is gonna be Vega so vague is gonna probably destroy these options if volatility drops the last thing is I'm gonna give you my super secret super successful option trading strategy in the video to the right of you peace out just awkwardly trying to hit the bull's eye with no strategy so in this video I'm going to give you four day trading strategies to hopefully allow you to hit that bullseye and bring in some profit

Channel: Market Moves - Matt Giannino

Views: 87,697

Rating: 4.9027729 out of 5

Keywords: choosing the right option strike price, which option, which options to trade, which options to buy, which strike, which strike price to choose for option, which strike price to choose, what options to buy, how to pick an option to trade, how to pick an option strike price, robinhood options trading, robinhood options, robinhood app, robinhood, option trading, options trading for beginners, day trading, swing trading, passive income ideas, day trading apps, stock market, djia

Id: anLWqdrxEAY

Length: 26min 1sec (1561 seconds)

Published: Sun May 24 2020