Options Trading Explained - COMPLETE BEGINNERS GUIDE (Part 2)

[Music] you've been introduced to the idea of options in part one you learn that you could buy a call if you think the stock might go up and you could buy a put if you think the stock might go down but at this point it's probably still a pretty abstract concept to grasp hang with us as we explain further if you haven't already guessed option contracts aren't actually physical pieces of paper it's all done electronically and you can buy or sell an option contract with your brokerage account within a few milliseconds at the click of your mouse just like we can buy and sell stocks what you were looking at is what we call an option chain an option chain is simply just a list of all the options that we can trade and it also shows the price of each of these options you can find an option chain in your trading platform and also a few different places on the web such as Yahoo Finance Google Finance etc but the one we are looking at right now is in our trading platform that is provided by our brokerage firm that we use to trade you can find a link to open a trading account with our favorite broker in the video description below again what you're looking at right now is an option chain it shows you all of the available options and the prices of each one and most of your favorite companies and even stocks you might already be trading have options and to see if a stock has options all you have to do is type in the ticker symbol and if it does have options you will see the data listed below and if it doesn't it will say no options are available for this symbol so let's just look at Apple stock options by typing in the ticker symbol AAPL you can see there are many option contracts that we can trade and there's actually so many that it might seem overwhelming at first glance but don't get intimidated we're going to explain this in the simplest way possible now before we get into why these option prices are what they are we're going to go over some very basic characteristics of options and also show you how to even read this option chain first we have to select our expiration the expiration date if you remember is simply the date that the option contract will expire so you can see there is a list of all of the available expirations and what you are looking at is the actual date that they expire and the number in the center here simply tells us how many days are left until that expiration date so clicking on this expiration date for example will show you all of the options that expire on the 17th of July 2020 and you can see here that that date is 11 days from now and remember we are still covering the very basics so we're not yet going to go over which expiration you should be trading in there are pros and cons to choosing different expiration dates and you're going to learn about this later in the course right now it's just important to get the basics down so we're just going to choose the expiration date with 11 days to expiration once you click on the expiration date you can see a whole list of options for that expiration on the left side you will see the call options that expire on this date and on the right side you will see the put options that expire on this date for now let's say we want to trade a call option with 11 days to expiration now we just have to choose our strike price the strike prices of each option are listed vertically through the center of your screen and just a side note I don't know who decided how an option change should be laid out but for some reason they decided to list the strike prices in a sinning order and you know I would think it would be the opposite where the higher strikes are higher on your screen but you know it is what it is and this is just something that you get used to now just like with selecting an expiration we also have to choose our strike price of the option we want to trade and again we aren't going to get into which strike you should be trading until later but for now let's just choose the 385 strike call option okay so that's it we know how to navigate the option chain to find a certain option you can find a call option or put option with a certain expiration date and a certain strike price but you can also see the price of each of these options just like stocks options also have what is called a bid price and an ask price and we're going to assume that you already know what the bid and ask price is if you want to buy an asset you're going to have to buy it at the ask price because that's where the sellers are and if you want to sell an asset you're going to have to sell it at the bid price because that's where the market is willing to buy it from you simple enough now let's take this option off to the side and we're going to talk about its pricing a little bit and what it would actually look like if you wanted to trade this option now stocks trade in shares but options trade in contracts and one option contract is going to control 100 shares of stock let me explain remember a call option gives us the right to buy stock at it's strike price at a later date okay so if we wanted the right to buy 100 shares of stock at a later date then we would have to purchase one option contract but if we wanted the right to buy 200 shares of stock at a later date then we would have to purchase two contracts so that's what we mean when we say one contract controls 100 shares of stock so let's just say that we wanted to purchase one contract of this 385 strike call option how much money would this actually cost us well looking at this call option you can see the bid price is 276 and the ask price is 281 so to buy this option we would have to pay the ask price of 281 but here's the thing to understand it's actually going to cost us two hundred and eighty one dollars per contract this is because since one option contract represents 100 shares option prices will have a multiplier of 100 now we know this may seem confusing and this is also just something that you get used to and with practice it will become second nature very quickly one trick you can do is just think of these prices without the decimal point if the price says two point eight one just remove the decimal and it's really going to cost you two hundred and eighty one dollars now remember we mentioned that you don't actually have to trade stock and you can just simply trade the options so what do we mean by this well just like stock prices fluctuate and move around each day option prices also fluctuate and move around each day and in Chapter three you're gonna learn about what causes option prices to fluctuate and why they might go up or down in price but for this example let's just say we bought one contract of this call option at 281 so we actually paid two hundred and eighty one dollars and over the next week or so let's say the options price goes from 281 up to four now just like trading any asset we constantly have to make decisions about when to sell and we could of course hold this and hope it gets higher but let's assume that we have decided to sell this option and take our profit so we close this position by selling the call option that we own at four so if we bought something for two hundred and eighty one dollars and we sold it for $400 it's pretty clear that we made a profit of one hundred and nineteen dollars now let's look at one more example for practice instead of buying one contract of this call option at 281 let's say we wanted to purchase two contracts the concept is the exact same here we're just purchasing twice as many contracts so if one contract cost us two hundred and eighty one dollars then to find our cost of two contracts we would simply just multiply that by two so two contracts would cost us five hundred and sixty two dollars so now if the price of the option goes up and we can sell both of our contracts at four then that means we turn five hundred and sixty two dollars into eight hundred dollars so our profit would be two hundred and thirty-eight dollars now again there are three factors that would cause an options price to move up or down resulting in a profit or loss the first factor that causes this we've already vaguely touched on in Chapter one and that factor is the movement of the underlying stock price the price of a call option will typically go up in value if they stock's price goes up and the price of a put option will go up if a stock's price goes down so to put it simply if you buy a call option you are betting that the underlying stock's price will go up and if you buy a put option you're betting that the underlying stock's price will go down but remember there are also two other factors that affect an options price and they are extremely important so don't go buying options yet you're going to learn about these in the next chapter now before we move on let's recap what you've learned in this chapter you learned what an option chain is this is simply what you'll look at to find all the listed options in the price quotes of each option you can find an option chain in multiple places but you're probably going to want to view options in your trading platform provided by your brokerage account you also learned that option prices have a bid and ask price just like stocks one option contract controls 100 shares of stock and because of this option prices have a multiplier of 100 okay guys now in the next chapter we're gonna go in pretty deep and you're gonna learn the three factors that cause an options price to fluctuate this is where it gets cool because then you will have the base knowledge you need that will allow you to start learning strategies to profit from option price fluctuations so alright guys hope you enjoyed the video and are staying safe out there be sure to click the like and subscribe button below and also be sure to check out our three free video series by clicking the link in the video description below these videos will help your trading tremendously and they are completely free all you have to do is click the link and put your email and we will send you the three videos so we'll see you there [Music]

Channel: Sky View Trading

Views: 789,308

Rating: 4.9639888 out of 5

Keywords: Sky View Trading, SkyView, options trading 101, options trading explained, options for beginners, basics of options, option trading basics, options trading for beginners, options trading, stock options, understanding options trading, introduction to options, stock options trading 101, stock options explanation, how to trade options, options trading basics, options strike price, option calls explained, option calls and puts, option puts explained, option spreads

Id: 1fMAjyC5lZ8

Length: 10min 49sec (649 seconds)

Published: Tue Jul 21 2020

Reddit Comments

[u/chicu111]

Good stuff dude