Options Trading For Beginners: Call Options Explained

today's video is about options trading for beginners and I don't want you to worry so don't worry I'm going to keep this very simple it's going to be so easy for you to follow along and I want you to know that I personally use options in the stock market to maximize my gains so I'm a Believer and I'm gonna I'm gonna teach you how it's done in today's video we're focusing on call options I'll make additional videos about options trading for beginners and those videos will cover covered calls puts and also cash secured puts but today's video is about call options okay so let's break this down to the fundamentals so what are options options are simply contracts they're options contracts so it's essentially a deal between you and another person so I want to show you this from the perspective of the buyer so in our example you will be the buyer of the options contract and again this is a call option now we'll just pick any stack and in this example we'll use yelpstock so the price of Yelp is at 35.84 cents but to keep it simple let's just round it up and say that Yelp is at 36 dollars a share so what if I tell you I'll give you the option to buy Yelp at 38 a share in the next 30 days and for you to have that option you pay me 80 cents so is that a good deal or is that a bad deal well honestly it's hard to say because we don't know if the stock price of Yelp will go up or down in the next 30 days but let's just say that you buy that contract for 80 cents and now you have the option to buy Yelp at 38 within the next 30 days so here's how you win the price of Yelp right now is at thirty six dollars so let's say that within the next 30 days the price of Yelp hits 42. then in this situation you're going to make good money because here's what's going on so the options contract that you bought was a call option so you paid for the option to buy a stock at a certain price within a certain amount of time now in our example Yelp hits 42 dollars so you have the option to buy Yelp at 38 so would you buy Yelp for 38 in this situation so the answer well it should be of course you would because you could buy it for 38 and then immediately sell it for the going rates of forty two dollars and then you end up with a gain of four dollars a share so here's what your profit would look like you buy Yelp at 38 you sell it for 42 but you have to remember that you paid 80 cents to have this option so you net a profit of three dollars and 20 cents and I want you to know that this is a real life example you could take a look for yourself so this is the Robinhood platform so all platforms will look pretty similar to this so you see at the bottom right where it says trade Yelp options which I outlined in Red so you click on that and it takes you to this so don't I just want to say don't be intimidated I'm going to walk you through this and it's going to be very easy to understand so these are the options contracts at different price points if you want the contract to be at 38 then 38 will be your strike price so as you can see here you're going to see the options contracts with different strike prices 35 36 37 38 39 that's just the limit of my screenshot so you can go for an options contract with a strike price at fifty dollars or even at twenty but I'm going to explain the difference to you in just a little bit but for right now let's just focus on you buying the call option at a 38 strike price and take a look for yourself that options contract is selling for 80 cents so was our example of Yelp going to 42 dollars in the next 30 days possible well take a look for yourself so I've highlighted in red in the top left Yelp has gone up by almost seven dollars in the past 30 days now let's go back to the topic of you winning and making money so Yelp is at 36 currently you bought the call option with a strike price at 38 and that option will cost you 80 cents so if Yelp goes above 38.80 in the next 30 days then you're going to be at a profit so maybe who knows Yelp could go up to 40 you can go up to 42 maybe 50 it could go to a hundred I mean that would be unrealistic but it's not impossible if Yelp skyrockets then you're gonna make so much money because you're gonna have the option to buy it at 38. so if you buy the call option then you want Yelp to go up as much as possible as fast as possible because if you think about it's very straightforward if Yelp goes to a hundred dollars you can buy it for 38 and then sell it immediately for a hundred so I just want to point out that that's the happy scenario where everything works out and you make a lot of money but we have to talk about the flip side of the coin we have to talk about how you can lose money and how you can get absolutely destroyed so the danger is that you have a limited amount of time before your contract expires and in that time if the stock if the price of the stock doesn't do what you want it to do in that set amount of time then you're going to end up with a worthless contract so I have to show this to you so here's how that unhappy scenario plays out Yelp is at 36 right now you bought the call option to have the option to buy Yelp at 38 dollars in the next 30 days if Yelp is at 38 or below then your contract is worthless so I want to demonstrate the good and bad scenarios for you there are four scenarios so here's scenario number one Yelp is at 36 a share currently you have the option to buy it at 38 within the next 30 days and let's just say that the stock price it goes down to thirty dollars in this scenario your contract is terrible it's worthless why would you use your contract to buy Yelp at 38 when you could just buy it on the open market for 30. and remember you paid 80 cents for that contract so you wasted your money and you lose so here's scenario number two Yelp is at 36 you have the option to buy it at 38 within the next 30 days and let's just say that the stock price it goes up to 37. in this situation it's the same it's the same thing why would you use your contract to buy Yelp at 38 when you can buy it on the open market for 37. so yes the price of Yelp stock it did go up it went up from 36 to 37 however it didn't go up enough because it's still below the strike price on the contract so you wasted 80 cents to buy that contract time the stock went up but not enough and you still lose moving on to scenario number three so Yelp is at 36 you have the option to buy it at 38 within the next 30 days and let's just say that Yelp goes up to 38.50 so in this scenario you can buy Yelp for 38 and you could sell it for 38.50 so that is a gain of 50 cents so congratulations however you still lose money because you paid 80 cents for the contract so your true cost basis it's 38.80 and you can sell it for 38.50 so you still lose but at least it's not a total loss so here's scenario number four so Yelp is at 36 you have the option to buy it at 38 within the next 30 days Yelp goes above your cost basis of 38.80 and then you're going to be at a profit and the more it goes up the more money that you'll make so basically in this situation you want the price to Skyrocket for example the best news would be Google decides to acquire Yelp for 60 a share and Yelp stock it skyrockets in price within your 30 days now here's the thing I want to tell you this because this is so important with call options or options contracts in general you can buy and sell them just like a stock so in our example if Yelp goes to sixty dollars a share you don't literally have to buy Yelp for 38 and then sell it for 60. you can just sell the options contract itself but if Yelp is at 60 and you want to buy Yelp for 38 and just hold on to it you can exercise that option and buy it for 38 and just hold on to the stock and then your options contract it'll disappear from your accounts and then you'll end up with the Yelp stock now let's go back to the options screen so I want to explain this whole option chain to you that's what they call this so you can buy call options at different strike prices so let me tell you what is going on here okay I want to ask you a question it's pop quiz time so I'm going to give you two offers you tell me which one sounds better to you Yelp is currently at 36 dollars so here's my first offer in the next 30 days I'll give you the option to buy Yelp at 38. and my second offer in the next 30 days I'll give you the option to buy Yelp at 39. so which one sounds better to you of course option number one sounds more appealing because I would rather have the option to buy Yelp at 38 instead of 39. therefore the contract at 38 a 38 hour strike price is more appealing okay but here's the thing these circumstances they're factored into the price of the options contract now I want you to compare the contract to 38 versus 39. the contract at 38 is selling for 80 cents the contract at 39 is selling for 55 cents so if you want to buy a contract with a higher strike price the the contract will be cheaper that's because it's less probable that Yelp will hit 39 compared to 38. so in this case they need to offer you a cheaper price so take a look at the 37 strike price that's trading for a dollar fifteen that contract it's more expensive because it's not that far-fetched that Yelp will go from 36 to 37 within the next 30 days now I want to teach you about the duration of the options contract so if you're thinking about this thing this whole thing everything that we're talking about if you think that it sounds risky because well you don't know what's going to happen in the next 30 days with Yelp stock if that's how you think then I would say you're absolutely correct I would agree with you because 30 days is not a lot of time but what if I told you Yelp is at 36 I'll give you the option to buy it at 38 but I'll give you that option for seven months so that scenario it would be more appealing to you because you have more time for Yelp to go up however those favorable conditions they're taken into consideration therefore if you want more time on your contract then you're going to pay for it so take a look for yourself I circled at the top your ability to choose the expiration dates of the contract so we're using the same strike price at 38. for a contract that expires in seven months this contract is going to cost you three dollars and ninety cents so compare that to the contract that expires in 30 days that's going for 80 cents if the expiration dates of the contract is sooner then the contract will be cheaper if the expiration date is farther out then the contract will be more expensive now I must clarify this one last thing because it's very important options contracts are for 100 shares so if you buy one options contract of Yelp and a 38 strike price then you're buying the option to buy 100 shares of Yelp at 38 and the contract price it's quoted at 80 cents right so that's 80 cents a share but you have to remember that you're dealing with 100 share increments so if the options contract says 80 cents then the options contract will cost you eighty dollars so if you buy five options contracts is going to cost you four hundred dollars if you found this video helpful please give the video a thumbs up I greatly appreciate that it helps a lot so thank you so much also I'm leaving you two links down below so the first link is if you're looking for free stocks please check out the link it's free money please take advantage the second link is I'm leaving a link to our website so it's a community for like-minded investors that want to learn more about investing so please check it out thank you for the support Please Subscribe and I wish a very nice day take care

Channel: ClearValue Tax

Views: 36,529

Keywords: options trading for beginners, options trading, call options, option trading call options, options trading explained, calls, covered call, options strategy, stock market, stocks, stock market for beginners, call options explained, options explained, options trading webull, options trading robinhood, options trading live, options trading example, options trading tutorial, stock market options, options in the stock market, Call options explained for dummies, stock options

Id: kC28MuQPyu8

Length: 13min 2sec (782 seconds)

Published: Fri Jun 23 2023