Options Trading For Beginners: Put Options Explained

I want to welcome you to this options trading for beginners Series this video is about put options explained for beginners if you're new to put options don't worry you've come to the right place I'm going to break this down for you nice and easy I will explain to you what are put options how you can make a lot of money with put options and how you can lose a lot of money with put options as well so let's start from scratch what is a put option a put option is a contract between a buyer and a seller so let's pretend that I'm the seller and you are the buyer so in other words I am selling the put option and you are buying the put option now let's choose a stock Dave and Buster stock ticker symbol is p l a y play Dave and Busters is currently trading at 44.96 but to make it easier let's just say it's 45 a share and I want to make a deal with you what if I told you within the next month I will give you the option to sell Dave and Buster's stock to me for forty dollars and I'll buy it from you so you don't have to sell it to me but you can if you want to that is your option but I'm not going to give you that option for free if you want that option you'll have to pay me 45 cents and let's just say that you agree you'll pay me 45 cents to have that option so ultimately you bought the Dave and Buster's forty dollar put option with a one month expiry for 45 cents so it sounds fancy but it's very straightforward but you have to remember that right now Dave and Buster's is at forty five dollars a share so you're not going to go buy it for 45 and then sell to me for 40 because if you did that then you would lose money you would lose five dollars a share so you wouldn't do that so the question is how do you make money so you want Dave and Buster's stock to crash within the next month if Dave and Buster's stock Falls to let's just say thirty dollars a share then you would be so happy because of Dave and Buster's Falls to 30 a share then you can buy Dave and Buster's on the open market for 30 and then you could immediately sell it to me for 40. and then you would make a gain of ten dollars a share and you have to remember that you paid 45 cents to have this option Therefore your true profit would be nine dollars and fifty five cents so that would be an awesome rate of return because with 45 cents you made nine dollars and 55 cents and I want you to know that this is a real life example those are real numbers take a look for yourself this is the options chained for Dave and Buster's ticker symbol p-l-a-y we go about one month out we open that up and you get this so don't be intimidated this is very easy to read so we're looking at the 40 put option that's selling for 45 cents you refer to the ask at 45 cents because if you're trying to buy the put option the seller is asking for 45 cents so you look at the ask now let me give you a different example to show you how you lose money so let's just say that you bought the same put option you bought the 40 put option expiring in one month if Dave and Busters does not fall below forty dollars in a month then your contract will be worthless so to demonstrate Dave and Buster's is at 45 a share let's just say that the stock Falls to 41. then in this situation your contract would be worthless because why would you exercise your option to sell it to me for 40 when you can sell it on the open market for 41. so if the stock does not fall below your strike price before the expiration then you wasted your money on buying the put option so in this example you paid 45 cents for nothing and wasted your money now I need to tell you about the duration of the contract and I'll teach it to you like this I'm going to give you two offers and you tell me which one sounds better to you offer number one you can sell Dave and Buster's stock to me at forty dollars within the next month offer number two you can sell Dave and Buster stock to me at forty dollars within the next five months so you tell me which offer sounds better to you and it's going to be offer number two offer number two sounds better because you have more time for Dave and Buster's stock to fall below 40. however this favorable Condition it's taken into consideration and I'll show you so take a look for yourself here are the options contracts on Dave and Buster's for the put option one month out the Forty dollar put option is selling for 45 cents now I want to show you the same 40 put option but five months out so we opened that up and we see this the same 40 put option is selling for two dollars and forty cents which is a big difference compared to 45 cents so regarding the duration the more time on the contract the more valuable the contract is so the more expensive it is time equals money so you can check the same forty dollar put option that expires in a week and you're going to see that the contract will be cheaper you can check the same forty dollar put option that expires a year and a half from now and that will be much more expensive now I want to tell you about the strike price I'm going to give you two offers again and you tell me which one sounds better to you offer number one within the next month you can sell me your Dave and Buster stock for 40. offer number two within the next month you can sell me your Dave and Buster's stock for 45. so which offer sounds better to you so in this situation of course offer number two is going to be better for you because you would rather have the option to sell me Dave and Buster's stock at a higher price however this is also taken into consideration so take a look for yourself this is the put option one month out the Forty dollar put option is selling for 45 cents the forty five dollar Point option is selling for 1.90 the higher the strike price the more valuable the put option is to compare that to the 35 put option which is selling for 15 cents therefore a higher strike price is more expensive and a lower strike price is less expensive now I want to remind you that with options you're dealing with 100 share increments so if you buy the Dave and Buster's forty dollar put option for 45 cents then you are buying the option to sell 100 shares of Dave and Busters at forty dollars a share and that put option will cost you forty five dollars because that put option costs 45 cents a share multiplied by 100 shares equals 45 dollars so if you want to buy the Dave and Buster's 40 put option expiring one month out for 45 cents this is how you do it the stock symbol for Dave and Busters is p-l-a-y buy to open because you're buying a puts you're buying one contract you choose the expiration dates you choose the strike price and you're buying a put the price of the contract is 45 cents but remember you're dealing with 100 share increments so it costs 45 dollars to buy the put option now if you want to buy 10 put options you would just change the number of contracts to 10. and that would come out to 450 in total that's because each contract costs 45 dollars and you're buying 10 of them last thing I want to tell you is this let's say that you buy the Dave and Buster's forty dollar put option and the stock Falls to 30. you don't literally have to go out and buy 100 shares at 30 and then use your put option to sell your 100 shares at 40. you can just sell the put option itself as if you were selling a stock and this is what it would look like sell to close if Dave and Buster's Falls to 30 a share the 40 put option would trade for around ten dollars so you would type in the price that you want for the put option no difference than selling a stock and you would make one thousand dollars per put option that's because you make ten dollars a share multiplied by 100 shares which equals one thousand dollars and remember you bought the put option for 45 cents so the put option cost you forty five dollars and now you can sell it for one thousand so you probably realize two things number one if things work out well then you can make a lot of money but number two if the stock price doesn't cooperate with you in your given time then you lose now this is very important what I showed you is the most basic way to utilize a put option but this is not the only purpose of a put option in upcoming videos I'm going to teach you how to use put options to hedge which is a way to protect your Investments I'm also going to teach you how to make a steady stream of income with put options they're called Cash secured puts so there's a variety of ways to use put options responsibly which I will teach you so please subscribe and I encourage you to check out our investing website I'm going to leave a link for you down below thank you so much I appreciate the support and I wish you a very nice day take care

Channel: ClearValue Tax

Views: 32,366

Keywords: options trading for beginners, options trading, put options, call options, option trading put options, puts, options trading explained, options strategy, stock market, stocks, stock market news, stock market for beginners, put options explained, options explained, options trading robinhood, options trading webull, options trading example, options trading tutorial, stock market options, put option, stock options, equity options, Put options explained

Id: tlcCPX4t9y0

Length: 9min 54sec (594 seconds)

Published: Sun Jul 30 2023