Options Trading for Beginners (WITH DETAILED EXAMPLES)

what is up everyone my name is rose and welcome back to my channel this video is all about calls and put 101 it's an options kind of beginner basics 101 video [Music] this video is the second video in a six week series where i talk all about options trading for a side hustle income and so if you haven't subscribed already make sure you do so you don't miss any of the future videos in the series so in this video i'm going to explain what options are how they work plus show you lots of examples so that you can really understand and that way by the end of this video you should have a solid understanding of what options are and what to do with them now fair warning it takes a bit of effort to understand options and really wrap your head around them but it's worth it because there's a lot of cool things you can do once you understand stock options like you can trade them for a few minutes a week generate a nice flexible side income which is actually something i talk about in this video right here but you don't get to that point overnight first you need to put in a little bit of time and effort to first understand the basics i'm going to first explain what an option is then i'll explain the difference between the two types of options calls and puts and finally i'll talk about how you can make money with options we have a lot to cover but you can do this grab a notebook take notes with and just stick with me okay ready let's do this let's start off with what an option is to start understanding options a useful starting point is to compare it to something that you already know stocks so buying and selling options is a lot like buying and selling stocks but with a few key differences so here's a price chart of apple stock if apple is currently trading at 145 but you think it's going to go up what you can do is you could just buy the stock for 145 wait for it to go up and then hopefully sell the stock at a profit if you are right and apple does go up to say 200 then your profit would be 200 minus your purchase price of 145 making a 55 profit on the flip side let's say you're wrong and apple actually goes down to maybe 100 then your loss would be 100 minus your purchase price of 145 which makes a 45 loss essentially when you buy a stock your profit and loss is linked dollar for dollar to the movement of the stock price so if apple goes up one dollar you make one dollar if apple goes down one dollar you lose one dollar if apple goes up a hundred dollars you make a hundred dollars and if apple goes down a hundred dollars you lose a hundred dollars so you get the picture this diagram illustrates the relationship between your profit and loss as a purchaser of the stock versus the stock price so if apple goes up to say 200 then your profit on the trade assuming a 145 purchase price is 55 and now if apple goes down to 100 like we covered in the example then your loss on the trade again assuming that 145 purchase price is 45 so notice that this profit and loss line is a straight line reflecting that one for one relationship between your profit and loss and the stocks price so that's how it works when you buy a stock now let's talk about how it works when you buy an option when you buy a stock option what you're buying is the right to transact on a stock at a specific price before some pre-determined expiry date so what if instead of buying apple stock for 145 you bought the option to buy apple stock at 145 so it's kind of the same thing but slightly different now this type of option where you're buying the right to buy a stock at a specific price is called a call option so let's say this call option costs you five dollars just pulling numbers out of thin air here and this call option gives you the right to buy apple for 145 at any time before the options expiry date wouldn't you agree with me that having the right to buy apple stock for 145 is gonna be quite similar to actually buying apple stock for 145 so the profit and loss scenario of buying the stock directly versus buying the apple call option are going to be very similar and i'm going to show you in just a minute so stay with me if apple goes up to 200 as the call option buyer that is good news for you because this option gives you the right to buy the stock for 145 which is also referred to as the strike price in options lingo if you own a contract that allows you to buy something for 145 when it's worth 200 on the open market you're gonna be happy because now what you can do is exercise your rights within the option buy that stock for 145 and then just turn around and sell it right back to the open market for that higher price of 200 resulting in a 55 profit one more detail since the call option costs you five dollars to buy in the first place you also have to account for what you paid for that option so after everything is said and done your net profit would be actually fifty five dollars minus five dollars for a net profit of fifty dollars so you always have to factor in the cost of the option that allowed you to generate that profit in the first place so you essentially would have bought apple stock for 145 and sold it for 200 except that you did it in a more roundabout way by using this call option instead of buying the stock directly so that's how it would play out if apple stock went up what about if you bought a call option and apple went down so if apple goes down to say a hundred dollars then that's bad news for you because you already paid five dollars to buy this option and it gives you the right to buy the stock for 145 but apple is trading at 100 so you're obviously not going to want to exercise the right to buy for 145 why would you want to pay more for something than what it's actually worth on the open market you wouldn't no one ever wants to pay more for something than they can get elsewhere so this call option in this case would be considered worthless here's where it gets really interesting remember how if you purchased apple stock at 145 and then it went down to 100 then your loss would have been 45 well if you actually purchased the apple call option instead of the stock and then the stock went down to 100 your loss wouldn't be 45 in this case it would only be five dollars why five dollars because you paid five dollars to buy the option and then the option ended up being worthless because the stock went down so all you lose is what you paid for the option and you can just walk away this diagram illustrates the profit and loss of what that options trade would look like if apple goes up to 200 then your option becomes valuable the profit on that trade is 50 which is the difference between apple's market price of 200 minus the option strike price of 145 less the five dollars that you paid for the option and if apple goes down to 100 then your loss on the trade is just five dollars which is what you paid for the option now even if apple goes down to zero dollars like the company goes bankrupt and the stock becomes worthless then your loss is still just five dollars so the potential profit versus the potential loss with an option it looks kind of like a hockey stick versus a straight line where your loss would be capped at five dollars it's always capped at what you paid for the option and nothing more but you still get all of the potential upside when you buy a stock on the other hand your upside and downside is directly tied one for one with the price of the stock following that straight-line relationship when you buy an option your upside is directly tied one for one with the price of the stock but your downside is not your downside is fixed it's limited to whatever you initially paid for that option and you'll never lose more than that amount so that brings us to the key difference between trading stocks versus trading options compared to stocks options have an asymmetrical payoff profile in other words limited downside with unlimited upside however there is a trade-off to this because options aren't free and they have an expiration date which means that if you are right you'll make a bunch of money that's great but you also have to get it right within a specific time frame and that is actually hard to do so when you buy an option you have to get the market direction right and you have to get the timing right which means you have to get it right and you have to get it right quick most people who try to do this end up just paying a lot of money to buy options that end up expiring worthless either that or the stock price doesn't move enough before the expiry date in order to make up for the cost of the option let alone leave you with a profit this is what happens to a lot of options trading beginners that is why buying options overall is a long-term losing strategy and statistically you have a better chance at winning as an option seller versus as an option buyer especially if your goal is to create consistent cash flow but that is a topic for another video for now i want you to really wrap your head around calls and puts first you gotta start with the foundation we touched a little bit on call options earlier but let's actually do a detailed breakdown on how a call option works a call option gives the buyer of the option the right to buy the underlying stock at the strike price anytime on or before the expiry date here's an example of a call option on apple where the underlying is apple stock the strike price is 145. the expiry date is august 20th 2021 and it is a call option and although you can't see it on here let's just say the premium or the cost to buy this call option is five dollars so you call that the option premium to visualize how this contract works let's say there's two parties justin is the buyer of the call option jacqueline is the seller of the call option because obviously if you buy something there has to be someone to sell it to you and so jaclyn she's just writing the contract she's creating the obligation and telling justin that in exchange for five dollars where he pays her five dollars she will take on the other side of this contract that allows justin to buy apple stock at 1 45 anytime on or before the expiry date of august 20th so he doesn't have to buy apple at 145 but he just has the right and if he does exercise that right jacqueline has to be on the other side of that trade meaning if justin wants to buy apple at 145 jacqueline is the one who has to sell the stock to him at 145. so to summarize justin is the one who has the right to buy jacqueline is the one who has the obligation to sell and in exchange for this agreement justin pays jacqueline five dollars in the premium and jacqueline is the one who collects that five dollars in premium so she's getting compensated for taking on the obligation and justin is paying money in order to have the right let's see how this shakes out if apple goes up so this is the profit and loss profile for if apple goes up to 200. so this horizontal line is this the stock price so if apple goes up to 200 what do you think is going to happen obviously since the call gives justin the right to buy apple at 145 and if apple's actually trading at 200 on the open market he's gonna be really happy because everybody loves a good deal to buy something at lower than what it's actually worth so he's gonna exercise at 145 and probably turn right back around and sell it on the open market for 200 so he's gonna pocket an immediate 55 difference between his strike price and the market price of apple so that makes a 55 profit but you also have to factor in the cost of the option the five dollars that he paid to have this option in the first place so that 55 profit minus five dollars for the cost of the option leaves him with a 50 net profit so this is always the formula for calculating the profit of a call buyer it's the market price of the stock minus the strike price of the call minus the cost of the option or the option premium and that equals your net profit and notice how it's a diagonal line the higher the stock price goes let's say it goes from 200 to say 300 to 400 500 to a thousand then his profit is gonna just keep going up and up and up when the stock price goes above the strike price and it gives the call buyer the right to buy something at much lower than what it's actually worth that's what you call in the money so in options lingo this call is in the money let's see what happens to the call seller logically since the seller is the opposite side of the buyer it's going to be sort of the mirror image so notice how the call buyers payoff profile looks like this like a hockey stick and the call seller's payoff profile looks very similar except it's flipped upside down so whatever the call buyer makes it's the call seller's loss um so if the stock goes above the strike price then the call seller remember jacqueline she has the obligation to sell apple at 145 to justin and she's not gonna be very happy because she's gonna actually have to get that stock from somewhere right she's gonna have to buy it on the open market for 200 and then sell it to justin at 145 locking in an immediate 55 loss however you also have to factor in the cost of the option premium that she actually received so that's gonna offset her loss so that would be 145 minus 200 which is um minus 55 plus 5 for a net loss of 50 and the payoff profile goes down diagonally meaning the more the stock goes up the more she's going to lose as the call seller so when a call is in the money that's good for the call buyer because you get all this and when the call is in the money it's bad for the call seller because your p l starts looking like this okay moving along let's see what happens when the stock price actually goes below the strike price so in this scenario let's say apple went down to 100. the strike price is 145 apple went down to a hundred so justin who's the call buyer he has the right to buy apple at 145 but the stock actually went down to 100 so he's obviously not gonna want to exercise his call option because why would you exercise the right to buy something at 145 when it's actually cheaper elsewhere so he's not going to exercise his call option it's just going to expire worthless this option that he paid money for didn't do him any good so he's just out five dollars and that's it he walks away nothing happens he just loses the five dollars that he paid up front for this option now when the stock price is below the strike price for a call meaning exercising that call would not be beneficial then that's what you call out of the money so in options lingo this call is out of the money when a call is out of the money that's actually good for the seller of that call because what's going to happen here is the call buyer is not going to exercise the option and therefore the call seller doesn't have any obligation to fulfill on and she's gonna walk away with the premium that she collected up front of five dollars to sell this option and she just walked away that's it so when a call ends out of the money meaning the strike price is higher than the market price of the stock that's good for the call seller and it's bad for the call buyer okay so to summarize the difference between buying a call versus selling a call if the stock goes above the strike price then as the call buyer that's going to be your profit zone and the more the stock rises above your strike price the more profit you make and then for the call seller their profit zone is if the stock is going down below the strike price so it's the opposite as for the call buyer buying a call is a bullish trade meaning it benefits from the market going up whereas selling a call is a bearish trade meaning that trade would benefit from the market going down give this video a thumbs up if you are getting this it is a lot to wrap your head around so don't feel like you have to get it all on the first go-around feel free to pause this video think through the examples and re-watch it as many times as you need it does take a bit of repetition to really wrap your head around this also if you like having something hands-on to study make sure to grab a copy of my free options trading starter kit it's got all the definitions we're talking about plus some good little diagrams printable cheat sheets and little quizzes to test your knowledge so click the link below to stock at the strike downl anytime on or before the expiry date here's an example of a put option where the underlying stock is again apple the export date is again august 20th 2021 and the strike price is 145 except this time it is a put once again let's say justin is the buyer of this put option and jacqueline is on the other side of that trade as the option seller in other words she's the writer of that put option what this means is justin is going to have the right to sell apple stock at 145 at any time on or before the ex free date of august 20th and if he does exercise that right to sell then jacqueline is going to be obligated to buy that stock from him at 145 because if he sells somebody has to take the other side of that trade and jacqueline is the one who signed up to do it so to recap justin is the one who has the right to sell because he bought the put option and jacqueline sold him the put option so she's the one who has the obligation to buy the underlying stock should justin choose to exercise and since justin is buying a right he's buying a privilege and jacqueline is taking on an obligation she's going to collect five dollars in premium and justin is the one who's gonna pay her that five dollars in premium let's actually visualize what happens when the stock moves let's say apple actually goes down below the strike price of 145 so if apple goes down to 100 and justin has the right to sell apple at 145 he's probably going to be pretty happy because if something's worth 100 and i get to sell at 145 i'm stoked because that means i get to pocket an immediate 45 profit right so his profit is gonna be 145 minus the underlying market price of 100 minus the cost of the put option five dollars which leaves him with a net profit of forty dollars so for a put buyer his profit always follows this formula where it's the put option strike price minus the current market price of the underlying stock minus what he had to pay to own that option in the first place which leaves him with his net profit so notice how it follows a diagonal line the lower the stock goes the higher his profit gets but you do need to note that since a stock can't go below zero his profit is capped so he'll make the max amount of profit if the stock goes to zero and he gets to still sell at 145 and that will cap his profit right here let's see what happens to the put seller oh but before i move on let's talk about options lingo of in the money and out of the money if a put option gives the buyer the right to sell at higher than where the market currently is that put option is what you call in the money so since his strike price is 145 but the current market price is 100 his put option is in the money meaning exercising that option would generate a bit of a profit for him so if a put option is in the money that's good for the put buyer but logically that would be bad for the put seller because their profit and loss profile is going to be the mirror image so if apple goes down to 100 what's gonna happen is justin the buyer of that put he's gonna exercise his right to sell apple at 145 and the put seller is going to be obligated to buy that stock from him at the strike price so if you were the put seller and you had to buy a stock at 145 when it's actually worth a lot less are you gonna be happy probably not right why would you wanna be obligated to buy something at 145 when it's actually worth a lot less but that's the risk and obligation that you took on when you sold the put in the first place so jacqueline the put seller will be obligated to buy at 145 and probably have to sell it back to the market at a loss so that means an immediate 45 loss for her but of course since she did receive five dollars in premium up front that's gonna offset a bit of her loss so here's the formula for a put seller it would be the market price of the underlying minus the strike price offset a little bit by the option premium that she received for a net 40 loss this is what happens when the put ends in the money the put buyer ends up with a profit the put seller ends up with the equal amount but opposite amount of loss now let's look at what would happen if apple went up if apple goes up to say 200 then as the put buyer you've got the right to sell at 145 but if you could actually sell at 200 on the open market why would you want to exercise your put option to sell at 145 nobody wants to sell for less than what they can get elsewhere so this put option is what you call out of the money because the strike price is lower than the market price of the underlying and it will expire worthless and the buyer of that put simply loses whatever they pay to own that option and they walk away with a five dollar loss for the put seller it'll obviously be the opposite if apple goes up to 200 then the buyer of that put is not going to exercise their right to sell meaning the seller that put is not gonna have an obligation to buy at the strike price they're just not gonna have to do anything no obligation whatsoever so they just walk away with five dollars in their pocket and that's it so if the underlying stock price goes above the strike price in a put option that put option is out of the money and out of the money is bad for the put buyer because they'll just lose what they paid for the option and out of the money is good for the put seller because they get to just keep the premium that they collected for the option and they just walk away with no obligations to fulfill let's summarize a little bit the put buyer their profit zone is if the strike price is higher than the market price of the underlying because it's good to have the right to sell something at higher than what it's worth elsewhere and it's opposite for the put seller if the strike price is lower than the market price of the underlying they walk away with no obligation and they get to keep the premium collected resulting in their maximum profit buying a put is a bearish trade meaning it benefits from the market going down whereas selling a put is the opposite it's a bullish trade meaning it benefits from the market going up i just said a lot here but trading options basically boils down to this there are only two types of options calls and puts and then there's only two things you can do with those options buy it or sell it if you buy an option whether it's a call or a put you have to pay the premium so it costs money out of pocket up front and you're buying a right if you buy a call you're buying the right to buy if you buy a put you're buying the right to sell the option buyer always has the right and the option seller always has the obligation to take the other side of that trade because the seller is collecting premium up front because what they're selling is they're selling an obligation so now that you have a basic understanding of calls and puts the real question is what can you do with them how do you actually trade them what is the point so when you sit down to trade options you always start with something called the options chain the options chain is a big matrix that lists all the calls all the puts and all the different strikes for all the different expertise for a specific stock for example here's the options chain for apple stock the underlying is apple and there's also a range of x free dates to choose from let's say you went with august 20th so if you click on the august 20th expert date that will expand it so that you can see all the different strike prices for that expiry date let's say you want to buy a 145 strike call option for august 20th expiry now option chains always show calls on the left and put on the right so if you want to trade call options you would just stick to that left side of the table so to buy a call option you'd have to pay about 141 that's the premium or the cost of that option as a side note if you're actually going to trade this even though it says 141 on the options chain you'd actually be paying 141 that's because option prices are always expressed on a per share basis but every option contract is actually on 100 shares so whenever you're doing calculations you have to multiply all your dollar amounts by 100 this is also known as the contract multiplier so the key things to know about this option are it's a 145 strike call option on apple for august 20th x3 and it's going to cost you 141 at this point if you decide to buy this call option you'll be paying 141 in premium or on the other hand you can also maybe decide to sell this call option instead and collect that 141 in premium okay so those are the different ways to trade options with that you've reached the end of this video congratulations thank you for sticking with me because i know it's a lot now this is a pretty introductory video but we've covered a lot for an introductory video don't you think all right let's review stock options give the option buyer the right to buy and sell the underlying stock at a predetermined price the strike price by the expiry date calls give you the right to buy puts give you the right to sell for a call to be in the money the strike price should be lower than the current market price of the underlying stock for a put to be in the money it's the opposite the strike price has to be higher than the current market price of the underlying stock also whenever you buy options you have to pay the premium up front and whenever you sell the options you collect the premium up front now that you understand the four building blocks of options trading buying and selling calls buying and selling puts you are ready to go to the next step which is understanding how to put these building blocks together to make trades the safe and smart way to generate a reliable income this video is the second in a six week series of options trading videos that i have coming up for you each one will build on the other so make sure to subscribe and hit the notification bell so you don't miss any video in the series next week's video will be all about the best apps and brokerages for trading options so you don't want to miss that one i will see you there and of course don't forget to sign up for my free options trading starter kit to help you retain everything we covered in this video that's it for today i hope you found this helpful give this video a thumbs up if it demystified options for you at all and check out my channel for more awesome awesome content on how to seriously uplevel your financial literacy and live life on your terms that's it for now thank you so much for watching i will see you next week same time same place bye [Music] you

Channel: Rose Han

Views: 853,377

Keywords: options trading for beginners, options trading, options trading explained, options trading for dummies, options trading 101, options trading basics, stock options trading, stock options trading for beginners, call options trading for beginners, put options trading for beginners, options trading strategies, call options explained, put options explained, call option vs put option, call options example, put option example, in the money vs out of the money, investing with rose

Id: TyZsemV_0YA

Length: 27min 7sec (1627 seconds)

Published: Wed Jun 30 2021