Selling Options 101: Learn The SECRET Strategy

selling options is the closest thing to free money today we are going to begin our journey learning options selling and how you can use this strategy in your investments to start making more money right away so i got this fake pile of cash the other day so i could use for thumbnails and things like that looked pretty legit but then under closer examination the heck is this what is this guy right here look at him it's like ben franklin's slower younger brother ladies and gentlemen welcome back to pandrea finance your favorite new finance channel here on youtube my name is alex pandrea and i know you're excited for today's video you've been asking me to teach selling options for my first video here on youtube and well today is your lucky day because today we start the journey of learning this incredible technique now i'll be the first to admit that it took me a while to understand the concept of selling options buying options for example is a lot easier now there's a lot of things with selling options that you need to understand before jumping into any trade today's video we're going to focus on what i think is the most important thing when selling options and that's how do we collect the most amount of premium possible using implied volatility and probability of success you cannot start selling options without learning these two concepts now at the end of this video i'm going to lay out a very important step-by-step plan a master plan of attack if you will when selling options which i have used very successfully throughout my trades so do watch this video all the way through for that now you've got to hit that like button before we start you just got to do it the information on this video is worth it trust me so just go ahead it takes just a click just a little little tap so if you are ready then so am i let's begin let's begin with a quick overview of options all options are broken up into calls and puts and you can either buy them or sell them so you can buy a call and you can sell a call you can buy a put and you can sell a put now it's very important to understand these definitions and what it actually means to buy and sell these contracts because i know a lot of people me included in the very beginning had an oversimplified definition of what they all mean now if you're the type of person that says i'll buy a call because i think the stock is going up and that's your definition of buying a call and i'm afraid that you are a step behind so here are the definitions for each pay attention and understand them buying a call this gives the buyer the right but not the obligation to buy stock at a given strike price on or before the expiration date buying a put this gives the buyer the right but not the obligation to sell stock at a given strike price on or before the expiration date now moving on to the sell side selling a call gives the seller the obligation that word is important the obligation to sell shares at a given strike price on or before the expiration date and selling a put gives the seller the obligation to buy shares at a given strike price on or before the expiration date now it is very important to understand that when entering into a contract there are always two parties involved the buyer and the seller when you buy a contract you are buying from the seller thank you but that is important to understand because usually i feel like the majority of people trading options are buying options so they're only seeing it from one side but there is also another person on the other side of the trade and that's going to be us today in today's video and of course this all translates to the point of selling option is when you sell an option contract you are getting paid by the buyer and therefore collecting premium or as i like to call it free money now of course it's only free money if you learn to do it the right way so let's learn to do it the right way the first thing that we have to learn is what happens when we actually sell options what is the process like and what happens step by step through that process now before even selling options you're going to need something called collateral now the collateral is going to be used to cover our position remember when selling options we have the obligation to either sell shares at a given strike price or to buy shares at a given strike price now when you sell calls you're going to need shares of the underlying company as collateral to make sure that we are able to sell those shares and when we sell puts we're going to need cash as collateral just in case we need to buy shares now let's look at step by step what happens when you sell an option there's four steps first thing is we pick an option to sell and then we sell it simple and straightforward once you sell the contract you have now entered into that contract step number two collecting a premium because you sold that contract the buyer will pay you for that transaction so you are collecting a premium that goes into your brokerage account right away that money is now yours step number three buying back the contract to close out the position you must buy back the contract and step number four hope the option expires worthless the whole idea of selling an option is to sell at a high price and buy back at a low price keeping that profit in between all right the perfect scenario would be if that contract expires worthless or worth zero dollars and zero cents this means that you are technically buying back the contract to close your position at zero dollars hence you don't have to put up any money to buy back the contract so you get to keep the entire premium now the key takeaway from these four steps that you have to keep in mind is that we want to sell an option with a high premium and then hope that premium goes down in price so that when we have to buy it back we can buy back at a lower price or hopefully step number four it expires worthless zero dollars and then technically buying it back means paying zero dollars for it you keep the whole premium and everybody's happy well except the buyer of the contract he's not happy at all so now the question is what makes premium prices high or low expensive or cheap and what makes them increase and decrease in value this is very important to understand this is going to be the secret for making high returns when selling options what makes a premium high or low well a few things the first thing is expiration date the expiration date of your contract see the premium of an option can be broken up into intrinsic value and extrinsic value the intrinsic value simply put is what the option is intrinsically worth and what it will be worth at the time of expiration this value does not change the extrinsic value is also referred to as time value because time plays a role in its value so the more time you have in a contract the more extrinsic value you will have which of course if there's a higher extrinsic value that will make the premium as a whole be worth more so more time on a contract means higher premium this is why generally you don't want to sell weekly options options that have one week until expiration the reason being is that you won't get paid a high premium because there's little to almost no time value in that contract and remember time makes the premium higher so if there's no time there's no value if there's no value what are we even doing now if we take a look at this example we're looking to sell the 450 dollar calls now on the left we have an expiration date of september 27th about a week out you can see that the premium is only 27 cents however if we take a look at the example right next to it we have the same exact 450 call but instead of expiring next week it will expire one month away october 27th and you can see that the premium for this 450 call is four dollars and 20 cents which if my math serves me is a lot more than 27 cents so there you go you really need a premium with a lot of meat in it right so here's an analogy you know how sometimes you order ribs and some of the ribs come with a lot of meat on it and some of them have no meat at all you just end up licking the barbecue sauce off the bone and you're like what is this well that bone can be thought of as the intrinsic value of an options premium the meat on the other hand is the extrinsic value the time value so wanting ribs with a lot of meat on there can be translated into wanting options with a lot of premium baked into it so to do this my advice is to sell options that are further out in time so you can take advantage of that meat that premium that we want which will in turn obviously make us more money now i'm hungry the second thing that will determine an options price is how far in the money or out of the money it is options that are in the money are more valuable because they have already reached their strike price they already achieved their goal basically so the premium will be higher and the further you go out of the money further from the current stock price the less premium you will get now the simple reason for this is that it is much more likely for an option that is at the money or close to at the money to expire in the money as in to reach the strike price and it is less likely for a far out of the money option to become in the money right because it's further away so far out out of the money options are going to be very cheap and not worth a lot of course when selling options we only want to sell out of the money options this obviously makes sense because if you sell in the money options you are then agreeing by definition of the contract you are agreeing to sell a stock lower than its current value which who would do that so the sweet spot is going to be somewhere in between at the money and really really far out of the money the last thing that determines premium pricing is implied volatility implied volatility is the market's forecast of the likely movement in a stock's price so basically volatility is how up and down the stock moves and we say implied because it is a forecast an estimate of how much that stock will move if we want to see implied volatility let's say on robinhood go ahead bring that up and trade trade options on your favorite stock pick an expiration date and then sell call and then let's pick a strike price now you're going to click on that limit price bid ask spread that green highlighted bid ask spread and a bunch of very important info will pop up one of which is the iv that you see there in percentage terms and that means implied volatility this implied volatility percentage reflects the expected move of this stock within one year okay so that's all it means so in this case we're looking at apple it has an iv of 19 this means that in the next year apple is expected to move up or down 19 now implied volatility has a few key features first when you have a high implied volatility when that percentage is high you will have higher premium prices and of course if the percentage is low that means it's not as volatile hence it's less likely to hit your strike price which therefore means it's going to be cheaper another thing that's important to understand about implied volatility is that it typically reverts back to the mean now what does this mean so this basically means that when the volatility spikes up when it increases it will typically revert back down to what the standard is and when it drops and dips really low it will typically revert back to where that mean trend line would be the average basically so simply put this expansion and contraction of volatility is what we are going to use to make the most amount of money possible when selling options we want to sell options when implied volatility is high therefore collecting the most amount of premium and a lot of premium means more money now all of these factors that i just talked about high or low implied volatility expiration date how far in the money or out of money your contract is all of these will determine the probability of success and guess what the probability of success can be calculated probability of success in a trade is going to make or break the trade you must understand this part if you want to sell options and actually make money doing so now any option chain is going to have the probability of success listed out right there in percentage terms on robinhood for example you can see that probability of success listed out as chance of profit robinhood here has the probability you will profit but some of the other brokerages might have the inverse percentage reflected in probability of expiring in the money for example so for robinhood you might see a chance of profit of 80 percent but that same option contract on another brokerage could be reflected as the inverse has 20 chance of expiring in or out of the money just something to keep in mind in case you are using a different platform because who uses robinhood now obviously the higher the percentage of chance of profit the higher the probability will be that that trade will work out in your favor but you'll also notice that the higher the percentage of chance of profit the lower the premium will be so if you want to basically guarantee that you're going to profit from a trade you can go all the way to like a 95 chance of profit but as you can see we're only collecting pennies at that point now if we scroll down more at the money to where the stock price currently is you'll see that your premium is much higher that you can potentially collect but also your probability of success on the trade is less likely remember when selling options we do not want our stock price to hit that strike price whether you're selling a call or selling a put so of course we are selling out of the money far away from the current strike price but we also want to collect a good amount of premiums so it's about finding that happy medium in between to collect the most amount of premium with the highest probability of success this brings me to this next chart this chart will be your new best friend so save this take a screenshot of it get a tattooed on your chest whatever turns you on this is called a normal distribution curve or bell-shaped curve and it will represent the probability of stock price movements the chart represents one two and three standard deviation moves from the mean the middle line right here which represents the current stock price a stock price will move up and down swinging up some days down other days some swings are larger than others but in general all movements can be graphed within this normal distribution curve most of the moves and percentage terms will lay between these two points one standard deviation move from the center point to the left and one standard deviation move from the center point to the right and taking a look at the percentage a one standard deviation move from the middle the current stock price will be equal to 68 percent chance of happening as you can see 34 on each side in simple terms this just means that 68 of the time the stock will trade between these two points easy going further out a two standard deviation move is about 13.5 on each side so adding the highlighted portions together at two standard deviations we are at 95 chance that a stock will move between these two points now we can easily apply this to options because guess what option prices and the percentage of success follow this exact distribution so if we sell a put for example one standard deviation lower than the current strike price you can see that the probability of the stock price expiring above our strike price which is what we want when selling a put is 84 the highlighted part if we add them all up 84 same thing on the call side if we sell a call one standard deviation above the current stock price then we will have a 84 chance of success in the trade because 84 of the time the stock price will trade below the point of where we sold the call got it good alrighty putting it all together this is the important part how do we use all these factors that we just learned to set up a successful trade when selling options well here is a checklist that you can use with things that we learned in this video to set up that perfect trade at least in my opinion the first thing that we want to do is sell options when implied volatility is high so that we can collect a larger premium typically i would look for implied volatility above 50 percent but of course this is going to be a case-by-case basis of what the standard implied volatility is on that given stock the second thing that we want to do is sell options further out in time so that the premium is higher my suggestion would be to sell at least one month out and at most three months out the next thing on our checklist would be to sell options with a chance of profit of 84 or higher that will put the strike price about one standard deviation away from the current stock price and when doing so you will have an 84 chance of success in that trade now save this checklist and use it when entering into a trade because before going into any trader investment we need a plan so this is going to be our plan this is the one that i use myself i would also suggest when starting out to not worry about the dollar amount figure of what you're going to get on each trade just stick to the strategy and stick to the checklist and start with small amounts don't obviously go all in what might help is to keep a log of your trades which ones worked which ones didn't work and what you are going to notice when keeping a record of these trades is that you can start making small adjustments here and there so that the strategy works for you personally maybe you don't go for an 84 maybe you want to scale it down to 75 or 70 now keep one thing in mind when selling options we are working with a mathematical percentage here these are not hopes and dreams of buying calls and hoping it goes to the moon when you buy options the probability is not in your favor those options will more than likely expire worthless so if we know that then we just take the other side of that trade and as option sellers we are just trusting the numbers and the percentages and collecting that premium time and time again this my friends is the secret to consistent gains with options now in one of my next videos we are going to take everything that we learned here today and put it into practice but please study these concepts in this video so that you can have an understanding of what it means to sell options before jumping into any trades like i said don't worry we're taking it step by step and we are going to do this together my friends you can check out the links down below in the description for free stocks and free crypto check out my other videos by clicking here and here thank you all so much and we will see you on the next video

Channel: Pandrea Finance

Views: 20,076

Rating: 4.9724393 out of 5

Keywords: investing, how to invest, 1 million, Robinhood, Robinhood investing, options, learn options, how to trade, how to trade options, how to buy calls, how to make money, how to make money online, how to make $1 million, how to be a millionaire, Robinhood trading, learn to trade, how to invest for beginners, trading, Andrei Jikh, graham stephan, finance, learn finance, Alex Pandrea finance, Robinhood tutorial

Id: tfNKPia9FGo

Length: 19min 12sec (1152 seconds)

Published: Mon Sep 27 2021