Stock options trading: A how to guide with everything investors need to know

it's time to consider your options I'm talking puts calls strikes expiries if all that sounds like Market jargon you can possibly get your head around think again that's why we're here and a lot has changed since the first time a basic options contract was traded that was an all of presses in ancient Greece olives want to take this position in the ever expanding Market but don't know where to start Yahoo finances options 101 caught up with the people who do to give you the information that you need take a listen selecting the right op option strategy can be a daunting task but don't let don't fear we're going to be breaking down which option trades are best given the current market environment in today's installment of Yahoo finances options 101 theme week sponsored by tasty trade and joining us here to discuss is sea mcclaflin Allstar charts Chief option strategist Sean thank you for coming here today I want to show the viewers at home the Wi-Fi interactive and hopefully you can see this too I've been showing this screen all week we have calls and puts you can go long a call and that gives gives you the right to buy a stock you can uh also short it that gives you the obligation to sell it and vice versa but what I want the uh viewers to see is a quadrant system that you've come up with to help you find the right options in the current market environment we have a scale going up and down of bullish to bearish and then from left to right low volatility to high volatility and we've put one example of what you can do uh in these different quadrants but there are many more strategies could you just kind of break this down for us sure hi Jared thanks for having me um and what we're looking at here is just a sample of of ideas that one can do based on the implied volatility environment that we we are in currently so I've seen the episodes you guys have done so far this week you're doing an excellent job of covering a lot of the basics and options the next step when you're about to put an options trade on is you don't want to just buy a call if you're bullish or buy a put if you're bearish you want to take implied volatility into consideration to stack the edges in your favor because what happens is in a high implied Vol volatility environment you're going to pay a higher premium for example if you're buying just a simple call right and if you're paying a higher premium that makes it harder for you to earn an acceptable return if you get that trade right on the flip side if volatility is high or sorry volatility is low then premiums are very cheap and you don't want to be doing uh credit spreads you don't want to be selling strangles things that bring in premium because you're not getting paid enough to compensate for the risk that might happen if a directional move happens in the wrong way or if volatility were to rise so knowing the volatility environment is key to to selecting the strategy you want to use to maximize your odds of success all right and I the vix has been pretty low lately at least on the index indices uh we've seen some pretty low implied volatility uh but I want to break down a couple trades on the Wi-Fi interactive here taking a look at mosaic that's ticker MOS and you're looking to buy the $30 put with an expiry in June of 21 this year and we have a profit and loss chart could you kind of break this down and how you're thinking about it and how that ties into what you were just describing sure well this is a trade that doesn't come along very often typically when a stock is breaking support and getting to lower levels or the lowest levels it's been in in a while you tend to see people hedgers uh people who are long who want who are worried about the position they tend to use the options Market to uh Ure against against a large loss so they'll purchase puts to protect their long their long position and when they're purchasing puts that drives the premiums of options up but in this case in Mosaic right now at least the time we put this trade on yesterday the implied volatility in these puts were very cheap the cheapest it's been in most for most of the past year and so we saw an opportunity where uh the the anal or the analysis that we've done here at All-Star charts we think that mosaic if it follows through on the downside could trade as low as $23 over the next couple of months so we saw that the June 30 puts were trading for $2 a contract if Mosaic gets down to 23 before June expiration those puts will be worth at least $7 that's uh what the intrinsic value will be at that point then we're looking at at least a 3X return on our $2 investment which is what we paid for those puts yesterday that seems quite attractive great risk reward uh we have time for one more so I want to get quickly to this next uh trade which is Lululemon you're doing a be put spread and just quickly for the viewers here a bare put spread is when an investor purchases a put option while selling the same number of puts at a lower strike price on the same stock and that's with the same expiration so here we're buying the 420 puts and selling the 380 puts with an expiry of April 19 for Lulu what do you think about this break it down for us please well with the Mosaic trade we just simply bought puts right yes in this case we're buying a put spread and there's two reasons why we did a put spread number one the implied volatility in Lululemon options was a little bit more elevated so it was more expensive to just buy puts in volatility terms also the fact that it's a nearly $400 priced stock means that options just in absolute terms are more expensive so by creating a spread by buying one put and selling the further out of the money put we lower our cost of participation we increase our odds of success and if Lululemon can't hold the levels uh that it's at right now or I'm sorry if it if it can stay below the levels where it recently was we think that there's a failed breakout in play here in lul lemon we think there's a lot more downside to go and we're looking at maybe 390 380 over the next four months all right really appreciate you stopping by here for options when a win one week Sean mclin of Allstar charts stick around all your Market coverage when we return many investors look for ways to diversify their portfolios and one way is through options stock options are Financial contracts that Grant the buyer the right but not the obligation to buy or sell a stock at a predetermined price within a specified time frame now option invest investing has surged since a pandemic with the retail share of options trading is rising from 35% at the end of 2019 to 48% just 6 months later and that month that number is declining from its peak sitting around at 42% right now all of this data compiled by the New York Stock Exchange by the way but despite the rise in popularity we're posing this question is options trading for all investors does it belong in your portfolio and here to help answer that question is Jim struger Keno Capital managing partner and this is part of Yahoo finance's option 101 theme week sponsored by tasty trade and Jim uh we've been throwing some uh definitions out here and we want to talk about everything but just an opening line to our viewers one would be if you get into the uh option options number one it requires a certain degree of focus and activity because options expire all the all the time uh and the other would be understand your risk before you enter into any position structure it as Define risk if you're brand new to these markets but most importantly understand what that risk is what it looks like for various outcomes great manage your risks my number one Mantra in trading so let's get to this investing in options these are some decisions and things that you'll have to think about before getting into the trade including the underlying stock and I put s in parentheses because you might have multiple stocks involved in the trade but we can go through the directional bias the strategy just talk to talk to us about some of these things some of the considerations that investors should have for their portfolio sure one consideration you have directional bias is this a directional trade are you coming in making a directional decision buying calls buying puts outright or is this a trade where you're seeking to take advantage of implied volatility being elevated where your short Vega or short volatility and ex extracting premium from the market all right we we're throwing a lot around a lot of of inside baseball terms here and that's fine because options involves a lot of this and we want to break it down so when you're talking about implied volatility this is the amount of volatility that we expected that the options Market is saying uh we expect the the underlying stock to move by this much and how does that factor into your determination of what to buy an option price at you want to understand where implied volatility is relative to itself and then also realize volatility which is actually the volatility that's realized looking back over the course of time quick example Microsoft reports after the close today yes options that expire this week are twice the implied volatility that they would normally be Market expects a fair amount of volatility on earnings even though it is Microsoft that's something any option Trader needs to understand before they enter a trade great example and we're going to get to our next page just want to point out that we have have to consider expiration rates and strike prices and let's give an example here's Tesla where we have an options chart profit and loss and this is for a Tesla call at the strike price of 210 expiring the monthly expirations on March 15th so just kind of break down this trade for us sure Tesla reported last week unspectacular earnings report they're over producing they've taken down the cost of their cars doesn't look great stocks down 30% over the last month you've got people like Kathy Wood who runs coming in buying $150 Million worth of Tesla if you want to express a long directional view in Tesla right here implied volatility is in the right place for that because it's as low as it's been in 5 years so it's about 40% you really won't find it lower so if you're paying up for premium whether it be calls or puts a good time to do it in this case we're talking about going out to March buying the 210 strike call outright for that long directional exposure break evens about 11% higher from here but again stock down 30% over the last month all right great and we want to get to another example this one involves a covered call this is where an investor sells a call option at a set price and expiration date on a stock that the seller owns in an equivalent amount so key there is that you already own the stock and the example we're showing here is NVIDIA where we have a covered call option at the 700 strike price expiring February 23rd that's a weekly just kind of break down this trade for us sure important Point here is that the statistical Edge in option markets is on the side of the seller right so here you have Nvidia they're going to report on the 21st of February we're using the Feb 23 expiration we want to sell the 700 strike call it creates a situation where if the stock happens to be above 700 at expiration it's going to be a 133% total return over the 3 weeks to that expiration if the stock is below 70000 we just pocket that premium it's about 1 and a half% % so in a lot of ways it's a win-win if you're willing to sell Nvidia stock up another 13% 3 weeks from now all right put quite well and thank you for your time here Jim struger appreciate your insights investors looking for bullish strategies have several Avenues to reach their end goals we're digging into those strategies via the options trade and the latest installment of Yahoo finances options 101 theme week sponsored by tasty trade and joining us here to discuss is Jessica Inskip she is the options play dor and education uh product uh liaison and let's just jump into this we got three different scenarios here so we're going to take long a stock and we're talking about risk reward because in trading you want to have a stop or you want to have some kind of management tool there so we're going to take a long stock view long call option and then long covered call option and compare them so let's begin with long stock and I'm going to let you set this up absolutely so especially for my beginner options traders who out there who've never traded before or any type of Trader we have to focus on risk versus reward so whenever we're buying a stock the most that we can lose is the most that we spend right but when we're trading we always have a price Target in mind and these are very essential components when we talk about options we just add that layer of complexity because it's a derivative of more than just the underlying security we've got time and implied volatility as well so in this scenario we're just assuming this hypothetical long stock as we're buying at the current market price of $100 we have a price target of 110 looking to make $10 which means our break even are the most that we can lose in this scenario is the amount of capital that we spent which is all of it but yes exactly all right now let's let's get to another scenario here uh long here we go long call option uh similar but uh break this down how the call differentiates the risk reward absolutely so same thing it's important to know that we have a price Target in mind so assuming that we still have that same 110 price Target but now we're buying the call contract for five that means that we've got actually a oh I believe this was moved around I apologize this would be a 105 break even right here is what this is because we would have a higher Break Even price because there's a cost I got you so we it if we at the current market price is 100 we'll just say well we'll correct it right here this is 105 now we're spending this is a risk to reward of of really we can only make 50% that's not very good this is actually a poor scenario and I think one of the biggest risks of people going into options is they're going to start by buying calls and if we're buying this call for five what you don't realize is that this is $5 from that 100 price is something you have to overcome before you actually become profitable and that's assuming at expiration but that's why those other factors are important and the risk of starting out with options this way it's important to know how pricing is really comprised yeah and price so all your premium can go out the window that's just time to K right there so let's instead of buying this option let's look at another scenario here um and here we have a covered call and first we're going to give you the definition investor sells a call option at a set price and expiration date on a stock that the seller owns that's very important in an equivalent amount so I have to own the stock and then I can sell a call above the uh current price and here's what that looks like yeah and I see where the issue came up it's on the previous slide this one's 97 so for that but so we'll we'll say this is this one's 97 so here's the difference though and I'm glad we can write it down now we're receiving that $3 premium so in comparison to that 100 we've now reduced our risk exposure because we're receiving upfront exactly so if this line here represents owning the underlying security right are have the same substantial loss potential because the most that I can lose is what I can spend I own a stock at this point I'm selling the covered call so therefore I'm bullish I'm utilizing the stock as collateral because I'm obligated to sell my shares at the strike price in this case our price target of 110 but I'm reducing my risk right here by $3 sh it left left there yes ever so slightly now with options there's a give and take the give of course is this premium reduction of $3 the take is capped up towards potential if I own the stock I theoretically can hold it indefinitely it can go up to an unlimited amount here I'm capping my gain potential at 110 all right so limited upside and again we got the potential of 100% loss but you've put some money in your pocket uh we got about a minute to go here we got lots of risks and also some rewards risks are leverage complexity time dekay and option and I'm going to give you the floor here in a second in terms of benefits we got leverage hedging defined risk what's the message you got one message you could give options Traders starting out what is it never hold an option till expiration that's the worst thing you can done this by the way it's it's risk if you are if you're hold the option you lose giving up the time value and then if you are short the option then you actually have what's called gamma risk and you have a huge issue of being unprofitable very quickly so trade small tradeoff and as they say a tasty trade trade small trade often I really love that Jessica inip thank you for joining us a new generation of retail Traders is flocking to options trading as an alternative to plain vanilla Stock Investing but the options of r can be complex to maneuver and there are also pitfalls to avoid so we're starting off with the basics in Yahoo finances options week 101 and this is sponsored by tasty trade and now joining us to break this all down is Interactive Broker Chief strategi Steve sneg Steve thank you for joining us here today and let's start with a very simple definition here this is a stock option definition Financial contract that grants the buyer the right but not the obligation to buy or sell a stock at a predetermined price within a specified period of time uh just tell some of the uh important aspects of this for us well it's important to remember Jared that it is that it is a right and that's where the word option comes from as opposed to let's say a Futures Contract or actually buying the stock where you're obligated to own that underlying security as a result the price tends to be lower but the very important parts are you're you have to get that Target price correct because of the because there's a predetermined price and you have to get the time frame correct so there's a lot of EX it's a little bit it's much less of an outlay but you really have to get everything just right for it to work out for you all right with that we have calls and we have puts calls are the right to buy a stock put is a right to sell but that's if you're long if you're selling the stock it's a little bit different matter and for the newer investors we're probably going to be thinking about buying calls or puts there right yeah most people start off by buy by buying options outright um there are a lot of people who do end up writing options particularly covered calls I know you'll get get to that later tomorrow I'm not going to I'm not going to I'm not going to front run the next the next guest but so what happens is but it's typical to think in terms of buying them uh to begin with and you know again it's a fairly limited outlay compared to the price of the stock usually um to either speculate about buy you know whether it's going to go up over that period of time or whether it's going to go down depending on the contract def finded risk a concept we're going to come back to so the structure of a call option here first of all one option equals 100 shares and then we have a couple different things maybe you can go through and outline the importance of each one of these things yeah so when you see the price of an option you have to multiply that by 100 so if you see it trading at a $150 your outlay is actually going to be $150 because it conveys the right to buy a 100 shares one contract buys 100 shares the expiration date is predefined so you you're buying the um March 190 calls on Apple so weekly and monthly expirations there even and even dailies for for for et for for certain ETFs and index options but we'll stick here to the weeklys and the monthlies for for Common Stocks but you but you do specify your date when you when you buy it and you specify your strike so the expiration date and the strike and when you and when you go to look at you know the quote that gives you the pre that gives you the premium and that's what you're paying if you're buying it exactly so so you so you pay that premium um it's especially if it's an outof the- money option meaning that if it's a call the price is above the strike the strike price is above the current price or put the strike is below that is pure premium there is no intrinsic value to that option it's just really what you're paying for the right to speculate on the stock price over that period of time at that so important to say that premium can just disappear 100% that's something that you're just outlaying from the beginning there premium premium does dis premium there's few guarantees and options Land one of them will be that there is no premium left on expiration date it's either going to be in the money or or it's going to be out of the money and this chart shows you that so yeah we have a first of all this is for an apple 190 call and this is a typical profit and loss chart so get used to this we're going to be showing a lot of these and in this example this is the 190 strike and it's $3.50 per share but maybe you can kind of break down the structure of this so if you're paying 350 so this this little red line means that if it closes below 190 you lose all 350 you have to get it up and above 190 350 for you to even break even on the other hand though the advantage the appeal of options is you could see how fast that Cur that line accelerates so if you get above that 19350 hurdle the the strike Price Plus the premium paid that can that can accelerate very quickly and and that's what that's the appeal that that keeps people trading in options and another thing is I look here the red line it never goes any lower no matter how much the uh strike or how much Apple price share price decreases your only going to lose that fixed amount that's true it's very defined risk the important thing though to keep in mind is most options expire worthless yes so it is important to realize that you're kind of giving that up in a lot of are giving that up and and on average it is speculation and I think unfortunately some people treat it almost as gambling and gamblers don't win most of the time so it's so you do want to use your defined risk but you need to use it intelligently yeah good point there the house tends to win and that involves writing but we're going to cover that later in the week for now just let go through let's go through some of the benefits here because we have leverage hedging we talked about defined risk so maybe you could talk about leverage and he hedging a little bit well sure well the leverage part was was in that graph before because you know we mentioned that it needed to get past 19350 if you got to 197 well that option is worth $7 and then you've doubled your money so there's your leverage so you know it's it's Hit or Miss to a certain extent and when you hit you can hit big and that I think again and tends to be a little too appealing sometimes to people yeah we saw that in 2021 exactly hedging on the other hand um you know tends to be if you know if you're long a stock and you you know and you want to protect yourself on the downside you may want to purchase a put um there are other ways to generate income which again you'll get to with writing with writing calls that's hedging um and so there's so the whole point of options was really not as a tool for speculation but as a tool for risk management to transfer risk and to allow hedging between different parties who wanted to some some wanted to assume risk some wanted to lay off risk very good we got less than a minute so we got to go over a couple of the the risk here leverage can work for you can work against you also options are complex and then time Decay we didn't talk much about that maybe you could just address time Decay with a little bit of time time Decay is we're experiencing it now time Decay is is one of the most unrelenting features of option trading what as I mentioned the guarantee I can only guarantee you that there will be no premium on expiration and that does dissipate as the time goes by the longer you have for the trade to work out the higher the premium of the option as you get closer and closer that premium declines the the risk by the way with trading very short-term options is that premium really decays very quickly it's not linear it's it it's an exponential function sorry for getting too methy but but it but it's a but you know you fall off a cliff as you get close to expiration we really thank you for appearing on day one of options 101 week here Steve niik thank you

Channel: Yahoo Finance

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Id: hU31WddMxmE

Length: 23min 35sec (1415 seconds)

Published: Sun Feb 11 2024