The Only Options Trading Course a Beginner Will Ever Need (The Basics from A to Z)

if you're interested in learning all about options but a worry that options are too complex and scared about getting confused or overwhelmed relax we've got you covered in this course we'll be teaching you all of the basics from A to Z in a very structured and easy to understand manner I'm Mike Bella Fieri and we're one of the top proprietary trading firms located in New York City and proud to develop number seven and even eight figure career Traders congratulations on finding this potentially game-changing video for your options trading now let's get started helping you learn what you need to learn to start trading options the right way to grow your trading account [Music] thank you foreign to the only options trading course a beginner will ever need the good news is that options are really actually easy to understand all you need to learn is some simple Concepts and then a whole new world of trading is going to open up to you that you probably never know existed it's a world where you don't even need to pick the direction you think a stock is headed to make money in fact you can be outright wrong and still make money with options and truthfully we're in a position to know because we're one of the top proprietary trading firms in the world and the 50 plus professional Traders on our trade desk here in New York City use the strategies that we're going to be teaching you in this course all the time so don't worry we can break this down for you it's not that hard okay so in this course we're going to be covering what are call options on stocks which is how you can control hundreds and even thousands of shares of stock for a tiny fraction of what they cost put options on stocks which are basically insurance against a stock going down then we're going to go over some surprisingly powerful things that happen when stock options expire then we'll go over how to make bets on entire indexes like the S P 500 and the Dow Jones Industrial Average through buying call options on indexes or put options on indexes and what takes place when those expire and after that we're going to be going over how often you can trade options and the many potential profit opportunities that you have available to you in the modern options Market after that we're going to cover how options are priced because they're different than how stocks are priced in really interesting ways and can give rise to some startling opportunities that regularly happen after that we're going to get into how little cash you'll need to buy call options to control a hugely surprising number of shares of the most popular stocks and on top of that we'll teach you the incredible secret about selling options an edge that most Traders and investors don't even realize after that we're going to jump into three really exciting options trading strategies that you'll be able to start trading almost immediately once you open your options trading account the covered call the credit spread and the Iron Butterfly and trust me you're going to get pretty excited about the profit and income potential of those three strategies once we explain them to you which we're going to do in detail then finally we're going to give you a step-by-step roadmap of exactly how to get started as an options Trader including how to pick an online broker which is critical what steps you should take to deepen your options trading knowledge the great importance of paper trading and back testing strategies before you trade them live and finally how much Capital you're going to need to fund your options trading account okay so let's jump in now in this course you're going to be hearing a lot about two key terms that are at the core of options trading call options and put options and while options are traded on lots of different kinds of Assets in this video we're going to be focusing on what is meant by call and put options on stocks and call and put options on indexes so what is the call option on a stock exactly well a call option is basically a bet the buyer of the call option is making a bet that the stock is going to go up Beyond a certain price which is known as the strike price of that option before that option expires for that bet he pays what's called a premium equal to 100 times the price of the option the call seller is the one taking that bet and receiving that premium if the call buyer is right he's entitled to buy 100 shares of the stock at the strike price of the option even if the stock has moved way past that strike price if the call buyer is wrong the call seller Pockets the premium that the buyer paid him for taking that bet so for example let's say that on May 1st XYZ stock is trading at a price of 175 dollars now let's say that a Trader believes that XYZ stock is going to Rally so consistent with his opinion he might decide to buy the 180 call which expires on June 30th about two months later which he found by pulling up the June 30th options chain on his online Brokers options trading platform and he found that the option was trading for three dollars and fifty cents but remember he pays 100 times that price or 350 dollars because the call option represents the right to buy 100 shares of that stock at 180 regardless of how high it goes if the stock rallies to say 190 then he can exercise his call option to buy the shares which are worth nineteen thousand dollars but he only pays eighteen thousand dollars as you can see because he had that right to due to his ownership of that call option and he can then turn around and sell them immediately for the market price of 190 receiving nineteen thousand dollars for the shares making ten dollars on each of his 100 shares for a gain of one thousand dollars on those shares now deducting the 350 cost of the option from that profit next to call buyer a net profit of six hundred fifty dollars so the call buyer risk 350 to make 650 a reward that is a little less than twice the risk now on the other hand if the stock sells off to say 160 then on November 16th the option seller the one who took the risk gets to Simply pocket that 350 in premium that he received for the call buyers bet in other words the option expires worthless now why is it worthless well if you have an option to buy shares at 180 but the Stock's trading for 160 who's going to exercise that option when he can go out and buy them for twenty dollars Less in the open market no one obviously and so the option has no value and the options price closes at zero on the options expiration day so the call buyer loses the 350 dollars he paid for buying the option and the call seller Pockets that same 350 dollar premium a put option on a stock is basically the exact opposite bet in other words it's a bet that the stock will go down and this bet is normally made by people who own that stock and are concerned that the stock is going to go down the buyer of the put option pays a premium again equal to 100 times the price of the option to the put seller making a bet that the stock will go down beyond the strike price of the put option and again the put seller is the one who's taking that bet in the case of a put if the put buyer is right he gets to sell to the put seller 100 shares of that stock at the strike price of the put option even if the stock has moved much lower than that price at any time before it expires if on the other hand the put buyer is wrong and the stock expires above the strike price of the put option the call seller just Pockets the premium that the buyer paid him for taking that bet and that's his profit so for example suppose that ABC stock is trading at around 60 on August 1st suppose a Trader owns 100 shares of ABC and wants to buy protection for those shares so that if the stock goes down below 50 before October 21st he can sell those shares for 50 no matter how low the stock goes in that case then he could buy the 50 put for 205 dollars the two dollar and five cent options premium times 100 representing the 100 shares now if the stock closes at 42 on October 21st then he can exercise his foot and sell the shares for 50 which is eight points more than they're worth on the open market where they're trading for 42. so if he sold them at Market he'd only receive forty two hundred dollars but because he owns the 50 but he gets to sell them for fifty dollars a share collecting five thousand dollars so he saved 800 on a gross basis eight dollars for each of his 100 shares receiving five thousand dollars where in the open market he would have received only forty two hundred factoring in the cost of the put that 205 dollars the put buyer is 595 dollars better off than had he not bought the put on the other hand if ABC rallies from its current price of 60 and closes at 68 on October 21st then the put option expires worthless why well who is going to exercise the right to sell shares at fifty dollars when in the open market he can get them 18 higher obviously that writes worthless and so the option has no value and it simply expires worthless meaning the put buyer loses 205 dollars he paid for the options and the put seller gets to pocket that same premium when a stock option expires your broker will take a look at the option and determine whether it has any value or not if it's a call option and the stock price is what is referred to as out of the money it means that the stock is has closed at a price lower than the strike price of the call option in which case the option expires with no value and just disappears from your account but if a stock closes at a price above the call option strike price then your broker will automatically execute that option for you in which case for each call option you own you'll receive 100 shares of that stock for which you'll have paid the strike price of the option for each of the shares so for instance if you own a 95 strike price option for for stock which closes at 98 dollars on the day that the option expires your broker will pay out of your account ninety five hundred dollars which is ninety five dollars per share times a hundred shares to the call seller and the call sellers broker will then deliver to your account 100 shares of the stock worth ninety eight hundred dollars which is the ninety eight dollars per share market price times 100 shares which means you'll show an unrealized gain of three hundred dollars in your account immediately because you spent ninety five hundred dollars to own shares worth ninety eight hundred dollars now in the very fluky case where the stock closes exactly at the strike price of the stock on the day it expires meaning the stock expired at the money literally then the broker will expire your option with no value because there's no purpose in exercising the call option to get shares of exactly the same value that you could buy them in the market stock options on puts are the exact opposite at expiration if the stock closes above the put strike price which is called an out of the money put option then it expires worthless because you're never going to exercise your right to sell your shares of a stock below the Stock's price so that option expires worthless if the stock closes below the put strike in the money then 100 shares of that stock will be sold from your account and you'll be paid to put strike price for each of those shares regardless of how low the Stock's closing price was on the day the put option expired and finally just like with puts if the stock weirdly closes exactly the strike price of the put option then it expires worthless because there's no point in exercising it you'd sell your shares for exactly what they're worth in the open market so there's no purpose in doing that it expires worthless it's also important to realize that stock options are generally what are called American style options meaning that in equity put or call option can be exercised at any time from the moment you buy it until it expires which is the property that makes them American style options and that's an important distinction because some options are what is known as European style options which means that they can't be exercised until they expire index options which we're just about to cover are European style options as one example in any event if an equity option expires your broker will automatically exercise it if it has value which is only the case if it's in the money as we just explained in the previous examples all right so now that you know how options work on stocks let's move to how options are used to make bets on entire Equity indexes such as the S P 500 or the Dow Jones and similar to stock options a call option on an index is a bet on an entire index the buyer of the index call option is making a bet that pays off if the index price rallies above the strike price of the call he pays a premium again 100 times the options price to make that bet the call seller is the one who takes that bet if the call buyer is right and the index on expiration day closes above the call strike price he gets a cash payment of 100 for every point that the index exceeds the call strike price on expiration date if he's wrong the seller Pockets the premium just like with stock options the buyer of an index put option gets a payment of one hundred dollars for every point the index is below the put strike price on the day it expires if the put buyer is wrong the seller again just Pockets the premium so for instance suppose that an index's value on March 1st is 1445 and the trader becomes bullish on that index and suppose that the 1500 call 55 points above the current price which expires on April 30th 60 days later is trading for 39.50 well in that case if he wants to make a bullish bet by purchasing the 1500 call he has to pay 100 times that or three thousand nine hundred fifty dollars for which he'll receive one hundred dollars per point that the index closes above 1500 on April 30th so if the index rallies to Beyond 1500 by expiration day to say 1620 then the call option seller will have to pay the owner of that call 100 for each point above 1500. in other words the call seller owes the buyer twelve thousand dollars and his profit is the twelve thousand dollars cash payment minus the original three thousand nine hundred fifty dollar cost of the option for a net profit of eight thousand and fifty dollars so the call buyer risked three thousand nine hundred fifty dollars to make eight thousand and fifty dollars if you think about it if on the other hand the index sells off to 1400 then the call option has no value the call seller owes nothing to the call buyer because the index didn't close above 1500 and therefore if the call expires worthless and the buyer loses his entire premium while the call seller Pockets the three thousand nine hundred fifty dollars that he was originally paid now put options on indexes are the exact opposite of index call options the index put option only pays off if the index closes below the strike price of the put option the put buyer pays a premium and again the put seller receives the premium but this time the put only pays off if the index closes below the strike price of the option on the day it expires so let's say that an index is trading at 14.25 and you're bearish so you buy the 1350 put which is trading for 52.25 costing you five thousand two hundred twenty five dollars if the index sells off to 1280 then the put buyer owes the put seller seven thousand dollars which means that you'd make a profit of one thousand seven hundred seventy five dollars after deducting the five thousand two twenty five put option cost on the other hand if the index closes above 13.50 on the day it expires that put expires worthless and the put seller again just Pockets the premium since you can't own an index you can only own shares of the stocks of its components index options are bets that pay off in cash in other words index options are cash settled at expiration if you own an in the money index call your broker will automatically exercise that option by retrieving from the call seller the one hundred dollars for every point that the index closed above the call strike price so for example if you own a 3150 call option and an index close to 31.80 your account will automatically be credited with three thousand dollars because the option expired 30 points in the money and therefore you're entitled to 30 times 100 that's three thousand dollars in cash for winning that bet however if the index closes below the call strike price on the day it expires the option simply disappears with no value the exact opposite is true of the index put options if the market closes below the put option strike price your broker will credit your account with 100 times the number of points the index closed below your put strike price so if you put strike price is 29.50 and the index closes at 27.50 then the put pays out two thousand dollars as you can see from the calculation okay so now moving on to how often options can be traded you need to know that options on all stocks and indexes uh expire periodically and for each expiration date the major options exchanges offer options chains for the options of that asset expiring throughout the year back in the day the major exchanges only offered options expiration once a month which expired on the third Friday of each month but in the first decade of this Century in the early 2000s the major options exchanges started to offer options chains across a large swath of stocks and indexes which expire every Friday eventually certain indexes such as the SPX and ndx indexes and the exchange traded funds based on those indexes such as spy and QQQ introduced daily options expiration dates so as you can see the options Market over the years has created a vastly greater number of opportunities to trade options contracts than when they first became publicly available in the 1960s giving Traders an incredible opportunity to be more targeted and granular in their trading strategies okay so let's think about it if you buy 100 shares of a stock and the stock goes up two dollars it's pretty obvious that you've made two hundred dollars on that stock but if you own a call option on a stock and the stock goes up two dollars how much money do you make well the true answer to that question is that you don't have enough information to answer that question and that's because for example a call options price will change differently depending upon three different factors the first factor is the strike price of the option you have to ask yourself how far is the strike price of the option from the current trading price of the stock is it 20 above the current price is it one percent above the current price is it below the current price well for call option the higher the strike price the cheaper the option which makes sense right because the higher the strike price the less likely that the stock will reach that price before the option expires and so the market doesn't value the opportunity to buy at that price before expiration is very valuable because it's it's not very likely the second factor is when it expires how far into the future does the call option expire does it expire tomorrow does it expire in a month does it expire in a year well with call options the farther out in time the call options expiration is the higher its price will be a later expiration allows the stocks price additional time to reach that price and so the market values that call option more than an option at that same strike price but less time to reach it and the third factor is what is called volatility how volatile is the Stock's price is the kind of stock that has these huge swings in price or is it a relatively stable boring stock volatile stocks have price spikes and price drops that are much more violent and frequent than low volatility stocks a volatile stock is more likely to trigger a call option reaching it before or at expiration then a low volatility stock which tends to grind up or in a slower and more orderly way so volatile stock call options for example will be more valuable than their counterpart options on less volatile stocks all other things being equal and so all of these factors can be summarized in this table of call options pricing the lower the strike price the farther out in time and the more volatile a stock is the higher the call option will cost and the good news is that once you understand call prices put prices become really easy to understand and that's because put price valuations only differ from call prices in one respect with puts the higher the put strike price the higher its price why well let's think of an example supposed to the stock is trading at 75 dollars per share which put option would be more valuable the 70 put or the 65 put the answer is obviously the 70 put right because it will take a much bigger move in that stock for the put to have any value on the day it expires because it's got to be below the put strike price for it to have any value on expiration and that's also because the value of having a contract a put option that gives you the right to sell your shares at 70 even if the stock goes to 40 obviously has more value than an option to sell your shares at 65 under those same circumstances for each share you'll have the right to sell it at a higher price for the 70 put than the 65 put so it's obviously worth more so other than directional movement in the price of the stock every other aspect of the put and call pricing is actually the same just as with calls the farther out in time the option expires the more price you'll get for the call option and Justice with calls the more volatile stocks prices the higher the puts price will be and so put pricing can be summarized in a table like this where you see that the higher the strike price the farther out in time it is and the more volatile the stock is the higher the price for the put options derived from it by now you're probably wondering why do traders buy stock options when they can just go ahead and buy the stock itself I mean after all if you buy a call option that's a bullish trade right well so it's just buying the stock and so by the same token if you're bearish on a stock you could just sell it sure to make money that way why buy a put option and try to make money by the stock going down and put option and getting more valuable and so a very good practice as a Trader once you become bullish or bearish on a stock is to ask yourself does it actually make more sense to just buy or sell the stock or would it pay to check the options chain related to that stock to make sure that it doesn't make actually more sense to buy a call or put option on that stock instead of buying or selling short those same shares and so here's an example okay so suppose that a stock is trading at 157 and there's a 160 strike price call option that expires 30 days out trading for three dollars for which he'll pay 300 as we explained earlier and incidentally this is a real example of a real stock and its options now if the stock never reaches 160 by the time the option expires then the trader will lose 300 which was the risk he was taking on this trade it can never get any worse than the 300 he paid up front but suppose that 30 days later later the stock closed at 177 on the day the 160 call option expired well let's do the math and as you can see if the trader were to exercise his call and buy the shares for 160 then turn right around and sell those shares for 177 he'd make 70 dollars per share so subtracting out the original cost of the option you can see the net profit is fourteen hundred dollars and the risk reward is awesome risking 300 to make fourteen hundred dollars in profit or a ratio of 4.66 to 1. now let's compare that to the risks and rewards of buying shares of stock to attain the equivalent of fourteen hundred dollars profit is the trader achieved through the options transaction he'd need to buy 70 shares at the original 157 price that the stock was trading at now let's look at the calculation from there and as you can see those 70 shares will cost him this time ten thousand nine hundred ninety dollars initially and as the stock Rises to 177 having increased 20 from where we bought it the profit is now twenty dollars per share obviously which comes to that same profit of fourteen hundred dollars but in this case the trader had to risk ten thousand nine hundred ninety dollars to make the trade in order to make that same fourteen hundred dollars which is a much much worse risk reward of zero point one two seven to one versus close to five to one in the previous example now that is obviously a huge difference additionally while the risk reward is substantially worse with the share purchase transaction there's the flat out fact that the trader has to come up with ten thousand nine hundred ninety dollars in the case of the shares while he only needs to have three hundred dollars in cash in his account to make the call options trade this leverage that is achieved with options contracts makes a huge difference to aspiring traders who may not have the capital available to make larger trades you see if you think about it when you're trading stocks or pretty much any other asset they're really only two very broad classifications of Trades buying stocks which makes you long those stocks or selling stocks which makes you short those stocks but with options it gets much more interesting because with options you can either trade them as single options such as buying single calls or puts or selling single options such as selling single calls or puts or you can trade them in combinations with what options Traders refer to as complex orders which despite their names are not actually that complicated at all complex orders are just combinations of different options traded simultaneously in a single order and to make this happen you need to execute what the options Market calls a complex order ticket now when you buy a call on a stock you may have realized by now that while you can effectively profit from the movement of hundreds of shares of a stock for a fraction of what would it cost you to add right by those shares there's a kind of a cost to that and that is that there is a hurdle to you making any money at all on the options until you have gotten past a certain hurdle which is the cost of the option itself so for example let's go back to the index call option example we were discussing earlier where the index was trading at 1445 on March 1st and we bought a 1500 call expiring on April 30th for 39.50 so he has to pay 100 times that or 39.50 if the index rallies and closes Beyond 1500 by expiration date say to 15.90 then the option seller will have to pay the owner of that call 100 for each point of both 1500 in other words the seller owes the buyer nine thousand dollars and so the profit on the trade is 5050 because the nine thousand dollars he received from the call seller exceeded the price that the call buyer paid but let's take another case and this is going to be very important for you to understand let's say that we had the exact same circumstances the call buyer buys the 1500 call it cost him 39.50 and thus he pays three thousand nine hundred fifty dollars for it and again we were right and the index did indeed rally but instead this time the index had gone up to 1520 and then just stopped well in that case the call buyer gets paid two thousand dollars 20 points Beyond fifteen hundred times a hundred dollars per point but remember he paid three thousand nine hundred fifty dollars for the call so he actually lost one thousand nine hundred fifty dollars by buying that call which is the two thousand dollar call proceeds minus the cost of the call the three thousand nine fifty so therefore the absolutely crucial principle for you to remember here is that if you buy an option you won't make any money on it until the price of the option exceeds the strike price by the amount of the premium you paid for the option so in that last example for the index trading at 1445 on the day you bought the option if you buy the 1500 call for 39.50 paying 3950 then you need the index to hit 15 039.50 which is the 1500 strike Price Plus the 39.50 call price in uh in order to receive three thousand nine hundred fifty dollars when the call option settles and even if it does get to 15 39.50 and you do get your payout of 39.50 all you've done is break even as you can see from the calculation in other words the break even on the trade is fifteen thirty nine fifty a full 39.5 points above the point where the call actually begins paying off now this is a big deal why well think about it since the call buyer the one making the bet must be right by enough to cover the premium that he paid in order to make any money on the trade at all it obviously follows that the call seller the one taking the BET makes money as long as he's not wrong by more than the amount of Premium the call buyer paid him which in this example meant that at any price below 15 39.50 the call seller makes money so ironically you can be right about the Market's Direction and still lose money buying an option when you're long an option it's not enough to be right about the Market's Direction you need to be right by enough to cover the original options premium that you paid and so it obviously follows then that the call seller can actually be very wrong about the direction of the market and still make money it's amazing if you think about it to break even the index in the example we just gave you had to Rally 94.50 points from 1445 to 15 39.50 for you to Simply break even on buying that call whereas the call seller makes money on any price below 15 39.50 so that means that the market can rally more than 94 points and the call seller still makes money even though he took the other side of your bet that the market will go up in other words the call seller can be wrong by 94.49 and still make money on the trade and so if you think about what we just said while you do get terrific leverage from buying options the real Edge in options trading is actually selling options think of it this way there are only five possible outcomes of for example an index call option trade the index goes down a lot the index goes down a little the index doesn't move at all the index rallies a little or the index rallies a lot that's it right so now let's take a look at each of those scenarios in light of buying that 1500 index call option when the index goes down a lot you lose the cost of the call when the index goes down a little you lose the cost of the call when the index doesn't move at all you lose the cost of the call if the index rallies a lot to as high as 15 39.49 you still lose because you didn't cover the 39.50 call cost only if the index rallies more than 39.50 the cost of that call only in that one case do you win but what about selling that same option well everything gets flipped on its head right if the index goes down a lot you win all the cash you receive for the call if the index goes down a little you win all of the cash you've received for the call again if the index doesn't move at all you win all the cash you received for the call if the index rallies a lot to as high as 15 39.49 you still win because you received 39.50 and you only pay out 39.49 only if the index rallies Beyond 15 39.50 to the point where the payout of a call exceeds the initial cash received only in that one case do you lose money it's incredible if you think about it the unbelievable benefit of selling options and how it improves your win rate in a shockingly positive way and so investors all over the world once they learn options trading and this edge of selling options have an amazing array of strategies available to them that can take advantage of the simple principle that you win selling options in four out of the only five cases that can happen as we just showed you so now you're probably wondering at this point what are what are some of these popular option selling strategies and I can tell you that a strategy called the covered call is the most popular option strategy and that is for one simple reason most investors own at least some stocks in their portfolios and while some stocks certainly do pay dividends the fact is that the average dividend of the stocks that comprise the S P 500 index for example is somewhere between one and two percent well that's simply not enough for many investors who while they're certainly looking for their stock portfolios to grow also plays a high priority on their Investments providing an abundance of monthly cash income as well and that's when the covered call strategy comes in and that's because covered calls create a way to substantially increase their income from stocks so here's how it works let's say that you own 100 shares of a stock XYZ which is trading at 200 and therefore the value of your shares of XYZ is twenty thousand dollars now suppose that this stock pays a one and a half percent dividend well that comes out to 300 per year which is right around the average of s p 500 stocks now let's say that you are somewhat bullish on the stock and you estimate that the stock could go up by say 20 points 10 over the next year but you wouldn't anticipate it that it would go much higher than that and so you pull up an options chain that expires in one year and you see that the 220 call option is trading at 17 now if you sold that 220 call expiring in a year then you'd receive 17 for each share that that call represents so you multiply it by 100 and as a result you'll receive Seventeen hundred dollars in cash for the call in addition over the course of that year you'd receive dividends totaling three hundred dollars adding a up the covered call Premium that you received and the dividend you would have received results and you're receiving a total of two thousand dollars and so as a result just by selling the cover call you've immediately improved by more than 500 percent the income that you can make through your ownership of XYZ stock increasing that return from one and a half percent to ten percent simply by selling the covered call against your shares and so if the stock closes below 220 on the day the option expires then you just walk away with a 10 return on your shares of XYZ and then you can go out to the next year and do it all over again you can simply sell a call above the price the stock is trading at and earn a ton of additional income beyond the Stock's dividend by selling that call above the Stock's current price year after year now at this point you might be wondering why we call this strategy the covered call what are we covering well in order to understand that we need to look at the scenario where instead of the stock closing below 220 on that day that the option expired which is a great scenario because you earn 10 on the stock in cash income that comes right into your account but what if instead we find that the stock did in fact close above 220 as it did in the case of this example where the stock closed at 228.91 on the day it on the day the 220 option expired you see when that happens then the call option will get exercised by the call buyer because he now has the right to buy those 100 shares from you for 220 even though they're worth 228.91 and so he's definitely going to exercise that right and so in turn you're obliged to sell your 100 shares of XYZ at 220 per share and while you would not benefit from any potential gains Beyond Two 20 you still get to keep that 1700 in premium you received earlier plus you'd received the dividend of three hundred dollars so in later the fact that you wouldn't benefit from any gain Beyond 220 you could see that it's important to set your covered call strike price at a share price where you'd be pretty happy to sell the shares because it's basically your price target for those shares and doing so makes the strategy a win-win because if the shares don't get called away you get that great income of the dividend plus the call Premium if on the other hand the shares do get called away you get the capital gain from the shares as well as the call Premium and the dividend and so this potential for your shares to be called away is why this strategy is referred to as a covered call the shares you own cover your obligation to sell the shares at 220 if the calls get exercised which almost certainly will happen if the stock closes above 220 on the day the option expires so remember it's very important for you to focus on the fact that once the shares are called away you won't own them any longer because you would have sold them at two hundred twenty dollars per share to the call buyer and depending upon your tax situation you may also be required to pay a capital gains tax on those shares which is a very important point to keep in mind if you decide to sell covered calls against shares of stock you own and it's something you should absolutely run by your tax accountant beforehand so that you'll fully understand the tax implications of this trade on the other hand it's not exactly a bad thing if the stock rallies 10 and your shares get called away in fact if you measure your full gain for the Year it turns out you that you'll have managed a 20 gain on your ownership of XYZ stock that year when you consider the covered call Premium of 1700 the dividend of 300 and the appreciation of the shares themselves which is two thousand dollars while this is obviously an attractive strategy it's important to keep in mind that the stock rallies passed your expectations you're giving up all the upside of the strike price of the covered call while maintaining all of the downside of stock ownership if it doesn't and so it's extremely important to set your covered call at a strike price where you'd be perfectly happy to move on from that stock at the strike price if you set the strike price correctly then the covered call is a kind of a win-win situation either you collect that great extra income on your Investments or you exit those Investments at prices that you considered attractive to you anyway plus you keep that covered call Premium whether or not your shares get called away you've seen how powerful covered calls can be let's explore another really effective option strategy in order to do that I'd like you to recall that earlier we discussed why the sellers of options have an edge because the of the numerous ways that they can win selling options but the downside of course is that if they lose they can lose big and in some cases very big so for instance if you sell an index put option on an index that means you think the index will go up but if instead the index goes down and passes through your put strike price and closes far below the put strike price then the put sellers on the hook for one hundred dollars per point below the strike price of the put and so if the index expires way below that put strike price the put seller takes a major bath and so how do we prevent a loss from getting out of hand well options Traders have developed a strategy known as the credit spread to build a stop right into the trades initial structure so that the loss can never get too far out of hand let's give you an example of how this is done suppose an index is trading at 32.25 and you think that the index will go up so you decide to sell a 3200 put on that index a little bit below the price of the index expiring in 30 days and you receive a premium of 20 for that so you'll receive two thousand dollars cash in your account which is twenty dollars times one hundred dollars if the index at least stays above 3200 by expiration date you'll just collect the full premium and pocket it because the put will expire worthless now in this first case you'll do nothing to protect the trade which would be called a naked put now suppose the stock closes at 31.20 on the expiration day 30 days later well in that case you subtract the closing price of the index from the strike price of the put option which would result in a payout under that put of eight thousand dollars now adding back the two thousand of initial cash you received when you sold the put the final trade loss would be six thousand dollars the eight thousand dollar payout less the two thousand dollar credit you receive for the put but suppose that the trader instead decided to protect the trade and enter into a put credit spread a put credit spread is when you sell a put option on a higher strike price and buy a put option on a lower strike price both being in the same options chain since the put that is lower will be cheaper because it's less likely the index would drop to the level of the lower strike price than it would to drop to the higher strike price then you'll still collect cash for the transaction but you're going to be getting less because out of some of that cash that you receive you're going to be using some of that to pay for a cheaper option lower down reducing your income so in this second case we'll instead enter into a put credit spread and you'll see how that provides built-in protection so the trade doesn't get out of hand so starting with the 3200 put we sold for 20 receiving two thousand dollars just like we did before in the case of the naked put but in this case we're going to buy simultaneously a 31.75 put for 11 resulting in a net cash flow of 900 in this case not the original two thousand dollars because we had to pay 11 for that 31.75 put so again the index closes at 31.20 and again the 3200 put we sold pays out eight thousand dollars but in this case we own that 31.75 put so that put pays us and as you can see from the calculation it pays us fifty five hundred dollars because the puts strike price exceeded the closing price of the index by in this case 55 points so in this case while the payout on the 3200 put Remains the Same eight thousand dollars we've got to add back the 900 we initially received for the credit spread and the fifty five hundred dollars we get back for the payout from the 31.75 put that we own which brings our loss down to sixteen hundred dollars and so compared to the loss of six thousand from the naked put the credit spread drops our loss to only sixteen hundred and so as you can see credit spreads are a much safer way to create income by selling options as the risk management of the trade is built into the trade itself as soon as the index reaches the long option the one we bought the long option increases in value for us point for Point negating any further loss created by the short option effectively stopping the loss on the trade credit spreads can also be executed if you think an index or stock will go down for this you'd enter into a call Credit spread which is just the opposite of a put credit spread in the case of a call Credit spread you would sell a call with a lower strike price and buy a call with a higher strike price in the same options chain hoping the price in this case goes down the lower call that you sell will be more expensive than the higher call you buy resulting in again you're receiving a credit for selling the combination of short and long calls in this way and just like with the put credit spread the long call in this case protects you so that if the stock or index goes up in other words you were wrong then the long call protects the loss on the short call from getting out of hand just as the long put protected short put from getting out of hand in the case of the put credit spread now the advantage of credit spreads is thus the built-in protection of buying the long option at the same time you buy the short option the disadvantage is that you'll receive less net premium than simply selling the naked option because of the cost of the long option that's the trade-off on our trade desk we strongly discourage naked options because they're dangerous as we just showed you instead opting for credit spreads particularly overnight where very large moves can take place and without the build and stop the position becomes very dangerous credit spreads are a much safer way of getting the benefit of selling options those four out of five winning scenarios we discussed earlier without taking undue risk and risking a catastrophe buying and selling calls buying and selling puts trading covered calls and selling credit spreads are all strategies which do best when the market goes in a certain direction those are known as directional options trades which are in contrast to non-directional option strategies which you'll be learning about in a minute for example if you buy a call or enter into a covered call you'll get your best outcome if the market rallies if you buy a put or sell a call Credit spread your best outcome is a market sell-off and that's true of almost every other trading vehicle your best outcome is when the direction you've predicted is the outcome that actually takes place in the market but with options you have another choice Market neutral options selling strategies a whole category of strategies that make money regardless of whether the market rallies or sells off as long as the market stays within a certain price range with Market neutral option selling strategies all you need to get right is the range of prices and you'll win the trade and with certain strategies these price ranges can be huge and thus have an extremely high win rate as high as 80 percent or higher way above what you could reasonably expect with other trading Styles these strategies include very popular strategies such as straddles strangles iron Condors butterflies calendars and double diagonals and so let's take a look at an example of a non-directional strategy which is known as the Iron Butterfly and to illustrate how this strategy Works let's head back to a Friday in early June looking at an index trading at around 1880 on that day so let's say a Trader pulls up an options chain that day that expires eight weeks out towards the end of July and he sells one call at an 1880 strike price right where the index is trading for price of 83.95 and one put at 1880 for price of 84.40 and then simultaneously buys a call 100 points higher at 1980 for protection at a cost of 37.55 while at the same time buying a put 100 points lower at 1780 for a cost of 49.65 if he does all four of those at the same time which any qualified options broker will do for you routinely in a single order where you sell a call and a put at the same price and you buy a call higher than the call you sold and you buy a put lower than the put you sold that entire combination of four options positions is known to options Traders as an Iron Butterfly and we'll show you in a minute just how powerful this strategy could be so the first thing we'll want to do is to examine what exactly has happened here from a cash flow standpoint so you can understand how this trade works and so let's start with the 1880 short call well we sold that one for 83.95 but remember each point above the 1880 call pays off 100 per point so we multiply that by 100 and so our total income from the call is 83.95 we also received 8410 for selling the put by the same logic and then we had to go out and buy the protective call for 37.65 in the protective put 449.65 respectively so if you crunch the numbers like we did here you'll see that the total initial cash inflow from the trade is eight thousand one hundred fifteen dollars and your broker will require 18.85 for you to put this trade on incidentally so just be aware of that if you do something similar that's your worst case a scenario on the trade as well so that 81.55 in cash goes right into your account and if your broker pays your interest on your cash balances you'll start earning interest on that immediately incidentally okay so now let's move forward to the day that the trade expires which is July 29th and as you can see the index has closed at 1885.23 now when the options expire they can be given a final valuation and so let's go ahead and do that right now and so let's start with recalling that we received that 18 150 initially when we first entered into the trade and so taking a look at the call we sold at 1880 while that call expired below the closing price of the index and so the way you figure out the payout on that call is that you take the index's closing price you subtract the strike price from it and you multiply that by 100 because it pays off a hundred dollars per point above its strike price and so as you can see from the calculation the result is that that will need to pay the one we sold that call to 523 dollars so that gets deducted from the cash we collected originally but as you can see the rest of the options expire with no value worthless and that's because the 1880 put we sold only pays off if the index closes below its strike price which it didn't and so that expires with no value to anyone and of course that's true of the 1780 put we bought also the 1980 call we bought also expires worthless and so if you net it all down the only option that had any value was the 1880 and so since we sold that we were obligated to make a payment on that one which resulted in our being left with 7592 dollars of profit from the trade which constitutes over a 400 percent return on a trade that lasted eight weeks and so I'm pretty sure you can see why people can get excited about trading iron butterflies now before we move on I wanted to make a really important point and that's that we didn't really care if the index closed above or below the 1880 price which was the price that the index closed on the day we entered it for instance let's say that the index had closed instead of 1840. now how would that trade have come out well let's take a look at that hypothetical situation so again we start with the 81 15 in cash we got in but this time the 1880 call expires worthless because it expired above the closing 1840 price so that's a value of zero for that one but the short put on the other hand well the index closed 40 points below its strike price and so that will cause us to make a payout under that put which as you can see from the calculation is four thousand dollars because we've subtracted the closing price of the index from the strike price of the put and multiplied the result by 100 and just like before both the 1980 call and the 1780 puts both expired worthless for the same reason as in the previous example and so in this case the index went down by the time the trade expired yet we made over four thousand dollars on the trade anyway so as you can see we made really good money if the index went up or if the index goes down and that's why the Iron Butterfly is referred to as a non-directional trading strategy in fact it will make money as long as the payout under the short call or the short put is less than the original credit collected in that case the Iron Butterfly will make money regardless so think about it we collected 8115 that's 81.15 times 100 per point so as long as the index closes 81.15 points or less below 1800 or 81.15 points or less above 1800 either one the trade makes money so if you think about it the downside Break Even is 1800 minus 81.15 as you can see from the calculation and the upside Break Even is 8115 points above 18 hundred as you can also see so that means that at any price between those two break-even points 17 18 on the downside and 1881.15 on the upside you make money and so you can now see why we refer to these as non-directional strategies because we literally don't care if the index goes up or down we have an opportunity to make money in either case just as long as the index stays inside the Breakeven ranges of the trade in either direction and so another way of thinking of non-directional strategies is range trades where all you need to do is get the range right not the direction of the index or stock and that's why people fall in love with options income trading honestly because they no longer have to worry about whether they're getting the direction right all they need to worry about is if they're getting the range right and the cool part is that certain strategies have these huge ranges such as iron Condors where the probability of winning can be set at north of 80 percent north of 90 percent in some cases because the range of iron Condors can be very huge okay so now that you're aware of the incredible flexibility and power of options trading some of you might be pretty excited about getting started and so there are a number of important steps that you should consider before you jump in okay so first off most ordinary financial institutions will neither have the expertise nor the inclination most likely to accept your orders to place options income strategies and so as a result a large industry of online Brokers has emerged to serve traders who want to self-direct their trading of option strategies some of those brokerage platforms were specifically designed around the needs of independent retail options Traders and so here are the specific characteristics that you should be looking for at a minimum in order to hone in on which options brokerage platform would be the most suitable for you now any brokerage platform that does not have a clearly laid out module in which the options change of all major indexes and stocks are available should be immediately eliminated from consideration further there should be readily available a menu of the most common option strategies which when pulled up are automatically pre-filled with options laid out according to the details of that strategy iron Condors butterflies calendars diagonals and vertical spreads should all be available through those venues a picture is worth a thousand words as they say and this principle is quite true of options trading strategies which is why your online broker needs to have detailed profit graphs displaying the risks and rewards of the trade for example this is what a profit graph would look like for a long call which graphically demonstrates how much profit along 40 strike price call on a stock with a cost of 150 is worth at various closing stock prices on the day of the call options expiration you'll notice that because the long call Cost the dollar fifty the call doesn't really get profitable until the stock reaches a price of a dollar fifty higher which is 41.50 in this case because otherwise the cost of the call isn't covered by the improved value of owning the option this kind of graphic display makes it easy to see where the break even on this trade is and how much you lose at different prices or win at different prices at a glance otherwise you'd have to do the math in your head for each scenario which is obviously super tedious and hard to keep straight online Brokers which have profit graphs that demonstrate graphically the positions that the Traders actively trading provide a major major advantage to the trader particularly as the positions become more complicated and the trader will need the graph to highlight the risks and rewards of the trade at a glance Now options prices change depending upon a number of factors such as the price of the index or the stock that the option is related to or the volatility of the price of that index uh or stock and the amount of time until that option expires the options Greeks measure how sensitive a particular option is to each of these factors and as you become more experienced you'll learn the importance of the Greeks and use them in your decision making all you need to know at this point is that your broker must display those Greeks on your broker platform now the most important Greeks are Delta which is how much the options price will move relative to how much the stock or index it's derived from will move Vega which is how much the options price changes based on how volatile the Stocker index is and Theta which is how much the options position gains or loses each day depending upon how far that options expiration date is in the future if your broker platform doesn't have column choices for the Greeks then that broker is definitely not satisfactory for trading options now most major options oriented online Brokers are more than aware of their competition and attempt to be as competitive as possible in the market but finding the cheapest broker may not at all be in your best interest particularly if a broker is lacking in the key platform statistics we just discussed full order ticket menus detail profit graphs in the Greeks having said that the key issues to compare between Brokers are as follows online Brokers have a wide range of commission prices uh per options contract but typically they're anywhere from 15 cents to two dollars depending upon the size of an options account and the number of options contracts being transacted some options Brokers do not charge anything for options contracts in which case the broker is obtaining their revenue exclusively from What's called the order flow that they're sending to market makers or exchanges however you must be aware that brokers in this category might have very limited capabilities if your options broker as most do do charge a per contract commission for each trade and if you trade a substantial amount of transactions in a month almost all Brokers are negotiable as to their charges and you should make sure to probe into that before making a final decision commissions are charged for both entering and exiting an options transaction unless you have to consider these round trip charges when assessing the economics of a trade at least one major broker has decided to waive its exit fee on an options trade only charging commissions for entering the trade initially some Brokers charge a minimum amount for each transaction known as the ticket charge in addition to their commission per contract those Brokers is a commercial trade-off May well charge less for commissions per options contract above the ticket charge if your broker uses ticket charges you must think through how many options contracts you are likely to transact at any given time and whether you're effective commission rate will actually be higher when considering the ticket charge than other brokers in the market who offer higher commissions but no ticket charge so for instance if your broker has a ten dollar ticket charge and a 20 cent commission if you trade one options contract your effective commission rate is ten dollars and twenty cents for that one options contract you'd be a lot better off with a broker that charges even a dollar fifty commission rate per option in that example some Brokers will charge a flat amount per month and no commissions per transaction at all depending upon how active you plan to trade your account this could be a very attractive option provided that the broker has all of the other requisite capabilities now there are large number of potential fees that an online broker can charge you in addition to the base commissions that they advertise these can include clearing fees regulatory fees exchange access fees options exchange fees and exchange membership fees some Brokers quote you a very cheap per options contract commission rate but then load many of those additional fees on top of that providing for some unpleasant surprises when you've completed a transaction other Brokers embed all fees within their stating Commissions in which case you're not charged for them explicitly we can't emphasize enough how important it is to clarify how these various fees are handled whether they're embedded or not when you're considering establishing an account with an online broker in order to be able to transact options with your online broker you will need to have access to what the current market pricing is for each option you're trading as well as the asset from which those options are derived like stocks index currencies or whatever options exchanges provide real-time Market data including quotes order book information historical data for each options chain publicly available to access this information for you online Brokers may pass on Market data fees to their clients the fee amount can vary based on the level of data required such as basic or Advanced Market data packages that you'll need to choose when you first establish an account with an online options broker so think through carefully which options you'll be trading and only ask for Market data that allows you to trade those particular options and whatever other data you need to make your trading decisions and don't get caught up in signing up for the endless amounts of available data feeds many of which you'll rarely if ever need to actually use in your Trading and finally some Brokers charge fees for exercising an option known as assignment charges While others don't it's important to check that particular broker's policy on that subject for instance if a short Equity call closes in the money Brokers will automatically sell your shares of the stock in question to the owner of the call at the call strike price that's an example of the assignment of an option and some Brokers will charge for this transaction While others may not incidentally most active options strategy Traders use one of three platforms think or Swim interactive brokers or tastyworks as they are all excellent in all the minimum requirements that we detail earlier but this is the dynamic field and so this list could expand over time as more and more Brokers want to establish the capabilities to gain market share in this growing Arena this course while it does cover a lot of ground is just a start to become a competent and successful options Trader you'll need a much more elaborate understanding of the major option strategies and their capital and margin requirements you'll also need to learn the critical skill of adjusting and modifying positions once you've entered them and the importance of the options Greeks and other very important topics without taking a comprehensive course in the fundamentals of options trading there's a pretty high probability that you'll inadvertently put yourself into dangerous trading situations with no firm understanding of the risks of the positions you've entered and that's a recipe for disaster it's also our experience that Traders need to experiment with each of the strategies that they're interested in through the use of back testing software that allows you to sort of simulate having traded the strategy using real historical options pricing data from the past back testing gives you confidence in your strategy helps you to understand its strengths and weaknesses and provide you with the simulated experience of winning and losing trades and understanding the flow of each strategy without back testing you're not prepared for live trading because you haven't built the muscle memory for the strategy which is essential to mastering any major option strategy most major Brokers provide you for free with a paper trading account that is funded with fictitious money paper money so once you've back tested a strategy then we recommend your paper trading the strategy for sufficient length of time to get a feel for how your broker platform works as to that strategy when you're live trading with real Capital the last thing you want is to be fumbling around learning the ins and outs of your broker platform while you're trading capitals at stake you need to be able to operate your broker platform as a second nature activity for you navigating the market shouldn't be Complicated by the fact that you haven't mastered your broker platform paper trading is the best way to master your broker platform each major broker provides you the paper trading account within which you can practice and build your muscle memory for how that platform Works don't make the mistake of not taking advantage of that now when you do finally begin to trade live capital in your account trade small for a while you're going to make mistakes you're going to make executioners you're going to experience different emotions most of which are counterproductive to successful trading while you're working out all these issues the last thing you want to be doing is to discourage Yourself by having each mistake magnified because you unnecessarily trade it too large when you're still learning and essentially in training you must trade live Capital to learn how to be a successful Trader but you don't have to trade large to get that experience most Traders think of any losses that they experience in their initial year of trading as additional tuition and that's a good way of looking at it so keep your tuition costs low and trade small most online Brokers will inquire as to your knowledge of options trading prior to granting you options trading permission which is another important reason to acquire a solid understanding of options fundamentals before you consider trading options with your hard-earned capital once they've qualified you you may only need to fund your account with as little as five thousand dollars we recommend to clients that they start out with at least five thousand dollars so that they'll have enough Capital to practice all the major option strategies however if you are more than minimally active you will be subject to what are known as pattern day trading rules which means that the broker's risk management software will think that you are day trading options even if you're not and will automatically limit the number of Trades that you can make in any trading week unless you fund your account with twenty five thousand dollars or more so unless you plan to make a minimal number of options trades in any given week you might want to eventually deposit twenty five thousand dollars with your broker to meet that minimum pattern day trader standards and so it's as easy as that to get started trading options get a solid education in the full details of options trading choose an online broker along the lines we just suggested back testing paper trade the strategies that you'll be learning during the trading process and then fund your account minimally at first until you have attained a level of trading consistency and success that it will be pruned for you to start judiciously adding capital and building monthly income and wealth through your options trading account now as a first step in that direction if you'd like to learn three more option strategies that our Pro Traders use all the time including the unique options trick that allows you to make money while you wait to buy stocks or ETFs at the price you want plus the options income strategy that allows you to make consistent money whether the market goes up down or sideways plus an incredible way to make money on a stock or index even if you're outright wrong on the direction then just click the link that should be appearing now at the top right corner of your screen or you can just head on over to optionsclass.com to register for this free Workshop directly it really is a rare opportunity for retail Traders and investors to learn directly from Wall Street Traders but that's exactly what you'll be getting through this free online Workshop so click the link to sign up now before you miss it

Channel: SMB Capital

Views: 325,229

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, options trading course, beginner options course, beginner options training, how to trade options, options basics, basic options trading course

Id: w_BjFmbwbYA

Length: 73min 32sec (4412 seconds)

Published: Tue Jul 25 2023