Best Beginner Options Trading Strategy

what's up guys welcome back i've done a ton of videos on the covered call and the cash secure put but i've never really answered the basic question of what is the wheel strategy like why should i even watch those videos about the covered call and the cash care put if i don't know what the wheel is so in this video i want to get down into the digital whiteboard i'm going to give you a basic you know picture of what the wheel strategy is and like why it's so hyped up and why so many people like myself are talking about how great it is then if you kind of like like what this video told you then you could go check out the playlist and look at a deeper dive inside the covered call and the cash secure put so when somebody asks hey brad why the wheel strategy why am i getting into it this video will answer that question for you okay so what the wheel strategy essentially is it's using collateral to sell covered calls and cash secure puts to collect a buyer's premium okay so we have a couple different vocab that we need to start with here we have the collateral that's pretty much a vocab word covered calls is going to be a vocab cash secure put and also premium once we get those established we'll have a pretty good idea of what's going on so first off what is the collateral so the collateral is going to be one of two things it's either going to be 100 shares of a stock and we call this 100 shares a contract and the second is enough money to cover the cost of 100 shares so if we're going to be using 100 shares this is going to be called a covered call if we're using cash that's where we're going to be using a cash secure put now with a put you might have heard of something called a naked put we are not doing that a naked put essentially is when you don't have the cash to cover the options trade that you're about to make and in both these cases guys we are going to be selling options not buying options and guys sometimes you'll see selling as writing so for example if i say i wrote a covered call that's the same as me saying that i sold a covered call and i'm going to dive into robinhood and show you exactly where you see all these things and exactly how you'd move forward in making these different options trades now the premium guys is it's just going to be cash that goes directly into your buying power you get it as soon as that option is fulfilled because you can write an option and it doesn't get fulfilled just like you can put in a limit order to buy a stock and then not get fulfilled options need to be filled by the market just like anything and once they get fulfilled that buyer pays you that premium immediately so i underline this upon fulfillment because oftentimes people say like it's not reflecting my portfolio value for example so like if you have a thousand dollars and on robin hood you're watching your you know your stocks do this and your and your you know the amount in your portfolio go like that well if you sold an option and got a 30 premium it's not going to say 1030. the 30 is going to go into your buying power and then after expiration that we'll talk about when i show you the actual options chain that's when it will reflect your portfolio value but you do have that money immediately so if you have an expiration of say two weeks from now and you make that option right now you get that premium right now you don't have to wait the two weeks to get it so essentially guys the long and the short is we have some sort of collateral we have a hundred shares of a stock or we have enough money to buy a hundred shares and we're gonna use that as collateral to just collect premiums over and over again now it is worth mentioning and i'll do a video on like the pros and the cons of this later i have that coming up next week but this is taxed as ordinary income people always want to know about the taxes and like i said it's taxes ordinary income whatever your federal income tax rate and your bracket is whatever that is that's what you get tax on on your premiums so now let's take a look at both of these covered calls and the cash care puts and what you'd see inside robinhood and very similarly whatever brokerage you're using and we'll look at all of these different pieces of vocabulary and we'll see where we're actually going to compete and how you determine your premiums so here guys is going to be what we call an options chain it's all the different options inside the option if you will and i've used att one of my favorite stocks to do the wheel with i my next video is actually going to be about all the stocks i do the wheel was so if you're interested about that you know subscribe or whatever hit the bell notification so you know but a t up here we can see a t and we have its current share price now what you'll notice is i have to put everything on a cell remember guys we are a seller we are not a buyer all right so when we say we are going to sell this we have a share price now this share price is also listed right here so that's what the stock is actually trading at and we call this at the money now you can see i've done a put here so what that means is whatever option i choose we're going to talk about i'm going to be using cash as collateral we're now on this side this is going to be the call side so that means i have 100 shares of a t and i am going to use 100 shares as my collateral right here we see the expiration and that's how long this option is going to stay open okay and if you want to know more about like the expiration date and the buyer signing like i said look at those deeper videos but i just kind of want to give you this information here the buyer has the option to assign or close this at any time in which the contract has been met all of the things inside the contract i've met that we'll talk about they can assign that at any time now as a seller we are able to close this options but that's what you see inside that playlist i did a video on just closing options so now let's look down here at a couple of different other numbers that we'll see the strike price okay now the great thing about the wheel is that we get to pick the price at which we would sell 100 shares or the price at which we would buy 100 shares so for example right now a and c t is at twenty seven dollars and four cents let's say my basis on them is twenty eight dollars and i'd be happy to buy another 100 shares of that at twenty six dollars so what i'm going to do is i'm going to write something called a cash secure put and this strike price here is the price at which i would buy 100 shares so the strike price is the first piece of the options contract it says if the share price were to fall below 26 dollars i will buy 100 shares for that 26 dollars regardless of how low the share price goes there's kind of like the give and take there if it dives all the way to zero you still have to buy them for twenty six dollars a share which is one of the cons now with att the likelihood of going to a zero in one week very unlikely but it could happen now the buyer wanted to go to zero right they want to get twenty six hundred dollars for a stock that is worth zero so for that likelihood and for that possibility of such a high return they are going to pay you a premium to make that option and to fix in the price at which you'd buy it that premium is shown over here at 14 cents now remember one contract is 100 shares so this right here is really 14 dollars in premium that you will get immediately upon fulfillment these percent change guys and these changes to be honest i very rarely look at them when i'm just a beginner that's something you look into further on down the line also chance of profit there are numbers called the greeks which kind of figure out this percentage that the likelihood that this might happen once again that's really just speculation it's not set in stone and this break even price that you're going to see down here in this column essentially for you to break even the price has to be at 25.86 because if you get assigned to buy a hundred shares of 26. we also received 14 as well so this is that 26 minus the 14 cents per share so now in this cash secure put what do we want to happen well what we want to happen is we want the share price to stay up here in this region here because if it expires worthless at the end of expiration if the share price is not dipped below 26 dollars we keep this premium and we keep our cash in this case the cash would be 2600 would be the collateral or the cash needed to cover this put now if any time between now and expiration the share price falls below 26 that's when the buyer now has the opportunity to assign this option and force you to buy 100 shares at 26 now if it dips below 26 and he doesn't assign you and then it goes back above 26 you're good it's only while the share price is below that so essentially as somebody that's selling a cash cashier put we want the price of that option to stay high so that we can just collect the premiums and we don't have to necessarily buy the 100 shares some people want to buy 100 shares so they'll make this option closer to the share price as you get closer and closer to the share price the money goes up and up and up the premiums increase the closer to the share price that you get now people ask me all the time like brad why wouldn't i just get 199 dollars and make this cash cure put here well essentially then you are buying 100 shares at 29 when it's only worth 27 that's a 200 difference and you only got 199 so essentially you'd lose on this trade right here so we never am going to make a cash secure put above the share price it doesn't really make that much sense if it's really close here sometimes i've done it right at the money like right above if i think it's going to shoot up in the next day or two it's very light unlikely for the buyer to assign early or far away from expiration as you get closer that likelihood goes up so if it's far to expiration i might make something just above the share price if i think it's going to go up but very very rarely now essentially on the covered call side like i said we have 100 shares in this option we are going to pick a price that we'd be happy selling 100 shares and that would not be a big deal for example let's say we had a t at a cost basis of 25 and we'd be very very happy selling it at 28 that would be a 300 capital gain which would fall under short-term long-term capital gains it really depends on you that's something i'll talk about in that pros and cons video so you might make a covered call up here saying if the share price comes up to 28 i'll sell off 100 shares i'll take my 300 in capital gains and i'll also take a nice 11 premium here so the break even now for me becomes that share price plus the premium people ask me about the red and the green all the time that just means how has the price or how is the premium change that day has a premium increase in price or deca you surprised that's really all it means now on the put side we wanted the price to stay up on the call sides we don't want to get assigned and lose our shares we want the price to stay down here if at any time the price goes above 28 dollars into this range that's when i can be assigned so we see the different things in a call we want the price to stay nice and low so we don't get assigned and we just collect this juicy premium and in a put we want the price to stay up so that we don't get assigned and we just collect the premium the goal is really just to collect premium but i must say you always want to assume you're going to get assigned and then hope that you don't like you cannot do this with the stock you're married to and that you don't want to lose 100 shares of or something that you have a ton of capital gains because if you get called away now you have realized capital gains that you will have to pay taxes on if you want to see that playlist with the deeper dive of the wheel and some other things that i've done inside of it some other instructional videos i will leave that playlist right here guys if the video did help please give it a thumbs up for the youtube algorithm and share it with your other friends that are learning how to trade options and until i see you guys on the next one stay positive work really really hard always be kind to other people hope you have yourself an amazing day and an even better tomorrow

Channel: Brad Finn

Views: 71,854

Rating: 4.9521117 out of 5

Keywords: Brad Finn, dividend investing, dividends, passive income, the wheel strategy, stocks, trending stocks, covered calls, cash covered puts, cash secure puts, the wheel strategy explained, what is the wheel strategy, how do I do the wheel strategy, covered calls on robinhood, cash secure puts on robinhood, wheel strategy simply explained

Id: cgHUOF46wYs

Length: 12min 5sec (725 seconds)

Published: Mon Nov 02 2020