Top 3 Options Trading Strategies for Beginners

[Music] hey everybody Chris here from project option comm and in today's video we're going to talk about the top three options trading strategies for beginners so in this video I'm gonna walk you through each of the three strategies give you a very simple explanation as to how they work then I'm going to show you a quick example to show you how these positions can profit over time and then I'm actually going to show you real trade examples and show you how to set up these positions with real option prices from today so let's go ahead and get right into it so with so many available options trading strategies where my beginners want to start well there are three strategies we believe our great started strategies for beginners which we will talk about in this video and I'm actually going to show you how to set these strategies up now before we get started I want to say that we're just going to cover the basics of these strategies and we're not going to get into the complex details but if you want in-depth guides on all of the topics covered in this video please go to project option comm and sign up for a free account with us as you'll unlock all of our structured modules that cover all of these topics in depth and we'll help you learn faster than anywhere else on the web so with that said let's go ahead and get started with these strategies so the first strategy we're going to talk about is the short put spread which means you're selling a put spread so selling put spreads is a great strategy because you can gain bullish exposure to stocks with limited risk and the potential to profit even when the stock price falls slightly so here is how you set up this trade so first of all you're going to sell a put and then you're going to buy another put at a lower strike price with the same quantity and in the same expiration cycle as the short put now this trade makes money when the stock price remains above the put that you sold as time passes and the trade loses money when the stock price Falls notably so keep in mind that through this video we're going to to the very basics and we're not going to get into all the complex details but there are links in the video description if you would like to look at each of these strategies more in depth so with that said let's go ahead and look at our short put example trade alright so here is our example trade for selling a put spread so this this trade is actually a trade that actually happened and the data that this example is based on is from real option data so as we can see here on the very top of this chart we're looking at the changes in the stock price and we're looking at the put that we're selling and the put that were buying so in this case the stock price is just above two hundred and fifteen dollars at the start and to create our short put spread we're gonna sell the two ten put and the two and we're going to buy the 205 put now on the bottom part of this graph we're looking at the profit and loss of this short put spread so I've actually pointed to a couple areas on this chart so on the top part of the graph I'm pointing to an area where the stock price is actually below the initial price where we sold the spread and in the bottom part of the graph I'm showing you that even though the stock price has fallen slightly the short put spread is up money and that's because as the stock price is above the short put spread as time passes that short put spread is going to continually lose value and that's going to create profits as a put spread seller now at expiration which is on the very right of this graph we can see that the short put spread is up $100 for one spread and that's because the stock price is above our short put spread at expiration so when the stock price is above the puts in your short put spread then that put spread will expire worthless at expiration and you'll keep the entire premium that you collected so in this case the profit is $100 from selling a put spread and that's that profit is realized at expiration when the stock price is above the short put spread so now that we've looked at a an example on paper of a short put spread I'm gonna show you exactly how to set up a short puts bread with current market prices so let's go ahead and set up this trade alright so now that you know how a short put spread is set up and the basics of how it works let me show you how to set up a short put spread on everyone's favorite stock which is Netflix so as we can see here Netflix has been down the last two trading sessions and is trading right around 139 so based on this price action let's say that you think Netflix will remain above 135 over the next 60 trading or 60 calendar days so about 2 months from now you think Netflix will be above 135 and you want to place a bullish position with limited loss potential so what we can do here is we can actually set up a short put spread so since you think Netflix will be above 135 at expiration in two months we're gonna sell the 135 put and to limit the loss potential we're going to buy the 130 put against that so we're gonna do the 135 130 put spread that expires in about 60 days or two months so let's go ahead and actually set this trade up so as I said we're gonna target a timeframe of two months or around 60 days so that fits to the June expiration cycle so we're going to open up the June options and as we said we're going to sell the 135-foot and we're going to buy the 130 put against that so on the right hand side we have our put options and we have our bid and ask which will allow us to sell and buy the put options that we need to so in the middle here we have the strike prices and right here we have the 135 strike so over in the put section this means that this is the 135 put so to sell the 135 put I'm going to hit the bid price and to buy the 130 put I'm going to hit the ask now this is going to create our short put spread so as we can see here we're selling the 135 put and we're buying the 130 put and we're collecting a net credit of $1 and 43 cents now this means that we're collecting 143 dollars an actual option premium because the one dollar and forty three cents is on a per share basis and the standard option contract multiplier is 100 since each option represents 100 shares of stock we're going to multiply this $1 and 43 cents by 100 to get a hundred and forty three dollars of maximum profit potential at expiration now this means that if Netflix is above 135 at the time of June expiration which is in 58 days then the 135 put and the 130 put will both be worthless in which case this spread will be worth $0 and if the spread is worth $0 when we sold it for a dollar and forty three cents our profit will be a hundred and forty three dollars per put spread so this is how you would take your trading assumption for Netflix and turn it into an actual position and in this case we're talking about a short put spread which means we're selling input and then we're buying another put at a lower strike price all right so options strategy number two for beginners is selling iron condors now selling iron condors is a great beginner strategy because the position is non directional providing profit potential in range bound stocks now the trade can be as conservative or as aggressive as you'd like and that's really one of the benefits of trading options is that you can make positions very aggressive or you can make them very conservative based on your risk preference account size and what not so here is how you set up an iron Condor trait so you're gonna sell a put and then your going to buy another put at a lower strike price so that's actually strategy number 1 which is selling a put spread and then you're actually going to combine that with selling a call spread which means you're going to sell a call and then you're going to buy another call at a higher strike price than the short call now the trade makes money when the stock price remains between your sold options as time passes and the trade loses money when the stock price moves substantially in either direction so let's go ahead and actually take a look at an example of an iron Condor trade and see how it performs over time as the stock price is moving so here is our example iron Condor trait so in the top part of this graph we're looking at the changes in the stock price relative to our our options in this iron condor position so in this position we're selling the 216 put and we're buying the 209 put to create our short put spread and for our short call spread we're selling the 230 column and we're buying the 234 call so this strategy will make money and will be maximally profitable at expiration if the stock price is in between our short put strike of 216 and our short call strike of 230 so as we can see here on the bottom part of the graph we can see the profit and loss of this particular iron Condor position over time now on the top part of the graph we can see that the stock price clearly remains between our short put and short call strike price as time passes and that means all of the options in this iron Condor position are going to decay as time passes now since we sold this iron Condor we want these option prices to decrease so when these option prices decrease from the price that we sold the map we start to see profits as iron Condor sellers so on the bottom part of the graph we can see that as time is passing and as the stock price is in between our short strikes we can start to see profits gradually over time now at expiration we can see that the stock price is in between our short put and short call strike price and that means we're going to realize the maximum profit potential for this iron Condor and in this case that means we're gonna make 118 dollars from selling this iron Condor so now that we've walked through a example iron Condor trade let me walk you through how to actually set up an iron Condor with real option prices as of today's market action alright so now that you've seen the basics of how an iron Condor position works let's go ahead and set up a real iron Condor position in IWM so IWM is the Russell 2000 ETF so as we can see here IWM has been trading between one hundred and thirty dollars and a hundred and forty dollars for the past four to five months so let's say we think this range is going to continue and we want a profit from that by creating a market neutral strategy that profits when the stock price remains in a certain range as we know the iron condor sounds like a perfect fit for that so we're going to create our short iron condor position by selling the 130 put and we're going to buy the 125 put against that and then we're gonna sell them 140 call and we're going to buy the 145 call against that so why would we choose these strike prices well if we think the IWM is going to remain between 130 and 140 over the next X number of days in this case we'll use around 60 days then we want to sell a call with a strike price of 140 and we want to sell a put with a strike price of 130 now to create the spreads I'm actually just going 5-5 points beyond both of those options so since we're selling the 130 put we're gonna buy the 125 put and since we're selling the 140 call I'm gonna buy the 145 call to create our iron Condor position so let's go ahead and take this basic trade idea and turn it into an actual options trade so I'm gonna go and open up IWM options and we're going to go to the June expiration cycle since we think this trading range will persist over the next two months so I'm going to open up IWM options expiring in June and as we said before I'm going to sell the 130 put and I'm going to buy the 125 put against it so I'm going to sell the 130 put and I'm gonna buy the 125 put and that's going to create our short put spread and then I'm gonna sell the 140 call and I'm gonna buy the 145 call against that and as we can see here this creates our short iron Condor position in IWM that expires in June which is 58 calendar days from today now as we can see here this spread is trading for a credit of one dollar and ninety seven cents now that means that if IWM is between a hundred and thirty and a hundred and four dollars at expiration then all of the options in this iron condor will expire worthless in which case this iron condor will be worth $0 so whenever you sell an option you the best case scenario is for that option to go to zero dollars since you'll be cool you'll be keeping all of the premium that you sold those options for so in this case if we sell this iron condor for one dollar and ninety seven cents that's actually collecting a hundred and ninety seven dollars in premium for one iron condor position and if this iron condor expires worthless then we'll keep a hundred and ninety seven dollars so let's go back to the chart here so if we sell this particular iron Condor position and IWM remains between our short foot strike of 130 and our short call strike of 140 through the the expiration in june then all of these options will expire out of the money which means they'll be worthless and we'll keep the entire premium that we collected for selling the iron Condor which in this case is one dollar and ninety seven cents which translates to an actual profit of a hundred and ninety seven dollars so this is how you would take your market neutral assumption for a stock and convert it into an actual trade in the form of an iron Condor all right so the third and final option strategy for beginners is the covered call now covered calls are great strategies for those with long stock investments because the strategy reduces risk on stock investments while also providing profit potential when the stock remains flat or even decreases slightly so by selling a call option against your shares of stock you create more than one way to profit so here's how you set up the trade you're going to buy a hundred shares of stock or if you already own a hundred shares of stock all you have to do is sell a call option against those shares so you're gonna sell one call option per 100 shares of stock that you own now the trade makes money when the stock price increases or remains flat as time passes and actually the stock price can even decrease slightly but not too much now the trade moves loses money when the stock praise falls but can make money if the shares fall only slightly and that's because you're going to collect a premium for selling that call option and that's going to provide some downside protection so let's actually look at a covered call example and let's compare its performance to just owning a hundred shares of stock ok so here is our example trade for a covered call so on the top part of this graph we're looking at the changes in the stock price relative to the call option that we sell as a part of our covered call and also our breakeven price for that covered call now on the bottom part of the graph we can see that that dark line is the covered call profit and loss and the yellow line is the profit and loss of just owning a hundred shares of stock so basically owning a hundred shares of stock without selling a call option against it now the first thing I want to point out about this particular example is that the stock price only ends fifteen cents higher than where it started so for a for an investor who owns a hundred shares of stock without selling a call against it that means their profit is going to be fifteen dollars which we can see on the bottom part of this graph now on the other hand this particular covered call position had a profit of $600 at the end of this period now that tells us that even though the stock profits were only fifteen dollars there was an additional five hundred and eighty dollars in profits that came from selling that one twenty call option and since the stock price was below the called strike price of 120 at expiration the investor who sold that call option against their shares gets to keep all of the premium for selling that call so on the bottom part of this graph there's an annotation that says the money collected from selling the call option provides protection against shared decreases and enhances returns when the stock price remains flat so as we can see the long stock position of 100 shares reaches a loss of about 750 dollars at the lowest point compared to only 250 dollars for the covered call position now that's because when you sell a call option against your shares of stock that call option is going to provide downside protection when the stock price decreases that's because when the stock price decreases you're going to have losses on your shares that you own but that short call that you sold the call that you sold is going to decrease in value and when you sell something in a decreases in value that generates profits for you so when the stock price decreases that short call is going to lose value which is going to offset the losses from the shares that you own now the big downside to selling a covered call is that if the stock price increases substantially you actually won't participate in all of those gains so by selling a call option against the shares that you own you're agreeing to sell your shares at the strike price of the call that you sell should the stock price be above that cause a strike price at expiration now there are ways you can avoid losing your shares but either way no matter how you approach it if you sell a call against your shares of stock and the stock price explodes your profit potential will be far less than it would be if you had not sold the call so a covered call is only a strategy that you would use if you are mildly bullish on a stock and it's not something that you would use when you are extremely bullish on a stock because if you're extremely bullish then you want all of the upside potential that you can get so the good news is that most of the time stock prices don't explode to the upside and by implementing a mechanical covered call strategy you can lower the cost of your shares and create a stream of profits when the stock price remains flat or even increases slightly over time so now that you've seen a covered call example trade let me walk you through how to actually set up a covered call position using real options from today's trading session all right so the covered call position we're going to use is going to be in ewz so ewz is the brazil ETF so let's say we're mildly bullish on ewz and we want to create a position that profits from stock price increases but can also have a little bit of downside protection or even profit if the stock price remains flat so since ewz is trading for 36.4 tea six cents we're gonna need to buy a hundred shares of stock before selling a call against it so to buy a hundred shares of stock that's going to cost us three thousand six hundred and forty six dollars which is just 36 46 times 100 now let's say we think ewz might rise to thirty eight and a half by the June expiration cycle in about 60 days so we can actually sell the 38 and a half call against the long shares that we've just purchased to create our covered call position so let's see what price we can put that on for so we're going to buy 100 shares of stock of ewz for 3646 per share and then we're gonna sell the 38 and a half call in June for one dollar and four cents so we can actually do this in one trade by doing covered stock so as we can see here it brings up a price of 35 dollars and 42 cents now that's because we're buying a hundred shares of stock of ewz for 36 46 but we're also selling a call option against it for a credit of one dollar and four cents so when you do 36 46 - one dollar and four cents we get to 35 42 so basically if we buy this position right here for 35 dollars and 42 cents if ewz is right at 36 46 at expiration this 38 and 1/2 call is going to be out of the money and it's going to expire worthless which means we're gonna have a profit of $1 and 4 cents per share or 104 dollars overall now we're gonna have no profits and no losses on our long stock position which means we're going to keep 104 dollars in profits and that's gonna be entirely from selling this call option so by creating a covered call position we actually can profit when the stock price remains flat now since we put this on for 35 dollars and 42 cents that means that's actually our breakeven price now that's because if the stock price Falls to 35 42 then we're going to have a loss of $1 and 42 cents per share I'm sorry one for cents per share and if the stock price is at 35 42 at expiration then this thirty eight and a half call will expire worthless which means our profit on this short call will be one dollar and four cents per share so since we lost one dollar and four cents per share on the long stock that we have and we had a profit of $1 and four cents on this short call option we break even if ewz is at 35 42 in 58 days so this just goes to show how setting up a covered call position can allow some downside movement in the stock price because that premium that you collect from selling the call will give you a downside buffer should the stock price decrease and as we discussed before that's because when the stock price decreases this call option is going to lose some value and at expiration it'll be worthless which will offset some of the losses from owning ewz shares so this is just a quick example of how you can set up a covered call position in a stock that you are mildly bullish on so as I said before you wouldn't want to use a covered call position if you are extremely bullish because by selling a call option against your shares of stock you do cap your upside so in this particular example if II W Z blasts it off to you know let's say $41 we actually wouldn't participate in all those gains because since we sold the thirty eight and a half call against our shares we would be obligated to sell our ewz stock at thirty eight dollars and fifty cents per share but for that obligation we're collecting a premium of one dollar and four cents so if you want to learn more about the covered call strategy please click on the link in the video description thanks so much for watching this video everybody if you found it informative and helpful please go ahead and subscribe to our youtube channel so that you get videos just like this one in the future also if you want to check out some of our other videos go ahead and click on the playlist link on the right hand side you

Channel: projectfinance

Views: 432,169

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Keywords: options trading strategies for beginners, option trading strategies for beginners, options trading strategies, option trading for beginners, trading strategies for beginners, options trading for beginners, trading options for beginners, option trading strategies, options for beginners, how to trade options for beginners, projectoption, best option trading strategies, options, strategies, trading, finance, how to trade, options basics, stocks, iron condor, options trading, chris butler

Id: ScPLX2ysE0c

Length: 24min 26sec (1466 seconds)

Published: Wed Apr 19 2017