Beginning Options Trading - Learn how To Profit With Options | Chris Douthit | Skillshare

Beginning Options Trading - Learn how To Profit With Options

Chris Douthit

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11 Lessons (1h 38m)
    • 1. 1 intro

      1:55
    • 2. 2 beginning

      10:42
    • 3. 3 why options

      10:26
    • 4. 4 read options

      10:12
    • 5. 4 read options udemy

      10:06
    • 6. 5 option pricing

      14:53
    • 7. 6 option pricing2

      11:48
    • 8. 7 combining factors

      8:09
    • 9. 8 option greeks

      12:54
    • 10. 9 position greeks

      6:35
    • 11. Thanks for watching best

      0:39
71 students are watching this class

About This Class

Option trading done right allows anyone to start profiting right away without the huge startup cost that most businesses require.  With the proper trading strategy in place, option trading can be an extremely lucrative business. 

We educate individual investors in the art of stock option trading so they can manage their own money while continuing to beat the market. We include beginning, intermediate, and advanced option trading strategies.

Is this course right for you?

  • Are you looking to make consistent profits that beat average market returns?

  • Are you looking to make more money with less capital?

  • Are you looking to make money no matter which way the market moves?

  • Are you looking for another avenue to diversify your portfolio?

The fact is if you wish to make the best returns in today's market you have to learn how to trade options and this professional course will detail all the top strategies for stock option trading success.

Transcripts

1. 1 intro: Hello, everyone. My name is Chris Dal of it, and I want to welcome you to the options strategies. Insider beginning option Trading Course. This course is your step by step guide on how to trade options the right way so that you can consistently generate profits with your trades. It doesn't matter if you don't know what an option is right now. The fact is, options are difficult for everyone. In the beginning, however, with quality instruction mixed with some practice, they will soon start to get a whole lot easier. Once you're on board and ready to learn how to trade options the right way, I promise it will all start to make sense for those who learn how to trade them properly. Option trading is a superior investment strategy to anything else out there, giving those who use them the best chance to win and earn the most money. There's an endless amount of ways to trade options. This is why it's very important to pick a mentor that has a proven track record and not just some self taught guy who dabbles in options at home. I am a former lead market maker who worked on an options trading floor for years, working with one of the largest investment banks in the world and right along with some of the best floor traders in the business. I have switched sides to become a dominant home trader, and I am now teaching my students the trading strategies that allow me to make consistent profits that beat average market returns. There are many advantages to learning how to trade options the right way. Some of these include allowing investors to make more money with less capital, make money no matter which way the market moves and add a power means to diversify and already existing portfolio with options strategies, insider on your team and just 15 minutes a day you can start making real money trading. I look forward to joining you on this journey. 2. 2 beginning: Over the last few years, stock option interest has exploded and many new traders have entered the market. This is good as it increases competition and titans option pricing. However, the majority of new traders failed to understand the strategies on how to make consistent profits with options. So we have set out to change that. You may or may not understand what an option is right away, but it's important not to give up. At first. Options seem complex and puzzling for everyone due to their many dimensions. But just like anything else, the more you study, the easier they'll become. I also suggest that you take notes while you follow along, so you have something to refer back to. For future reference. Just keep with it, and I promise it will all start to make perfect sense. I refer to options as the major leagues of investing Option trading. Done right is where the serious investment money is made. But in order to make that money, you need to make sure you understand options because almost all new traders start out losing money. Traders who take both are beginning and advanced course will get the proper foundation, the right tools and the proper trading strategies to make consistent profits month after month with options members at our website Option strategies insider dot com will also always get real time trade notifications of our exact trades, which on average have a 90% plus success rate. In the end, our students will have the complete picture on how to maximize their reward while balancing returns intelligently against risk. So what is an option? An option is a contract that gives the buyer the right but not the obligation to buy or sell an underlying asset at a specific price on or before a set date. The seller of the contract sells this right and is obligated to fulfill the buyer in exchange for receiving a payment called a premium to simplify things. Let's run through an example, say we own a trucking company and we think gas prices, which are currently trading at $2.50 a gallon, are going to surge higher over the next year, and we want to protect ourselves against raising prices. We could buy a contract that allows us to purchase gas for $2.80 a gallon up to 10,000 gallons for a price of 10 cents per gallon. Because this contract controls 10,000 gallons and it carries a premium of 10 cents a gallon , this contract will cost us $1000 today. Now, why would anyone pay for a contract giving them the right to buy gas A $2.80 a gallon when it's currently priced at only $2.50 a gallon? That's a good question. And if gas prices stayed under $2.80 we would never exercise the contract. Why would we? If gas prices in the open market or cheaper this would result in a loss of that $1000 premium we purchased? The contract for the seller of the contract would get $1000 just for taking on risk. That never ended up being an issue good for them. However, if gas prices were to shoot up to, say $3.50 a gallon, this would be a totally different story because we purchased the right to buy gas at a price of $2.80. We can now force the seller to honor the agreement and sell us up to 10,000 gallons of gas for only $2.80. When everyone else pays 3 50 our total savings is 70 cents per gallon times 10,000 gallons or $7000. Of course, we did have to pay $1000 for this contract, so our total profit for buying this insurance on raising gas prices is going to be $6000. This is basically how a call option works. There are going to be a few technical terms that come along with option trading. That's just the nature of the business. It can sound like a foreign language at first, But please don't let that stop you from learning how to trade options. There's not that much. And through repetition, it's going to all make sense very soon. Once you actually get through the course, which is full of examples and actual live trading, it's all going to make perfect sense. The understanding of what is actually happening will come with time. My promise to you is that I will get you there in the shortest amount of time possible so you can start making money with options sooner rather than later. With that said, we have to lay a basic foundation. There are two types of options. Call option contracts and put option contracts. A call option gives the buyer the right to purchase stock at a predetermined price and within a specified time period. This means there will be a limit to how long the buyer may wait. The more time given the more the contract will cost. The seller of a call option is obligated to fulfill the rights of the buyer if that buyer chooses to exercise those rights. A put option is similar to a call option. In regard to the rights given to the buyer, however, a put option works a little different. A put buyer can sell the stock at a predetermined price, and within a specified time period, the seller of a put option is obligated to fulfill the rights of the buyer if they so choose to exercise their rights. So now that we know a little about options, I want to cover some key option trading terms. First call options control the purchase of stock while put options control, the sale of stock buyers of options both calls and puts have the rights, while sellers have an obligation to fulfill the rights of the buyer at the agreed upon price and before the predetermined date. This agreed upon price is known as the strike price, and the predetermined date is what we refer to as the options expiration. One more point. One option contract under normal circumstances controls 100 shares of stock for both calls and puts okay. I know that's a lot to take in. So how about we run through some examples demonstrating how all this works? Let's pull together the terminology we just learned in a real scenario here, we're going to look at calls first to get a better understanding of why options are so powerful. For instance, we want to initiate a long position in the company X y Z, which is trading at $50. If we buy the stock, that means were risking $50 times the amount of shares we want to buy. If we buy 100 shares, that's a $5000 investment. However, options allow us to take a long position in this stock where we can avoid actually buying the stock and risking so much capital. First we need to decide where we think the stock is going and what we can afford to risk over the next two months. If we think the stock is going to trade up to $58 the price of a 55 strike price call option is a dollar 50 this will give us the ability to purchase the stock for the price of $55 any time within the next two months. If the stock does trade up to $58 that's going to be great as we can exercise the call option and buy the stock for 55 even though it's currently trading at 58 our total cost per share is going to be the $55 plus the dollar 50 cost of the option for a total of 56 50. Because we can now sell the stock for $58. We just made a nice return of a dollar 50. This position on Lee cost us a dollar 50 being so we have made a 100% return on capital in just two months. Ah, far better return on capital versus just purchasing the stock. Another benefit of buying a call instead of the stock is that our max loss is also capped at the price we paid for the option. Had we purchased the stock and it traded down to $40 we would have lost $1000. But because we instead decided to purchase an option, are max. Loss is limited to the cost of the option, no matter how far the stock trades down. Remember, one option contract controls 100 shares of stock, so if we purchase one contract for a dollar, 50 are max. Loss is only $150. Next, let's take a look at put options. These are very similar to calls, but instead of giving us the right to buy stock puts, give us the right to sell stock. If we're looking to take a short position in the stock, we can either sell the stock short or buy puts. A lot of new traders understand calls, but it takes a little longer to get their heads around. Puts people often buy puts instead of shorting stock, but it's also very common to use puts to protect a current portfolio, just like drivers by car insurance to protect their vehicle. Although you have to pay insurance premiums, most hope they never actually use it. However, if there's an accident, they know they are protected. Puts are often used in a similar fashion. They allow the buyer of the put to sell stock at a predetermined price. And if a stock they own gets crushed, the investor has the right to exercise the puts and sell the position out, saving themselves from a larger loss. Let's look at Stock X y Z again, which has now traded up to $62 this time we want to protect our profits against the stock, trading back down to $50 in the near future. Here we can look to buy a 55 put, which is priced at a dollar 25. If the stock trades down to $50 like we thought, that would mean we have the right to sell the stock at the 55 strike price. With the current market value of the stock at $50 for a $5 profit minus the dollar 25 we paid for the option, giving us a net profit of $3.75 not bad for only a dollar. 25 investment. Okay, everyone, I hope you find this first lesson engaging, and you're starting to get excited about option trading. In the next lesson, we're going to have a look at some of the benefits warnings and why investors might want to sell options. I look forward to seeing you there. 3. 3 why options: Welcome back a za weaken. See options. Give traders some huge benefits. Other investment vehicles cannot provide. Traders often start off with stock or another investment type and then later graduate. Two options when they think they're ready for mawr involved investing. There are several reasons why educated traders eventually make the jump to options. They offer the highest return on capital maximizing and investors dollar. They allow investors to decide on their desired probability of success before putting on the trade, in essence, allowing traders to set their own desired risk tolerance. And finally, options allow traders to define their risk versus reward. By doing so, a trader compare options together, capping their profits in exchange for limiting their losses. This type of control and flexibility is not possible in other investment vehicles. For those who are interested and want to make above average returns, options allow them to do so. However, it comes at a cost. Options are not easy, at least at first. They require plenty of studying and experienced. For those who have a desire to learn, they will all start to make sense and pay off very soon. Moving on. You have heard me talk about return on capital throughout this course. But what exactly is return on? Capital return on capital is the percentage that represents the amount of profit gained against the total investment size. It's calculated by simply taking the profit and dividing it by the investment. Return on capital is important because it shows how much an investor can earn for every dollar they invest. For example, if we bought an investment property for $300,000 then that property generated $24,000 of rental income a year, we would have a return on capital for this investment of 8%. This same analogy works in option trading. If we make a trade that has a max profit of $1000 a max loss of $4000 the investment bank will hold $4000 in order to secure payment. If this trade goes bad. If we hold this trade to expiration on, are successful in reaching our max profit, our return on capital is going to be 25%. If we instead decide to buy the trade back early and only profit $400 are return on capital is going to be 10%. Most new investors have no idea what a good return on capital would be. If we bought this trade back a few weeks before expiration, we might have only made $400. So would this have been a good investment? Let's go back to our property. Example. There was an 8% return on the whole year. Did you think that was a good investment at option strategies insider dot com Our average trade length is only about 30 days, so if we were to annual eyes are 10% return over a year. That would be an annual return of over 120%. So I think a 10% return over 30 days would be an amazing return. Even a 3% return monthly would add up fast over the course of a year just to give you some idea. If we invested $1000 today and received a 3% compound ID monthly return on our money, we would more than double our money in just two years. In this example, exactly two years from our investment date, our $1000 would now be worth $2032 the point is, as an option investor, there's no need to be overly aggressive. In fact, that's how most option traders get in trouble. We're happy to be making 12 or 3% a month, and then every once in a while have a month where everything goes right and we pull in a much higher return over time. This turns into a lot of money. If you're getting excited about options, that's great news. But before you rush out and buy a bunch of calls or puts, there are certainly some negatives that come along with participating on the buy side of an option trading strategy. In the last lesson, we ran through some examples of investors looking to buy options and why they might want to do so. But for there to be a buyer, there also has to be a seller, which is just someone who is willing to take on the buyers. Risk insurance companies normally performed this function in society. However, in the investment world, you don't have to be a big time insurance agency like Geico or one of the many others to sell insurance. Anyone could do it, and for any size they feel comfortable with the option seller takes in a premium in exchange for ensuring the buyers investment risk. The key to being a successful insurance agent, a k a. The seller of options, is to take on the best possible insurance situations. Car insurance agencies consider a lot of different factors when selling insurance. The person driving the type of car, the miles driven per year, just to name a few. They then come back with a price that justifies their risk. Option sellers could do the same thing. Look at a company's fundamentals. Understanding management, market perception, implied volatility as well as many other possible factors that go into calculating if the risk warrants the reward. But why would anyone want to sell options when that comes with limited profits? And oftentimes those profits are smaller than the max loss of the trade? That's a good question, and what's typically going through the head of most new option traders about now think of it like this. A car insurance company like Geico takes in many people's small premium payments, and every once in a while they have to pay out. But overall they end up taking in way more money by selling insurance than they pay out to the people buying insurance. There are so many insurance companies today because the ones running their business intelligently are all making money hand over fist. The same goes for selling option premium. Those who do it intelligently will make money. I want to run through another example, except this time will be selling. But before we do that, I want to talk about calculating. Are breakevens? You may have noticed what are breakevens were on our previous examples, even though we didn't talk about it specifically. But before we run through our sell side examples, let's discuss. It's very simple to calculate a break even on an option trade. If we buy a 50 strike price call for $3 the stock has to reach $50 before we start making any money. But we still have to account for the $3 premium we paid for the option so easy enough we simply add the premium to the strike price. Once the stock reaches $53 we've made a $3 profit on the call option, which covers the $3 premium we paid for the contract so in this example, $53 would be our break. Even the break even is calculated the same for both the buyer and the seller, except they're on opposite sides of the trade. If the stock finished right at $53 on expiration, this would be a tie, and both the buyer and seller would break even above 53 the buyer would turn a profit and the seller would lose below 53 the seller would win and the buyer would lose. Puts work very similarly, except we simply subtract the premium from the strike price to calculate the break. Even if we bought a 50 strike price put for $3 we would start making money once the stock trades below $50. But we would need to make up our $3 premium so we would not reach a point of profitability until the stock reaches $47. With that said, let's take a look at stock ABC, which is trading at $45. If we believe it will not trade any higher over the next several months, we can sell a 50 strike price call three months out for a price of $4. The most we can hope to make on this trade is the $4 which is what we sold the call for. If the stock stays under $50 will, in fact make the $4 we had hoped Teoh. For every dollar it trades over $50 we lose a dollar. Of course. We were paid a $4 premium to take this trade so we wouldn't start to take a loss on the trade until the stock penetrates. $54 are break even for every dollar it trades over 54. It would be a loss. Let's now take a look at selling a put option. Like the call. The put option works the same way. But on the downside, let's look at stock ABC once again. Only this time we think the stock is going to keep moving higher. We decide to take a relatively aggressive approach and sell at the money put option, which means selling a put that has a strike price at the same level as where the stock is currently trading. We'll go three months out and sell the 45 strike put for 6 50 If the stock does continue to go higher and stays above $45 like we hope our profit would be $6.50. Now let's first figure out our break. Even for every dollar the stock trades under 45 we lose $1. We make 6 50 right off the top from the sale. So are break even will be 38 50 as long as the stock doesn't trade under 38 50 in the next three months, this will be a winning trade for every dollar ABC trades under 38 50. That will result in a loss of $1. All right, that concludes our lesson on learning the basics of calls and puts. If you've made it this far, then you're well on your way to learning the key fundamentals of option trading. Just be sure to keep watching, because we're going to show you far better ways to trade options than what you've seen thus far. There's a lot more to cover, so make sure you understand everything we've covered thus far with the quiz below, and I look forward to seeing you in the next video 4. 4 read options: in the last lesson. We learned the basics of calls and puts and why we might want to buy or sell them and the risk versus reward for each strategy. But what many new option traders don't know is that just like trading stock, you can buy and sell option contracts instantly on your computer with just a couple of mouse clicks. Here, I have pulled up what is referred to as an option chain. This is a list of all the available options for a given stock listed by expiration date, with the most recent expiration on top and then within that expiration by strike price, with the lowest strike price on top, we have two sides calls on the left and puts on the right. This is a pretty standard format that you will find at most brokerage houses or websites like Yahoo Finance. The platform I have up here right now is the think or swim desktop software provided by TD Ameritrade. There are a lot of choices when it comes to a trading platform, but in our opinion, think or swim is going to be your best bet. Think or swim is very powerful, free with any TD Ameritrade account comes with some of the lowest fees in the industry and has great support for these reasons. It's also one of the most popular trading platforms out there. So no matter what you're trying to dio, it's very easy to find answers. For these reasons, it's our first choice for an option trading platform. If you're using another broker or you're still trying to decide on a broker, we highly recommend signing up to T. D. Ameritrade. The advantages of the think or swim platform are going to make trading ah, whole lot easier and more profitable. And if that wasn't enough, we have negotiated discounted commissions on Lee for options strategies insider dot com members. So when you place a trade with TD Ameritrade, it will cost you less than everyone else. For those interested, make sure you sign up using the link below so you can receive your discount coming back to think or swim. We're looking at Netflix options. Netflix and most other publicly traded companies have options in order to see if a stock has options. You just come up here and enter the stock symbol if you have a company in mind and aren't sure what their stock symbol is. That's an easy fix. Just ask Google and they'll provide you that information. Let's go back and look at Netflix stock and look at the option Shane, with more detail, as previously discussed. The options are listed first by the date they expire. The option dates, then go down in order, with one's expiring in the longest amount of time on bottom, These ones down at the very bottom that expire in a year or longer, are referred to as leaps due to their long duration. The options expiration date is listed first thing on each bar you have the day, month and year of the options expiration. And then after that, in parentheses, you have the number of days from today until that date. The rose that have text written in yellow are weekly options, while the ones listed in light grey our monthly options Monthly options are what most people trade and what we trade here at option strategies insider dot com. If we open up a month, we'll get a list of options available for trading listed with call prices disseminated on the left and puts are disseminated on the right. These are separated by strike price, which are listed going down the page from smallest to largest on each line. There are prices for that option contract notice. There's a bid price and an ask price. Just like stock. The bid is the most someone is willing to pay for that option. Right now, the ask is what someone is willing to sell that option for right now, when the bid and the ask meat, then there is a trade. So if we want to sell an option immediately, we would sell on the bid price. And if we wanted to buy an option immediately, we have to buy on the ask price. Let's discuss what would happen if we wanted to buy one of these call option contracts. First, we should understand that one option contract controls 100 shares of stock. So if we buy one of these option contracts, we will be allowed to buy 100 shares of stock at a price of $165 up until the date of September 15th 2017. And if we bought 10 contracts, we would be able to buy 1000 shares at a price of $165 up until that date. For now, let's just stick with the strategy of buying one. Netflix, September 1 65 Call option contract. How much is this going to cost us? Well, we have a couple of options. We could put out a buy for a lower price than the ask and hope someone takes it. If the market is 4 60 at 4 70 we put out a bid of 4 65 there's a good chance someone might want to do that. And we may get a fill. However, if we don't want to take any chances and want an immediate fill, we would need to pay the ask price of 4 70 This price of 4 70 represents the price of one controlled share, and because one option contract controls 100 shares, this would end up costing US $470. Even though option contracts control 100 shares, the prices are listed on a per share basis, so whatever the price is listed at, you would calculate the cost of the trade by multiplying the price times the number of contracts purchased. So times 100. If we wanted to purchase 10 contracts, we would pay 4 70 times 10 contracts times 100 shares for a total of $4700. We would then have the right to control 1000 shares of stock. If our stock prediction was correct and Netflix shot upto 1 75 per share, this would be a nice winning trade. We would have the right to buy 1000 shares of stock at a price of 1 65 and sell it for 1 75 Now you might be thinking buying 1000 shares at a price of $165 is still going to cost $165,000 that is a lot more money than you have access to. The good news is we don't actually have to buy the stock When we trade options. We can sell this option position back out for a huge profit in the exact same manner We bought it and the cash just gets added right into our account without any stock ever coming into play. So if the 10 options we just purchased a month earlier for 4 70 per contract for a total of $4700 is now worth $8 per contract for a total of $8000. We can sell that back out, and now our bank has just increased by $3300. Just like in this example, you don't have to wait until expiration to open or close a position. If you buy an option, you can sell that option back out at any time until it expires. Selling options works the same way. You can always buy it back until expiration. Now let's talk a little bit about pricing. Options are referred to as in the money if they're currently in a position where they could be exercised. In the case of a 100 strike price call. When the stock goes over 100 theon Shin would be in the money. If the call is trading under 100 it would be said to be out of the money. As you probably guessed. A 100 strike price put would be considered in the money if the stock trades below 100 would be considered out of the money when it trades above 100 when it comes to option pricing. There are two main elements. Intrinsic value and time value. The intrinsic value is easy to calculate for in the money options. It's the difference in the stock price and the strike price. So if the stock X Y Z is trading at 50 the 40 strike price call would have an intrinsic value of $10. This is the real value the option has right now. Out of the money, options would have no intrinsic value. If the 40 strike price call was selling for $12 it would be said that there is $2 worth of time value and $10 worth of intrinsic value. You can calculate time value by simply subtracting the intrinsic value from the total option premium. The more time you have to expiration, the more time value premium you're going to pay. This time value premium corresponds to the amount of time the option has to become more profitable. It would make sense that we would have to pay more for additional time to add further profits to the position. All right, that concludes this lesson on stock options. I know this was a lot of information to take in, but I hope things were starting to come together. Just remember, everyone is confused by stock options. When they first start out, you have calls and puts and then buys and sells on each one. It's logical that it would be confusing. Just take it slow and soon it will all start to make sense. Remember, we're just covering the basics right now. The good news is you're learning from the ground up, and by the end of this course, you'll have a trading strategy in place that will allow you to make consistent profits trading options while other people come right out of the gate and lose. You will have the knowledge and the support to succeed. All right, everyone. I look forward to seeing you in the next lesson where we're going to learn all the factors that go into option pricing and how we can leverage them to our advantage. This is going to give us the building blocks to create successful option trading strategies that continue to pay. Just make sure you understand everything up until this point. Take advantage of the quiz below, and I will see you soon 5. 4 read options udemy: in the last lesson. We learned the basics of calls and puts and why we might want to buy or sell them and the risk versus reward for each strategy. But what many new option traders don't know is that just like trading stock, you can buy and sell option contracts instantly on your computer with just a couple of mouse clicks. Here, I have pulled up what is referred to as an option chain. This is a list of all the available options for a given stock listed by expiration date, with the most recent expiration on top and then within that expiration by strike price, with the lowest strike price on top, we have two sides calls on the left and puts on the right. This is a pretty standard format that you will find at most brokerage houses or websites like Yahoo Finance. The platform I have up here right now is the think or swim desktop software provided by TD Ameritrade. There are a lot of choices when it comes to a trading platform, but in our opinion, think or swim is going to be your best bet. Think or swim is very powerful, free with any TD Ameritrade account comes with some of the lowest fees in the industry and has great support for these reasons. It's also one of the most popular trading platforms out there. So no matter what you're trying to dio, it's very easy to find answers. For these reasons, it's our first choice for an option trading platform. If you're using another broker or you're still trying to decide on a broker, we highly recommend signing up to TD Ameritrade. The advantages of the think or swim platform are going to make trading ah, whole lot easier and more profitable. And if that wasn't enough, we have negotiated discounted commissions on Lee for options strategies insider dot com members. So when you place a trade with TD Ameritrade, it will cost you less than everyone else coming back to think or swim. We're looking at Netflix options. Netflix and most other publicly traded companies have options in order to see if a stock has options. You just come up here and enter the stock symbol. If you have a company in mind and aren't sure what their stock symbol is, that's an easy fix. Just ask Google and they'll provide you that information. Let's go back and look at Netflix stock and look at the option Shane, with more detail, as previously discussed. The options are listed first by the date they expire. The option dates, then go down in order, with one's expiring in the longest amount of time on bottom, These ones down at the very bottom that expire in a year or longer, are referred to as leaps due to their long duration. The options expiration date is listed first thing on each bar. You have the day, month and year of the options expiration. And then after that, in parentheses, you have the number of days from today until that date. The roads that have text written in yellow are weekly options, while the ones listed in light grey our monthly options monthly options are what most people trade and what we trade here at option strategies insider dot com If we open up a month, we'll get a list of options available for trading listed with call prices disseminated on the left and puts are disseminated on the right. These are separated by strike price, which are listed going down the page from smallest to largest on each line. There are prices for that option. Contract notice. There's a bid price and an ask price. Just like stock. The bid is the most someone is willing to pay for that option right now, he asked. Is what someone is willing to sell that option for right now, when the bid and the ask meat, then there is a trade. So if we want to sell an option immediately, we would sell on the bid price. And if we wanted to buy an option immediately, we have to buy on the ask price. Let's discuss what would happen if we wanted to buy one of these call option contracts. First, we should understand that one option contract controls 100 shares of stock. So if we buy one of these option contracts, we will be allowed to buy 100 shares of stock at a price of $165 up until the date of September 15th 2017. And if we bought 10 contracts, we would be able to buy 1000 shares at a price of $165 up until that date. For now, let's just stick with the strategy of buying one Netflix September 1 65 call option contract. How much is this going to cost us? Well, we have a couple of options. We could put out a buy for a lower price than the ask and hope someone takes it. If the market is 4 60 at 4 70 we put out a bid of 4 65 there's a good chance someone might want to do that, and we may get a fill. However, if we don't want to take any chances and want an immediate fill, we would need to pay the ask price of 4 70 This price of 4 70 represents the price of one controlled share, and because one option contract controls 100 shares, this would end up costing US $470. Even though option contracts control 100 shares, the prices are listed on a per share basis, so whatever the price is listed at, you would calculate the cost of the trade by multiplying the price times the number of contracts purchased. So times 100. If we wanted to purchase 10 contracts, we would pay 4 70 times 10 contracts times 100 shares for a total of $4700. We would then have the right to control 1000 shares of stock. If our stock prediction was correct and Netflix shot upto 1 75 per share, this would be a nice winning trade. We would have the right to buy 1000 shares of stock at a price of 1 65 and sell it for 1 75 Now you might be thinking buying 1000 shares at a price of $165 is still going to cost $165,000 that is a lot more money than you have access to. The good news is we don't actually have to buy the stock when we trade options. We can sell this option position back out for a huge profit in the exact same manner We bought it, and the cash just gets added right into our account without any stock ever coming into play . So if the 10 options we just purchased a month earlier for 4 70 per contract for a total of $4700 is now worth $8 per contract for a total of $8000. We can sell that back out, and now our bank has just increased by $3300. Just like in this example, you don't have to wait until expiration to open or close a position. If you buy an option, you can sell that option back out at any time until it expires. Selling options works the same way. You can always buy it back until expiration. Now let's talk a little bit about pricing. Options are referred to as in the money if they're currently in a position where they could be exercised. In the case of a 100 strike price call. When the stock goes over 100 theon shin would be in the money. If the call is trading under 100 it would be said to be out of the money. As you probably guessed. A 100 strike price put would be considered in the money if the stock trades below 100 would be considered out of the money when it trades above 100. When it comes to option pricing, there are two main elements. Intrinsic value and time value. The intrinsic value is easy to calculate for in the money options. It's the difference in the stock price and the strike price. So if the stock X Y Z is trading at 50 the 40 strike price call would have an intrinsic value of $10. This is the real value the option has right now. Out of the money, options would have no intrinsic value. If the 40 strike price call was selling for $12 it would be said that there is $2 worth of time value and $10 worth of intrinsic value. You can calculate time value by simply subtracting the intrinsic value from the total option premium. The more time you have to expiration, the more time value premium you're going to pay. This time value premium corresponds to the amount of time the option has to become more profitable. It would make sense that we would have to pay more for additional time to add further profits to the position. All right, that concludes this lesson on stock options. I know this was a lot of information to take in, but I hope things were starting to come together. Just remember, everyone is confused by stock options when they first start out, you have calls and puts and then buys and sells on each one. It's logical that it would be confusing. Just take it slow and soon it will all start to make sense. Remember, we're just covering the basics right now. The good news is you're learning from the ground up, and by the end of this course, you'll have a trading strategy in place that will allow you to make consistent profits trading options while other people come right out of the gate and lose. You will have the knowledge and the support to succeed. All right, everyone. I look forward to seeing you in the next lesson where we're going to learn all the factors that go into option pricing and how we can leverage them to our advantage. This is going to give us the building blocks to create successful option trading strategies that continue to pay. Just make sure you understand everything up until this point. Take advantage of the quiz below, and I will see you soon. 6. 5 option pricing: Hello, everyone. In the last lesson, we left off talking about option pricing today. I want to talk about the elements that influence option pricing. There are six factors that can change the price of an option, some certainly more important and more powerful influencers than others. Many new option traders may not consider some of the minor influencers, or perhaps they don't even know about them. That's okay, but there will be times when they leave money on the table. So I want to make sure I cover all six factors. So there's no question on why an option price might have changed Once we understand how these pricing elements affect, an option will be able to execute trades that allow us to profit by taking advantage of the expected option price movements, these air factors that every option traders should know. In fact, when I got my first job in the options exchange, my boss would quiz me on these option pricing elements every few days. So I highly recommend you take notes, especially on this section. Once we cover the basics, will then be able to implement powerful strategies that capitalize on what we have learned these six factors are the price of the stock, the selected strike price, the amount of time to expiration, the volatility of the option interest rates. And if that stock offers dividends, some of these things might look familiar. And they should, because we have discussed several of these factors already. Let's first talk about the price of a stock and how this affects option pricing. When we talk about a call, we know this gives us the right to buy stock at a certain price in the future. So it should be no surprise that the higher the stock goes the MAWR, that option will be worth. Let's look at two scenarios. First, we own a call option with a strike price of 100 where the stock is currently trading at $90 . Second, we own a call option with a strike price of 100 but the stock this time is currently trading at $120 which would we rather own? Clearly, Option one has less value. No one is going to exercise a call and buy stock for $100 when they can just go into the open market and buy it for 90 Option two is far more appealing. Being able to buy stock for $100 when it's currently trading 1 20 has far more value. There would be $20 worth of intrinsic value in this option. Plus, the remaining time value puts work the same way. But in reverse. Would we rather own a $100 strike price put? Which means we can sell the stock at $100 when the stock is trading 1 10 or trading 80. Obviously, owning a put contract that allows you to sell stock at $100 when the stock is currently trading 80 is going to have more value because stock prices are always changing. If you own a call and the stock goes up in value, then your call will also go up in value. However, this has an inverse effect on puts stock price increase means put price decrease. Furthermore, if you own a put option and the stock price decreases, then that will cause your puts value to increase. Just like with the other scenario, when puts increase, calls decrease so a stock going down in value will cause the call options to also go down in value. This brings us to the strike price, which is our second pricing factor. In the previous example, we owned a 100 strike price option, and we evaluated what happened when the stock moved. But now let's take a look at our option chain and see how our strike price values based on which strike we consider here. I have pulled up Disney stock on our favorite platform, thinker Swim, which is currently trading about $107. Thinker swim does a great job of separating the in the money options from the out of the money options in the money options have a purplish background, while out of the money options have a black background remembering from before. When a call is in the money, it means the stock is trading at a price higher than the strike price. When a put is in the money, it means the stock is trading at a price lower than the strike price. In the case of Disney, any call option strike below $107 is going to be in the money. Any put strike above 107 is going to be in the money strike prices that are deeper in the money have more value. In the case of Disney, we can see this very clearly. Ah, 105 Strike price call is worth about 4 55 less than a 100 strike price call, which is worth about 4 60 less than the 95 strike price call. Having the right to buy stock for a lesser price translates into more value for that option . In the case of puts, if we want the right to sell stock for a higher price, that translates into paying more. For that put, we could buy the right to sell Disney stock at 1 40 per share within the next 28 days, but that's going to cost us a hefty $34.80 or $3480 per contract. Remember, Option contracts control 100 shares. If we decided to buy the 1 20 put instead, that would cost us a lot less money. Being able to sell Disney stock at 1 20 a share has a lot of value when the stocks trading at 107 but that certainly has less value than being able to sell the stock at 1 40 This makes sense, as we can tell from our option chain. The deeper the option is in the money, the more expensive that option is. This is because the better strike price execution we get on that option, the more value that option has when it comes to an option's value on expiration, there's no time value left as the option is expiring and its life is ending. If that option is out of the money, it won't have any value at all, and that option will expire worthless. If that option is in the money, the option's value will be made up of 100% intrinsic value, the difference between the strike price and the stock price. Basically, if we have a 100 strike price call and that stock is trading 107 then that option will be worth $7. If we have a 100 strike price put and that stock is trading 89 then that option will be worth $11. Let's head back to Disney and take a look at the May options that expired today. Disney closed at 107 52 now these marks might be off by a couple of cents because the mark figures are the average of the bid and the ask and people are going to be bidding a few cents less than what the option is worth and asking a few cents more. This is because traders are not willing to do a trade unless they have something to show for it. They're going to want to earn a few cents for their troubles, or there is no point in making the trade. As you can see, no one is bidding for these worthless out of the money options shown in the black area. But there are certainly people willing to sell them as they have zero value. And selling something with zero value, even for a few cents, is better than nothing. He's out of the money. Strikes would rarely ever trade, But there's a market there just in case. Looking through the option chain, we see the 107 calls should be worth about 52 cents and it ISS The 104 strike price call has 3 52 of intrinsic value, and that is right in the range of where it finished trading for every dollar we go deeper into the money, the option will also increase by $1. Looking at the puts, the 1 10 put should have a value of about $2.48 and we can see that's also right where it ended up. Remember this because owners of these puts will be allowed to sell stock at a price of $110 with the stocks real value at 107 52 this means there is $2.48 of intrinsic value, and that is the only value these puts have as they have just expired. So just a review out of the money options, once they expire, have a value of zero in the money. Options have a value of only their intrinsic value, which is calculated by taking the difference between the stock price and the strike price. Looking back at our June expiration, which is next month, we see out of the money options have some value, and if we look even further out in time to September, which is four months away, we see those same strike prices have even more value so what's happening here and why do these out of the money options have value. These options have value because they have our third point an option pricing more time to expiration. What we commonly referred to as time value options have a limited lifespan. Thus their value is affected by the passage of time. The more time and option has, the more value that option has. If we have a car that is worth $30,000 we go to buy insurance, we will have to pay a premium of $100 every month. That insurance contract is good for one month, and every month we must buy a new one for $100. We also have an option to buy the exact same insurance, but to pay every six months, and that will cost us $600. Options work the same, weakened by one month coverage or weaken by six month coverage. We just have to be certain about the length of coverage we want in our car insurance. Example. If we only by one month of car insurance, forget to pay our bill and then have an accident the day after our insurance lapses It's too bad, so sad. Our insurance company will not cover our car, and we will have to eat the full cost of the damages. Well, guess what? Options work the same way if we own a one month put option. And the day after our put expires, the CEO of the company dies and the stock gets crushed were not covered, and we get no benefit. So the more time we want, the more it will cost us going back to Disney. We see our September 100 puts are, in fact, out of the money, but they still have a dollar 64 of value because stock prices move and they give us a protection against downwards stock movement. Over the next four months, Disney could very easily take a turn for the worse, and that 100 put that's currently out of the money now could finish in the money by September until that option expires worthless. There's always a chance it could finish in the money, and that's why it still has value. Looking at our Disney option chain, we can see that the further out of the money the option is the smaller the contract price. That's due to the fact that the further out of the money we go, the lower the probability of that option finishing in the money. And if it does finish in the money, the exercise price will be at a lesser value, as we just discussed, the more time the option has to expiration the MAWR. That option is worth. However, as that time to expiration gets closer, the value of that option begins to decrease. With every passing day, there's a little less time to expiration and that less time is reflected in the option price. For these reasons, options are considered to be decaying assets. For example, if we purchased one Disney September 100 put for $168 the stock just stayed right where it was trading sideways over the next four months, that put would start to decay away. With four months to expiration and the stock trading at 107 that put is worth 1 68 however , next month, with the stock in the same place. That put is only going to be worth 1 21 in July, with the stock still trading 107 the value will fall toe only $64 in August on Lee $20. And in September it will be worth nothing. Where would the Stock have to go for us to break even? Remember, with puts, we calculate our break even by subtracting our option premium per share of 1 68 from our strike price of 100. So are break even would be 98 32. We start cutting into our losses once the stock goes under 100 but we do not start to turn a profit on this trade until the stock goes under 98 32. As you can see, time would be our biggest enemy, decaying our option away, reducing its value so that it expires before we could reach a point of profitability. This is why successful option traders don't go nuts buying out of the money options. Not only will the stock have to move in our favor, but it will have to move enough to account for all that time decay. We can measure this time decay in something called fada, which represents the amount the option decreases in value daily due to time decay. This is why at option strategies insider dot com. We choose a strategy that takes advantage of time decay, and instead of having time be our enemy, time becomes our ally. Now, don't worry. We're going to talk more about this later. For right now, I just want to make sure you understand why going out and buying a bunch of options is not a good strategy for success. So far, we have covered the 1st 3 factors of option pricing. These include the stock pricing and how the fluctuation of a stock's price affects the option's value. How the strike price chosen will affect the value of that option and the likelihood of it finishing in the money at expiration. Finally, how options are decaying assets that have limited lifespans, thus losing their value little by little with each passing day later on. In this course, we're going to talk a lot more about time decay and how successful option traders use it to their advantage. So I urge you to make sure you finish this course, all right. I know this was a lot to take in, so let's stop right here. And in our next lesson we'll start fresh with our fourth option pricing factor and my personal favorite volatilities. See you soon 7. 6 option pricing2: Hey, everyone, glad to see you here in the second section on option pricing and for good reason. Most traders quickly come to understand the pricing elements discussed in the last section stock price, strike price and how time affects an option pricing. But they stop there and never even try to understand what we're going to cover in this lesson. To me, that could be a bit scary, because the fourth factor in option pricing is one of the most important for making consistent profits. Many people get confused by volatility, so never try to understand it or feel like volatility will just take care of itself. This is the wrong approach, and that's the reason why most option traders continue to implement trading strategies that are not sustainable. Understanding volatility is the key to long term option trading success. I want you to get comfortable, get a cup of coffee or your favorite beverage because this lesson is that important. So what exactly is volatility? Volatility measures the amount something changes better known in mathematics as the magnitude of change, an option trading. We use something called implied volatility, which represents the expected future fluctuations of a stock over a period of time. Implied volatilities is based on a number of factors. Some of these factors include historical volatility, which is how much fluctuation a stock has had in the past. Future events such as analystsforecasts, upcoming earnings announcements or other possible news can all affect the magnitude of change in this stock. Also included are imbalances in the stock supply and demand resulting in large price swings . If there's few people bidding for stock and a lot of people are coming in to sell, they're going to have to start selling the stock at lower and lower prices, which will cause the stock price to drop quickly and without warning. The higher the stock's volatility, the higher the risk and the higher the risk, the more reward when a stock has a lot of volatility, it has a greater chance of shooting up when a good event occurs. But it also has a greater chance of getting crushed when a bad event occurs. This is basically true for all types of investments, but especially important when dealing with options. If implied volatilities high, it means the stock has large price swings and the options become expensive. If implied volatility is low, it means a stock has minimal price movement and the options become more affordable. This makes sense as no one would want to sell options if a stock had a good chance for a big price change. Unless, of course, the price of that option is jacked up to warrant the increased risk. This is exactly what implied volatilities does. Adjusts the prices of an option to where buyers and sellers can agree. Once we understand that implied volatility is always moving around just like stock prices, we can use this to our advantage. Think of it like this. Let's pretend we own a life insurance company and we have two guys applying. Matt is 40 years old, is 5 11 and a healthy £185. He eats well, exercises regularly, doesn't smoke and only drinks on rare occasions. George is also 40 years old and five foot 11 but weighs in at £300 eats a lot of fast food , doesn't exercise smokes and drinks often. Should we ensure both of these guys at the same premium levels? Of course not. Matt is clearly a better bet than George, and if we're going to take on risk. We would much rather take on Matt unless, of course, we could collect much higher premiums for George. From an investor's point of view, George is considered to have high implied volatility. But there is some price level where ensuring George is going to make sense. Let's compare the same philosophies that exist with our life. Insurance example with option trading here are two companies that are trading for the same price. Northrop Grumman Corporation currently trades at 2 49 79 has an implied volatility of 14.62%. Biogen is currently trading at 2 49 79 has an implied volatility of 23.27%. Let's compare these two companies and see how the options for the same month and the same strike price steak up. Comparing the July 2 50 strike calls, which have 60 days to expiration, we see that Northrop Grumman Corporation options are priced $5 at 5 30 while the Biogen options are priced $9 at 9 50 the Biogen options cost 80% more, with the only difference being the implied volatility. Same stock price, same expiration. Different implied volatility. Looking deeper, we see that the trading range of a Northrop Grumman corporation over the next 60 days is expected to be 11 96. Because Biogen has a much higher implied volatility. It's expected range is 18 98 so we can see how implied volatility effects option pricing, the greater the likelihood of the stock moving the MAWR. The option is going to cost. This is a perfect example of how implied volatility has a huge effect on option pricing. This difference in implied volatilities will affect all months, all strikes and for both calls and puts. Hopefully, at this point, the logic seems simple. Ah, high implied volatility translates into high priced options, while low implied volatility means low priced options. Once we understand this, we can use this to our advantage. It's pretty common among stock traders to buy low and sell high. I'm sure you've heard this before, but option traders conduce the same thing with implied volatilities sell when implied, volatility is high and the options are priced high. And then by the options back when implied, volatility is low and options are more affordable. We can do this because implied volatilities is predictable. Educated traders can take advantage of market events that change and options implied volatility and use them to their advantage. We'll get more into that later in our advanced course, but for right now, just make sure you understand how implied volatility works and how changes in implied volatility effects option pricing the next two factors that affect option pricing are relatively smaller pricing factors. But they do have an effect. We rarely look at these factors when trading, but we want to give a complete picture of option pricing. So when they do kick in, no one is left scratching their head as to what happened. The fifth factor in option pricing is interest. All option pricing valuation models use interest rates to calculate the final price of the option. Interest rates don't change much, and because of that, they're usually not talked about as much. But when they do change, so do option prices. Think of it like this. We could purchase 100 shares of stock at $50 but in doing so we would have to spend $5000 to cover the cost of that stock. However, instead of purchasing stock an investor could purchase a call option at a fraction of the price of only $500 put the remaining $4500 in an interest bearing account. The option trader would then get the benefit of both the movement in this stock, but also the interest they earned from the savings account. When interest rates rise, call options become more attractive because less capital would have to be spent in order to participate in any upward movement in the stock. In order to counter act this call, option pricing will actually increase in order to equal out the benefit of not having to tie up as much. Money in the stock puts work in the exact opposite way. Buying a put is similar to shorting stock. If we short a stock. In theory, we get the cash, which could then be put into an interest bearing account. No one would want to buy a put if they could instead get cash for shorting stock and then put that cash in a savings account. Collecting both the benefit of the stock movement and the interest earned because of that puts have negative correlation to interest rates and get discounted when interest rates rise. If this is confusing, don't put too much weight in memorizing this. Just understand that if interest rates go up, call prices go up and put prices go down. If interest rates get reduced, call prices go down and put prices go up. Interest rate changes are rare, but when the U. S Federal Reserve does make a change, you'll have a good understanding on why the option prices changed. Finally, the last factor that affects option pricing is dividends. Not all stocks pay dividends, but for the ones that do, a dividend will change the price of an option. When it comes to a dividend, there's something called a declaration date. This is the date set by the company when it will declare its dividend. The other important date when it comes to dividend payments is the X dividends date. This is the date on which the rights to that current dividend no longer accompany a stock. So any investor who owns that stock the day before the ex dividend date will receive the dividends payment. The ex dividends date is also the day the stock will drop by whatever that dividends payment Waas. So if a stock is trading $30 the day before the X dividends date and it pays a $1 dividend on the Ex dividend date, it will open up a $29. Clearly, anyone can see how an instantaneous drop in the stock will effect option pricing because we know what the stock price drop is going to be on the ex dividend date ahead of time, it's easy to calculate option pricing that accurately effects the options. After the expected price drop put options will gain value when the price of the stock goes down and call options will obviously lose value. With the price drop, stocks are usually in higher demand leading up to the X dividends date so the owner can receive the dividends. For this reason, call option, which doesn't participate in the dividends, tends to fall in price leading up to the ex dividend date. If this seems confusing, the good news is option Pricing is very efficient. When it comes to dividends, there's little opportunity to perform an arbitrage, but they do factor into option pricing and we should be aware of that. So an increase in the dividend payment causes put options to increase in value. While this increase has the opposite effect on call options, causing calls to fall in value, we have now covered all the factors of option pricing. These include the price of the stock, the selected strike price, the amount of time to expiration, the volatility of the option, interest rates. And finally, if that stock offers dividends in the next lesson, I want to put these factors to the test so you can see first hand how powerful some of these pricing elements are. All right, everyone, I look forward to seeing you in the next lesson. 8. 7 combining factors: Hello, everyone. In this lesson, what I want to do is pull up the think or swim platform and look at how some of the factors we just discussed actually change the options price. This is not something you need to take notes on. I just want to demonstrate how important thes main pricing elements are in affecting the options pricing so you can see first hand what small changes condo's. For this demonstration. I'm going to use a tool within the think or swim platform called Theo Price. This is a tool that will allow us to hypothetically change elements of the pricing model to see how it would affect the options price. Here I have up in video, and I am looking at the June options. If I look at the 1 38 calls, which expire in 24 days, I see it has a current market price of $4.2. Now let's see what happens if I make some adjustments to the pricing factors discussed in the last lesson. I want to start off with a strike price. Looking at the calls, it's easy to see that the lower the strike price, the higher the options cost. In the case of puts, the higher the strike price, the higher the options cost. Not surprising, this is due to the fact that the deeper into the money were allowed to exercise our option , the more value that option is going to be worth. Options that are out of the money today can finish in the money, but if they don't they become worthless. So let's see what happens to our 1 38 call when we adjust the price of NVIDIA. In this example, all other pricing elements will remain the same, but the price of the stock will shoot up $5. Here, the price of the option changes to 6 72 Clearly, this has a very large effect on the option because the likelihood of the option finishing in the money is substantially greater. If the stock dropped $5 the option pricing for the 1 38 call would instead plummet to 2 13 Without a doubt, this type of movement in the stock would cripple thes options. Chances of finishing within the money and the option Pricing now reflects that I want to reset the stock's price back to the current price, and I want to look and see what happens if we were to change the date. With no other pricing factor changing, I want to see what will happen with each passing day as we gradually go through the days left until expiration, we see this poor option is slowly but surely losing its value day after day, decaying a little more until finally, the options price approaches and then reaches zero. Remember, an option will only have intrinsic value when it expires, and all out of the money options will expire worthless. So if in video was to expire next month at the price it's currently trading at now, the 1 38 call would have no intrinsic value. And since it's out of time value, this option is now worthless, and anyone who bought this call would have lost their entire investment. Let's now reset our position and have a look at what happens to option pricing if the implied volatility changes. If you recall when implied volatility rises, then that stocks options both calls and puts will also rise in value. So for this example, our stock is going to stay the same. Our days to expiration is also going to stay the same, and Onley implied volatilities will change. Let's assume a random market event happened and the implied volatility has jumped up 30%. This has changed the option price from $4.2 to 8 28 So if we were long this position, we have greatly benefited from this spike in implied volatility, and our position is now profitable without any change in the price of the stock. We could then sell this option back out right now for a huge profit. Keep in mind, these are isolated cases where we look closely at just one pricing element of the stock. But in real life, all of these elements are always changing. So let's take a look at how pricing oven option might change in a couple more scenarios. How about we look at the price of an option 10 days from today and the stock price is going to be up $3? That would likely drop implied volatilities by probably 0.5%. This would result in the option price of 4 44 Obviously we lost value from the decay which is unavoidable, and we lost slightly with the decrease of implied volatility. But we were able to make up for both of these factors due to the price movement in the stock and still turn a slight profit. But keep in mind, we called the direction of the stock right. It moved up $3 we still only made a small profit. Another situation. This time the option increased by $5. However, it took three weeks for this to happen and implied volatility is still down on Lee 0.5%. Here we can see the stock went up by even more than our first example, but time decay is really starting to eat away at our profits. We were right about the direction of the stock, but it took too long. And that time decay is costing us big time. This time, even though the stock is up $5 we lost money. How about one last situation where the stock price has a $1 increase? Onley a week has gone by but implied volatilities has dropped by 20%. We still have a lot of time to expiration, but because the stock is not expected to move much over the period, it has little chance to make any significant upward movement, and the price of the options now reflect that by dropping significantly, the option is now on Lee worth a dollar 34 even though the stock price has gone up, resulting in a huge loss. Looking back at the option, as it turns out, in most of these situations, we ended up losing money, even though we called the direction of the stock correctly. If we would have just bought the stock, we would have been better off. So you might be thinking, Why did we even by this option and my answer to that is exactly, we bought the option. In all of these situations, the person who sold the option was in a better position to win right from the start, and in most cases they did. The problem is, most new option traders do something similar to this. They buy out of the money options and then hope that the stock's price movement more than makes up for the loss in time, decay and volatility. However, getting the stock movement right is difficult, but at the same time, toe also have it move up by an amount large enough to counter the time decay and implied volatilities. Well, that's hard to dio. The fact is, people who end up buying options typically lose more than they win and often times a lot more. Fortunately, you don't have to be on the buy side. Once we understand how options work and how we can limit our risk. Even went on the sell side, we will be able to take advantage of selling options and getting time, decay and implied volatility to work for us, not against us. While everyone else is concentrating on the price of the stock will be laughing all the way to the bank. Most option traders failed because they're trying to predict where the stock is going and, in the process cash in a big payday. But over the long haul, crash and burn time and time again, the advanced strategies that we're going to implement will not concentrate on where the stock is going, but instead on where the stock isn't going and then collecting on the time decay and the volatility changes. I hope you're getting excited because we're not that far away from getting into the advanced course, that's going to make us the real money. Please make sure you understand everything up to this point and be sure to take the quiz. I look forward to seeing you in the next lesson. 9. 8 option greeks: in the last section, you learned about option pricing, the factors that affect option prices. We even did some experiments to see how the options price would be affected based on time decay, changing stock prices and altered volatility. But the real question is how each of these factors influence is an option's price. If a week goes by or two weeks or a month, how much will that time decay reduce an option's value? If the stock goes up by $1.2 dollars or $5? How much will that change affect the option's value? If volatilities drops by 5% 10% or 15%? What is that going to do to an option's price? Attempting to predict what will happen with an options pricing can be difficult due to so many factors that come into play. As we saw in the previous lesson. Option pricing doesn't necessarily move in conjunction with the price of the stock. Because of this option, traders refer to something called option Greeks, which allows traders to measure profit and loss sensitivity that results from changes in the pricing parameters that make up the final options premium. Understanding Greeks is important because as we saw previously. Some Greeks may be working against us, while others are simultaneously working for us. If we understand how changing conditions can affect our options trades, we will be more likely to better position ourselves accordingly. Each Greek isolates a variable that can drive options price movement and provide insight on how the options premium will be affected. If that variable changes options, traders often refer to the Delta, Gamma, Vega and Fada when discussing their positions. So these are the ones we're going to cover in this course. The first Greek every new trader learns is Delta. The Delta will reflect the increase or decrease in the pricing of the option as it relates to a $1 movement in the stock, also known as the theoretical change in the option pricing. As it's affected by stock movement, the Delta will have a value anywhere from 0 to 1 for calls and zero to negative one for puts. So if the option has a delta of 0.5 and the stock goes up $1 then the option will go up by 50 cents. If the option had a delta of negative 0.5 and the stock goes up $1 then the option will go down by 50 cents. At this point, you're probably thinking, what causes and options Delta, And that's a good question. The Delta represents the probability and option is going to finish in the money. For example, if the stock ABC is trading at a price of $60 you buy the 60 strike price call, the option theoretically has a 50 50 chance of finishing in the money. ABC could go up and finish in the money, or it could go down and finish out of the money. For this reason, the option will be represented by a 0.5 Delta options that are out of the money will have a Delta less than 0.5 because they have less than 50% chance of finishing in the money, while options currently in the money will have a Delta greater than 500.5 because they have a greater chance of finishing in the money. If we were to buy a 50 strike price call in ABC, with the stock trading $60 this has a much better chance of finishing in the money. The stock would have to drop $10 to finish out of the money, so this would have ah, High Delta. This call could have a delta of 100.85 because it has an 85% chance of finishing in the money. If we were to buy a 70 strike price call, the stock would have to increase in value $10 to finish in the money. The probability of that happening is much less. This option might have a delta of only 0.15 Delta is important as it gives us a really life probability that our option will finish in the money or not, and from this we can make strategic place. Delta also tells us how much money we're going to make or lose in a $1 swing in the stock. If we buy one contract of the 60 strike, call for 2 50 the stock trades up $1 the next day, we will make $1 times the Delta for a profit of 50 cents per share, being that one contract controls 100 shares. This is a $50 profit. Let's look at our out of the money position. If we were to buy 20 contracts of ABC 70. Strike price calls for 30 cents with a 300.15 Delta. How much money would we make if the stock traded up $3 the next day? First, we know 20 contracts controlled 2000 shares. We would then multiply the number of shares times the stock price change times the Delta. So in this example, our profit would be $900. If we pull up an option chain for Apple, think or swim will allow us to set the Greeks in columns. As we discussed. All calls have Delta's that are positive, and all puts have Delta's that are negative. All options that are in the money have a delta greater than 0.5, while all options out of the money have a value under 0.5. If Apple was to go up in price by $1 tomorrow, the 1 55 strike calls would go up in value by 43 cents per share, or $43 per contract. But what about the 1 55 strike put in this case? Because the option has a negative delta. If stock went up, $1 then puts would go down by 58 cents per share, or $58 per contract. Another thing that has to be considered. As the stock price changes, so does the Delta. If a stock goes from $60 to $70 the calls options are all going to have higher deltas, and the puts are all going to have lower deltas. We contract this with our next Greek gamma. Like the Delta, the Gamma reflects the change in the delta with a $1 movement in this stock, whether you're trading calls or puts, you always add gamma to the old Delta as the stock rises and subtract the gamma from the previous Delta. As the stock drops, Gamma has the largest effect, with at the money options and decreases in value, the further the stock moves away from the strike price. Looking at Apple, we can see that the gamma of the 1 55 strike call is 550.6 So if Apple was to trade up $1 than the Delta of the 1 55 strike would adjust to 550.49. This makes sense because if Apple traded up $1 it would be trading at a price of 1 54 80 and we know and at the money option would have a delta of 800.5 here. The 1 55 strike call would be just barely out of the money, so it would have a delta of 550.49 If you're thinking this is getting a bit confusing, don't worry. Gamma is not something home traders tend to look at daily. The important thing you need to take out of gamma is just that it exists and that you understand the concept of a changing delta. This basically means if you own out of the money, call options and the stock price goes up $1 you make money. But the next dollar upswing makes you even more money. The dollar after that, even more for every dollar the stock trades up your gaining deltas. And with that, more profits on a percentage basis. As the stock trades higher, same thing goes for puts. When the stock trades down, traders will start gaining a higher percentage of profit for every dollar the stock trades down because the delta is getting larger. If you're still confused by gamma, don't worry. It's probably the most confusing concept of everything we teach. It's also one of the least important elements to trading and something that you will soon understand. No problem if you keep with it next on the list. And one of my personal favorites is data data is the measurement of the options decay. As we have already learned, options are decaying assets. They all have expirations, And when that expiration date comes, the option will either have value or have no value one or the other. More time adds more value to the option. Data is the rate at which an option loses its value As each day passes, Fada is always represented by a negative number, whether it's calls or puts because options decay with each passing day. For example, an option that is worth $2.14 today with a theta of negative 140.5 will have five cents deducted from its opening price tomorrow. It will keep getting a price deduction day after day, and those amounts on Lee get higher and higher until the option expires. Long term options have a fada of almost zero because they have so much time, they do not lose value day to day, Fada goes up substantially as options near expiration, losing MAWR and more value with each passing day. As a general guideline, options begin to decay quickly at about 56 days out from expiration and gain even more Fada with every passing day until the final week, when they lose all their time value. As you can see in the graph, the closer we get to expiration, the Mordecai the option has. With most of the decay coming in the last 30 days and substantial decay in the last week, Fada should be a relatively simple concept. It's important to understand that whenever we buy an option, we always have time. DK working against us. Okay, finally, our last Greek Vega, which measures the change in the volatility of the option. The Vega oven option is shown by a point change in theoretical value for each percentage point Change in volatility. So what does that mean? Basically, an increase in volatility means an increase in the option price, while a decrease in volatility results in a decrease in the option price. Pretty straightforward. Looking at our apple 1 55 options again, we can see that if volatility went up 1% are Vega. Having a value of 10.16 would increase the value of the option by 16 cents. As you can see, if volatility shoots up 10% or 20% this can have a huge effect on option pricing. It doesn't matter if you're dealing with calls or puts. Vega is always a positive number. This means when volatility increases, the option price goes up, and when it decreases, the price goes down. It's also worthy to note that Vega will decrease as expiration approaches. Less time means a smaller chance of stock movement. A six month option will have a greater Vaca and will be more sensitive to a change in volatility versus a one month option. So that's it for the option. Greeks. I hope you were able to make it through this one. Okay, as the Greeks are the most difficult concept for most new traitors, the good news is this stuff all starts to be second nature with a little experience. Let's recap. Delta reflects the increase in the option price as it relates to a $1 upward movement in the stock. Gamma reflects the change in the delta as it relates to a $1 upward movement in the stock data is the measurement of the options decay with each passing day, and Vega measures the increase in the option price as it reacts to a 1% increase in the implied volatility of the stock. You now have a good understanding of how each of these Greeks will affect an option's price and what we need to have happened so that we may profit when trading options. I know the Greeks can be a tough section, so let's go ahead and take a break here and we'll pick it up right where we left off in our next lesson. 10. 9 position greeks: learning the Greeks is confusing for most at first, but what thinker swim allows us to do is view our position Greeks, which are automatically calculated for us by the software In Apple, we have a position on called an iron Condor. Now, don't worry. If you don't know what an Iron Condor is, we're going to cover this in a later lesson. But for now, I just want to call your attention to the position Greeks on this Apple trade that we put on a few days ago. Looking at this Apple position, which is made up of four different option strikes, we can see what each of our Greeks actually is per strike. But more importantly, we can see what are accumulative Greeks are for our whole Apple position. Our delta is currently negative 59.34. This means if Apple trades up $1 we're going to lose $59. And if Apple trades down $1 we're going to make $59. We've already made a profit of $450. So if the stock traded up $1 it would reduce our prophet toe only $391 However, if Apple trades down $1 then our profit will go up to $509 because we have a negative Delta . This tells us that are weighted average of the apple positions is short and that we make money when the stock goes down. If we had a positive Delta, then we would be long and make money when the stock traded up. The Delta also tells us how much directional exposure we have to a changing stock price. This number should obviously be in line with our risk tolerance levels. If the Delta gets outside of our risk tolerance level, then we would need to make an adjustment on the position to ensure we keep ourselves safe. So what is safe, safe really depends on you and what your risk tolerance is. You can evaluate your risk by simply evaluating a Delta as equal to one share of stock. If we own 100 shares of stock and the stock goes up $1 we make $100. If it goes down $1 we lose $100. The same is true for Delta's. If we have a position of negative 59 Delta's than its equivalent to being short 59 shares of stock. The position Delta of Negative 59 is fairly small, which is typical in the case of an iron condor. A position like this mainly makes its profit from taking advantage of volatility and time decay and has limited effect from stock price movement. We're going to learn more about that later, but for now, just make sure you understand the Delta and how it can affect a position. Of course, as we talked about before, this Delta position can change, and that's represented by Gamma. Our Apple position has a delta of negative 59.34 a gamma of negative 17.95 So if Apple trades up $1 then our Delta position will increase by the amount of the gamma, causing our delta to increase from negative 59.342 negative 77.29 We already calculated that our position would lose $59 if the stock traded up $1. Gamma tells us what our position would lose if Apple trades up another dollar, and that is $77. As we can see our short Delta position continues to get higher as the stock continues to trade up again. Gamma is not something that's evaluated frequently as it starts to become second nature to traders with experience. It should just be understood that the Delta will change as the stock moves and gamma is a way to measure that change. If we look at our position theta, we see a value of 15.47 which is a positive number. Just a few minutes ago, we discussed how all options have a negative data. So how is it possible that we have a positive fatal? It's possible, because when we buy options, in other words, pay a premium for options. We lose money daily due to time decay. For this position, we sold options or received a premium when we put this trade on. So this position is benefiting from time. Decay were actually receiving $15.47 every day just for having this position on, and every day that fate a number goes up a little as well. I just put this trade on last week as this trade still has 51 days to expiration in another month that fate of number is going to be a lot higher and all be pulling in money day after day. Just for having this position on having time decay on our side is a definite advantage and the strategy most successful option traders implement. Finally, Vega. Our Net Vega position here is negative. 99.70 which represents what will happen to our P and L if implied Volatilities goes up by 1%. So if implied, Volatilities goes up by 1% will lose $99. And if implied volatilities goes down, we'll make $99. That's all for this lesson. I know the option. Greek section is a tough but interesting section. And if you don't get the Greeks right away, don't worry. It takes everyone a couple times through to really understand how these elements affect option pricing. Just be sure to stick with it, and it will all start to make sense soon enough. Remember to take the quiz below, and I will see you in the advanced option section, where we start to discuss actual trading strategies that experienced traders used to profit . This is where it really starts to get good thank you for trusting us and are beginning options. Course. It's a privilege we do not take lightly. If you wish to learn the same advanced strategies we used daily to profit with options, make sure to head over to option strategies insider dot com to continue your training. In addition, we provide our option picks in real time, along with the exact logic behind each trade so new traders can feel secure and profit while they learn. Thanks again for watching, and I hope to see you soon on the option strategies insider dot com Discussion board. 11. Thanks for watching best: thank you for trusting us and are beginning options. Course. It's a privilege we do not take lightly. If you wish to learn the same advanced strategies we used daily to profit with options, make sure to head over toe option strategies insider dot com to continue your training. In addition, we provide our option picks in real time, along with the exact logic behind each trade so new traders can feel secure and profit while they learn. Thanks again for watching, and I hope to see you soon on the option strategies insider dot com Discussion board.