Options Trading: STRATEGIES (Part 1) | Scott Reese | Skillshare

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Options Trading: STRATEGIES (Part 1)

teacher avatar Scott Reese, Engineer & Investor

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

10 Lessons (2h 30m)
    • 1. Introduction

      3:33
    • 2. Call Debit Spread

      24:09
    • 3. Put Debit Spread

      18:31
    • 4. Call Credit Spread

      20:41
    • 5. Put Credit Spread + Clarifications

      20:52
    • 6. Iron Condor

      16:07
    • 7. Iron Butterfly

      11:44
    • 8. Strangle

      20:02
    • 9. Straddle

      10:04
    • 10. Wrapping Up

      3:53
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About This Class

If you've been curious to get actively involved in the stock market, especially with options, then look no further! This course will walk you through in detail some of the most common and easy-to-use options trading strategies that will allow you to play the markets however you want. Whether you want to be directional, neutral, have high odds of success, have lower odds of success but with greater payouts, etc., you'll be able to find one or more strategies in this course that suits your goals!

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Scott Reese

Engineer & Investor

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Transcripts

1. Introduction: Hey there. So if you have an interest in getting involved in financial markets specifically with options and this will be a great introductory course for you, I'm gonna show you some of the most common and easy to use strategies that I personally use myself and you can utilize to play the markets however you want. Do you want to be directional? Do you wanna be neutral? Do you wanna have bigger payouts with lower odds of success? Or you won't have smaller payouts, but much greater probabilities of success. Do you want to keep your wrist defined or undefined knowing that the mawr intelligent risk you take on, the bigger your payouts could be, Or maybe you want, use a combination of all these different techniques. Either way, this course will walk you through each strategy in detail so that by the end, you can start trading options in the market with a goal, obviously of making some great returns. So when you waiting for let's jump in. All right. So I just want to start this course off with a quick introductory video. My name is Scott Reese. I'm a software engineer currently in the financial Services industry animal. So an options trader, right? I'm in the market every day trading these financial products as often as I can. In regard to this course, it will require just very basic knowledge on how options work. So, you know, as long as you understand what a call is and what it put is and just the key concepts of, you know, a call option gives the buyer the contract the right to purchase 100 shares of the underlying asset at the strike price. And a put option gives the contract buyer the right to sell 100 shares at the strike price . And that's about it, right? So long as you understand this key concepts, you'll be totally fine working through this course. If you are brand new, however, I had, I recommend you watch my other course called Stock Market Options Introduction, and that course will teach you everything you need to know to get up to speed on how options work. And once you're done with that, you can come back to this course and then continue one. So as you are working through this course, you will first learn about some debit based strategies which are going to require you to pay money initially to get into these positions and they're gonna be a very directional positions. They're going to require that underlying asset to really move in order for you to make money. But they're gonna have the highest payouts, but also lower chances of success. Then we're gonna get into some credit based strategies which allow you to take in money initially, when you put in the position and you're gonna have smaller payouts but much greater chances of success. And then by the end of the course, you'll see how we can tweak thes credit based strategies to give them undefined risk, which may sound kind of scary, but it's actually not. Although I will say the undefined risk strategies are best suited amongst more advanced option traders. Once you get to that level, that information is going to very valuable because the undefined risk strategies are gonna have the highest probabilities of success and also the highest payouts, at least in regards to credit based strategies. So on the last thing I want to leave you with before we start this course off is none of these strategies were designed for you to just make one or two of them and make a lot of money, right? The key here is repetition. You really need to make a lot of trades, have a lot of occurrences so that the probabilities have a chance to actually play themselves out over time. Right? Just because you make 10 trades, each with a 70% chance of success, that does not mean seven out of those 10 trades are going to be winners. Only through again are gonna be losers, right? You could win all 10. You could also lose all 10. That simply because you have not made enough trades for those probabilities to actually play out, right? So I just want you to keep that mind as you're working to this course, that repetition is key making trades on a consistent basis, staying small and that kind of thing. So that being said, let's get started with the cold debit spread 2. Call Debit Spread: All right, welcome to the first video in this course, and in this video as well as the next one, I'll be showing you debit based strategies. And what I mean by that is you know, these strategies are gonna require you to pay a price, pay some money up front to get into these positions. And the idea here is, you know, at some point down the road, if the trade goes in your favour, you will be able to close out of the position for a premium, meaning you take money in. And of course, the goal here is, You know, at the end you want to be taking in more money than you actually spent putting on the position so that you could take the difference as profit. Right. So what you're seeing here is think or swim, which is my platform of choice when trading options. This is the option chain for Apple will be showing you apple options today. And so I'll be looking at the option change for options, both calls and puts that expire on May 15th which at this time is, you know, the expiring about 38 days, so open that up. And here you go. You can see on left hand side. These are all the call options, right? Calls on the right hand side, all the put options puts on in the middle. Here, you can see all the strike prices, and over here is just a duplication of all. Just the expiration date. May 15th. Right? Um and so a call debit spread, which is the focus of this video, is going to be a very directional bullish position. Right? So looking out for here, if we were to put this position on, we want Apple to really explode to the upside increasing price by a significant amount. And the way the strategy works is we're going to purchase and in the money call option and then sell and out of the money call option My all the calls and the puts that are highlighted in blue here. Is it all in the money options currently And then all the options not highlighted in blue are currently out of the money, right? Apple's currently trading at about $259 in 50 cents running up. So look at the calls here. You know, with a strike price of 2 55 That's currently less than the share price. So this options in the money and so are all these call options. Right? So if I were to set this trade up, what I might want to do is, let's say, purchase the call option with a strike of 2 55 and then sell a call option with a strike price of to 65 by the 2 55 cell the to 65. Let me set that up for you. So by vertical. And these are also called vertical spreads, Aziz. Well, so I'll purchase this vertical spread. Um, someone purchase by one contract of Apple of exploiting May 15th strike price of 2 55 and then I'm going to sell one contract of Apple. Same expiration. I'm gonna sell this with a strike price of to 65 right? And I'm going to pay an overall net debit of $5.50 per share. And just a reminder, You know, option contracts, for the most part represent 100 shares. So the price you see here, you multiply it by 100 that's the price are actually going to pay for this position. So it's actually cost $550 to put on this position up front. And so what's the reason why you're actually to pay money for this position, right? Well, contracts that are in the money are always gonna be more expensive than contracts that are out of the money. Right? So if we're selling the 2 55 strike call option, that's in the money. Now we're selling in the to 65 strike call option. It's out of the money. Is out of the money contracts gonna be worth less than the in the money to 55. Strike call option. So, looking at the bid, ask spread here for the 2 55 strike call. You know, this contract by itself is going to cost, you know, purchasing it. It's gonna cost about 1760 ish dollars, just kind of going in between the bid and ask, right, but also selling the to 65 strike call option, which is about I'll call it $1200. So 1760 minus 2200 right? Cause we're poaching, purchasing this one and selling this one. The difference between those two prices is going to be about 550 bucks and again because we're purchasing the more expensive one. The difference of five fifties, actually, what we have to pay to get into this position, right? That's why this works. And, you know, just as a n f Y I you know, if you're watching this and they're kind of turned off by, you know, while this is 550 bucks is a lot of money, and I'm not gonna be able to put on this kind of position. You don't have to trade apple. You don't have to do a $10 wide spread, right? You can do you can buy the 2 55 and sell the to 60. Took that really fast, right? That's all. And it costs $270 right? And you know, Apple is a pretty pricey stock. Writes 260 bucks per share and with you know, the option chain. Currently, it currently has strikes that are separated by $5. Well, you can look at other stocks. E T s, that are much cheaper, right? If you go to let's say Twitter, for example. That's a you know, a 30 ish dollar stock, and the strikes are only gonna be $1 wide. I mean, if you were to service the same kind of position a called debit spread on Twitter, it might only cost you like, 30 bucks, right? So I'm just showing apple because Apple is a very easy stock to demonstrate with. Everyone knows Apple. But you certainly don't need to have a lot of money trade options, right? You can have just, you know, like I said, position can cost you, you know, 10 $2030. And, you know, other positions can cost you hundreds or thousands, right? There's a huge spectrum. So, um yeah, that's why this position is actually cost you money because you're purchasing a more expensive option on selling a less expensive option. So let me walk you through a couple scenarios of how this might work in terms of making money and losing money if you're wrong, right? So, again, the idea here is we want Apple to really explode to the upside, writes truly trading at about 2 60 we want to go maybe to 70 or even higher right, although with his position we can certainly get get away with our maximum profit on the trade. As long as Apple stays above to 65 we'll see how that works in a minute. So let's just say for our first scenario that Apple explodes to the upside, were correct and maybe they had great earnings. Maybe the iPhone launch was incredible. An Apple stock goes from to 60 old wayto to 75 or something. So how is this position going to actually work and make us money and all that? Well, um, we initially purchased a co option with a strike of $255 right? And if you know, this course does require a little bit of knowledge beforehand of just how options work. So with with call options when you purchase a co option that gives you the right to purchase 100 shares of Apple in this case at the strike price at 2 55 right? So if buying call option gives you the right to purchase the 100 shares at the strike, and selling a call option means you have to sell 100 shares at that strike, right. Assuming the bio, the contract actually exercises it, which they would if apples all the way to to 75 by expiration. In which case we obviously have to make good on that on this transaction. Right. And for the sake of these examples, I'm just gonna make things simple and say that, you know, we're going to close out of this position at expiration. So at May 15th this is what's gonna be happening right? And towards in this video, we'll show you what you can do if you don't wanna wait. Always expiration. That's certainly not required. Um, and actually wouldn't even recommend it. But to make this as easy as possible, understand? So may 15th rolls around Apple up to 75. We have a co option here that says we can buy 100 shares of Apple at $255 per share, even though it's trading at 2 75 That's great, right? So let me put my calculator here. Some kind of walk you through how the math is gonna work. Um, so we would exercise or co option with a strike up to 55 right? And we would take in 100 years of apple at 2 55 per share, so ah, $205 per share. Times 100 right. This would cost us $25,500. And don't get alarmed. You actually don't need to have this money. Your broker would actually take care of all this for you behind the scenes, right? Um, the only money actually need to have a front is the debit. You paid 550 bucks. Your broker would take care of all of this buying and selling shares behind the scenes for you, but still just gonna walk you through the process and how it all works. So we would buy 100 shares of Apple at 2 55 per share. That will cost us $25,500 in total. And then now this corruption that we sold with a strike up to 65. That's also in the money and expression as well, because Apple's trying to 75 said the by of that contract would exercise the option just like we did for our collection that we purchased. And then we would immediately turn around and sell these 100 shares to that option. Buyer at a price of 2 65 Right? So, you know, even though Apple's trading it to 75 in this example doesn't matter. This is what our position says we have to do. Buy it to 55. Sell it to 65 right? So what? That's what we would do. We would then sell 100 shares of Apple at $285 per share, which means we would take in $26,500. So if we paid 25,500 then sold and took in, 26,500 are net. The difference between the two was $1000 right? That's what that transaction would actually make for us. Um, if this scenario scenario were to play out. But we also have to factor in the fact that we paid also 550 bucks to put on this position initially. So this this Deb, it's gonna come out of this property here as well. So we subtract now 5 50 and there you go. Our overall net profit after this is all said and done is 450 bucks, which is actually pretty amazing when you consider the fact that we risked 550 bucks to put on this position and we made 4 50 which is a 82% return. Almost 100% return on this on this ah, trade. Assuming everything went in our favour right, which is pretty incredible when you consider the fact that, you know, with the stock market as a whole, you know average annual return for the stock market is around 7 to 8% per year. Well, this trade we just made 82% return in a matter of a couple weeks, basically has put incredible right debit strategies like this can certainly make you a lot of money. But as you'll see in a minute here, you can actually lose a lot of money. And the the chance of success is actually a lot lower than Mawr premium based strategies, which we'll see later in this course. Um, but they certainly have their purpose. They have their place, and you can get amazing returns out of them. Um, so that's what would happen if Apple totally exploded the upside and we were correct and everything worked out perfectly. Let's say that didn't happen. What happens if Apple actually doesn't move? Doesn't go anywhere rights at 2 59 43 let's say, just moves it a little bit too to 60 and just stays right there by expiration. So become May 15th. Apple still a to 60 and it hasn't really moved much. What happens there? Well, the corruption he purchased with the strike of 2 55 that's still in the money. It's still worth something. We can exercise it and use it. The call option we sold with the struck up to 65 that's going to expire. Worthless, right, cause the strike is higher than the current trading price of to 60 right, so this option that we sold would just disappear at expiration. We want to deal with it, and we could just move on. But we have this corruption that we can that we can exercise, which means we can purchase 100 shares of Apple at 2 55 per share rights. That's what we would dio put the calculator again. So we had purchased hundreds of apple that would cost again $25,500 then we could immediately turn around and sell those 100 shares, uh, back into the market at the current market price of to 60. Right, So we paid 25,500 then we're going to sell these shares for $26,000 right? $260 per share, times 100 shares, 26,000. And we on that transaction make $500. But don't forget, we also paid 550 bucks to put on this position that comes out of this. Ah, this profit right here. So we subtract 5 50 and Oh, there you go. We actually lost 50 bucks on this trade after everything was dealt with and closed out. Right, So you can see here. Um, like I said, this this position is very directionally bullish. We have toe Apple has to move up by a significant amount in order for us to actually make some money if apple just kind of moves up a little bit or stage where it's at, You know, even though the cops we purchased stayed in the money the entire time, we still ended up losing money on the trade because Apple just did not move up enough, right? We need to get a big upward move with Apple for this position to pay off. Now, let's look at what happens if we're completely wrong, right? Apple actually moves down and maybe plummets to 2 40 or something, for whatever reason, right, What happens there? Well, we purchased a co option with a strike of 2 55 and we also sold the CO option with the price of to 65 with the strike of to 65. Because both of these call options have strikes that are now greater in the share price of Apple, which would be at 2 40 by May 15th. Both of these call options expire worthless. They both disappear and they go away, which means every penny we spent putting on the position, all 550 bucks goes away along with them. So we would lose 100% of the money we used to put on this trade, which is definitely gonna hurt, right? That's the name of the game, right? If you are going to play stocks or ETFs very directionally, this is when we can do it. And when we can do without spending a whole lot of money. Because if you were to just for example, Purchase Michael option with a strike of 2 55 and then do nothing else looking at the bid and ask here for that option, it's gonna cost you, you know, some around 1760 $70 somewhere in there, right? Doing it this way we will cap are Max profit at 450. Um, but we only ever have to risk $550. Right? Weaken. Certainly risk a lot less in the case that we're wrong and Apple moves down instead of just buying a call option and spending, you know, almost three times as much. Right. So, um, that's certainly a possibility. With these positions, if you're wrong, you could lose a lot of money. Right? So let me also show you a graph and another way to ah, visualize this position. So I pulled up. Here is a graph that depicts, um, in terms of the blue line here they profit and loss diagram or profit loss curve for opposition at expiration. Right. So pay attention to these numbers over here at least the blue number gets the purple in a minute. So pay attention to the blue number here first and how it moves as I move my cursor. Right. Um and then also here on the y axis, this is our total profit or loss, depending on where my cursor is And on the X axis. Here is the current share price of Apple right, Depending or where I move my cursor. Right. So, for example, if Apple were to go all the way down to 43 right, looking at this number down here, if apple, the share price were to go all the way down to 43 going to the blue line and again, you can see it over here as well. Um, we would lose everything we paid all $550 right? That's regardless of anywhere. Apple moves below 2 55 Basically right, because to 55 is our strike for our long call option. The call option he purchased. So apple drops below 2 55 We will lose every penny that we used to put on this position. Right? Which is why this blue line here is completely flat below 2 55 But as Apple starts to inch up above, to 55 again paying attention to this visible numbers over here you can see it's R p en EL or profit and loss starts to increase and you know it's still negative, obviously. But as Apple, the share price moves up and up and up, we will actually start making money right and see this little read dash right here. That's our break. Even price right to 60 59. That share price or sees me to 60 and 50 cents is our break even price, right? I can't get my cursor exactly line up on that number. But that is the break even price. Where if Apple were to at expiration, traded at exactly $260.50 we would break even on this trade, and we would live to fight another day, right? Um, and then, beyond that, we actually start making money up until $450. That's their maximum profit, right? Because if we can buy shares at 2 55 and no matter how high Apple goes, we always have to sell those shares at 2 65 We will never get to participate on Apple moving up above to 65 right? Even if it goes to 400 we just won't get to realize any of that profit. We only get to ever make 450 bucks on this position. Right? But again, like I said, you are paying a lot less to get this position on than just buying a call option, which, yes, has theoretically infinite gains to it. But you'd be paying almost $1800 for that contract. And if you are wrong, app moves down, you lose every penny by expiration. Right? So another thing you can dio, because you don't have to wait till expiration, obviously, and I wouldn't recommend that necessarily. This purple line right here represents our profit and loss curve. As of right now, right? It's currently April 7th. So we're still over a month away from expiration. And so, you know, I'm not gonna go too in depth about you know why this curve is different in the blue curve . But what will happen is as time gets closer and closer to closer and closer to expiration, this purple line will start to morph into this blue line. No, it'll start to mirror this blue line mawr more closely until that expiration. It'll mere exactly right just has to do with, you know, with a month left to go, there's still a lot of time decay left a lot of extrinsic value still built into these option contracts. So the curve, the profit and loss curve right now is not going to be as extreme. Which means right now, if Apple were to drop by a significant amount right now, you can look at this at this purple number over here. If Apple were to drop to 2 48 right now, our position will be down $112. 60 cents, right. As opposed to expiration. $550 right again, because they're still over a month left. There's still a lot of time and extrinsic value built into these contracts. There's still time for Apple to come back around and move back up. So we're not gonna lose all that money right now. Of Apple starts to drop, right? Likewise, if Apple really starts to reset these little slices here, there we go. If Apple starts to really rally a bit and move up. Let's say Apple moves up 2 to 70. Looking again at this Ah, purple number over here to 70. Our position would be up $103. Right? So to put that war into context, if we paid 5 54 it if Apple moved to to 70 our position now in total will be worth, you know, $6.62 right for $662 overall. Which means we could then close out of this position at that time, right? Maybe next week Apple goes into 70 our positions worth, you know. Ah, $662. We could then close out of this position entirely for $662 in premium. And then if we paid 5 50 to get into this position, the difference, which is 1 12 is our overall profit on the trade. And we didn't have to wait till expiration. Didn't have to go through the You know, the turmoil of Apple may be moving back down again, or there's obviously a lot more that could happen in the future. But of course, if you close out early, you will not realize the maximum profit, which is what this blue line represents again. Right? So if you want this maximum profit that the blue and represents, then yeah, you will have to wait till expiration or get very close to it. And Apple would have to it, you know, absolutely explode to the upside in order for these contracts to have Onley intrinsic value basically baked in. But, um, the idea here, mostly with trading options, is you don't really wanna hold to expiration. Um, it's much more advisable. These, in my opinion, to get a position on. And, you know, once it starts moving in your favor by a certain amount, maybe 30% or 25% depending on which of profit targets are than to take the trade off, and collector profits may not get the maximum amount possible. But, um, if you could take your money off the table early and not exposed to more risk and still make some money at the same time, that's the way to stay alive in this game. So I hope that all made sense. I know there's a lot information here, but that's the basic breakdown of a cold debit spread and how everything works. One last thing I'll leave you with is if you want to calculate your max profit and your Max Lawson, your break even points very easily on what you can do is for your max profit. Just take the difference of the strikes. So to 65 minus 2 55 which is 10. Take the difference of the strikes. Subtract what you paid for it. $5.50. She left over with $4.50. Multiply that by 100 450 bucks. That's your max. Profit right again to 65 minutes to 55 is 10 10 minus 5.5 is 4.5, 4.5 times 100 is 450 bucks at your max profit. You're Max. Loss is simply what you paid for it. 550 bucks. That's what you stand to lose. If the trade totally goes south and your break even point is there gonna be your the strike of your corruption that you purchased? Plus the debit you paid so 2 55 plus 5 50 is gonna be to $6260.50. So at that point, if outpour to close at expiration at 2 60 50 cents, you break even, right? So that's how you can calculate those numbers rather quickly. So thanks for watching this video. Hope it all made sense on your body. And when you're ready to move on to the next video, we'll be talking about put debit spreads, so I'll see in the next one. 3. Put Debit Spread: all right. Thanks for joining me here in this next video. And this is where I'll be showing you another debit based strategy called the put Debit spread. And as you'll see here, they put debit spread is basically gonna be the exact opposite of the call Debit spread. This is going to be a very directionally bearish position. So we want apple stock to move down in price. So again, here I have pulled up the option chain for Apple. All these contracts expire. Make 1/10 which is still over a month away at this point. And of course, now we'll be looking at the put options. So the set up here is gonna be very similar to the cold of it spread. We're going to purchase and in the money put option, and then sell out of the money put option. So, for example, looking at these contracts right here, I might want to purchase the put option with a strike of to 70 and then sell the put option with the price of to 60. Apple's currently trading at about $266 so it's gonna fall right in between the two strikes so that might be a good position to put on right now. I just as a side note, you know, the way I'm setting these positions up. Both the put debit spread and they called it but spread. I'm purchasing an in the money contract That's as close as possible to being out of the money and then obviously selling out of the money contract. You don't have to do it this way, right? You can go a Sfar in the money as you want in terms of purchasing, like maybe this contract and then selling this contract both in the money you can purchase and out of the money contract and selling even further out of the money contract, right? Just depending on where you're strikes are, that's gonna dictate how much money you're going to pay to put this position on as well as how much Apple needs to move in order for the position to actually pay off, right? The further in the money you go right, the higher the chance that apple is not going to rally old way up and make your position worthless so you have a heart chance and making money in the trade, but the debit you'll be paying is going much higher as opposed to If you were to maybe buy this contract and sell this contract, both of those are pretty out of the money. So Apple is really gonna have to move for the position to make money, even though the debit might be just a few dollars to put this, put that position on. It's a very low chance of actually making money so you can play around with strikes in your own time. Just kind of see how this all works. But to keep the example is consistent. Um, in terms of the put Deva spreading the call, David Spread, I'm going to just purchase this to 70 strike put option and then sell the to 60 strike. Let me set that up. So by vertical here and you can see we're gonna buy one contract of Apple. May 15th expiration strike up to 70 and then we're going to sell one contract of Apple same expiration with a strike of to 60 right, $10 widespread. And you could see the net debit that were gonna pay to put on this position is going to $4.8 per share. So, in total, with 100 shares, that's $408. Right, Um, And again, you know, the reason why you have to pay money to get into this position is we are purchasing a more expensive contract and then selling a less expensive contract, right? The put option that we're buying with a strike of to 70. You know, buying it's gonna cost around $1620 or so and then selling the to 60 strike contract. You know that contracts killing, trading it about well over 1200. So it's much less in. The difference between the two is around 408 and that's what we pay to put on this position . Right? So just same thing as the call did it spread? All right, so now to walk you through a couple different scenarios in terms of, you know, how is this position gonna work and potentially make you money or make you lose money? Um, no. The put debit spread strategy is going to be Avery directionally bearish strategy. The complete opposite of the call debit spread. So we want apple to really go down in price. So, for example, here, let's say, you know, Apple is currently trading at 2 66 And right now, in these scenarios, I'm gonna be assuming we're gonna hold until expiration just to keep things simple. But you see, towards the end of the video, just like what they called a put spread, you obviously don't have to wait until expiration. And I would recommend you don't. Um So let's say Apple right now with training at 2 66 goes all the way down to 2 50 by expiration. Maybe they had terrible earnings. The iPhone launch was a flop. Whatever reason, Apple plummets down to 2 50 by expiration May 15th. Right? So what happens here? Well, we have a put option that we purchased with a strike of to 70 and a put option that we sold with the price strike price of to 60. So both of these contracts are gonna be in the money expiration because again, apples trading at 2 50 at expiration. Um, and so how is this all going to play out in terms off? What are broker's gonna do behind the scenes and how we're gonna make money in all this. Well, looking first at the put option that we sold with a strike of to 60 you know, put options when you buy them. They give you the right as the buyer to sell 100 shares of the underlying asset. Apple in this case, right? So if buying a put option gives you the right to sell 100 shares than selling a put option means you have to purchase 100 shares. If that option buyer exercises the option in this case, they would, because Apple's trading well below the strike price and expiration right? So that's what we would have to do. The put option buyer that we sold his contract to it exercised the option, and they would sell us 100 shares of Apple at a price of $260 per share. Even though Apple's trading at 2 50 doesn't matter, this is our contract. This is what we have to dio. But it's OK because we also have a put option it we purchased with a strike up to 70 and now, since we're the buyer this contract, we have the right to sell 100 shares of Apple at 270. So you pull the calculator here. So if we have to purchase 100 shares of Apple at $260 per share, that's gonna cost us $26,000. And again, our Brooker will take care of all this. All this for us behind the scenes. You don't have to have this money, but that would cost $26,000 to purchase those shares. And then we can immediately use our our put option he purchased to sell these 100 shares at a price of $270 per share. So that would allow us to take in $27,000 right to 70 times 100 27,000. So that would give us a net profit, at least on this transaction of $1000. We bought it to 60 and sold it to 70 right, But again, just like with the cold a bit spread, you did pay some money up front to get into this position $408 So that amount get subtracted from this $1000 profit. Sighs attract 408 which means at the end the day after everything's been closed out at expiration, we've made $592 which is pretty amazing when you consider the fact that this is a 145% return. We wrist $408 to make over $500 we made we had a 145% return. That's pretty darn incredible. But again, Apple really had to move to the downside for this to work out in our favor right on. And that's obviously not always gonna happen. So what would happen now if Apple, currently turning out to 66 just stayed right around there all the way until expiration? Um, so in that case, if Apple and expirations training at $266 the put option that we purchased with a strike of to 70 will be in the money so we could use that. But the put option that we sold with a strike of to 60 that's going to be out of the money at expiration, And so it will expire worthless. It would just disappear. So what do we do here to potentially make some money right? Well, we have our long put and we can exercise it because it's in the money at expiration, right? So again, with buying a put option that gives you the right as the option buy or to sell 100 shares of Apple at 2 70 right? Well, if you don't have 100 shares of Apple right now to sell well, what you can do is go out into the market and purchase 100 shares of Apple at the current market price, which, as I said, is to 66 Apple stays right here all the way till expiration. Right? So that's what we would do. We would purchase hundreds of Apple at the current market price of $266 per share, so times 100 shares that would cost us $26,600. And then we could exercise our long put option with a strike up to 70 to sell those 100 shares, now at $270. That would allow us to bring in a $27,000 profit on that sale for an overall net gain of $400 right, But again just like what they called it, but spread. We paid some money up front to get into this position so that money comes out of this profit. So it does attract $408. And there you go. We've actually lost $8 on this trade over. All right? Obviously not a huge amount of money wouldn't be a big deal, but, you know, just like what they called it. But spread Apple really has to move in order for this position to pay off, right? And so what happens if we're wrong now? And apple actually explodes to the upside, right? Well, you know, in this case, let's say Apple goes from to 66 all the way to to 75 by expiration totally explodes to the upside. Um, in this case, our put option that we bought with a striker to 70 that's not gonna be out of the money. And the put option we sold with strike of to 60. That's also going to be out of the money. So both these options expire worthless. Which means all the money we put into this position also disappears along with them. So we would lose all $408. That's definitely gonna hurt, right? So But, you know, if you have a really directional assumption on Apple, and you really think it's going to drop in price by a lot because you think they're gonna have some bad earnings, For whatever reason, a put debit spread may be something you want to dio. Conversely, if you have reason to believe that Apple's we're really gonna explode and shoot up in price , you might want to put on a call debit spread. But, um, certainly. Now you can see the risks involved. Apple really has to move either way for these positions to pay off. So now I'm gonna show you, just like the last video. A graft kind of depicting the payoff diagrams for this Put Devon spread so same set up as before, um, when left hand side here on the y axis, we have our profit and loss we have on the X axis, the share price of apple. And again, this is all depending on where a move my cursor, the blue line represents our profit loss curve at expiration, and the Purple Line represents our profit loss curve right now, um, which is currently, you know, April 8th and expiration again is May 15th so still over a month away? You know the reason why the Purple line is different than the blue line? It's because, you know, with still a month left to go until expiration, these put option contracts still have a lot of extrinsic value. Associate with them. There's still a lot of time for Apple to move around and for the position to really change either in our favor or out of our favor. Right? Eso looking first at this blue line here there are expiration curve. We can see that. You know, if Apple trades above to 70 basically and again, you can look at the the blue number on the bottom left hand corner of this graph. You can see any trading price of apple above to 70. We will lose every every cent that we put into this position. All $408 right? That's because above to 70 both of our put options that we either bought or sold will expire worthless and they'll just disappear. And so will all the money that we used to get into this position. right. But as Apple starts trading below to 70 and if you look at the numbers again on the bottom left, you can see we can start. Our property loss starts to increase until becomes positive, and we start making money. Right. Um, And again, these red ticks represent our break even prices. So right around $265 it should be 92 cents. That's our break even price with this position, right? So Apple trades below at expiration, $265.92. We will start making money, right? Anything beyond that, we will start losing money until above to 70. We lose everything right? And if Apple trades below, you know to 60. That's when we will realize our maximum gain, an expiration all $592. And again, the reason why this is a this the prophet you can make is capped just like the cold debit spread. You know, our position says we have to purchase shares at 2 60 and sell them at 2 70 Right? That's regardless of how far Apple may actually move down, right? Doesn't matter. Only by to 60 and only sell it to 70. So the difference between those two strikes minus our debit paid is always gonna be 5 92 And that's the maximum profit, Right? So, you know, as I said earlier, you don't have to wait until expiration to realize profit if you want to risk it on. And you really think apple If it if Apple were to drop dramatically and you really think it's gonna stay down there, you could certainly wait till expiration to realize your maximum profit of almost $600 right? You can see, you know, if Apple were to trade away down to, let's say to 52 some change, right? You know, right now this position would stand to make $156.35. So if you know we paid $408 to put this position on, if Apple, for whatever reason, drops down at 2 52 either right now or in the very immediate future, our position would now be worth $564 in total, so we could then close out of this position for a $564 credit he would take that money in. And since we paid 408 put this position on the difference between the two is gonna be right here. 1 56 35 And that's what you make as profit right when this whole position is closed out. And you know, as you can see here, still far less than our maximum profit. But this will allow you to take your money off the table early, expose it to less risk and still lie you to pocket some profit and then re deploy her your money elsewhere to put on a new position. Right? And this is why I always recommend doing with option trading or just trading in general. Right? Um, the less time you can have your money out there sitting with risk involved, the better, right. You may not be collecting as much in profit if you're taking money off the table early, but in doing so, you'll be obviously pocketing profits right away. And you can, as I said, redeploy that capital to put on more positions in the future. Right? So I hope that all made sense and one last thing will leave you with just like with the called it. But spread the way you can calculate your breakevens, your max profit and your max Los It's quite simple. So for your max profit, you just take the difference of the strikes. Right? So to 70 minus 2 60 which is 10. You take 10 and subtract from that the debit you paid 40 wait and then multiply the difference by 100. Right, So 10 minus four point. Oh, wait, is gonna be 5.92 times that by 100. And there you go. $592 is your maximum profit on this position, your max loss is simply gonna be what you paid for it, right? $400. That's what you stand to lose in the worst case and your break even is gonna be the strike price of the put option that you purchased. So that's strike 2 70 minus the debit you paid for a weight. So it's gonna be $255.92 is gonna be your break even price. And this is all expiration, right? Right now, as you just saw with apple trucks moving around this purple Line Will will show you how much money either stand to make her lose right now. So, um, all that being said, that's the end of this video. And in the next video and the ones that after we'll start getting into credit based strategies which allow you to take in money initially instead of actually having to pay money initially to put in the position. Right. And these are the kinds of strategies that I actually use for my option trading activities and the kinds of positions I encourage others to use as well, because as you'll see the chance of actually making money, your probability of profit so to speak on these credit based strategies is always gonna be much, much higher than these debit based strategies. Debit Bay strategies Well, or they can at least make you more money portrayed. But the likelihood that they are gonna pay off is much less. And so, you know, they certainly have their their purpose, right? If you have a really directional assumption on a stock debit spread may be a great position to put on. They're also great for hedging your overall portfolio. Um, but overall, I would mostly stick to credit based strategies and then on Lee having a small fraction of my trading be allocated towards debit based strategies. And again you'll see why this all plays out in the next next video in the ones that after. So when rates move onto the next one, where we're going to start looking into the call credit spread, so see the next one Thanks. 4. Call Credit Spread: All right, So now we're gonna start looking at credit based strategies, which I mentioned the previous video allow you to take in money, initially taking a credit when you put on the position, as opposed to having to pay a debit when you put on the position, right? And so what you'll find as I'm walking you through this video on call credit spreads and the other credit strategies thereafter that these credit based strategies are really going to be the inverse of these debit strategies in many ways. So, for example, you know, with e called debit, spread that position. You know, we had to pay money initially to get into the position, and the idea was to close out of the position at some point in the future for a higher price than what we paid for it. Right? Well, they call credit spread. It's going the opposite, right? We take in money initially, and the idea now is to at some point on the road, closed out of the position by paying money. And ideally, that money that we pay is gonna be smaller than the credit that we took in initially. Right? Just the universe Moreover, he called debit spread is a bullish strategy, right? We wanted Apple to really rally and move up. That's the only way that position can make money he called credit spread is the opposite. It's a bearish strategy, but you'll see, um, Apple doesn't actually have to move down for this position to pay off, which is really cool. So once again, I have pulled up here the option. Shame for Apple. May 15 May 15. Expiration for these contracts. And so he called creds spread that I'm gonna be walking you through assuming quite simple and very similar to the debit strategy. The difference here is we're going to initially sell a call option that's gonna be out of the money, but closer to being in the money. And then we're going to purchase a call option that's further out of the money, right? So, for example, I might want Teoh sell the cull option with a strike of to 80 and then purchased the CO option with the price of the strike price of 2 90 Let me go ahead and set that up for you. So sell. Now, we're gonna sell a vertical. So one contract Apple May 15th expiration strike up to 80. We're going to buy one contract Apple. Same expiration with a strike price of two to 90. Right? And you can see Now, over here, we're gonna take in a net credit of $3.80 per share. So times 100 shares, that means we take in $380 right there when we when we put on the position. And so what is it? Work this way? Well, now we are selling aim or expensive option, and we're purchasing a less expensive option, right? The to 80 strike corruption that we're selling looking at the bid Ask spread. Here, it's, You know, when we sell it, we're gonna take in about, you know, 700 maybe 60 or $70 right? And they call call option that we are purchasing with a strike of 2 90 That options trading in about $400. Right? So the difference between the two in terms of the prices is about $380. It's like I said, since we're selling the more expensive one, we're gonna end up taking in money in the end, which is really cool. So now that we have the set up here, how is this gonna work in terms of different scenarios that play out right? Well, like I said earlier, even though this is a bear strategy and we will like Apple to go down in price, that would be the ideal scenario. It doesn't have to. It can go down. It can actually stay right. Word is apples curling trading at $268 so it can stay at 2 68 all the way till expiration. It can. Even you can even rally a bit and go up in price. And we will still make the maximum amount of money on this trade, right? So with the debit strategy, with the call debit spread, the only way that strategy can make money is if Apple really rallies and increases in price . With this credit based strategy, we now have three different scenarios where we still make the maximum maximum amount. Apple apple goes down in price, it goes sideways or it goes up by a little bit. Right? So our odds of success, our chance of success is could be much higher with this position. Um So we walk you through a couple of different examples. I'm So let's say in the first scenario with Apple trading at 2 68 come expiration and that's inaudible. You'll be talking about expiration first here, assuming we're gonna hold until May 15th. Right, So come expiration. Let's say Apple rallies from 2 68 all the way to to 75 right? We didn't want that to happen. We thought Apple was gonna go down in price, but we were completely wrong. Apple actually rallied and went all the way to to 75. But we're still gonna make the same amount of money and you'll see why in a second. So how is this gonna work in terms of our position now? So I had expiration Apple up to 75. Well, we have a co option that we sold with a strike up to 80. That option is still out of the money. It was out of the money when we sold it, and it's still out of the money at expiration. So it's gonna expire worthless and disappear. And the call option that we purchased with a strike up to 90 that was even further out of the money at expiration or will be put in a position. Excuse me, and it's now still out of the money at expiration. So it also expires worthless and disappears. Which means we get to keep all $380 that we took in initially, every cent we get to keep and we will get to keep that amount as long as Apple stays. Below are short call strike The collapse that we sold with a strike up to 80. As long as Apple stays below to 80 by expiration, we will make every penny of this $380. Very cool. But let's say we are even more wrong. An apple, really. Rallies come expiration and let's say Apple goes from to 68 all the way to to 85. So right in between are to call strikes. What happens there? Well, looking first at the co option that we purchased with a strike up to 90 that option is still out of the money, so it expires worthless, and it disappears. But we know how that call option that we sold initially and it's now in the money, right, because Apple's trading at to 85 the strike at to 80. So what happens here? Well, as I mentioned before, you know, a co option gives the option buyer the right to purchase 100 shares of Apple at the strike price. But since we sold this option, that means we have to sell those 100 shares to that option buyer at the strike price. But what happens if we don't have 100 shares of Apple in our portfolio to sell? Or you have to go into the market and purchase them first and then sell them to the option buyer here? And the current market price of Apple, as I said, is to 85. Let's pull the calculator here. So if Apple's truly trading at expiration at to 85 we have to purchase 100 shares of Apple at that price. So to 85 to $95 per share comes 100 shares, so it's gonna cost $28,500. And so once we have those 100 shares, we can now immediately turn around and sell them to the option buyer at a price of 280. So when we do that. We'll take in $28,000 on the sale, right? $200 per share. Times 100 shares is 20,000. So in the end, we will lose $500 on the trade, at least on that transaction. But remember, we also took in $380 as a credit. Initially, when we put on the position, so that will actually reduce our maximum are lost right here. So we take this minus 500 we add 382 it. So in the end, after our this entire positions closed out at expiration, we lose $120. Not a huge deal, right, but definitely gonna stink. But, you know, Apple had to really rally all the way from to 68 2 to 85. That's a huge move for this to happen. And even in that huge move, we didn't lose that much money because the credit we took in help to reduce the amount of money that we could have lost, which was that full 500 right? So that certainly in advantage of these credit based strategies as well, you have that credit to use to help offset some of your losses if that kind of scenario plays out. So now what happens if we are really wrong? An apple goes from maybe 2 68 all the way to 300. Let's say massive, massive move. Um, on this scenario, you know both the option the culture that we sold with a strike of to 80 and the cops and that we purchased with the strike of 2 90 Both of these contracts will now be in the money at expiration. So looking first at the collection that we purchased with the striker to 90 well, this gives us the right because we're the buyer of this contract, the right to purchase 100 shares of Apple at 2 90 even though it's trading at 300. So that's what we would do. And then we would immediately turn around and sell those shares at a price of 2 80 Because again, we sold this contract, which means we have toe sell those shares at the strike price. So put a catheter again if we have to sell 100 shares of Apple A to 80 but we can buy them at 2 90 even though Abbas at 300 that's certainly going to help in terms of offsetting how much money we could have lost on on this position. So we first by 100 shares of Apple at a price of $208 per share that would cost $29,000 then we turn around and sell those 100 shares at $280 per share. So on that sale we make $28,000 for an overall net loss of $1000. But once again we have that $380 credit that we took it initially, so that helps to offset some of our loss. Here we add 3 80 which means at the end of the day, you know, in the worst possible scenario, we stand to lose a maximum of $620 Right? This is our maximum loss on the position that they would hurt. But, you know, Apple had to rally all the way from to 68 to 300 or really anything above 290. And that's the odds of that happening are pretty slim. So this could happen. It certainly will happen at some point in the future. But, um, you know, the chances of this happening are very low, as I said so. But I'll remind you once more again, you know, there are still three different scenarios where Apple can trade, a rabble can move and we still make the full 380. It could go down, it could go sideways, or it can go all the way up to 2 80 and we still make money. So, um, I hope you can now see why these credit based strategies really improve your chances of success. A supposed to the debit based strategies. But, you know, like I said before, these Deva strategies can also make you more money in the end, right? The maximum we can make on this trade. I'll get more into this in a minute is $380 is the credit we receive, whereas with the debits debe strategies Um, you know we, for example, with a call debit spread, I believe you know, we paid, like, $400 to get into that position, and we made over 500 on that, right? So you can not You can make with these devastated Jeez, is certainly a lot more if it does work out that way. Um, but there's always a trade off, right? With these credit strategies, you have a higher chance of success, so you won't make as much. But you know, for me personally, I'm gonna go with the higher odds and a slightly lower return, right? That's just a personal preference. So now let me pull this up onto the, um, the diagram here again, showing the profit and loss curves. The blue line is as the profit and loss occur, but expiration the Purple Line is our profit and loss curve right now, which is still over a month before expiration. So you can see here and again, paying attention to these numbers down here is if Apple trades below $280 we stand to make every penny of that $380 right? This three d doesn't change. That's again, because if Apple stays below to 80 it'll be below both of our strikes of the call options that we've both sold and purchased. So if that happens, both these contracts expire worthless. They disappear. We could to keep every penny of that credit. Beautiful. But as Apple starts trading above to 80 you can see over here with the numbers. Um, our profit and loss starts to decrease in decreasing decrease until it turns negative, right, Until it hits a maximum loss of $620 in the red tick, as you saw in previous videos, is our break even price. So if Apple trades should be, if I could get my cursor right on it. But if Apple trades at $283 should be 80 cents, we will break even on this trade, right? So that means if it trades below 2 83 80 at expression, we will make at least one cent on the trade. Obviously, we want it to be below to 80 so we can get the maximum profit. Right? Um and so the reason why the max loss here is capped, just like with the debit strategies, is, you know, looking at are spread here again because we have this long call this option that we purchased This will always give us the ability to purchase 100 shares of Apple at $290 regardless of how high it rallies even for goes to 500 we will always be able to purchase 100 shares of Apple at $290 then we'll have to sell them, sell those shares at 2 80 So if we always have toe buy it to 90 and sell it to a T. In the worst case, that difference is always gonna be you. A $1000 loss and then we have to We can add in our $380 credit to offs offset some of that loss s. So in the end, we always stand to lose at most, $620 with this trade. So that's why this lines flat here, Um and likewise, you know, with the options expire worthless of apples blow to 80. You know, we just get to keep the credit. So that's why three eighties, our maximum profit on the trade And so you know, this once more has to do with, um, the scenario of waiting and holding until expiration, right? Only an expiration when you actually get to keep the full $380. Assuming apple closes below to 80 by May 15th right? Um, because looking at this purple line, this is our profit and loss right now. So if Apple, which is killing training it like I said to 68 if it were to drop all way to 2 60 for example, because you know there's extrinsic value still built into these options into these options , there's still plenty of time left. We're not going to realize the full $380 profit maximum profit right now. We'll have to wait until expiration. But as you can see here, you know, Apple trades down a to 60 today forever reason we would stand to make about $117 right? So if we initially took in $380 in credit and Apple trades down to in this case now to 60 17 are total position would be worth $265. So that's what we could close out for right? We would close out his position for a $265 debit, and so the difference between our credit and our Deb it would be 100 and 15 ish dollars, and that would be a profit on the trade, so that's pretty good. And you wanna have to hold until expiration. You wouldn't have to have your money at risk for another couple of weeks, right? You could just take your profits early on, then redeploy our capital for dinner for a new trade, right? And so, just like with the debit based strategies, there's a very simple math you can do as well to calculate your max profit. Your Max Lawson, your breakevens, um, your maximum profit with these credit strategies, it's just gonna be the credit that you take in initially, right. Three eighties. The maximum amount that we could make something we hold expiration. Our max loss is going to be the difference of our strikes. So to 90 minus 2 18 which is 10. Subtract from that or credit, which is 6.2, and multiply that by 100. So $620 is our maximum possible loss on the trade. In our break even point is going to be the strike price of the option that we sold right, so to 80 Here you take to 80 and you add the credit you receive right so to 80 plus 3.8 is 2 83 80 Um, and so one last thing I will mention with these credit based strategies and one The reasons why I love to use, think or swim is that it has this probability in the money column here for both calls and puts right. It's kind of cut off here. But this says probability in the money. And what that means is, you know, looking at the to 80 strike call option that we sold. It says it only has a 34% chance of being in the money at expiration, right? So you could take that as there's only a 1/3 chance that Apple stock is going to trade above $280 at expiration, which means there's a 66% chance that it never gets 2 to 80 by expiration. And you know what it technically means is at expiration on May 15th the chance of it of Apple stock being above to 80 is only 34% right? So, someone along the way it could rally a bit and cross above to 80 but it could come back down, right? So at expiration May 15th the chance that Apple is above 2 80 is only 34%. So those are pretty good odds, right? Certainly better than 50 50. Which means if you were to make the same kind of trade over and over and over again over a long period of time, you would be making money, right, cause you have a greater than 50 50 50 shot of making money on these trades. And there's a little bit more detail and complexity that goes into this kind of this kind of strategy. Um, that's the main idea, right? You give yourself better than a 50 50 shot at making money by putting on these credit strategies where both options air initially out of the money and the likelihood that apple trades all the way up to above your short strike. In that case, where we would start, um, losing money is gonna be You know, this case only 34% and you can choose any strike that you want, right? For example, you could sell this CO option with a strike of three or five. It has only has only a 9% chance of being in the money at expiration. right, Very low. And then you could you could buy. And maybe you know, the 3 15 call option in this case, though, because both options are so out of the money, you're not going to getting that much credit for it. So, yeah, you might be winning more often because your odds were really, really in your favor, but your winds will give you much less profit. So I personally find the greatest balance between these two things at right around the 30 to 35% level, right being 30 to 35% out of the money for your short call option on your short put option that you'll see in the next video gives you a very good, um, probability of success as well is very good credit. Right? But you know, you can certainly player on this play around with the strikes, and you can kind of see the trade off between, um, better odds and lower credit, or, worse odds and even higher credit. So I recommend you play around with that. So that's it for this video. Thank you for watching. Um, and in the next one will goto. We'll get into the put credit spread 5. Put Credit Spread + Clarifications: All right. Welcome back to the next video. In this course where we're going to start looking at the put credit spread, which is basically gonna be the opposite of the call credit spread, right. The call credit spread is a generally barest position. In this case with Apple stock. We want an apple stock to go down in price, but certainly didn't have to to ah, payoff in the end, right? The put could it spread is like I said, that would be the opposite. So it's gonna be a generally bullish position. The ideal scenario is Apple stock increases in price. As you'll see, that also doesn't have to happen for us to reap the full awards of this position, right? So once again, I have the option chain pulled up here May 15th expiration for Apple stock markets still closed. So apple still, you know, last closing price of Apple was to 68 almost. Let's to set up here again. You've seen this before? Obviously. So, um, looking out the puts right, the put credit spread is gonna be set up in a very similar way. So we're going to sell and out of the money put option. That's gonna be a little bit more close to being in the money. And then we're going to purchase and even further out of the money put option. Right. And that put option is basically the one that we're buying is gonna act as our protection. It's going to allow us to cap our maximum loss in this position, just like with buying the call option as part of the call. Quite a spread, and you see more. How about you'll see more how this works in a second? Right? Um, so looking at the option Shane, here I meant one Teoh, for example. Cell. He put option with a strike of 2 45 You can see here from the thinkers from platform. It's saying, you know, has about a 30% chance of being in the money on the day of expiration. So kind of right in that sweet spot of what I would like to put on this put on these kinds of positions so I don't want to sell the to 45 strike put and then, by the to 35 strike, put which, as I said, it's gonna be our protection on this position. So be a $10 widespread. Let me set it up for you. So sell one vertical. Right. So we're gonna sell one contract of Apple May 15 expiration strike up to 45 and then purchase one contract of Apple. Same expression. Strike of to 35. I think it's over here. Now. We have an overall net credit on the position of almost $2 times 100 shares. Eso almost $200 overall that we would take in when we put this position on. And one thing I just want to clarify. You know the order you're seeing here. This is a limit order and the price that you see that credit by default, it's going to show you the average between the bid and the ask, right? But because this is a limit order, I have full control over the price at which I want to sell this vertical spread in. And I want more clarity. More clarification when I say sell the vertical spread. Um, that's basically just a way of describing this position in terms of what I'm doing. Right, um, selling one. Put option buying one put option. Since I am overall. In the end, taking in a net credit Aiken described as, um, I'm selling this vertical spread, so I just want to clarify that. But again, you know, I might want to when putting this position on initially set my price a little bit higher than the default right, the average between the bid and the ask just to see if you know there's a buyer and seller out there willing to meet me at this price, you never know, right, and you get an extra three bucks out of it. But if I had this order sitting out here for a while and it wasn't getting filled, you know, at some point I would come back in and lower my price a bit and just slowly lower, lower, lower until my order doesn't get filled. Or, you know, it's possible that if I have to go so load toe where the credit is No, not worth any more. I would just scratch the whole position and move on. But I just want to clarify that the number that you see here does not mean you have to actually put on the position at that price. You have full control. So I'm gonna set this $42 initially. Um, And so now that we have the order set up, you know, same as before, I'm gonna walk you through a couple different scenarios here. So with the put, could it spread being a generally bullish position? Well, like apple stuff to go up, that's our assumption. But in the first scenario, you know what? If that does happen them on right or we're wrong in Apple. Either stays where it is at 2 68 or it actually comes down in price a bit, and it can actually come down all the way to $245 per share. And by expiration, we would still get to keep the full $200. That's pretty darn cool. And why is that right? Well, just like what? The call? Quiet. Spread. If apple, um, you know where to trade down to? Let's say 2 50 Right? So we were wrong in our assumption and say expression. May 15th. That was up to 50 per share. Well, both the put option that we sold and the put option he purchased, they were They were They were out of the money when we put on the position, and they're still out of the money at expiration. So they both expire worthless. They disappear, and we get to keep the full $200. Beautiful. Right. Um, but now what if we are even more wrong in Apple trades your further down to, let's say, $240 per share by expiration. So right between our two strikes, what happens there? Right. Well, our option Our put option that we purchased with a strike of to 35 that's still out of money. So it will expire, worthless and go away. But we have the put option that we sold with the to 45 strike that's now in the money and expirations that's going, Teoh cause a problem for us. Right? So just to recap, you know, put options give the option buyer the right to sell 100 shares of the underlying in this case, Apple stock at the strike price to 45 in this case. Right? Um, which means, on the flip side, the seller of the contract has to purchase those shares at the strike price. Right? So because we sold this to 45 strike put, we now have to purchase 100 shares of Apple it to 45 per share, even though, in this example apples, actually, you know, by the market is trading at 2 40 So it's put the calculator here, so we're going to purchase 245 or excuse me, 100 shares of Apple A $245 per share, so that would cost 24,500. Now, if you actually had the account size too, um, actually purchased these shares and hold on to them. Right, Because if you didn't know once again your book or will handle this kind of stuff for you behind the scenes. But if you were actually, if you had the money to purchase all 100 shares of Apple at this price, then you could simply hold onto those shares and maintain your bullish. You're bullish assumption, right? If your boss before an apple really came down and price a lot and you're still bullish on the stock for whatever reason, Well, now you have a reason or even more of a reason to hold onto those shares because you bought them now on even lower price than when you put on the position to begin with. And so if you were to hold onto the shares and eventually you're right, an Apple stock started to trade back up. You could actually totally turn this position around into a winner and then sell those shares later at a higher price. But like I said, you would need 24 grand to do this. So if you don't have the account size to handle that, what your Booker would do is your They would buy 100 shares at the strike price of 2 45 and then you would have to sell those 100 shares in the market at the market price of 2 40 right? So when you do that on the sill, you would take in $24,000 right to 40 times 100 24,000 for overall net loss on that transaction of $500 right? But like before, you know, we have this credit that we took in initially helps to offset some or some of our losses. So in the end, up after this whole positions closed out, we have lost $300 you know, nothing gonna hurt, But we definitely lived to fight another day. Right? So now what happens if we are super super wrong and Apple trades all the way down to, let's say 2 30 by expiration. Big drop. Um, Well, in that case, and now you're going to see how our, um, the put option it we purchased is gonna be used as protection. It's gonna limit our maximum loss on the trade. So Apple trades all way down to 2 30 by expiration. Both the options that we sold and purchased are going to now be in the money. So looking first at the option that we sold but the 2 45 strike just like before, we have to purchase 100 shares of Apple at $245 per share. So do you. 45 times 100 24,500 right? Just like before. But now we have an option that we purchased, which is now in the money that allows us to sell these shares at 2 35 $235 per share, even though apple trading at 2 30 So this is how they're the protection starts to work for us. So if we have to purchase at 2 45 and sell it to 35 then that means we're gonna take in $23,500 on that sale for an overall net loss of $1000 which is the most we could stand to lose on this position. And but don't forget, we also have the credit that we took in initially. That does help to offset our losses a bit. So in the end, the true maximum amount we can we can lose on this trade is $800. But, you know, like like I said this to 40 or to 35 Strike put saved us from losing a lot more. Because if we didn't have this put option and we just basically sold a naked put so to speak, um, if Apple traded only down to 2 30 that means we still have to buy shares at 2 45 but now sell them in the market at the market price of 2 30 So we would lose even more money on the trade. So I hope that clarifies now how this put option that we purchased and same thing with a call option that you purchase is part of the call. Credit spread serves as a form of protection to help capture maximum loss on the position. So that'll make sense there. Let me now throw this up onto the diagram here again, I'm gonna walk through a little bit more cooking out says you should be familiar with this , But just as a reminder in on the blue line is a profit and loss curve and expiration. Purple Line is a profit. Last curve. Right now at this very moment, um, so you can see here looking for us the blue line. We could see here that if Apple trades below the strike price of the put option that we purchased right, the protection that we purchased Ah, we will lose our maximum amount. But as Apple starts to trade above 2 35 looking Anthes profit loss numbers, we go from the maximum loss of 800 starts to increase, increase, increase until we break even and actually start making money until we can make the the full potential maximum profit of $200. Right? The credit that we initially took in the red line. As you saw, have you seen before is our break even price, which is going to be exactly $243 per share. Um, and I haven't really walked you through that example necessarily. So just to do it really believe for here, So you can think about it mathematically. You know, if Apple to close an expiration at $243 the put option that we sold without to 45 strike, we would have to We'll be assigned not a contract and have to purchase 100 shares at 2 45 And then we could, you know, subsequently sell those 100 shares at the market price of 2 to 43. Right? So if he bought it to 45 sell to 43 we will lose $200 on that transaction. And then with the $200 we made and credit when we first put on the position, those 200 will cancel out. So we don't make any money and we don't lose any money. So I just wanted Teoh take a second to clarify how that works. But then you. As long as Apple trades above 2 45 which is the the strike price of the option that we sold as long as Apple's above 2 45 expiration, we get to keep the full 200 bucks, right, Cause at that point, both options expire worthless, and they disappear. And we get to keep everything and in regards to, you know, calculating your breakevens, your max profits, your max losses. Um, very simple for Max, profit just before is going to be the credit that you taken initially. So 200 bucks is the most we can make on this position. Your maximum loss is gonna be the difference of the strikes. So $10 minus the credit you receive times 100 so 10 minus two is 88 times 100 is $800. That's the maximum loss in the position. Um, and then your break even point is going to be the strike price of the option you sold, minus the credit you receive so to 45 minus two is 2 43 That's a break even price. Right? So very simple to calculate those numbers again. Um, there's a few things I want to clarify before I wrap this video up. One is, you know, going back to this purple line with our, which represents our profit and loss right now. You know, As I said before, as time moves forward, this line will slowly start to morph into this blue line, and it has to do with what's called time decay or theta decay option contracts. If you don't know this option, contracts slowly lose value. Their prices slowly decrease over time. Just how the pricing model works for these types of financial securities, Right? As time moves forward, especially for out of the money contracts, which is, you know what? We used to make this position. Um, the price of those contracts, their value a slowly dwindle away as time gets closer and close to expiration. So that's a good thing for an overall net option cellar basically taking in a credit because, um, the idea, as I mentioned previously, is to close out of this position for a debit where we have no way we're going to pay something to close out of this position. But I want to close out at a lower price than the credit that we took in. So even if Apple were to stay exactly where it is at $268 per share, because time will slowly decay the value of these options, let's say two weeks pass and apple still a to 68. These option contracts will have lost a lot of value. And so this overall position will no longer be worth $2. It may be worth only $1 simply because time marched forward. And so this purple line will be a little bit closer to the blue line at that point, just so you can kind of visualize it right, which means simply by time moving forward and Apple stock not doing anything, this position would not be ready to be closed out for a profit, right? If it was only worth $1.2 weeks from now, simply because these option contracts lost a lot of value, then we could pay $100 to close out completely and sweet. Since we took in 200 initially or net profit, it would be $100. That's simply because time moved forward. Simple. Is that right? And another thing I want to clarify is, you know, I've been mentioning over and over again and closing out of the position. So what does that exactly mean? Right to close out of a spread, for example. And you'll see this also with iron condors and things like that later in this course. But to close out, you simply do the inverse of what you did to prom. The position. So, for example, if we sold the 2 45 strike put and bought the to 35 straight put, we would just do the inverse we would then, by the 2 45 strike, put and sell the to 35 strike, put just the inverse. And when you do that, you basically will close out of the position for debit, right? So, like I said, if the position was was worth only a dollar at that time, um, you would buy the to 45 cell the to 35 for a $1 debit and then overall, in the end, make a $1 profit on the trade, and again it's for share. So $100 in total eso yeah, Time to K is definitely one of the major benefits for these credit type strategies, but we have an added advantage. And like I said, this position that put credit spread is a generally bullish strategy. So if we're correct, an Apple actor starts to move up. And time, you know, is always going to move forward along with that. You know, looking at the at this purple on here again, you know, as Apple stock trades higher and higher and higher. Even right now, right? Let's say Apple goes 2 to 77 looking at Thea purple number on the far left bottom left corner of this graph. We stand to make $53 if we to close out this position. And let's say Apple trades up 2 to 77 forever reason. And, you know, a week from now these option contracts will be worth even less because time is March forward right there. State of the K. So we're trying to get out here is you can make money on these positions in two ways, both independently or at the same time. Apple stock could move up and time moves forward. Both of those two scenarios will decrease the value of these position of this position which will lie you to close out for a profit, Right? Apple moves higher. These contracts will become even further and further out of the money, so even ignoring time, just buy them becoming more and more out of the money. They will inherently lose more and more value. And you add on top of that, the decay in their value because time is moving forward along with that, this positions were really going to start losing value quickly if those two sonars happened at the same time. So even though expression maybe a month away from now, it could only be a few days. If you are right in your assumption and Apple stock moves up and time moves forward that this position value goes from $2 down to $1 you can close out for $100 profit, right? So that's a really, really great advantage of these of these credit based strategies, because you can take advantage of how they can make you money in multiple ways, right? It's not just dependent on Apple stock moving. You can have that benefit, but also simply the added benefit of time moving forward as well. A something called volatility, contraction, and I won't get into too much of that in this course. But essentially, volatility is another component of option contracts. And when volatility goes down and things become more stable, the prices of options also decrease. So you could basically have time moving forward. Apple stock increasing in price and volatility contracting all three of those things. If they happen at the same time, they're really gonna punish the value of this position, which is really gonna lie you to take a lot of profit very quickly. So you three different scenarios in regards to you know how options are priced to make money on the trade as well as the fact that you know, Apple can trade down sideways or go up in price. And, you know, by expiration you get to keep the full $2 that you took in or the full $200 right? So a lot of different ways you can make money on these positions, which is why I really encourage people to use them in their trading and just to remind you once again, you know, with the option that we sold has only a 30% chance of being in money at expiration. That means you have a 70% chance that Apple stock on May 15th is never going to be below 2 45 And you get to keep the full 200 bucks. Right? So you have the odds in your favor, and you have a bunch of different scenarios and things that can play out that could all allow you to take profits. So, um, I hope that all makes sense. And with that being said, that concludes this demonstration on the put credit spread. And so in the video next, and the ones there after, we're gonna start getting a little bit more fancy, we're gonna be using both calls and puts, um And so you'll see the next video. We're gonna start getting into the iron Kander, which is one of my personal favorites. So I'll see in the next video. Thanks. 6. Iron Condor: Okay. So, like I said, we're going to start getting a little bit more fancy now because this video is gonna focus on the Iron Condor, which is going to be a combination of both the call credit spread and the put credit spread . And this position, as you'll see, is actually a neutral strategy. It's not bearish, and it's not bullish. It's just neutral, right? So if you have reason to believe that Apple stock is just going to kind of trading sideways or, you know, just bouncing around within a certain range over the next month or so, then an iron condor might be a great strategy to use. Right? Um, so, you know, once again, of course, I had the option chain pulled up for Apple stock May 15th expiration for all these contracts, right? So as I said this, this position is going to be a combination of the call credit spread in the put credit spread. The major difference here is, you know, with the call credit spread by itself or the put credit spread by itself, I recommend that the option that you sell have around a 30 to 35% chance of being in the money by expiration, right? So, you know, if you remember, if with the call credit spread video, you know, we were selling someone around the to 80 strike call, right, cause it has about a 33 34% chance of being in the money on the day of expiration. Same thing when the puts, you know, I was looking at selling the 2 45 strike put because it has about a 30% chance of being in the money on May 15th. Wealthy Iron Condor, since for now gonna be selling puts and calls at the same time, we're gonna wanna move our strikes further and further away from where the stock is actually trading. And that's to give us a wider range for Apple to trade in such that we still give ourselves about its 70 65% chance of success. Right? You know, looking at the puts again with a 30% chance of being in the money by expiration gives us about a 70% chance that the Apple stock is not going to trade below 222 45. So a 70% chance that we will make money on this position. Same thing with the call spread right With a 33 or 34% chance of being in the money. That gives us about a 64% chance of making money in that position. Right? So we still wanna have those high odds with the Iron Condor, and you'll see how this works in a second. But the way we achieve that is by backing are short strikes further away from the actual stock price. So, for example, if I'm looking to put an iron condor in apple here, I may now want to look at selling the to 95 call and then buying the 305 strike call. And on the put side, I want to come further away, And I might want to buy or excuse me, sell the to 25 strike put and then purchase the to 15 strike. Put right. Let me set that up so you can see how it all looks. So sell an iron Condor. And as you can see, we're now using four contracts. So looking at the calls first going to sell one contract of Apple May 15th expiration strike of there should be to 95 and then we're going. Teoh, purchase one contract of Apple. May 15th strike of 305 Right, Um, And then for the put side, we're going to sell one contract of Apple. Same expiration strike place of to 25 and then purchase one contract one put with a strike price of 2 15 There you go. Right. So evil. The strikes in place and you can see we're still gonna take in an overall credit of $2.64 per share. So, in total, $264 that goes into our account, right when we problem this position. Pretty cool. So now, looking back to the probabilities here, well, the way this works now, because we have two different scenarios where we can lose money in the position, right? Apple can really rally and blow through our short call strike or Apple can really drop and blow through our short put strike. Right? And so since we have these two scenarios, that can't happen the same time. It's either or the way the probabilities work is you add them together. So for the co option that we're selling it has about a 16% chance of being in the money on the day of expiration, and the put option that we're selling has about a 17% chance of being in the money on expiration. So we're gonna add those two probabilities together. So 17 plus 16 is 34 so that what that means is this on Condor has a 34% chance of basically losing money on the day of expiration. So Apple stock there's a 34% chance that Apple stock is going to either trade above to 95 on expiration or below 2 25 on expiration, right? Two different scenarios now. But if there is a 34 ish percent chance, that's gonna that could happen. That means there's going to be about a 64% chance that it doesn't happen. There's about a 64% chance that Apple remains below to 95 and above to 25 so just kind of bounces around in that range. So by backing are short strikes further away from the actual stock price. We still give ourselves about a 64 65% chance that this position is going to play off, right? That's the probability that Apple's just gonna bounce around within this range until May 15th. So that's how you achieve these business high. Um, these high odds with an iron Condor just back away, your short strikes further and further away. Right? So, you know, in previous videos, you know, kind of walk you through some different scenarios and examples of you know what happens if Apple stock is this or that, right? I'm not really gonna spend too much time with those examples with the Iron Condor because it's basically the same, right? If Apple remains in between, are short strikes so above 2 25 below to 95. By expiration, all these contracts afford these contracts are going to expire worthless. They'll be out of the money by expiration, and so it'll just disappear, right? And we get to keep the full $264 if we're wrong. And Apple really has a great rally and blows past the strike of the co option that we sold , and maybe it either ends up right in between are to call strikes or, you know, blows past the the 305 strike of the call that we purchased. You know, the scenarios that are going to play out in terms of how we're gonna lose money or what not ? It's the same exact thing that you saw in me call credit spread video, Right, cause this is just a call cried spread on this side. It's the same thing. Conversely, on the on the put side, you know, for wrong. And Apple really has, you know, bad earnings or whatever, and it just tanks and make it blows past. You know, the strike of the put option that we sold to 25 kind of ends up in between are to put strikes or just blows through both of them The same again. The same scenario you're gonna play out as you saw any put credit spread video, right, cause this is just a put credit spread on this side. Same thing. We're just putting both them together into one strategy. Right? So, um, you know, if your if you want a refresher on this different scenarios in terms of what happens if we're wrong, then just go re watch those videos and the same thing as I said applies to the Iron Condor . So I'm now gonna throw this up on toothy analyzed tab here again, and we can see now our path diagram is looking a bit different. Right? Um, just as reminder again on the blue line payoff diagram for expiration, The date of expiration. Purple lines are profiting Last curve. As of right now, um, so you can see here or no visually now that as long as Apple trades above 2 25 which is the strike of the put option that we sold and trades below to 95 right, which is a strike of the co option that we sold. Then we make the full profit. You can see down here again with ease these numbers. You know, you can see the to 64 there and blue as long as apple trades within this range, we make the week it to keep the full credit that we receive initially. Right, But is apple for wrong and starts trading below 2 25 You know, we do have a little bit of wiggle room right here because, you know, just like with the credit spreads by themselves, you know, this is a credit based strategy. So we do have credit to help offset some of our losses of Apple starts trading below or above are short option strikes. So is Apple Straight trades outside of this range? You know, we'll start to lose money until we just break even, right? And you know, if we're really wrong, then yeah, we'll start losing money until we hit our maximum loss of $736 the $736 max loss is the same on both sides, right? So if we're really wrong to the upside in, Apple blows past our short strike and we still have a little bit of wiggle room again to maybe make a little bit of profit or just break even. But, you know, if we're really wrong, then yeah, we're gonna lose money up until the max loss of 7 36 And the reason why the maximum loss is the same on both sides, it's because the wits of the strikes from both the call spread and put spread are the same right there, both $10 wide. Now you could have an iron condor that has different strike wits for either the call spread or the put spread right. That would be kind of a skewed iron condor, right? Nothing preventing you from doing that. So the way you calculate your max loss on Iron Condor is you take the largest strike with of either the call spread of the put spread, which everyone's larger in this case of the same, so doesn't matter. But if you had a skewed iron Condor, you just take the largest of the two in terms of the strike wits and subtract from that the credit you receive. So this example, you know, with the strikes, the strike wits being the same there, $10 in each side. So we just take 10 minus 2.64 and then you multiply that by 100 rights. That's how you get the $736 Max los on both sides. Um, your max profit Samos before it's just the credit you receive. That's the maximum amount of money you could make on this position and your breakevens. Now you have to break evens, write you a break even on the put side in the coal side. So to calculate your break even on the put side. You just take the strike price of the option that you sold writes the to 20 to 25 strike put, and you subtract from that the credit you receive. So to 25 minus 2.64 can do the math in my head. But it's around yet 222 $122.36. Right? That's the break even point on the on the put side For the call side, you just take the strike price of the option that you sold. So in that case would be the 2 95 strike call, and you add the credit you receive, right? And you know, you've seen before it the same thing as with the call crowd spread by itself and the put credit spread by itself. So, you know, to 95 plus 2.64 is $297.64. Right? There you go. That's your break even point on the call side. Um, so one last thing I want to mention, but the Iron Condor is that you're not gonna have the added benefit of really making money on this position based on how Apple stock moves, you know, with the call credits bed credit spread by itself or the put credit spread by itself. You had the added advantage of making money. If Apple stock moved in the direction you wanted, right with the put credit spread, for example, if Apple stock really started to rally and you are correct in your directional assumption, well, those puts are gonna become further and further out of the money. Is Apple really starts to take off right? And that's going to decrease the value of those put options. So that's gonna help you close out of that position for a profit. Conversely, with the call credit spread if Apple starts really dropping price So you're right, directionally Well, those calls are going to come further and further out of the money, so they're going to come worth less and less and less, and you will be able to take advantage of that in terms of taking a profit early, right? Well, with an iron condor, since we have calls and puts on both sides, you know, if Apple shares to rally yeah, that puts will start to decrease in value because they become further and further out of the money. But Apple's gonna start moving closer and closer to our calls, so they're going to come closer and closer to being in the money, which means their value is going to increase. So as the value that puts decrease, you know, that amount is gonna be basically offset by the amount that calls increase in value San Thing. On the flip side, if Apple starts to really move down, the amount that you know the call prices are going to decrease are gonna be roughly offset by the price increase of the puts. Right. It's not going to exactly one for one. But that's generally how these positions work, right? The movement of the stock, um, is not going to be a great advantage for making money on this position. But what is what you're the best way to make. Money on our condor is simply letting time move forward, right? If apple just kind of bounces around within this range as time moves forward and I mentioned in the previous video the value these contracts of both the calls and the puts are gonna slowly deteriorate. Right? Let's just due to time decay. So, you know, right now, this whole positions worth about $254. But maybe two weeks from now, Apple's just kind of moving around. It's Ah, it's, you know, share price of $268 so just kind of moving around here somewhere in that range. Um, you know, this position may drop to $1.32 simply because two weeks of past time has moved forward. Um, and thus the value these contracts have dropped. So, you know, if the value this position drops to $1.32 you know, we could close out of this entire position for a 50 50% profit, basically a 50% gain of what the maximum potential profit would event, right? You know, of course, you can hold till expiration. And if you're correct, an apple, you know, ends someone this range by May 15th. Yeah, you'll keep the full toe to 64. Um, but as I've mentioned before, I would recommend that right. You want to put your money at the table, assumes you can, so you can redeployed elsewhere. So time decay is going to be your best friend with iron condors. And you know, there's also the added benefit of volatility, contraction, which I'm not gonna get into too much in this course. Get into more of that. In a future course I have planned coming up soon. It's gonna be more about the mechanics of an overall option trading system. But, you know, just generally speaking, volatility has to do with you know, how how much stock prices are moving in the market currently is. So as things start to calm down and prices are moving less and less and less volatility is going to contract, which is also going to really punish the value these positions. So you still have the two the two pronged advantage with an iron condor of time moving forward, which is going to decay the price of these options as well as you know, if volatility is contracting and things were becoming more stable, that's also going to help you with a closing out this position early. Right? So leave. That covers everything I wanted to touch on for the arm Condor. Um and so the next video we're gonna get into the Iron Butterfly 7. Iron Butterfly: All right, So now we're gonna take a look at the Iron Butterfly and this strategy, as well as the strategies you'll see in the next coming. Videos are gonna be best suited for larger account sizes, Right? So if you have a decent on a capital that you want to allocate towards option trading than yeah, butterfly or the strangle or the straddle that you'll see next those are best suited for larger accounts sizes because you know, they're going to be very credit focused in a sense that you're gonna take in a lot of credit initially. So the payouts, if you win, are gonna be pretty big. However, there's always the relationship between risk and reward, right? So if you're taking a lot of credit initially when you put on these positions, you're gonna be required to have a lot of capital to maintain the position going forward and you'll see why. This that's gonna be the case in a second here with the Iron butterfly. So beyond butterflies basically going to be a slight variation of the Aaron Condor still gonna use a call credit spread and in combination with the put credit spread, However, the main difference here is going to be the call that we're going to sell and the put that we're going to sell the strike prices of those options are going to be the same, right? And we want to sell these options as close to at the money as possible. So, you know, at the money, just as a reminder means, you know, the strike price of whatever option you're looking at equals the current share price of the underlying asset. Right? So in the case of apple here again, um, apples training a bit higher today at 2 73 25 So at the money color put would have a strike price of 2 73 25 However, there is no color put option that has those strike prices has that strike price. Right? So we're going to get us close as we can to to 73. So I'm gonna dio to set the example here is sell the cull option with a strike of to 70 and then also sell a put option with a strike of to 70. So the call options gonna be slightly in the money, right? Cause the strike price that were selling here is, you know, $3 less than the current share price, and the put options gonna be slightly out of the money. So this iron butterfly is gonna have a slightly bearish skew to it. Um, ideally, you know, just like with the Aaron Condor. We want all these options going. We want all these options to expire worthless so we can keep the maximum credit that we initially received. Right? So in order for that to happen, Apple needs to move down to exactly 2 70 so that the at the money call input that we're selling both expire worthless. And they're also gonna be purchasing further out of the money options as protection. And those will obviously expire worthless, too. So in that event, right, which is pretty rare, and that's not really the point of this position, but that's always the goal, right? You want all the contracts to expire worthless, so you get to keep the full credit. So let me go in and set this up. So we're going to sell and with, um, TD Ameritrade Digger swim. There's no iron butterfly list here, so it's technically gonna be set up as an iron condor. But since I'm gonna be selling the column put with the same strike, it's actually going to be an iron butterfly. So just keep that in mind. So sell one contract of Apple call option with a strike of to 70 right? And now this is where you're gonna potentially see why you need a lot of capital. At least in the case of Apple, you know, you don't have to put this put this kind of position with Apple because it is a very pricey stock. You can certainly do this with a much cheaper stock, like maybe Twitter, which is around $30 In which case you wouldn't need nearly as much capital to do an iron butterfly, right? But just to keep things consistent with using Apple s O for selling the to 70 call, then I might want to buy, you know, the let's say the 3 20 call the 3 20 strike. All right. So a $50 wide call credit spread, which is pretty significant, right? Um and so now with the puts were going to sell one put option, same strike as the call that were selling so 2 to 70 again, and then I'm gonna go $50 down to the to 20 strike put right there. So $50 wild on each side and the column put that were selling had the same strike of to 70 . So now you can see over here with this credit, that's a pretty massive credit, right? 24 almost $25 per share, times 100 shares. That's almost $2500 that you would receive into your account when you put on this position , right. So as you can see massive credit going into your account, but with a $50 wide spread on each side for both the call credit spread in the put credit spread, you're gonna need a lot of a lot of capital to hold this position, right. So if I would hit confirming, sent, actually have WiFi turned off. But, um, you know when you hit, confirm and send if you're used, think or swim, it'll tell you how much capital you need to have, right? And it's basically, you know, it's gonna be the difference of the strikes minus the credit you receive. So it's going to be around, you know, $2500 that you need to have, right? Your maximum loss in this position is out $2500. And so, you know, with any spread that you're putting on, whether it's a call credit spread by itself or Iron Condor or whatever the maximum loss on this positions, you need to have that capital in your account in the case that you are totally wrong. And you do hit the max loss so that you know, you have the money to pay up And, um, you know, take the loss. Right? So the same kind of procedure with cackling your Max Lawson, the Iron Butterfly. It's just the width of the strikes, minus the credit you receive. And because, you know, with an iron butterfly being suitable for larger accounts sizes and you're taking in larger credit, that means the maximum loss is even larger. It right. So I hope you can see now that yeah, these this is best suited for, um, large amounts of capital. But once again, I'll just remind you that apple is a pricey stock. You can definitely this with, you know, something like Twitter. Um, and to be much much, much more manageable for smaller count sizes. But, um so that's how you set up the Iron butterfly. And now I'm going to throw this up on the analysed, have first here so you can see the shape of the payoff diagram and is gonna more clearly show you how the breakevens and whatnot are gonna work. So with the Iron Butterfly payoff diagram, you know, it's similar. Similar looking to the Iron Condor. Right? But the Iron Condor have had a more flat plateau top. Now it's just ah, Peak writes a triangle, basically, um and so the idea with the iron butterfly is like I said, the ideal scenario is Apple closes at exactly 2 70 right on the day of expiration, which is the strike price of the call, and put that we sold in that way. All of the options expire worthless, and we get to keep the full $2500 right. The chance of that happening is happening is extremely low, but that's not That's fine, right, because we still have $2500 of credit that we initially receive. So apple can, you know, move around quite a bit and yeah, you know, it's going to decrease our overall credit that we will get to keep in the end of expiration . Right? But there's still a good chance that we'll get to keep a lot of it. Maybe half, maybe 2/3 or even even 25% of this amount is still a significant amount of money. Right? Um and so you can see, you know, our breakevens are basically right around $245 on the downside and right around $295 on the upside, right? So just like an Iron Condor, we have a range in which apple can trade for us to at least break even by expiration. So as long as Apple remains above 2 45 ish and below to 95 by expiration, we will make at least one penny on the trade. Right. So the iron butterfly, um simply put is you are using all of your credit too. Basically offset some sort of loss that you're gonna have when Apple moves around. Because, like I said, the chance of apple expiration hitting exactly to 70 is basically impossible. So you're gonna be losing a little bit of money expiration cause Apple's gonna be either above to 70 a little bit below to 70. But you have a lot of credit that you can use to offset that little bit of a loss. And in the end you'll still get to hopefully keep most of it right. So it's like I said, it's a very credit heavy position and, you know, in regards to the worst case scenario, um, it's very similar to an iron condor, right? So if Apple really blows, blows up to the downside of the upside and goes past your breakevens on either side, then you're Max. Loss is capped right, because this is still basically just a combination of a call credit spread and put credit spread. These are just much wider. So, you know, as I have explained, the max losses much greater right? You can see it's about a little over $2500 on both sides, and that's again because you just take the difference of the strike wits and minus the credit you receive. You've seen this before. Obviously, that's your maximum loss. Max profit. Um, you've seen this before as well. You know, it's just the credit you receive and your breakevens, just like unerring condor on the put side. It's basically the the strike price of the put option. You sell so to 70 minus the credit you receive, right? And then the call side. Same thing with the young condor. It's the strike price of the of the call option that you sell. Um, plus the credit you receive. Right? So also to 70 plus 24 94. So there you go. I'm just a little bit of a very of the Iron Condor. Um, and once again, you know, Time to K is going to be your best friend here, just like with the arm Condor. Because, you know, as Apple moves around, let's say apple starts moving to the downside. You know, your puts are gonna become more valuable and the calls to become less valuable. Conversely, apple moves to the upside the calls, they become more valuable and the post puts will become less viable. So they're gonna kind of offset each other, just like with the Iron Condor. So again, you really want to rely on just time moving forward and slowly decaying the value these options. So at some point, you know, apple just kind of moving around a little bit, Um, the value This position starts to drop and drop and drop so you can close out for profit in the end, right? So I believe that covers everything for the Iron Butterfly. Um, And so in the next video and the one thereafter, were it again to just more different variants of basically the Iron Butterfly, an iron condor which are going to be using completely naked positions. Right, So we're not gonna have any protection on the downside. And so you know, these these these positions basically the strangling the straddle, they're kind of the the holy Grail of options trading in terms of, you know, taking a lot of risk potentially. But, you know, really, in the long term, on average, taking in the most profit. Right. So, um, when you ready to move on to the next video, we're gonna start taking a look at the strangle 8. Strangle: All right, Welcome back. The next video in this course, and now we're gonna get into the strangle, which is my personal favorite option trading strategy to use. And so the strangle, as well as the straddle that you'll see in the next video. These are what's called undefined risk strategies, which may sound kind of scary. But Azul see later this later in this video, it's actually not. And so the reason why I called undefined risk positions is you don't have any protection to the downside, right? So, you know, with an iron condor, for example, or credit spread, you had to find risk. Your maximum loss was a finite number, which you could calculate by just taking the width of the spread or the width of the strikes minus the credit you receive. And that was your maximum loss, right? No matter what happened with the stock apple, in this case, your maximum possible loss was always finite, with a strangle and the straddle that you'll see later. It's not the case, right? You theoretically have infinite risk, infinite losses, right? If something were to something bad, were to happen now with that said, there has never been an options trader in the history of the world that has ever lost an infinite amount of money. It's just not possible, right? It's just a terminology used to describe the fact that there is really no downside protection to your position. And that's OK as long as you know what you're doing. Right. Um, so the strangle here is basically a variant of the Iron Condor, so we're basically going to sell and out of the money call and out of the money put. However, unlike with the Arm Condor, we're not gonna buy any further out of the money options as protection, right? We're just going to sell a call in a put and that's it. We're still going to sell them at around the same level or same distance of being out of the money, as we know only would with an iron condor. So we still have about that 65 70% chance of success on the position, right? So looking at Apple here again May 15 expiration for these calls and puts if I were to sell strangle here, I might want to look at Let's say the 3 15 strike call option to sell right about 14.3% chance of being in the money on the date of expiration. And on the put side, I might want to look at selling the to 40 strike. Put about a 15.7% chance of being in the money on the date of expiration. Um, and, you know, just like with Ian Condor, the way you calculate your probability here is just adding them together. Right, So 15.7 plus 14.3 is about 30%. Right? So, again, the way you interpret that is, there's about a 30% chance that Apple is going to trade above 3 15 or below 2 40 on May 15th. Right? Which means there's about a 70% chance that that never happens. The apple stays below 3 15 and above to 40. So in which case, you get to keep the full credit that you receive. So let me set this, um, strangle here. You can see the credit and everything, and I'm also going to show you a comparison with the Aaron Condors. Well, so strangle We're gonna sell one apple call option. May 15 expiration 3 15 strike and then also sell a put option. Same expression with a strike of 2 40 right? And so now you can see the credit we receive on this is about $540. That's pretty darn good, right? Which is one of the reasons why I love these strategy types. Because the credit you receive is is so much larger, which makes sense because your risk here is also much larger, right? You have undefined risk. Therefore, you should be be You should be paid more to take on this risk. Um, so comparing this to an iron condor, let me switch the order type here. So I'm gonna show you now when Iran Contra would look like selling the exact same strikes for the call in the put, but then buying the call in the put option $10 away, right? So I'm not gonna sell also an Iron condor. Same stripe with the call option. I'm going to sell the 3 15 but we're going to buy the 3 25 call. And on the put side gonna sell the to 40 just like with the strangle. And then by the to 30 strike put So there you go. Same short strikes, but now they credit you receive is less than half right. It's not bad, but you know, that's that's shows you the difference between taking on a defined risk position and an undefined risk position. The credit you receive is way, way more now. Moreover, um, if you were to put on a strangle or any other undefined risk strategy, it's going a little bit different in terms of how much money, how much money you need to put up in order to hold the position going forward, right with a defined risk position, like an iron condor or credit spread, you only need to put up enough money to cover your maximum loss, writes on the case This Iron Condor. Your maximum loss is, you know, the width of the strikes. So 10 minus the credit you receive 2.12 which is 7.8 times 100 right, so your maximum possible loss in the Iron condor is $788 which means your broker, we require you to have $788 set aside locked up. You can't touch it until you close out this position, right? Just in case the stock moves against you, and you do hit the max. Los. Now your broker has ensured that you've got the cash to cover your loss, right? Well, with an undefined risk position, you know, your book is not gonna make you have an infinite amount of money set aside. This makes sense. So what they would typically dio is required you to have enough capital set aside to cover a two standard deviation move of the stock. Um, and you know, you're not well versed in statistics. A two standard deviation move means it's a move in the underlying stock that is so large that it only happens about 5% of the time, so very, very rare. But it does happen, Right? So, um, if I were to let me close out with me just this back to just now a strangle here if I were to try and confirm and send this order, you can see my broker would want me to have about $2800 set aside, locked up for to cover this position until I close out of it. Right. Which means, you know of Apple would have a two standard deviation move, You know which, like I said, happens about 5% of the time. I would probably stand to lose around $2800 right? So my booker, just trying to cover itself is making me require is required me to have this money set aside to cover, um, a loss that might occur of this extent if it if Apple were to move beyond a Houston deviation move, or even if Apple were to really start moving out of the direction. Um, this number right here, this buying power effect, I would also probably start to increase. My broker would require me to have even more capital set aside to cover the position If Apple really started to move against me at some point, though, you know, if I don't have the money to cover the position out, you have to close out of it, or my broker would actually have to close it for me, and they would have to eat some of the loss as well. So when you're doing undefinable strategies, your broker, it is also taking on some risk with you because they know if something really really bad happens. They will lose money as well. But that's only gonna happen less than 5% of time. So they feel pretty comfortable. Require you to have enough money to cover 95% of the underlying stock movements. Right. So, um, I just want to clarify that in terms of how that's gonna work and, you know, just as a reminder again, you know, this this could be a turn off for some people. You know why I gotta have $3000 just to cover one position in apple apples of Price's stock . Right. You don't have to trade strangles an apple. I certainly don't. I don't have the capital for it. Um, so I'll show you later in this video, I actually put on a strangle in GDX, which is a gold e t f much, much cheaper, much, much cheaper E t f. And so you'll see. Once I demonstrate that to you, it's only gonna require, you know, a few $100 to initially put on this position. Right? So, um, even though strangle straddles and I'm butterflies are more suitable for larger accounts sizes, especially with undefined rece positions. And you know, because the buying power fact can increase. Um, you can still get away with using undefined risk positions in somewhat moderate sized accounts if you just trade really, really cheap underlings. So I hope that clears all that up. And so now I want to throw this up onto the analyze tab again. You can see the payoff diagram here, and some of the major difference you'll see now between the strangle and the Aaron Condor is you know, we have a similar shape once again, kind of plateau looking figure. But now there's no point at which it levels off, right with the Iron Condor. At some point, when you start losing money, you hit your max loss, and the line was just perfectly straight on both sides, right? Well, with the strangle, it just keeps going, right? Just keeps going on forever and ever and ever. So if Apple were to drop all the way down to $50 for whatever reason, you know you'd be looking to lose over, you know, $18,000 right? A lot of money. Same thing on the upside of Apple just explodes for some reason. Their losses air technically infinite on the upside. If Apple goes all the way to 5 50 you know you're gonna be losing $23,000. So I'm not showing you this to scare you, but I just want to demonstrate that this is what undefined risk really means. However, before you tell yourself there's no way in hell they were gonna trade these strategies. Let me just walk you through a couple couple points here about this. Another one is undefined. Wrist strategies are going to be the best way to potentially make some good money with trading options. That's because you are just selling options. You're not buying any options as protection, right with young Condor. You know, for example, you're still selling. Let's say you know the 2 40 strike put in the 3 15 strike call. You would take in, you know, basically $540 of credit. But because you're also buying options as well as protection, that's why you receive less than half of the credit with an iron condor than the strangle. Right. So the credit you receive with the strangles me much, much higher, which also means your break evens are going to be much much wider. Right? Um, you know, the ideal scenario here is Apple trades between our two short strikes. Right? So we get to keep the full credit records. If that happens, thes options expire worthless, and they go away. But, you know, Apple trades below. Oh, excuse me. Above 3 15 by expiration or below 2 40 by expiration. Yeah, well, we'll get a sign on that collar put, and we'll lose some money there, but we'll have $540 to use to help offset some of those losses. Right. So you can see on this diagram. You know, our break even on the on the downside is actually around 200 $6234.55 Somewhere around there, right, which is pretty far below our actual short puts strike up to 40. Same thing on the call side. You know, Apple trades all the way to, you know, 3 20 by expiration. We're still going to break even and not make any money, not lose any money. So the breakevens, as I said, are much wider on a strangle than arm Connor. Simply because you have more credit to use to help offset any losses that you incur. Additionally, time to K is really, really going to help you with undefined risk positions on. The reason for that is because looking at looking back of the Iron Condor, you know you're still selling two options. And as those options decay in value over time just because time marches forward when you close out of position. And remember, when you close out of a options position, you just do the inverse of what you did to put on a position. So closing out an iron condor just looking at the options you sold initially, you have to buy him back, right? And so if you sold them at a certain price and they slowly decayed in value, let's say by half. But when you close out of the Iron Condor somewhere down the road, you're gonna buy them back for half the price, and you'll make money on that trade, right? But with Young Connor, you also purchased two options as well, right? You purchased going back to the option chain here. You know, we also purchased the 3 25 strike call and the 2 30 strike put well because we bought these two contracts. That means to close out the Anchondo fully work, have to sell them, right? And so if we bought them first and time to K is gonna wither away their value over time. That means when we sell them later on to close out of the Iron Condor, we're gonna be selling them for a loss. Right? So that's obviously going to impact your profitability on the Iron Condor. You're still gonna make money in the on Connor, don't get me wrong. But it's not gonna be as as beneficial as with strangle, because once again, the strangle you're just selling options. That's it. And as they Dechaine value, you can buy them back for a much cheaper price and make the difference is profit. And that could simply happen as apple just kind of moving around. It doesn't do a whole lot. Right? So those two things together, you know, the wider breakevens, right? So you have more room for apple to move for you to still make money as well as having time to care. Really? Um, you know, helping your position lose value more more quickly, so you can buy it back sooner for profit. Those two things are why I really enjoy using the strangle right now. Also, last thing I'll mention is you in regards to losses because your losses are theoretically infinite here. Well, stocks are not going to move, you know, wildly in one day, right? Mean, when I say that me, I mean, you know, apples not gonna move from to 80 old way to, you know, 501 day. Likewise, it's not gonna go from to 80 all the way to zero in one day. That's technically possible after one bankrupt. But that is not gonna happen, right? I think we can all agree on that. Which means even if Apple has, you know, wild movement, right? Or if you know, over the next couple weeks, it's going to really move up or down. You have that time to close out of this position, right? So Apple released rights movement down and you start taking on losses. Well, you can just close out of position for loss and move on, right? And that in that way, you major loss defined. It wasn't infinite. You made it defined because you just closed out of the position right? An alternative solution is rolling the position. And by rolling the position, I simply mean, you know, if Apple starts to move against you fine clothes out of the struggle that you have and then reopen the same exact strangle in the next expiration cycle. So, for example, of apple releases to rally and your your call option that you sold starts to get tested and you start to lose money well, then you can just close out of this strangle for a loss and then reopen the same exact strangle in June for the June contracts. And when you do that more often than not, you'll be able to do so for a credit, right? Because options further out in time are going to be more valuable time. More time increases the value of options. So by closing out of the current month, May for loss and then reopening the same exact position with same strikes in June, the June contract, we're gonna have a whole month mawr worth of time built into their value, so they're going to be worth more. And once you close out of the make contracts and reopen the June contracts Like I said, more often than not, you'll be able to do so for overall credit. And top of that, you add another month for Apple in this case to turn around. So if in May, you know, like I said, if Apple has a really great rally, you close out of the make contracts, your reopened in June, you taking some credit, additional credit, and then you give yourself an extra month, and then maybe in June, apple comes back around and falls back down in between your two strikes, and then you can actually close out of the entire position in June for profit, right? So even though these positions are undefined, that can sound scary on. And yes, there are times, you know, maybe 5% of time or 1% of time, you could lose a decent amount of money. But more often than not, those gigantic moves. I'm not gonna happen in one day. You'll have time to react to close out if you need Teoh. Um, but for the most part, these are very safe strategies to to use. If you know what you're doing, you have the benefit of rolling the contracts to just close out for a loss. You have that ability to basically define your losses. And you also have much wider breakevens as well. So apple could even move a lot more than like with an iron condor. And you still can break even or make a little bit of money, right? So I hope that makes everything clear in regards to the strangle. One last thing I will mention. And also, I will show you really fast the, um, strangle I sold in GDX just to show you that you don't need thousands and thousands of dollars. Teoh, trade these positions, um, nor to trade undefined risk positions. You will need special permission from your broker. It's not difficult to get permission. There is no black and white answer in terms of, you know, what do you exactly need to do to get approval? But essentially, you know, you basically need tohave, some amount of money, your account usually $5000 or so. You need to have some sort of stable income and, you know, on your investor profile, whenever your broker calls it, you basically need to specify that you know what you're doing. You know that you want to take on some risk and you're trying to go for aggressive growth and things like that, right? Basically, your bunker just wants to make sure that you've got income to cover any big losses that you may have. And you know what you're doing, right? You know that you're taking on big risk and you're not going to sue them if something bad happens. Right? Um, so in the last thing, like I said, I will show you the the Stranglers sold in GDX today. Just so you can see, you know, another another way of looking at a strangle in terms of a much cheaper underlying. So GDX is a gold E t f, um, and selling a strangle here. Right? I sold the 35 strike call, and the 24 strike put right there. Took in about $100 in credit, and you can see my broker only only required me to have about $300 of buying power tied up toe. Hold this position now. This could expand, of course, if something bad would happen. So there's no way of knowing what will happen in the future. But I just wanted to show you this to provide proof that, like I said, you don't need a whole lot of money to trade these positions. You will need a decent amount, right? A couple $1000 I would recommend. But you don't need a massive amount of money to problems positions. So hope that clears everything up. And in the final video coming up next, we're going Take a look at the straddle. 9. Straddle: all right. Thanks for joining me here in the final informational video of this course. And now we're gonna take a look at the straddle, which is another completely naked option trading strategy, just like the strangle. And it's basically gonna be a variant of the Iron Butterfly. So if you recall from the Iron Butterfly video, we sell in at the money call and also selling at the money put and then we also purchase both a call in a put that are much further out of the money, right on both sides. And that's supposed to be our protection so we can define our risk on that position, right? The straddle were still gonna sewn at the money call and selling at money put, but we're just not going to buy any protection. We're not gonna buy more options further out of the money to define our risk. Right. So, um, you know, this is obviously apple stock here once again, close today at around $286 per share. Although after hours is actually trading a bit higher to 95. So I'm gonna use the closing price to determine where where at the money is. So obviously we want to get as close to 86 is possible for our strikes. And since there is no to 86 strike, we're gonna go with the to 85 because that's as close as we can get. So I'm gonna sell the to 85 strike call and the to 85 strike put. And that's gonna be our straddle position for Apple. Let me set that up. So we're gonna sell now the straddle one call one, put same strike of to 85 you could see the credit. Just like with Iron Butterfly is pretty massive, right? Taking a lot of credit. This is $2750 in total. And you know, that's that's the point, right? Because we're selling options right where the current stock price is trading at right. Which means of apple starts to move around, you know, either above or below 25. This struggle position is going to start taking on water and losing money. Um, but you know, that's fine because we taken so much credit that we can use to help offset some of our losses right, and that's totally acceptable because, um, you know, just like with the Iron Butterfly, the chance of Apple actually closing at exactly 2 85 on the day of expiration is basically zero right. It's significantly more likely that Apple closed closes above to 85 or blow to 85 as long as it isn't closed too far above or below to 85 then we'll get to keep most of this credit , right. But you'll basically almost never get to keep all of it, and that's fine. Um, and you know, if I were to hit, confirm and send here because this is a naked position, my brokers once again going to require me to have a lot of money tied up and set aside, as you know, collateral. In case this position totally goes against me, and because we're selling at the money options, the risk is much higher, right? So instead of you know, I think it was around $3000 with a strangle that my broker would require me to have set aside. It's now almost $6000 right? The risk is much higher here, but once again there's always that relationship between risk and reward we're taking on more risk with this position. So the payout if we are correct and Apple stays right around to 86 or so is going much higher. Right? If apple just kind of, you know, wiggles around to 85. 26 come expiration on May 15th will get to make probably over $2000 as to pose as opposed to maybe a few 100. Um, so it's always that trade off. Right? So let me now throw this up onto the analyzed trade to have again, just like the Iron Butterfly. The shape here is mawr, like like a mountain, right? Has a peak to it instead of like, a more of a plateau with the Aaron Condor or strangle. Um, And because this is a naked position, losses are theoretically infinite, right on both sides just goes on forever. Um, but once again, you know, no one has ever lost an infinite amount of money, right? As long as you know how to manage these kinds of positions, Um, you know, you'll be fine. So we can see here that, you know, we have some pretty wide break, even still right. That's again. Due to the fact that we took in a lot of credit. So on the downside are break even is going to be right around $257 per share. Right? And on the upside are break even is about $312 per share. So a pretty big range for Apple a trade in in order for us to, you know, either break even or actually make some money. Um, so let me actually pull this up onto the option Shane again. So to 57 and 3 12 So now, looking back of the options on the downside or break even was 2 57 So I'm gonna look at the 2 55 put just gets close, possible. And then on the call side, it was 3 12 I'm gonna look at the 3 10 call. Right? So now we can use these options and specifically look at the probability of in the money to kind of get an idea of what our probability of success is on this position. Right. Um so the chance that apple trades below 2 55 or above 3 10 by May 15th. You know, once again it's the some of the probabilities here. So 25% plus 21% is, you know, 46%. So that's a pretty high chance that apple closes above 3 15 or sees me above 3 10 or below 2 55 expiration. But you still have better odds than 50 50 right? You know, with the 46% chance the apple closes above or below these two strikes, that means there's a 54% chance that it doesn't so yet better than 50 50. Um, but you can see here that, you know, these things straddle positions, don't have the greatest probability of profit. And that's simply because the payout, if you are right, is so large and gonna load back to that, uh, the relationship between risk and reward High high reward means high risk, Right. So your chance of success here is gonna be lower. Um, but you know these positions. You know, on average, if you were to make this kind of trade over and over and over again, should work out pretty well for you. But certainly every now and then if something really bad goes, you know, if something really bad happens, then, Yeah, you could lose a lot of money on these positions. So you just gotta understand that risk and going back now to the analyzed tab again. So just like the strangle time decay is going to be your absolute best friend with this position, because once again, we're just purely selling options. Were not buying any protection, which is gonna kind of work against us in terms of, you know, the time to came. What not So, you know, as time moves forward and hopefully is apple just kind of bounces around a small range. You know, these these options in terms of their values going, it's gonna really start to decay very rapidly. Um, so you know, I've said this multiple times in this course, but, um, you know, I always encourage people to close out of these kinds of positions at 50% of max profit. So once this positions worth about, you know, $13.75 I would close out completely by these options back, obviously for much, much less than I sold them for and taking that profit and walk away. Right? Um and you know, if that if it works out that way. Then I'd walk away with over $1300 huge payout and obviously took on a lot of risk. But you know, it's it should work more often than not, because you have a greater chance than 50 50 with his position, right. And I believe that covers everything I wanted to talk about for the straddle. You know, it's it's basically pretty is pretty similar to the strangle in many ways, so I don't want to be repetitive, so I will leave you with one piece of advice. However, if you are brand new to options, trading onto something you want to get involved with and feel out to see if it's something you wanna pursue long term, Um, I highly encourage against starting out with trading naked positions, right? My guess is your broker want even approve you If you are brand new, um, they will need to see typically a little bit of trading history before they will grant you that approval to trade naked positions. But even if you do have that that status to trade these kinds of strangles and straddles and whatnot, um, I do advise against it because you know these are risky positions if you don't know how to manage them, how to roll them on just how to maintain stability in your portfolio and whatnot. So, um, if you are brand new, start out with credit spreads. Aren't condors basically anything you can do to define your risk, right once you get the hang of it and you understand how this all works because you certainly will lose money, you will lose trades. You're not gonna win everything. And it's better to lose a finite amount of money in the beginning when you're just kind of getting up to speed versus having a very risky large position on with undefined losses at stake and for something to really bad go wrong, right. So you can also paper trade as well, which basically means trading with fake money. And in that case, I guess you could trade naked positions. Obviously doesn't matter because it's not real money. But once you have your real hard earned cash on the line, start out with define risk. Get the hang of it, and then as you gain more experience, you can seek approval from your broker to trade naked positions and then once you have that approval, start out by trading very small. Still cheap. Underlying is cheap stocks. They don't They don't really move a whole lot once again. So you can just kind of get the hang of trading something brand new, right? So all that being said, that's about it in terms of the core material for this course. And so in the final video coming up next, I'm just going to happen some things up and then sending you on your way. So I'll see you next video. Thanks. 10. Wrapping Up: All right, So this point, you have now completed the course, so you should be ready at this point to start trading options in the stock market. My recommendation from here, And this is what the course project is. It's, too. If you haven't already create a brokerage account. I do recommend TD Ameritrade because they have the sink or swim platform that you can download and use for free and then start paper trading. Right? Use fake money because if you are brand new to this kind of thing, you're brand new to trading. It can certainly be a very exciting and fun activity or profession to get involved with, but can also be very frustrating and difficult at times when things don't go your way. So if your brand new, it's better to be on the safer side of things and, um, trade with fake money because you will make mistakes, you are going to have losing trades. There is a bit of a steep learning curve when it comes to applying all this knowledge. So I recommend, as I said, trade with fake money first and then once you are more comfortable with this, this activity and how to make trades and how to manage them and things like that. Then you can transition over to using real money, right? Just as a few reminders here, it's very important to make trades very frequently right. These positions. These strategies were designed such that you need to make them over and over and over again , so the probabilities have a chance to actually play out. Over time. I try to make it least one trade per day, although I used usually shoot for two or three. But some days I make no traits. Some days I'll make 10 trades, right? It just depends on where the opportunity is. Sometimes there's a lot. Sometimes there's none right, but on average, I'd say 12 to 3 trades a day is a great number to be at, Um, and also it's very, very important to stay small. What I mean by that is my recommendation is to not risk more than 5% of your account value on any given trade. So if you have $5000 in your account, 5% of that is 250 bucks. So I would not recommend risking more than $250 on anyone trade, because when you do have losing trades and you certainly will, you can't win everything. It's better to lose a small fraction of your account than to lose a huge piece, right? If you were to lose, let's say, 20% of your account value because one trade blew up. It's going be very difficult to come back from that. Whereas if you just lose 1% over here 3.5% over here, it's much easier to rebound from the small little losses, right? So trade small trade often and then also give yourself high probabilities of success better than 50 50. Which is why I'm most encouraged people to use credit based strategies because they give you a wide spectrum of probabilities that you can choose from to give yourself great changes of success. Right, so the last thing will leave you here before I wrap this video up is you know, this course is designed to get you up to speed on the various strategies that I personally use when trading options. But the next step from here is to create a mechanical system in which to utilize these strategies right. The more mechanical you can be about trading, the more effective and more successful. You should be right, because when emotion start getting involved in this profession and this this practice, things can go really wrong, right? Emotional trading is not what you want to be doing. You want to be mechanical and stick to your rules and your process for trading. So those mechanics can be something that you create for yourself, depending on your own risk, tolerance, your own goals or levels of ambition and things like that, Um, or you can stay tuned for the course that I have coming up next, which is gonna be all about my personal trading mechanics when it comes to options on the things that I look for in the markets to basically signify when I should and shouldn't make a trade, right. So with all that being said, thank you for watching this course. I am Scott race again. I do publish one new course every two weeks and all my materials about investing as well a software development and personal growth. So please do check out the other courses I have on skill share. I think you really enjoy them and stay tuned for the have come in next happy trading