Stock Market: OPTIONS Introduction | Scott Reese | Skillshare

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Stock Market: OPTIONS Introduction

teacher avatar Scott Reese, Engineer & Investor

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

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

8 Lessons (1h 41m)
    • 1. Introduction

      1:03
    • 2. What are Option Contracts?

      4:24
    • 3. Put Option Example

      10:53
    • 4. Call Option Example

      9:16
    • 5. How are Options Priced?

      27:47
    • 6. The Greeks

      18:33
    • 7. ThinkOrSwim Demonstration

      25:21
    • 8. Wrap Up

      3:26
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About This Class

Option contracts are simply another form of a financial security, like stock itself, that you can trade in the stock market. While there is potential to make a lot of money in trading these contracts, there is also greater risk involved if you don't understand what they are and how they work. This course is designed to get you up to speed on all the ins and outs of option contracts. By the time you finish it, you will have a solid knowledge base on which to formulate your own option trading strategy, or you can use my strategy (courses on that coming soon!). Either way, option contracts can offer you a great and easy way to make money in the stock market, so let's get started!

EDIT: In the second to last video called "ThinkOrSwim Demonstration", I misspoke when I was explaining what "In the money" means for call options. The call options that are highlighted in blue are in the money because their strike prices are less than the current trading price of SPY. I accidentally said it the other way around!

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Scott Reese

Engineer & Investor

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Transcripts

1. Introduction: option contracts. What are they? How do they work? Can you make a lot of money with them? Can you lose a lot of money with them? All these questions and more will be answered right here in this course. If making money in the stock market sounds interesting to you, then option contracts are a great way to do so. And this course will be your first step to getting to that point. But before you're ready to start diving into the real markets and trading those contracts like a pro, it's imperative that you understand the interest, all these questions. And that's exactly what this course is designed to provide you. So with that being said, just a little information about myself as well. My name is Scott Reese. I'm currently a full time software engineer in the financial services industry, and I'm also an options trader. I trade option contracts every day. I learn a lot about the stuff in college, and I've been teaching myself more mawr every day since graduation, and I can definitely attest to the fact that with enough patience and enough time to really understand how these things work, you can definitely make some good long term income by trading his contracts in the stock market. So if all that sounds intriguing to you, then let's get started. 2. What are Option Contracts?: welcome to the first video in this introductory course on options, and my goal here with this course is simply going to be to teach you guys how option contracts work as well as some other things, like our options priced one of the dangers and risks involved in dealing with option contracts. Things like that, right? I will have a separate course in the future that will teach you more about how to trade these things in the stock market to make some good long term income. But before you get to that point, obviously you want to make sure you understand the core concepts, principles, understand the risks involved and all that, because I mean this is especially important with option contracts because the risks involved are much greater. You can potentially make a lot of money with option contracts, but you also stand to lose a heck of a lot more money than if you were just dealing with stock. So it's very important to have a very solid foundation before you get started with these things, and that's what this course is designed to give you. So that being said, I just want to start diving into the material in this course or excuse me in this video, I want to just talk about what option contracts are gonna walk you through on the computer . A couple examples within graft is to show you more concretely how they work and how they make you money and things like that. So just kicking things off, what is an option contract, Right. Well, simply, simply speaking, an option contract is a form of a financial security that you can trade around, buy and sell in the stock market, just like stock. Right? But these air contracts and the way they work, is there tied to what's called an underlying asset. Now, this asset is typically a stock could be something else. But, you know, for the purpose of this course, we're gonna we're gonna be dealing with stock. So the option contract is tied to some stocks of a particular company, and the contract needs a buyer and a seller. What the contract means or what it would state is the the buyer. The contract has the option of buying or selling shares of the underlying stock with that cellar at an agreed upon price at some point in the future, right? That's it. Um, and these things were initially designed and created to offer a form of protection. If you had, let's say some other stock positions in your portfolio, so ah, common example would be, You know, if you have a long stock position in your portfolio, let's say you bought shares of some company and you want the share price to increase over time so you can sell those shares later on for a profit. Well, your assumption that the share price is gonna increase over time could be wrong, right? The stock might plummet, and you could just be losing money every day, every week, every month into the future, right? Well, you could protect yourself from that possible outcome by buying what's called a put option , and this put option will protect you from losing money. If the stock price goes down, let's say you bought a share of some company at 50 bucks, and the share price goes from 50 down to 40. Well, if you just had that stock position of nothing else right now you are down $10. You stand to lose 10 bucks. But if you bought a put option ahead of time. That $10 you lost with the stock will actually be made back from the put option. So you actually don't lose any money? That's it's great, Right? So that's what they were designed to dio, um, you could certainly use him that way, but a lot of people don't use them in that way, including myself. A lot of people are just trying to make money off the fluctuations in the prices of these contracts, just like they would with stock. Right. You can buy an option at some price and then sell the contract later on at a higher price and make the difference as profit, just like you will the stock. Um, the cool thing is, what the way option contracts work and I'll get into this later. Is the money you can make by doing that is a lot more right. But you also could lose a lot more, so there's some more risk involved. Obviously. Um so that all being said, I'm gonna dive dive in over to the computer Now, I'm gonna walk you through a couple examples with some graphs, just just to show you some concrete demonstrations of how these things actually work and how they make you money. So let's dive over to the computer and I'll show you what's going on with that. 3. Put Option Example: already. So as you can see here, I have Ah, pretty simple graph set up that I'm gonna be using to walk you guys through a couple examples showing how options are a great tool to protect yourself from losing money of, You know, a certain position you have in stock moves against you, right? And the general set up here is gonna be and we have some position set up with some company stock. Will call that company X Y Z, right. That's gonna be the made up ticker symbol for the stock. And so we have some position and X y z. Maybe it's long. Maybe it's short, right, and we're going to using options for protection. And so, as you can see on this in a scrap, the Y axis is going to represent our profit at the end. The day, right, Once our entire position is closed out, what's our total profit or what's our total loss? That's what this Y axis is going to show. And then on the X axis, we have, um, the actual share price of X y Z. Right? So the first example is going to be a more common easy to understand example of Let's just say we have a long stock position and x y z you know, maybe we bought one share at 50 bucks, and we're hoping the stock price is going to increase over time. And so that weaken at that point sell our share of X y Z at that higher price tickets a profit and then call a day right. And so, before we get into how we can use in this case, put options to protect ourselves from X Y Z moving down, I just want to show you the the general payoff diagram for a long stock position, right? And that's gonna look something like this. Let me just make sure the everything's lined up something like that, right. So to explain this, that's so we bought one share of X Y Z 8 50 bucks, and maybe a month from now, the share price goes from 50 all the way to 75. Well, a profit is going to be if you go to the red line and then over to the Y axis our profit at the end. The day is going to be $25 you can do some simple arithmetic just to double check that right? You know, you can take or we bought one share of X Y Z 8 50 We sold it 75. The difference between the two is 25 bucks, right? And that was our prophet. Um, and of course, the opposite could certainly happen where the share price of X y Z moves down. Our assumption was wrong, and, you know, we're now losing money. So if x y Z went from 50 all the way to down to 25 our net profit is actually negative. $25. We've lost money. That's not good, right? But I want to show you this just to demonstrate what a payoff diagram looks like just for a simple, long stock position. But, you know, looking at this weaken, ask ourselves the question of how do we get rid of this piece decreased this piece. You know, how do we prevent ourselves from losing a lot of money if our assumption of where X y Z is gonna go is wrong? This is where put options are a great tool to use for that. And I'm just going to quickly, um draw the path diagram for a long stock position of X y Z plus you having bought one put option, right? And I will walk you through me diagram in a moment it's gonna show it to you first. So this is what the new path diagram is gonna look like for one share that we own of X y Z . Plus, we also bought a put option. Before I get into all this, there's a couple things you gotta keep in mind with options in general and then put options specifically so with options in general, every option contract has what's called a strike price. And this strike price is, as I've mentioned before, is going to be the price at which you and the option seller like if you're the option buyer , the strike price is going to be the price at which you and the options seller have agreed to trade shares at X Y Z at at some point in the future. And that's regardless of where the price of X y Z actually moves right. You're always going to in this case if we bought a put option with a strike price of 50 bucks we're always going to trade shares of X y Z at 50 bucks private. Now there's some more detail on top of that, but that's the general idea. So the set up now is we have one share of X y Z. We bought it 50 and we also bought a put option with a strike price of 50. And one more thing to keep in mind with options as well is they always have an expiration date. You can buy options that expire in a week. Expire in two weeks. One month, six months a year. Two years, right? There's a whole spectrum of different time horizons you can choose from. Um, so in this case, let's say we just want to be in our X y Z long position for one month. So where you we want to buy a put option that expires in one month, right? And there are a couple of different flavors of options in general. There's what's called an American style option, which means you can only use it to basically excuse me, an American style. The option means you can use the option at any time to basically recuperate your losses right a European styled option means you can only use the option on the day of expiration to recuperate your losses, right To take advantage of that protection, it provides you. So to keep things as simple as possible in this course, we're gonna be dealing with European style options. Meaning, you know, if we bought a put option expires in a month, then we can only use its protection toe actually recuperate all the losses at the very end of that one month, right? So just keep that in mind. So going back to our example here now dealing with put options in particular, put options are only useful if the price of the underlying stock x y Z in this case drops below the strike price. Right, Because from the perspective of the put option buyer, this put option gives the buyer the right to sell shares of X Y Z to that option cellar at the strike price. And you'd only want to do this if the strike our excuse me if the share price x y z drops below the strike price and I'll walk you through an example here. So let's say you know, just once again a reminder. We bought one share. X y z at 50. We have a put option that cost us $5. It's one more thing I forgot to mention. These things aren't free. You bought one put option that costs us five bucks. That expires in one month. Right now, if in one month the share price of X Y Z drops from 50 to 25 Well, if he just looked at our stock position, we would have lost $25. Right? But we have a put option that allows us to still sell this shit X Y Z at $50 to whoever sold us that contract. So even though X y Z actually dropped to 25 that's the That's the current market price Now in a month. Basically, we still get to sell our share a month from now at 50 bucks, which is great, because if we bought in at 50 bucks and we then we're able to sell it back to the option seller 50 bucks we broke even right now, obviously, like I said, we spent $5 to pay for the contract. So in this case, are total overall net profit or loss is only $5. We've lost $5 but we're only ever gonna lose five bucks regardless of where X y Z moves below 50 they could go to 49. It could go to zero. It can go to three anywhere it moves below 50. Bucks are maximum loss, basically, is only ever gonna be $5. And that's incredible, right? Um, now, on the other side, What if x y z moves up? Right? And that's what we wanted. That's what that's what we wanted anyway. Toe happen. And the put option was only to you to protect us from the opposite occurring. Um, so in this case, keep in mind if put options are only useful if the share price of the underlying asset moves below the strike price, then that means they're gonna be useless if the share price of X Y Z moves above 50. And you can kind of think about this logically, right? If the price of X y z a month from now went from 50 all the way to 75 why would I want to sell it to this option cellar for only 50 bucks? I would want to sell it in the markets to somebody else for 75 right? And that's what I would do. But because the put option cost just a bit of money five bucks, that means our profit is not going to be the full $25 as it was before. It's gonna be the difference of when we bought it and what we sold it for, which is $25. Minus the price of the contract, which was five bucks. So are at the end of day are net profit is $20.25 minus five is 20. And so you know, that's a very fair thing to happen, right? You got protection, which certainly should not be free, right? Sleep a little bit of protection that's going Teoh. Decrease your total net profits if you are right and X y Z moves up. But, you know, I think that's totally worth it. If you are completely protected on the down side, no matter where X y Z moves below 50 bucks, you are guaranteed toe only ever lose $5 and that's that's incredible. So I hope this diagram made sense in this example made sense Um, and the next one, we're going to going through a very similar example with showing how call options work. It's kind of it's going to this exact same set up, but on the reverse. Right. So, um, you know, this is some complicated material. I understand. So maybe you have to watch this video a couple times. Um, certainly do that This step. It took me a couple of times toe fully learn and understand and, um, actually implement in my own life. So, um, take your time with this video. And once you fully understand this example, then move onto the next one where we're gonna be talking about call options. 4. Call Option Example: Okay, So in this next example, we're gonna be talking about call options, which is the other kind of option you can buy. There's put options and those call options. And as I kind of mentioned briefly, there's different styles of both American and European. We're doing just with European style options here, Um, so with the case of using call options to protect yourself, this is going to require you have a short position in X Y Z right before in the previous example, we had a long position, right? We bought one share of X Y Z 8 50 We hope the price is gonna increase with time, and that's how we make her money. When you short sell a stock, the opposite is true. You actually want the stock price to go down, and that's how you actually make money. I'm not gonna go too in depth into what short selling means and all that. But on a high level, it essentially means that you borrow a stock from somebody else. So we say we ball one share of X y Z from somebody else. We then immediately sell that share in the market for the current market price, Let's say 50 bucks. And then if we're right and X y Z actually moves down like you wanted it to at that point later, down the road, we would then buy it back for 25 right? If X y z went from 50 toe down 25 we buy it back at that price and give that share back to the person we bought it from. And then we take in our profits, right? And in that case, our profit will be $25. Right? We sold for 50 took in 50 bucks as just cold, hard cash as premium. We later used half of that to buy the share back when the price dropped. So are net profit at the end of days. 25 bucks. That's essentially how short selling works and a payoff diagram for that right would look something like this right? Which is just make sure things lined up, which is basically kind of the opposite. As your long position right as the share price X Y Z moves down, right? Let's say it goes to like I said, If it goes down in a 25 a prophet, this $25 if it goes up to 75. Well, if we only had 50 bucks to spend to buy that share back in the market, that goes up to 75. Then that means we basically have to come up with another $25 typically out of her own pocket to buy it back and give it back to our lender. Right. This is the payoff diagram for a short position in X y Z. And just, like, long position. There is a big component of it, a big piece of it that has a lot of potential for losing money. So how do we protect against this? This outcome, right. This is where we use call options. And again, let me just get the diagram set up, and then I'll walk you through it. But it's gonna look, um, look, something like this. See, I can make us as Lined Oppa's possible something like Like that. Right now, one thing give mine again is you know, with call options put options. This some of the same principles apply. They both have an expiration date. They would have strike prices, right? So in this case, you know If you only wanted to be in our short X y Z position for one month, we would buy a call option that expires in one month. And if we initially sold that one, Sheriff X Y Z had 50 bucks. We want to buy a call option that has a strike price of 50 bucks, right? Let's say we did that. The price of that call option was $5 again, right? So still trying to keep the set up here is similar is possible now in this case, Like I said, we want the the share price of X Y Z to move down. And that's how we make our money, right? But if it moves up, we obviously want some protections. So with a call option, the main difference between a call option of put option is again, you know, from the buyer's perspective, when I buy a call option instead of the option, give me the right to sell shares of X y Z at the strike price. Ah co option gives the option buyer the right to purchase shares of X y Z at the strike price, right so and that exists in this example if we initially sold that one share of X Y Z that we borrowed in the market at 50 bucks. And one month from now, the share price climbed to 75. Right. Well, we have a contract that says I can still buy that share back from that option cellar at 50 bucks, right? I don't have to buy it back in 75. I can buy it back at 50 and that's what I would do. So if I initially sold the X y Z share for 50 and then down the road, I use my call option, um, at expiration to buy it back at 50. I broke even. And you know the options Self costs me five bucks. So my net pay off at the end of it all, or my net losses only $5. And again, that's true of any price point that X Y Z moves to above 50 bucks, right? N even goes to 75. It goes to 51 goes to 2000 right? My maximum loss is only ever going to be $5. It's amazing. And now, on the opposite side, if it goes down to 25 like we wanted it to. Well, then, the call option is useless. Right? Put options are only useful if the share price drops below the strike. Call. Options are only useful if the share price goes above the strike price right there. Just opposites of each other. And so you kind of think of a logically, you know, if I shorted once you have X y z, I sold it initially at 50 bucks and it drops down 25 like I wanted to. Why would I want to buy it back at 50 Right. I want to buy it back at the lower price that the new current market price a month from now 25 taking my $25 profit handed him the share back to my lender. And then I guess you know the net profit in the day would be 25 minus the $5 that $5 cost of the co options. So my net profit in the day would be $20. That's where 20 would be right around here. Right? So again, same kind of concept. My maximum profits are reduced a little bit, right? If I just had a short stock position and no options. Yeah, I could have made $25 if x y z one from 50 done in 25. But, you know, I thought it was worth to pay five bucks toe have all this protection. And if that means my maximum profit if I'm right is reduced by $5 so be it. That's totally worth it to me, in my opinion. So, um, that covers this example with call options and how they can be used for protection as well . And you know the purpose of these two examples I've showed you were to demonstrate the true intent of options like a set in the initial intro video. You can use them this way. Like if you have short a long stock positions, you can certainly use put put or call options to protect yourself in either of these scenarios. But you can also kind of play around with the fluctuation in the prices of the option contracts. Right wing like a said this example, we bought a put bought a call option for five bucks. Well, you don't s so they have tohave shares of stock that you either or long or short with toe actually buy option contracts. You can just go buy a contract for five bucks, and I hope that the price changes in such a way that it becomes profitable that sell it later on. And I'm gonna walk you guys through how the pricing of options changes. There's many variables at play, but you can use that knowledge to basically just buy options without having stock involved at all and still make a lot of money, right? But anyways, the point of these examples of this that was just to show you the core heart of what these things are meant for and how they work, how they kind of make you money, that kind of thing. And then going forward in the next couple videos, I'm gonna be showing you guys what goes into pricing these things. And there's something called the Greeks, which can tell you how the prices are gonna move in the future. Based on if certain things happen, the market etcetera, etcetera, and you can kind of used as that's. That's the knowledge that I'm alluding to that you can use to just buy options without stock involved in potentially make money. So hope this ah example made sense just like the last one again. If you'd walk through these couple examples a couple of times, please do. It's very important that you understand these things, these concepts in these examples before moving on. So take your time and when you're ready, I'll see in the next video. Thanks. 5. How are Options Priced?: So in this next video here, I wanted to take some time to discuss all the different variables that are a play which affect option prices. As I've mentioned a couple of times before. These are very complicated financial instruments, and it's not just a matter of how that underlying asset that stock moves around in the market as time goes on, that affects the prices of options. That is one piece of it. But as you can see here, there are five total variables, if you will, that you know, if any of these values were to change will also affect the prices of calls and puts so these air a very multi dimensional financial tool. And so, before I dive into this, I just want to briefly show you, uh, the mathematical calculation that goes into creating prices for calls and puts right this Excel spreadsheet you see, here is basically a little option pricing calculator that I put together pretty quickly. That just takes in these inputs right these variables and applies this what's called the Black Scholes equation and outputs the price of a call and a put. And so again, I'm gonna show you these equations just so a. In case you are kind of a math geek like I am, it might be something kind of interesting to see. But be It's just to give you an a priest appreciation for the complexity of option contracts. And you know, it's it's definitely 100% not required it all to understand the math that goes into pricing these things, necessarily I something wouldn't recommend you try and learn it. I unfortunately had to go through this stuff in college when I was taking these finance courses. But, you know, if you don't want to take the time to understand the math and I recommend you don't, then it's imperative, absolutely imperative that you at least understand which variables. All right, play right. These five, um, that affect option prices and how the effect option prices, right? If you know the stock price moves up or down, how's that affect calls and puts in terms of their pricing if implied, volatility, and I'll get into what that means in a minute. If that moves up or down, how does that going to affect the prices for calls and puts and what not right? So without further ado. Um, here you go. This is a mathematical derivation that shows you how put options are priced. Right. Um so curious. You know, this basically means the price of a put option based on the current stock price, the current date and the date of expiration for this contract equals all this stuff, right? I'm not gonna walk you through this like, like I said, 100% not required to understand all this. I mean, in case you're a little bit curious, you know, become a math geek, right? We've got some calculus in here. We've got some probability and statistics in here got some discounting with all that and all that. So there's a lot of different mathematical concepts that are applied in formulating option prices and with co options. It's a very similar set up. Very similar kind of, uh, deprivation. Eso again just want to briefly show you this case you're interested. But more importantly, it's really just to drive home the point that these are very complicated. And if you don't want, take the time, understand this math, then, as I said, it's imperative that you understand at least this stuff here, so uh, taking things right off looking at stock prices. And actually, before I get into how these variables effect prices for calls and puts one thing that I mean to be aware of is the pricing for both calls and puts are broken up into two distinct pieces. Right? Options, um, have what's called intrinsic value and extrinsic value. And the some of those two pieces equals the actual price of a call or a put, for example, right and so intrinsic value. And we're going to focus on call options here first because there's some slight, subtle differences between calls and puts intrinsic value for a call simply means what is the current stock price in this case is 31. What's the strike? Which is 30. We'll have to do to calculate intrinsic value for call options. Take the current stock price. Subtract that, subtract 30. The strike from 31 gives you one, and there you go. In this with this set up call options have an intrinsic value of $1. Right now, when you think about it, I mean, that kind of makes sense, you know, if at expiration, um, you know, time, expression here is 0.5 years. This numbers in terms of years. So six months from now at expiration, if the stock price was at 31 and the strike was at 30 you'd be able to buy shares of this stock at $30 and sell in the market for 31 you make $1 per share, basically. So that's why I call options. Have entrant have an intrinsic value with this set up of $1? Now? If the stock price was below the strike, let's say stock price was $29. Then call options would have zero intrinsic value right at expiration. If the stock price was at 29 and the strikes at 30. Call options are useless. In order for corruption to be useful, the stock price has to be greater than the strike. Um, so without a mind you can see here that call options are are valued at greater than $1. Currently, I mean, if they have an intrinsic value of $1 and the current price is $2.71 you know what's the deal with that? Well, the remaining value that's left after you calculate Internet value is called extrinsic value. So here we have $1.71 worth of extrinsic value for call options, and that simply means that, you know, with a timed expiration of 0.5 years. So six months. That's still a lot of time left for things to happen. For the stock to move, for example, right, the stock could move in six months from 31 all the way up to 40. Who knows? And there's value in that time. It's called the time Value of money. And because of that, that's why I call options are at this point in time. With six months left expiration, there's still valued at more than just their intrinsic value. And if you look at puts, for example, I mean, if you remember from previous the previous videos, that puts the only useful, um, and expiration. If the stock price is below the strike and in this case it's not right, and so at expiration, put options with a strike of 30 would be absolutely useless. And yet today they're still worth almost a dollar. So even though put options have zero intrinsic value at this point and the way you would calculate that is for put options. You would take the strike minus the stock price, and if that number is positive, then that is going to be the intrinsic value. But this case, 30 minus 31 is negative one. And in this case, you know, you know, the put options don't have negative $1 of interest intrinsic value. They just have $0 of intrinsic value, right? And even though in his case put options have no intrinsic value, there's still six months left for the stock price to move around, potentially dropped below 30 and then put options will become valuable or more valuable, right? So that's why at this point, both calls and puts have value more than zero. And you know you'll see that, especially with time expiration as this time get smaller and smaller and smaller. As we get closer and closer and closer to expiration, the values of calls and puts we're going to decrease until the until they reach just their intrinsic value, right? So, for example, with six months left, call options currently have a value of $2.71 even though they only have an intrinsic value of $1 right? Well, as time moves on, right, let's save offensive half a year to expiration. Really? Have 1/4 a quarter of the year, right? So three months. Well, there you go. Call options. Their prices have now dropped right. There's no less time for the stock to move around. There's less value in that time because that time is now smaller. And so the prices of CO options with structure 30 that is, are going to slowly drop down, down, down until they hit $1. Right. Assuming the stock price stays the same, stays at 31 call options. They're going to slowly drop down to a dollar. So we decreased time even more. We go to, you know, 0.1 years left to expiration, Son Supply. Just a couple days now call options only worth a dollar and three cents right. There's still little bit of time left for something to happen, so there's still a little bit of extrinsic value there. Both calls and puts, even though for puts its only a penny. Um, but there's still little bit of time left, and I can't just put zero here. Unfortunately, the math math is not gonna work out with the way of the calculation set up. Um, but, you know, if I just really small number There you go. Culture now worth exactly $1 puts are worth nothing, right? There's exactly $1 of intrinsic value at expiration because the stock is at 31 strikes at 30. 31 minus 30 is $1. There you go with puts. Since the stock places not below the strike put options have no value, their now worthless right? And I should have mentioned earlier in case you're wondering how old these numbers are changing, right? This calculator basically has hold his math built into it. So when I'm changing these numbers, this math is basically being applied and giving you the final results. And these d one d two, uh, these these numbers up here, they're basically just intermediate calculations that are used to, uh, calculate the final results here writing me. If you look at this derivation, you can see D one right here. Do you two right here? That's what these numbers mean. But the point I'm trying to convey in this video you can basically just ignore them, right? The whole point is seeing how these numbers move relative to these numbers, right? But I want to Do we just drive that point home first? That option prices have two components, intrinsic value, extrinsic value. And as time moves on, that extrinsic value slowly deteriorates, right, because there's less and less time for things to happen. There's less value in that time remaining, etcetera, etcetera. And so that's how um, that all works. Something just reset this to back to half a year, okay? And so now we're gonna look at how the movement in that underlying asset right option contracts have to be tied to some underlying asset, right? And for the purpose of this course, we're dealing with stock. So we're gonna look first now at how movement in that stock price can effect price movements in calls and puts. So, um, let's say the stock price moves from 31 2 35 Right? And as you can see here, calls have now become a lot more valuable, right? Intrinsically speaking, they have $5 worth of intrinsic value. Remember, Stock price minus the strike. That's five bucks. And then anything left over on top of that is all extrinsic value. So we have 96 cents here of extrinsic value and put options obviously decreased in price, because, I mean, there's even though there's still six months left and we obviously have 22 cents of extrinsic value left here. There's the possibility that the stock is gonna go from 35 down below 30 is now much less than when the stock price was just at 31. Right? And so that's why puts are now less valuable still have some value there. There's still six months left. Something could happen, but that's why that price has dropped considerably. Likewise, if the stock price did plummet and it went to 25 right now, the opposite kind of happens calls now become almost worthless. But there's still a little bit of that extrinsic value there. There's still plenty of time for that stock price to climb back up, but now that the stock prices below the strike and blow it considerably puts now have a lot of value there, and so that's how stock price stock prices can affect the movement of option pricing and the strikes themselves. Um, maybe just reset this here one. So the strikes themselves. I mean, these things obviously don't fluctuate like stock prices do necessarily there fixed. But when you're looking at excuse me, when you're looking at options to to buy or sell, you're gonna have a whole spectrum of contracts that you can choose from with different strikes. Mean strikes of 30 31 32 35 40 25 2010. Right. You can pick which one you want to buy herself. And the prices are obviously gonna be very different, depending on that strike relative to you, where the stock price is right. So I mean, you kind of think about this logically. If instead we chose to buy a call option with a strike of 31 instead of 30 right? Let me reset that. You can see calls, all right. $2.71 with strikes at 30. And then we go to 31 cause no one down, 2 to 14 right? Because there's now $0 here worth of intrinsic value. But there's still $2.14 where the that extrinsic value right, um and like like that puts even though there's still no intrinsic value with puts right, because the stock price still is not below the strike their equal. But it's getting really close, obviously. So the chance that the stock might drop below 31 is now much greater with a higher strike. And so puts are now more valuable. Um, so that's how strikes will affect the prices of calls, inputs. And so I know, for example, if you wanted to buy a call option, maybe the call options you're looking at are pretty expensive, because maybe that underlying stock is very expensive. Um, you might want to purchase a co option with a very high strike, right? Something like maybe a strike of 40. You can see here. You know, a call option with a strike 40 and a stock price of only 31 is only worth 11 cents. That's much more affordable, right? And before I continue, you might think, Well, you know, $2.14 is also very affordable, right? Well, one thing I probably should've mentioned earlier is typically actually, it's almost universal. But when you are going to go buy or sell options, the prices will always be in terms of one share, right so you'll see prices of, like $2.14 or maybe $5 whatever sense. But each contract typically represents 100 shares, not just one share. And so what you would do is you would take the price that's currently offer to the market, and you would multiply that by 100. So if I would buy a call option that's priced at $2.14 that's only $2.14 per share on a call option. You know, almost universally speaking, will represent 100 shares, so you'll actually be paying $214 to buy one call to buy one put you be spending $137. And so that's why I'm saying, if that is, you know kind of your price range well, you could, by co option with a much higher strike, right in this case, a strike of 40 in which case now the call options, along with 11 cents per share or $11 over. All right, so based on your your budgeting and what not, you can kind of play around with buying different strikes to get lower or higher prices depending on what your goal is. Right? So that's strikes now, going into implied volatility. What does this even mean? Implied volatilities, simply speaking, is simply the the prediction that the market has for how great of a movement that stock price might have in the next year. And you would interpret this number as a percentage, so 0.2 is 20%. So it basically means the market is assuming that in the next year the stock price is going to move either up or down by 20%. Right? And because this is all forecasting and predictions and what not, uh, this number can fluctuate and can fluctuate quite wildly to, um especially, for example, like when earnings were coming up. Implied volatility can blow up a lot because, you know, if earnings are bad, the stock might plummet a lot if earnings a really good the stock might shoot up by a lot. And so, um, implied volatility is going to change to reflect that potential outcome right? And the important thing to really keep in mind with implied volatility is this is going to typically have the greatest impact on option pricing. When this guy moves even by a little bit option prices could move by a lot, right? So, for example, with an implied volatility of 20% let's say for some reason the market now has reasonable reason to believe that the stock price might move by 40% in the next year. So that point to goes 2.4 right, and you'll see call options. We're gonna move, um, from $2.31 all the way to 4 33 Right and put options went from just 97 cents all the way to $2.60. Basically right. That's huge movement for just a doubling of implied volatility. Right? And so this is something that you really got to keep an eye on because, for example, let's say you wanted to Baikal option for basically $271 you wanted to basically sell that contract later on at a higher price, just like you would with stock and make a profit, right? Well, the stock price can stay exactly the same, does not have to move at all. But if implied volatility doubles, for example, you just made a lot of money, right? because your co option and I just went up to $4.33. You then sell that and you made a lot of money. Right now, the flipside, the opposite could certainly happen as well. You could buy a call option right now implied volatilities high at 4 33 And then, if implied, volatility collapses and goes down 2.2. Well, crap, Now you're really underwater. And the stock price didn't even move. It did not even move. And so this is why kind of gambling with option contracts could be very risky, because the stock price could stay exactly where it is and implied volatility could move. Interest rates could move. Time also always moves forward. And as I mentioned before, as time moves closer and closer expiration, both of these guys are going to start losing value, right? So especially if you are buying option contracts and you have all these things stayed exactly the same, right? Except for time. As time marches forward and you cannot stop that, obviously, right. As time moves forward, your contracts are going to slowly start losing value right, Which means you better hope that the stock price moves or implied volatility moves or interest rates move so that you can sell your contracts later on for hopefully a higher price and click profit. And that doesn't happen. Then you're just going to see your contract slowly losing value every day until expiration . And one thing to keep in mind as is as time moves closer to expiration, the rate at which your options lose value is going to increase right. As time gets closer and closer and closer to expiration, your your contracts are gonna start losing value mawr and more rapidly. So it's kind of a game against time. If you want to gamble with ease option contracts in terms of buying them, Um, because time is really gonna be your biggest enemy here, so on. And so is implied volatilities. Well, I mean, if you are on the wrong side of volatilities, so to speak and you buy a contract when implied, volatility is high and then it collapses and nothing else changes. Stock stays where it is. I mean, maybe a couple of days move forward, but that isn't that hasn't had a huge impact on your option value yet, you know, that's still gonna crush your position just by implied volatility going down. So, you know, I'm trying to be as detailed as possible with all this stuff. So you really understand how many different variables at play here and how they can all affect the prices of options that you may be buying or selling right? So not getting into Indus traits. Interest rates are typically going to be the least important thing to keep in mind with all of these variables. Typically because meaning in these times interest rates are changing so slightly and so insignificantly. And even when they do change, um, interest rates. Just if you were to kind of look at the math and all that, um, administrators don't have a huge impact anyways on option prices. They certainly have an impact, but just not as profound as let's say, implied volatility. Um, but obviously it's so important to understand how interest rates affect option pricing. And so I'm not gonna go into conceptually why are conceptually explaining the relationship between industry. It's an option. Prices. It's actually pretty complicated. So I would just say Memorize this kind of if then set up here. So if interest rates increase call option prices will also increase and put option prices will decrease right, so as an example, interest rates are currently 5%. This is also a percentage here. That's how you should interpret it. If interest rates went from 5% to 10% again, it's a pretty big jump, but you'll see that the impact is actually gonna be not super significant. So the call options will go up a little bit and put options will decrease a little bit. And there you go. So, for ah, doubling of interest rates mean calls and puts definitely had a price movement but wasn't drastic, right? And so then, conversely, if I mean I do that, I just reset it. Excuse me, right? Eso then. Conversely, if interest rates were to go down, then call option prices will go down. Put option prices will go up. There you go. So just memorized that kind of relationship. Like I said, not gonna go into the actual detailed specifics. It's actually quite complicated, So just keep that in mind and then last thing as a kind of warning mentioned before with timed expiration. This is the last variable at play that will affect your option prices on this. Like I said, this is kind of your your biggest enemy when buying options. And it's actually gonna be your greatest asset when selling options. And I'll get into more of that in my letter course on trading these things to action make money. But as time to expiration dwindles and ah goes away, the prices of your options are going to decrease as well, and they're going to decrease more and more rapidly, right? So with six months left to go, this is what calls and puts a price stat. But with only 0.1 years left, you can see we had a pretty significant drop there and with shows before, with basically no time left, you know, puts go to zero calls went down to one right. And so this is also one of the biggest dangers with buying options is, you know, if you were to by co option, for example, at $235 right? It's a lot of money, and let's say there's six months left expiration, but the stock maybe had bad earnings or something, and the stock went down to $25 right? Well, a you just lost a lot of money just on that big stock price movement. But there's still a chance that it could come back. There's still some extra extrinsic value here, but expiration, right? You lost everything. That entire 200 some odd dollars you put into this deal. You lost every single penny, right? Whereas with stock, if you bought, you know, a share of that company at 31 whatever it was before and dropped down 25. Yeah, you lost some money, but you still have 25 bucks of value per share. Their right, And the stock could always rebound, and you could regain your losses. And everything will be totally fine with call options or put options as well when expiration hits. And the stock is not where you want to be. Sucks to be you. You've lost every penny that you put into it. And sorry, dragon. You know, that's one of the biggest dangers here with options and kind of no gambling with him and whatnot. So, um, I think that's everything I went to cover with these variables that are at play here. Um, and this this was a pretty lengthy and more complicated video. So I would recommend watching this a couple times at least really kneel down these concepts and to understand how all these different variables truly affect option prices. So, um, thank you for watching this video, and when you are ready to move on to the next one, I will see you there and we're going to start diving into what's called the Greeks. 6. The Greeks: Alrighty. Welcome back to the next video in this course, and in this one, we're gonna be diving into what's called the Greeks. And this is basically ah, group of five metrics that you can use to see exactly by how much call and put prices are going to move based on a change in, let's say, the price of that underlying asset or a change in implied volatility or a change in interest rates. In the previous video, I just told you, generally speaking kind of how these different variables affect option prices. You know, if implied volatility increases, then the prices of calls and puts are going to increase right. But the Greeks will actually tell you exactly how much these price changes for calls and puts are going to move. And that's why they're very useful to look at, um, so before I get into all that, I just want to briefly walk through what you're seeing here. This is what's called the option chain, and I have this pulled up through Robin Hood's website. Robin Hood, if you don't know, is a pretty popular brokerage platform nowadays, larger, largely because it offers commission free trading. You don't have to pay any fees or commissions to buy and sell stocks or options, which is pretty incredible. Um, they also offer a very clean, simple user interface, which is why I love the platform. I don't personally use it anymore to do any trading, but, um, I still use the charts in and whatnot that they have available just to kind of keep an eye on the markets and whatnot as I'm working throughout each day. Just because, as I said, the user interface is just so clean and easy to use. But anyways, um, so this is the option change for calls that we can see here, right? And you can toggle it for puts if you wanted to, but I'm going to start off with with calls. And so the underlying asset for these call options is S P. Y. You can see right here. And if you're not familiar with SP y, it's just a very popular market E T F. That tracks the S and P 500. Um, I'm not gonna go into any detail what utf sar aur market indexes and all that. If you want to dive into that further, you can watch my course on how to safely invest in the stock market. But SP wise, it acts just like a stock. You can buy, buy and sell shares of it just like any other stock in the stock market. And excuse me if it currently, as you can see here, is trading at a price of $337.25. So that's the underlying asset, and all these call options expire on March 20th. At the time this video was recorded, its currently February 17th. So he's the all these call options expiring about a month, and you can see here there's a whole lot of different expiration dates you can choose from , right, and it goes way, way on up all the way through 2022. Um, and so I mean, you typically find with asked like SP why that are so heavily traded every day. When you look at the options offered on them will typically have a multitude of different expiration days to choose from. So definite lot of latitude for you to kind of pick which expert expiration date you want based on your preferred time horizon and all that So we're gonna go with the March 20th expiration. And so, as I pointed out earlier, we can see here the current trading price for S. P. Y. And then on the first column we can see all the different strike prices, right? And so, for example, if you want to buy one of these call options based on your budget, you can take a strike price. Ah, that will meet that budget, right? So, for example, if you want to buy the 3 32 strike call option resuming here in case it's hard to see, you know you have spend, you know, it says $8.95 here. But remember, this is on a per share basis. So if you actually wanted to buy this call option, since always contracts represent 100 shares, you'd actually to spend $895. That's a lot of money, but it's obviously a lot of money because with a strike with 3 32 and a current share place of 3 37 right this so far this co option looks like it's gonna be worth a lot of money. Come expiration, right? There's a lot of a lot of intrinsic value already built in. And there's a lot of extrinsic value as well. So, you know, it's obviously gonna be worth a lot of money, but that's outside of your budget, right? You can obviously pick a higher strike. Maybe you want to go for the 3 42 strike, it is only gonna be $252 right? It's a big difference. So, um yeah, I just I want to give you a brief walk through of what All this is. Um and you know, if you sign for Robin Hood, then this is it. This is exactly what you'll see, and you'll find that buying and selling options on the website is incredibly easy and straightforward. So without further ado, um, you know, if I would click on any one of these co options, let's look at the 3 36 strike call option, for example. But click on that. Let me zoom in here. You can see right here we have what's called the Greeks. And as I said, you have five different metrics Delta, Gamma, theta Vega and Rho. And you're just basically gonna have to memorize what these mean? Um I mean, these are obviously Cem Greek letters here that don't really have anything to do with what these numbers actually mean. So you just can't memorize the relationships, you know? What does Delta actually mean and all that? So taking things off with Delta, but this number means. And actually, before I continue when you're looking at all these metrics here with the exception of data , right, Onda, actually, you know, you could argue for all these. Um, you can interpret them in the same way. So what I'm trying to get out is the numbers we're seeing here, all based on a $1 move up of the underlying asset price or a 1% move up of implied volatility, a 1% move up of interest rates, etcetera, etcetera and forth. Ada, I guess you would interpret it as a one day forward from today. That's how you would interpret it. And the same thing will be true with put options. You always want to look at these and kind of remind yourself that the way these numbers are listed here, I'm kind of referring to being positive or negative. You would remind yourself that these numbers reflect how option prices are going to move based on a $1 move up or 1% move up of whatever those they represent. And if you wanted to see how option prices move if the opposite occurs, right, if the underlying asset price moves down by a dollar than you would just have to put a negative sign in front of these, right? And so this will become more clear once again to this. But I just wanted to give you that info ahead of time. So for Delta, this basically means for a $1 increase in the underlying asset. So if spy hours ago from 3 37 75 to 3 38 75 then the delta will tell you exactly how much the price of this cull option will increase. Right? So if, like, a set of spy goes at 3 38 75 then get my calculator here just to Aiken prove the wow for the concept. So if that would have happened than the price of this option contract, which is currently trading at $5.96 per share will increase by. I'm just gonna round down to 59 cents. Right? So, Spi, Spi moves up by a dollar, then the price of this corruption moves up to $6.55 for sure. Basically right, Um, and then on the flip side of spyware to move down to 3 36 75 you just put a negative sign in front of this Delta. And you would see then that the price of this option would actually move down by 59 cents so it would fall to $5.37. Right? So that's what delta means. And one thing also to note is when the price of spy does move, Delta is also going to move with it. These are not static numbers that are never going to change. All these numbers are going to constantly change based on how the price of as people I moves or case of Vega, how high volatility moves get to all the rest. But these numbers will change. And even though that might seem kind of confusing, just know that whatever numbers are currently listed, that simply means that okay for the next. In the case of Delta for the next $1 move of SP y. This is how the call option price is going to be affected. Right? And once that happens, you know, the Delta might change to 60. Now, is there a 0.61 something right? Which means the spine spyware to move again by $1 Then the priceless collection would move by 0.6, whatever it waas. Right. So these numbers will change. Keep that in mind. And game is actually a great way to kind of demonstrate that because gamma, we'll tell you how Delta moves when the underlying asset s p Y actually has a price change . So if spy words and move again, same example of sour to move from 3 37 75 to 3 38 75 Yeah. The co option price will move up by 59 cents. And then once that happens, Gamma will tell you. Okay, Now Delta is going to increase by 0.337 Right? And so me calculator again. So, to your 0.59 for eight plus 0.337 So once spy moves up to 3 38 75 Delta will move to 0.6 to 85 Which means if Spy were to move up again by a dollar to 3 39 75 then the price that CO option will increase by 62.85 cents. Right? And the opposite is true if Spy were to move down. Right, So Spy went down to 3 36 75 Then you put a negative sign for the Gamma right, which will tell you that Delta will drop by 0.337 Right, So that's what Gamma will tell you. That's like I said, a good example to show you how at least Delta will move with the share price of spy changing. Um, so then moving on to fade out here, me, actually swop their ago. So forth, Ada. They will tell you how time the march Ford of time will affect the price of your call option. And if you remember from the previous video, as time moves forward, your option contracts are going to slowly deteriorate in value until expiration hits. And then all that's left is the intrinsic value, which could be positive. Or it could be zero right um so I mean, obviously these contracts, currently with a month left to expression, have a lot of extrinsic value and when fatal will tell you is for every day that passes the price. This contract will drop by in this case, 7.71 cents. Right? And once tomorrow ends, you know this number is going to change, and what you'll find is as time gets Aziz no, the day gets closer and closer to expiration. Fada is going going to become increasingly negative, right? Which means the price, the value of your option contract is going to decrease mawr more rapidly. It's going to the radio wish it loses. Value accelerates as you get closer and closer to expiration. Which is why, you know, as I said multiple times before, if you just want to start buying options, you know, that's kind of a gamble, right? Because if you're wrong, you know, with your underlying assumption of where the stock's gonna move, Um, or if it's just stubborn and it's not moving at all, then every day passes you're just gonna see the value of your call options start to wither away, and it's gonna wither away from more and more quickly. That's gonna be a painful thing to see. And one thing I also should mention before I continue is you know, these numbers will tell you how you know this co option. For example, move assuming everything else is held constant, right? So in the case of data, if the stock price doesn't move and Vega, which I'll get to means apply volatility if implied volatility doesn't move and row first to interest rates. So if root end, if interest rates don't move, nothing else moves. Except one day has passed, Then the price of this option will drop by 7.71 cents. Same thing with Delta, right? You know, we're still looking at today, and time has, you know, stop for a brief moment, implied volatility hasn't changed. Interest rates don't change. Nothing else has changed except the price of SP y. Then, given that the value of this option contract will move by 59 cents, right, so also, keep that in mind. And typically, you know, these multiple things will be changing simultaneously. So it's not a perfect science to use these toe. See exactly how the price of this is going to move, but they're still very, very helpful in giving you an assumption. Right? So with Vega, as I just mentioned, Vega is going to tell you how implied volatility affects the price of your option contracts . So with a 1% increase in apply volatility, the price of this CO option is going to increase by 40.52 cents. And likewise, if implied, volatility decreases by 1% you know, put a negative and funny here. That means the CO options going to drop by 40 cents right now, Vega means. And then lastly, we have RO, which, as I really, really mentioned, refers to interest rates. How do interest rates affect the price of your option contracts? So for a 1% increase in the risk free interest rate, the price of this corruption is going to increase by 18.67 cents. And then again, if interest rates dropped by 1% put a negative out here and that means the prices contracts going to decrease by 18.67 cents. And again, like I said, all these numbers are gonna continually change as, um, you know, interest rates change or implied volatility moves the stock price moves etcetera, etcetera. So, um, that covers it with the Greeks. And one thing I want to point out also is, you know, if I want to puts, let me just pick 3 39 Strike put. Zoom in here. You'll notice now that the Delta is negative and so is row, right? Why is that again? When you look at these numbers, you have to have that assumption or that And son Assumption, I would say that understanding that all these numbers refer to an increase in whatever it is they're trying Teoh whenever is related to right. So for a $1 increase in the stock price, um, the price of this put options going to drop by 50.48 cents. And on the flip side, if the stock price decreases by a dollar, you put a negative in front of this number and a negative negative cancels out in terms. Do it positive. So for $1 decrease in this people, I the price of this put option with an increase by 50.48 cents. Same thing with road here. Now it's negative because it's that default interpretation still remains true. For a 1% increase in interest rates, the put option is going to fall by 16.87 cents and for a 1% decrease in interest rates, you put a negative out here again, Negative negative cancels out, becomes a positive. That means the prices put options going to increase by 16.87 cents and then gamma data in Vega or all the same across both calls and puts. So that's one to point that out in case you come across that in your are kind of confused. But that's why row and Delta are negative for puts, um, so that covers everything with the Greeks. I hope, um, you know, if you start getting into buying and selling calls and puts and whatnot that these become very useful tools for you to see how the prices are going to move relative to maybe assumptions you have with stock prices are high volatility or interest rates and whatever. So, um, that concludes this video. Thank you for watching it. I appreciate it. And in the last video, in this course coming up next, I'm gonna be showing you just a brief tour through my preferred trading platform Thinker Swim, which is TD Ameritrade's kind of professional trading platform. And I'll show you what? Um, making an actual trade. Um, buying or selling option actually looks like and you'll see that take a swim will offer you a lot more different metrics and numbers and things you can look at to help give you the best. The are the greatest money information that you can use toe make the best trade, right? So once you ah, fully understand this understood this material, then hopping over to that last video and we're up things that from there, so thanks. 7. ThinkOrSwim Demonstration: Okay, Welcome back to the last instructional video of this course and this last one here. I just want to take some time to breath you walk you through my preferred trading platform , which is TD Ameritrade's think or swim application. This is just a more professional trading software application that you can use to trade stock options. Forex futures. Really anything you want, right? Um, and don't worry, I'm not gonna walk you through much of this, but there's a few things I wanted to show you and think or swim that, you know, Mawr Simplistic brokerage platforms like Robin Hood may or may not have going forward. And the additional metrics and things that they think this one includes could be very helpful in your trading activities, right? I'm also going to show you what actually making a trade looks like as well. So, um, just kicking things off. If I go to the trade tab up here, this is gonna take me to the option chain, And I should you the option chain, or at least what it looks like in Robin Hood in the previous video. And it's gonna look a bit different in thicker swim but it's all the pieces are still going to be here more or less, right? So here we have all the different expiration dates for both calls and puts the underlying asset is S P y again. And I know some of the text might be pretty hard to read because it's so small, so I'll try to be as descriptive as possible. So, you know, if you can't read what's going on some areas, at least you'll be able to hear what's going on and what not So the underlying asset is SP y again, it's currently trading at $336.73. And you know, let's say I'm gonna look at the March 20th call and put options right. You can see this little number here, 31. That means these options expiring 31 days from now. So certainly pretty ah, handy to have that there. So I click on that tab at all. It's gonna unfold and is going to show you all the different calls and puts you can buy that expire on March 20th and there's a bunch right now. Obviously, it's laid out a bit differently than Robin hood. There's a lot more numbers and metrics going on. Um, so walk you through this on the left hand side here, all these options or calls, but you can see call options and all these are your puts in the middle. Here we have the expiration date, which, you know is gonna be the same for all these March 20th. Right next to it. We have all the different strikes, right? And, you know, with Spy currently trading at 3 36 if you look it calls here, you might. You obviously noticed that a lot of these air highlighted in blue. What does that mean? Well, for all the co options that are highlighted in blue and I'll get the puts in a second, all these CO options are was called in the money currently right? Which means at this point in time, the share price of SP Y is currently trading less than the strike prices of all these call options. Right? We can see here the strike of this corruption is $337 while spies currently, you know, 27 cents less than that. So this co option is in the money and you can see here the strikes get smaller and smaller as we go up basically on this interface. And so all these collections are currently in the money, which means, you know, it's kind of a slang ish way of saying at expiration. Assuming SP y stays where it is, all these co options are gonna be worth some money in the end, right? And all the co options currently not highlighted in blue they are all currently out of the money, right? All the strike prices for these call options are currently greater then the share price of SP y. So sp I will have to move up at some point before the next 31 days is up in order for these call options to become in the money and actually expire worth something more than zero right And same thing applies for these put options. All the put options highlighted in blue. These are all put options that are currently in the money. The strike prices for these put options are currently greater than the share price and obviously with put options for them to be useful, you want the share price to be less than the strikes. So all these were in the money. All these puts air out of the money, right? And for options where the strike price is currently equal to the underlying assets trading place, those options are called at the money, right? Just some vocabulary, that vocabulary that you should be aware of. And so I'm gonna walk you through a couple these metrics here, you can see, you know, in this big column we have, you know, some or sub columns, if you will, Right? And one thing you'll notice right off the bat. If you were to sign for any brokerage platform and start trying to buy or sell options is you're never gonna have a set fixed price for any anything, right? Stocks, options, futures, right. You're always gonna have what's called the bid and ask Spread right here. You can have You can see that. And what this means is, you know, looking at the bid, let's pick this call option. For example, the 3 41 call option expiring March 20th. The bid on this CO option. If you can see it is $2.46 that's what this number means. And again this is per share, so it's really $246 but it's currently quoted at 2 46 and the ask price is $2.50. And what this means is the bid represents at this point in time. And, you know, even though the market's closed right now, um, so these numbers aren't really gonna be changing. But when the markets opened, these numbers are going to be changing every second or every half a second, right. But the bid means this is the highest priced a buyer is willing to pay to purchase this call option. $2.46 per share, basically, and the ask represents the lowest price a seller is willing to sell. This call option for in what you find is the ask is always going to be greater than the bit just the way the stock market works, Um, and so what you'll find is when you wanted to, Let's say, purchase this call option. You want to place what's called a limit order, which basically allows you to set the price at which you want to purchase this call option , and you can see anyplace you want, you can set. You can say I want to buy this corruption for three cents. Now, no one in their right mind is going to sell you that call option for three cents, right? Considering the lowest someone's willing to sell this four is $2.50. But the bid an ass will give you a very good, um, range in which to place that limit order. Right. So what you can do is place a limit order that says, you know, I want to purchase this cull option for $2.46 right at the bid. This is the highest price someone's willing to purchase this corruption for at this exact point in time. And typically, what will happen is your order will not go through. It will not get filled. Some was not going to sell you an option for only $2. 46 cents, right? If at that point in time below us, someone's one willing to come down, come down to is to 50. But you never know, right? You might place that order. And 10 15 20 minutes might go by, and at some point a cellar might be willing to come down and meet you at $2.46 and then your order will get filled, right? You never know. There's no way of predicting that or knowing when it's gonna happen. Might take 30 seconds. Might take 20 minutes. Might take four hours. It might not happen at all in the entire trading day. So what you can do is, you know, for me, for example, I'll place an order, and if my order doesn't get filled within 15 minutes, I'll come back, cancel it and make a new one with, you know, if I were buying an option with a slightly higher price. So if my order at 2 46 didn't get filled in 15 minutes, I'd come back, cancel it and then make a new order saying Okay, now I'm going to buy this co option for $2.47. And if that doesn't get filled and I go to to 48 right, I'll just kind of slowly inch my way up until somewhere out there in the market, Sellers one to come down and meet me at that price, and then the transaction will happen. So the been asked, just gives you, uh, very good accurate range in which to kind of place your limit orders. Right. So pay attention to that. Um, and you know, every brokerage platform. We'll show you the bed and asked. This is not unique. Teoh thinkers went by any means. I'm going over here to open interest. Um, actually up. We'll talk about volume first. So this column column represents volume and volume represents how many contracts were traded. Ah, in today's, uh, in today, right? So typically with, you know, very popular assets like S. P Y. You know, you're gonna see a lot of volume, very high amounts of volume. There's gonna be a lot of trading happen, a lot of buying and selling of these contracts. And that's a good thing, because if you want to you, you know, buy or sell a call option. In this case on this p y, there's a lot of trading happened. There's a lot of volume. There's gonna be a lot of buyers and sellers. Buyers and sellers are willing to, you know, go through with you on that transaction, which is great, right? You're gonna be able to get your order filled. Ah, lot easier if there's a lot of, uh, trading going on than if volume was very low. And there's only a couple buyers and sellers in the market right now looking at these option contracts and also it will happen is with very high volume. You're gonna have very tight bid. Ask spreads. You can see here. You know, the bid and the ask are only four cents apart here. And therefore sense apart here, only one cent apart very, very tight spread. So you know you're not gonna have to. I mean, if you were toe place your order first at the bid and didn't get filled when you're not gonna have to come up on price very much in order to get your order filled because the ask is so close to the bid, which is great, right? So that's certainly an important metric to look at. And then you have open interest, which is kind of similar to volume. They were going to tell you similar things, but open interest represents the current number of open contracts in the market. And what that means is, you know, if I were to buy an option contract and someone sold that to me. That contract is considered open, right? And then let's say later on I work to sell that contract back in the market. And for the purpose of this example, let's say the person who initially sold me that contract was also the same person that purchased it. No way to guarantee that happens in the actual market. But let's just say that happened. At that point, that option contract is considered closed, right? So when the contracts open, open interest increases by one and then when the option contract gets closed, open interest decreases by one. And so you know this will also tell you how, how popular or how much demand and supply there is for option contracts on SP y. And so, with high volume and high open interest, you know that's a good sign in knowing that your trades and SP Y are going to be able to be open and close very quickly by assuming you're pricing is is actually realistic. There's always going to buyers and sellers willing to, uh, trade these contracts with you, which is great, right? So those are very important metrics that I always look at before placing any orders. This next column here we have or Delta right again from the from a previous video in this course, you know, Delta means the amount that these corruptions we're going to move in price based on a $1 move up in price for S P Y. Um, so that's that. And then here, this is one of the most important metrics that I actually look at. This is probability of being in the money, right and have already covered what in the money and out of the money means, right? So if you wanted to purchase, for example, a call option, Obviously, the further out of the money you go be with these higher and higher strikes, these options are gonna be cheaper, right? Because the likelihood that spy comes all the way up to above the strike price is gets less and less likely, right? And so the cost of these contracts is gonna be cheaper and cheaper. So you could purchase, for example, this co option which is only gonna cost you about $10. Awesome. But there's only a 2.63% chance that spy is going to come from 3 36 all the way to above 3 55 in the next 31 days. That's a pretty low chance, right? So might only cost you $10. But you know this corruption is most likely going to expire worthless, and you'll lose every penny that you put into it, right? So I wouldn't purchase that one and least I wouldn't purchase it just as a single option contract. There are reasons as to why you might want to purchase KAL options or put options so far out of the money that's out of scope for this course has it has more to do with an actual trading strategy. But if you just want to purchase a call option on this people, I would not be buying this one right. It's much more worth your time and money to purchase something with a higher percent chance of being in the money. And yet you'll be spending Mawr to purchase these options 246 $78 or, you know, $350 for these contracts. But your chance of the's option contracts expiring in the money is certainly a lot higher, right? So you might want to be looking at contracts in this range. Obviously, if you go away in the money and you're by this one Well, now you have You have to spend over $1500. That's that's a lot of money, right? So definitely use these probability in the money metrics to make your purchases right, cause this is gonna be very helpful in picking the right option to purchase, if that's what she wanted to dio. So, um, I believe that's where one to cover in terms of showing you thicker swims, option chain and metrics and whatnot. Not just to cover quickly. What? Actually purchasing option looks like in Lakers win. Let's say I want to buy uh, 3 40 co option. Right? I can just right click on this one. Go to buy. And there's obviously a lot of different ways you can kind of formulate strategies and positions here. I'm not gonna cover these your yet, but, you know, I'm just gonna by a single co option, right? So by a single call option just one. And the underlying asset here is S P Y expiration is March 20th the 3 40 strike call option , right? And here's where I can set my price. Why? This is a limit order I'm trying to make here and we can see here the bid and ask is very tight, which is great. The bids to 95 they asked us to 98 and you know, it just kind of gave us a default value to 98 which is the ask. But, you know, I might want to try first, coming down to the bid to 95. And so what's gonna happen here is when I place this order, this order is not going to get filled unless someone out there a seller is willing to come down and sell me this contract for at most $2.2 dollars, 95 cents per share. So $295 total. You know, if someone's want to come down below that, let's say 2 to 94 then great. My order will get filled at 2 94 but to 95 is my highest place. And so it's a limit order. As I've said, it'll be good just for today. So if this order is sitting out there and no one is when it come down to this price and never gets filled. Then once the markets close, then this this ah order would just get canceled. But I can also make it a good to cancer order, meaning there's only just be floating out there indefinitely until I can't slip myself or it does get filled. So I'll leave it as a day order. And then you can actually specify which exchange you with this order to go through on the New York Stock Exchange. The NASDAQ. Whatever else, right? I live it to just best, which means, you know, I want to buy this contract on any any stock exchange that's available as long as there's a seller. Somewhere in any exchange 12 meet me at this place. Make it happen, right, because typically the best way to do it. And so, after looking at all these numbers, they're looking to me. I would hit, confirm and send. It will show you a couple more little metrics here, says my max. Profit is theoretically infinite, you know, kind of cool, but, you know, you're obviously not going to ever make infinite money, but call options when you purchase them do have infinite gains. Technically, um, it also shows you your break even price, right? Which means, you know, if I'm going to be spending $295 for this contract, then that means SP Y has to move up to $342.95 by expiration for me to break even. Because if this were to happen, if this option expires and spies at 3 40 to 95 then this contract will have intrinsic value of exactly what I paid for it. So to 95. So really, what I'm hoping for with this contract, if I would've purchased it, is by expiration spyware to move above 3 40 to 95. Because at that point, every cent that spy moves above this point, I start to actually make money, which is the whole idea of the game. Right? So, you know, I would look over these numbers, every looks good, and then I would hit send not going to do in this video. But I would hit, send. And there you go. The order gets placed, and if it gets filled, great. If not 15 minutes goes by, I'll come back, I'll cancel the order and I'll make a new one with a slightly higher price, right? Simple and easy. Is that so? That's what purchasing an option look like. You know, the same process is the same process for purchasing. Call our puts as well. And, um, at this point, you know, if you've watched everybody in this course, you should be up to speed enough to potentially sign up for Robin Hood or tedium, irritate TD Ameritrade's think or swim and start purchasing option contracts. If that's what you want to dio now, I would like I've said this multiple times in the course. I don't recommend you just go out and start buying option contracts by themselves. It's certainly, ah, big risks that you're taking because there's a lot of different variables at play, as you've seen that affect option prices. Um, and you know, if you're wrong, you could lose every penny you put into it. But, you know, I I certainly just sometimes buy a call option or a put option on something just for the heck of it. It's a fun little gamble to fun thing to do. Sometimes you actually makes a lot of money. Sometimes you lose it. All right. It could certainly be kind of fun. Um, and using these metrics like probability and the money will certainly help you, um, you know, set up a trade that will give you the highest probability of success without spending a huge amount of money. Right. So you kind of pick You know, how much money want to spend and how much chance of success you wanna have and make a trade based on those assumptions. Right? Um and what will be detail later on in the future? Course I have planned is actually how to trade option contracts on a daily basis That will long term give you consistent income, which is a great thing. Right? And what you typically would I want to do with that and in terms of building a strategy is you want to be an option cellar. I'm not gonna go too in depth into this yet, but I'm just kind of giving you some foreshadowing of what's coming is the way you really want to make money In option trading is you want to be an option seller. You want to be selling contracts right cause if I were to, for example, sell this contract cells co option with with a 3 42 strike. You know the bid here is two or three. The ask us to a seven, so I might be willing to sell this at 205 So I would take in $205 as as premium, right? Cause I sold this option. So I sell the option and I taking money. I just made 205 bucks. And there's only a 31% chance that at expiration, this corruption is gonna expire in the money. And if it does, then I lose and I would lose a certain amount of money. But you know, that means there's a 70% chance that this option contract is going to expire worthless, which means I would get to keep every dollar that I made in selling it, which is the whole point right now, even though I'm an option seller, I do also buy options as a form of protection, though I don't just typically buy a call option or by put option and kind of make a gamble I usually would sell. Let's say this co option. And then I might purchase the two or the 3 45 strike call option right here as a former form of protection. And you know that doesn't fully make sense. Or that's not clear yet. Don't worry, that will come in my letter course. But the reason why you would do that is, you know, if you buy a call option, your gains are like I said, theoretically infinite. And between the buyer and the seller, someone's gonna lose. With this trade, there's has to be a loser here. So if the buyer has a theoretically infinite gain, that means the call options seller has a theoretically infinite loss potential, right? You could theoretically lose an infinite amount of money if you just sell a naked what's called a naked call option. You just sell this collection as is, and don't do anything else. But if you purchase a co option, that's further out of the money, like the 3 46 striker than 3 40 strike 3 45 strike call option that will give you protection and actually make your potential loss finite, and you will have control over how much potential los you want to take on. So that's just a kind of foreshadowing, foreshadowing off what a an option trading strategy would look like selling options and then purchasing options for protection. And that's the kind of stuff I'm going to really get into in the future. Course I have on option trading. So all that being said, I hope this video was informative for you. And, you know, if you are ambitious with options, you want to get started. I would highly recommend you sign up for on account with TD Ameritrade and download their thinker swim platform. It's absolutely free to use. One thing to keep in mind, though, is they do charge trading commissions. Robin Hood is absolutely free, but with TD Ameritrade's Thinker swim, they do charge you 65 cents per contract, which is basically nothing, right? So if I would've purchase this call for its A 300 bucks, it would actually cost me $300.65 basically nothing kind of annoying. They still charge you that little bit of commission, but for 65 cents per contract, you get to use this entire platform and believe me, once you get used to using it, and you understand how it works. I mean that, you know, the charts they offer, for example, are very, very detailed. And you can have many, many different kinds of graphs and charts that represent different kinds of indicators that help you predict where spy, for example, is going to be going in the future. You know, I would heavily, I highly recommend you investor time and 65% commission cost, too. Get this platform, get yourself up to speed on it and start trading with it. So all that being said, thanks again for watching this video, and I'll see you in the in the last one just to kind of wrap things up. Thanks. 8. Wrap Up: All right, so at this point, you have essentially completed the course. So congratulations on that. And in this last video here just wantedto wraps things up. Talk about a few things, the first of which is the course project. And it's just a simple exercise that is actually gonna be necessary if you want to start getting involved with trading option contracts. So the project is to sign up for some brokerage platform. If you don't really have an account with someone, right, so you can sign up for you. Robin Hood, Vanguard, TD Ameritrade. Which is what I would recommend. Charles Schwab. You trade there's a bunch, right? You have to do a little bit of research and to kind of figure out which one is going to be best for you. I really can't go wrong with any of them. They're all great platforms. So, um, if you don't have an account, create one was with one of those guys trying to get everything set up as much as you can, you know, linking your bank account information, all that and then from there, trying to figure out how to actually purchase call options and put options and things like that, right? Um, you know, every platform is going to different websites are gonna be laid out differently, so it's going to be obviously beneficial and necessary to figure out where the option chain is right on your brokerage platform. And how doe I actually set up in order to purchase a call option on something, right. So it's gonna be something that you kind of toe walk yourself through in your own kind of teach yourself. But, you know, these platforms make trading options and stock, and we're not very easy, so it should be something you can pick up on very quickly. You don't actually have to submit in order to purchase an option contract or anything like that. But obviously, you're gonna want to know to. You don't know how to take all those steps to get to that point. Right? Assuming this is something that you want to start getting involved in. So that's the project. Simple exercise. But obviously it's necessary. And then the second thing I want to talk about is just, you know, myself a little bit in terms of my courses look like going forward and whatnot. So, um I do try to publish a course once every two weeks, I'm going to really try and stick to that schedule and my courses once I've already made in the ones going forward or kind of revolve around three main concepts. Three main topics, if you will. So there's this kind of material, you know, investing in the stock market options, trading real estate. Eventually, all that stuff there's gonna be courses on suffer development, a technology interviewing and that kind of thing and then personal development, which courses for that will be coming in the future. But you know it's giving. Those courses are gonna revolve around, you know, teaching people how to become the fullest and best versions of themselves through things like short term, intermediate term and long term goal making, creating habits and routines that will allow you to achieve those goals and one not so things like that personal growth and development. Ah, those were the three main topics that my courses going forward are going to be around. So I would highly recommend you look at the courses I have already made on skill shows website to see if there's something I've already published that you might want to take a look at, um if not, you know, I really appreciate you taking the time to watch this course. And I do appreciate any feedback. You have comments or ratings. What? Not I do. Take that feedback seriously. And, um, stay tuned for my courses going forward. So thanks again for watching and take care.