Transcripts
1. Introduction: If you're curious to get involved and start trading in the stock market, but don't know where to start or what products you should be trading. Then you've come to the right class. Hey there, my name is Scott and welcome to my course on an introduction to stock market speculation, where you're going to learn about the three main financial products that you can use to speculate in the stock market. So that's going to be stocks, options, and futures. And in particular, I'm going to take a deep dive into each one of these products and explain the most important concepts about each one and also the various strategies, techniques, and expectations. You should also know when trading stocks, options or futures, because as you'll see throughout this course, these are all very different financial products. And as a result, they are each going to deliver a unique training experience that you must be prepared for. So ultimately, the goal of this course is to give you a very solid foundation into stocks, options, and futures. So that by the end, you can make the most informed decision as to which one or ones you want to start pursuing and trading yourself. And in case this is the first course of money you've come across. My name is Scott Reese. I currently work as a software engineer in the financial services industry and I'm also an entirely self-taught and self-directed trader and investor in the stock market. Lastly, before we get started here, I also want to let you know that you can find me on YouTube as well. Or I'll be continuing to push out content on trading, investing, and personal finance. And you can simply navigate to my profile page on Skillshare. And there you will find a link that would drop to your right on over to my YouTube channel. So be sure to check that out and subscribe so you don't miss out on any my content. And so with that being said, let's jump on over to my computer now and we'll get things started.
2. Stocks: Okay, welcome to the first lecture of this course on a beginner's guide to stock market speculation. So as I mentioned in the introduction video, this course is meant to give you a great overview on the three major financial products that you can use to speculate in the stock market. So that's going to be stocks, options, and futures. So in this first video, I want to talk just about stocks. So if you were going with this route and you are trying to pursue stock trading, or you're considering stock trading, this is going to be purely directional trading. You are simply trying to make a profit with the up and down fluctuations of stock prices. And that's it. And what you'll find is that stock trading is going to be one of the most difficult forms of stock market speculation. So now I want to talk about the essence of stock trading. What is this style of trading like? And what should you expect if you want to pursue this kind of trading? And so as I kind of briefly mentioned here, the whole point of this is you're trying to speculate on short-term price movement, short-term price fluctuations. If you think the stock is gonna go up in price either today, in the next few minutes or over the next few days, you buy the stock. And then conversely, if you think the price is going to go down, then in that case you would short the stock. And I'll talk about what shorting is later in this video. But in the most simple fashion, That's all stock trading is. Now, obviously there's a lot more that goes into it specifically involving technical analysis. And technical analysis basically comprises the entire collection of tools and indicators and metrics at your disposal to aid you in your directional assumptions, your entry points and exit points. Now I do want to warn you that technical analysis is a pretty slippery slope in the sense that there are literally thousands of different kinds of indicators, each of which are totally customizable with different kinds of parameters and different ways to use them to actually try and gain an edge in predicting where stock prices are going to go. You can literally spend an entire lifetime trying to figure out which combination of metrics or indicators are going to give you a proper edge in the market. That being said, in my experience, I have found a specific form of technical analysis that really does not involve any indicators or metrics. Although I'll show you examples of that in this video, and I have found it to be beneficial. And specifically, let's back out of the PowerPoint here and come over to my trading platform. Specifically, I'm referring to support and resistance levels and or trend lines. So here for example, I have a one-year price action chart of I OWN. This is an ETF that tracks the Russell 2000 index, just a certain component of the broader US stock market. And let me zoom in a bit here so it's easier to see. And I'll expand this chart down a bit more. There we go. So I've already gone ahead and drawn in this red support line. And perhaps you may have heard of support and resistance before, but if not, support levels are simply a point at which, or a price at which there is a lot of demand to buy whichever product that you're looking at, in this case, I WM. So if you'll notice over the past many months, every time I WM got down to this price, which is around 207 bucks per share or so. Every single time I got down to this price, it was bought right, backup at this level for whatever reason, the market has decided that once the price of IUWM gets down to this point, it is now at a discount and therefore worth buying. There is value in purchasing this product at this level. And so I, for example, have been watching this chart for the past few months here. And it was at this point, once I, WMD came down and tested this price level for the third time, right here's the second time. And then the first time was over here for the third time. Because once again, this ETF bounced off that level, I would say with a very high degree of confidence that this price point around 200, seven bucks per share is a significant support level. So that the next time I WMD came back down to this price, again, I would definitely go in and buy or put on some kind of bullish position on this product, on this ETF. And I did just that over here, right? It was yesterday where I WM once again came back down to the support level and I took a shot and sold a credit spread, which is a bullish option strategy, not relevant for this video, but still it's a bullish strategy that takes advantage of the price going back up. And so far that's exactly what's been happening. And this position is going really well. So this is one great example of how technical analysis is used to help pinpoint your directional assumptions, either bullish or bearish. And then also at what price points I'm going to enter a position, right? If I'm bullish on this ETF, I'm not going to sell a put credit spread or buy shares at this ETF when it's all the way up here, when it's already sky high, I'm going to wait until it comes down and hits a major support level before I buy the ETF. And then also one more thing on this chart here. If I go to the drawing tools and let's go to the trend line here. Up here, you could definitely say there's a significant resistance level. And so a resistance level is just the opposite of a support level. It's a price point at which the market as a whole for some reason, has decided that once this product gets up to that price, it's now over bought or it's too expensive, and therefore it needs to be sold off. So right around 235 bucks per share, I WM for the past few months has hit a lot of selling pressure. And so this ETF gets slammed back down. And then once again, once it hits a sub port level of price at which the market, generally speaking, views this product now at a discount, it will now meet a lot of buying pressure. And so for this entire past year, this ETF has just gone back and forth, back and forth over and over and over again. And this has been a great product to trade on both sides of the market. You would buy at this point around 207 bucks per share. And then you can also short the ETF up here at around 235 bucks per share. And just in case you are not familiar with shorting. And I will explain it in much more detail later in this video, but just simply stated, it's how you make money when the price of the stock or the ETF actually goes down. It's just the opposite of buying stock and making money when the price goes up. That's it. So this really is the main form of technical analysis that I personally use and that I find to be the most beneficial. Now as you can see here on my charts, I do have a few other indicators as well, although I do try to keep it as simple as possible, because like I mentioned, it's very easy to go down the rabbit hole and trying to investigate and figure out which of the hundreds or thousands of indicators and metrics at your disposal that you should actually use. And in my experience, what I've found is that the more simple you can make it, if you can just use a handful of other indicators or metrics, then you will likely do a lot better. So for me what I have down here is the RSI indicator. This just shows you how over bought or oversold a product is. So for example, with IUWM back in this zone over here, once the value of this indicator gets to or above 70, this ETF is now considered to be over bought. Or it's at a price point where it's getting too expensive and it should be sold off. And then conversely, once the value of this metric gets below 30, you would now consider IUWM to be oversold or now at a discount, and therefore it should be bought back up. So again, this is just another metric that you can use to help pinpoint your entries and your exits a bit better and to help you gain an edge when trading stock. Now down here is another indicator that shows you the implied volatility for IUWM over the past year. And this is really only relevant for options trading. So I'll talk about this in the next video. No need to talk about it here. And then back on the price action chart, I do have two other indicators. These purple and blue lines are called Bollinger Bands. They simply show you how overextended either to the upside or the downside a certain stock or ETF is. And then down here in yellow, this is the 200 period moving average, which is mostly used for more long-term understanding of where a stock or an ETF is going. But again, all of this is to say that support and resistance or indicators, charts, etc, are all just meant to use to help you decide which direction to pick. Am I going to get bullish on the stock? Am I going to get bearish? And then at what prices am I going to actually get in and make a trade and also get out either for profit or a loss. That's all technical analysis is meant to do for you. So now let's come back to the PowerPoint here and we'll continue forward. And so the third major thing you want to understand about stock trading is that you're going to have a win rate of around 50 percent. And there really is no way to get around this or to avoid it. And by when Ray, I'm referring to the percentage of the time where you make a trade and you actually turn a profit, only about half of your trades in the long-term are actually going to be profitable and the other half are going to be losers. And this is still true even for some of the best stock traders in the world. You look at all their win rates that are right around 50 percent. Now, why is this coming to the next slide? It's because the stock market or short-term stock price fluctuations are very close to being perfectly random. So what I have shown here is a picture of what's called the bell curve or the normal distribution curve. This is a graph that is very commonly used in the world of statistics to model random events or random systems. Now, obviously there's a lot going on in this diagram, but I'm just going to keep it very simple in this course in that if you're able to analyze the outcomes of a series of events and if you were to plot those outcomes onto a chart, and if what you get looks a lot like this diagram, a lot like the bell curve than what you are modelling are random events. And there is no way to gain an edge in a random world, right, for example. And let's back out again and come over here. I ran an experiment a little while ago where my computer simulated the flipping of a coin, which is a random event, right? The chance that you get heads or tails is just 5050. So specifically what I did or what my computer did, my computer simulated flipping a coin 100 times and there's 100 coin flips is considered to be the first trial, which you can see right here, trial one and others, 100 coin flips. In the first trial, there were exactly 51 heads, and then my computer repeated that entire process. It did a second trial and flip that coin 100 more times. And of that second round of those 100 coin flips, we got 53 heads. And then for the third trial, 52 heads and so on and so forth. And my computer simulated doing this 100 times. We did one hundred, ten hundred trials. And then over here in this table, I simply took this data and formatted it in a way that I needed to then plot it onto a graph. So for example, the way you interpret this table is in the case of this first row, the number of trials that gave exactly 31 heads was only two. Of the one hundred, ten hundred trials. My computer did, only two of them, gave a count of exactly 31 heads. And this should hopefully be a bit intuitive because theoretically speaking, like I said, when you flip a coin, it should be a 5050 probability that you get heads or tails. So if you flip a coin a 100 times, theoretically you should get 50 heads and 50 tails. Now that is probability theory. It's not reality. So of course, do in reality, you're not always going to get exactly 50 heads. But that being said, when you do get a different number of heads than 50, in this case 31. And especially when you get a very different number than 50, these kinds of occurrences are going to happen very rarely, not very often, right? So in comparison, the number of trials that gave exactly 49 heads, very close to 50 was 782. So the vast majority of the time where my computer flipped a coin a 100 times, it got very, very close to exactly 50 heads, which is what the theoretical probabilities would say you should get, and then so on and so forth. And then finally coming over here, I simply took that data and plotted it onto a chart and look what we got a near perfect symmetrical bell curve. So again, what this means and what I just want you to take away from this information. That's one important fact. And that is again, if you can model a series of events, specifically if you plot the outcomes of those events onto a chart, and what you get is this bell curve than what you are modelling are random events flipping a coin in this case, is it totally random event that changed that you get heads or tails on any coin toss is just 5050. And because these events are totally random, as proven by this chart here, there is no way to gain an edge in trying to predict the outcome of flipping a coin. You can sit there all day long and flip a coin and tried to predict whether you're gonna get heads or tails. But in the long term, you're always going to be correct only half the time. Now the reason why I'm showing you all this stuff is because the stock market is very, very similar to this. You can model stock price fluctuations in the short-term with a bell curve, which therefore means that the chance that a stock is gonna go up in price or down and price on any given day is basically the same as a flip of a coin. It's 5050 or very close to it. So finally, if I come over here, I basically went on to Yahoo Finance and downloaded 20 years of daily price movement for SPY. And in case you don't know, SPY is just an ETF like IUWM. But this one track's the S and P 500. It's basically the entire US stock market. So again, as you can see, I have daily price action data from September fifth of the year 2000 all the way to 2021. And so very similar to my coin toss experiment, I took the raw data, put it into a format that I could use to then plot into a chart. That's what this table is, four and the Knaflic come over here. Here you can see once again, I plotted the SPY data onto a chart and look what we got. Now in this case, there are two different graphs on this chart. The dots in blue are the actual SPY data from Yahoo Finance and the ones in orange are the theoretical bell curve model. Basically what I showed you on the PowerPoint slide right here. This is a theoretical model. This curve here is essentially perfect. And so I wanted to compare coming back now, I wanted to compare the actual SPY data with the theoretical perfect model, which as I said, is an orange. And as you can see here, the actual data in blue is very similar to the bell curve model. So as I said, What this means is the daily price fluctuations of any stock or any ETF in this case, corresponds very closely to being perfectly random. Now because these two curves are not identical, that means it's not quite impossible for a very skilled and experienced stock trader to find a small edge and trying to predict what a certain stock is going to do in the short term. And again, that goes back to using your technical analysis tools, support resistance, moving averages, the RSI indicator, et cetera. But point being because you can model the stock market very closely to a theoretical perfect bell curve. That's why it is so difficult to gain that edge to actually be successful in trying to predict short-term stock price fluctuations. Because just like with the coin toss, you could sit there day after day and try to predict whether SPY is gonna go up or down or any individual stock. And what you'll find in the long run is that you'll be correct only about half the time. And because of that fact, That's why your win rate coming back to the first slide here, That's why your win rate will always be around 50 percent. It could be a bit higher if you're very skilled, and it also could be a bit lower and you could still be successful. It just depends on what your profits are. Your average profits are compared to your average losses, right? For example, let's pull up the calculator here. Let's say my average profit on any given stock trade is $100. And let's also say my average loss on my losing trades is also $100 and that my win rate is 50% Half my trades, I make a profit, and the other half my charades, I lose money. So now the way you figure out your long-term expected returns are your long-term expected profitability given these parameters, is you take your average profit 100 bucks, you multiply it by your win rate, which is 0.5, that's 50% as a decimal. And that gives you 50. And then you subtract from this your average loss, which is also a 100 in my example, times you're losing rate, which is just the opposite of your win rate. And so if you went half the time, that means you lose half the time. So my losing rate in this case is also 0.5 and that gives you 0. So this means in the long term, with my current approach, my average profits a 100 bucks. My average loss is a 100 bucks. I went half the time. This calculation means in the long-term, I'm gonna make no money. Because as I continue to make trades over and over and over again, my losses will always exactly cancel out my profits. And hopefully that should be somewhat intuitive. I make a 100 bucks half the time. I lose a 100 bucks half the time. So net-net, the result is I just make no money. And this is why stock trading is just so difficult. So ultimately this means, given that your win rate is going to be pegged around 50 percent and there really is no way to get around that is just simple statistics. That means your average profits have to be larger than your average losses. Because now let's say my average profit is 200 bucks. So now take 200, multiply that by the win rate, which is 0.5. And now I subtract from this my average loss, which let's say is still $100, so minus 100 times my losing rate, which is also 0.5. Now the result is positive 50. So because my average profits being 200 bucks is larger than my average loss, which is only a 100. That means even with a win rate of exactly 50 percent in the long-term, I'm still going to be making money. Specifically on average, I would expect to make 50 bucks per trade. Obviously, I'll make money on some trades, lose money on other trades. But on average, if you factor in all the wins and losses together, it would come out to be on average, making about 50 bucks per trade. And this is the kinda thing you want to shoot for. Your average profit must be greater than your average loss. That's the only way to overcome a win rate of around 50 percent. Now finally here there's one more slide I want to go over, and that's going to be cash versus margin. There are two different kinds of trading accounts that you can use to trade stock, cash accounts, margin accounts. So starting off first with a cash account, with these kinds of accounts, you must pay the full price for a position. So if you want to buy a 100 shares of stock where the stock price is currently 50 bucks per share, then you yourself must put up $5 thousand to purchase those 100 shares. You need to have that money in your account. Now there are also some limitations that come with cash accounts. The most major of which is you can only buy a product first and then sell it afterwards. There is no shorting allowed in a cash account. And this can be a major hindrance to stock traders because basically this means you can only get long OR gate bullish on stocks because you'd have to buy them first before you can sell them. That being said, cash accounts are much safer for beginners. So if you are just getting started, I would recommend you open up a cash account or even a fake money account before moving on to a margin account. Now for our margin account, you actually have the ability to borrow money or stock from your broker to enter stock positions. So this is where things can get a lot more interesting. And so as a result of this, specifically, because you can borrow money from your broker, margin accounts are much more capital efficient. So now if you wanted to buy a 100 shares of stock that was trading at 50 bucks per share, you only have to put up a fraction of that 5000 dollars to get into the position. And specifically, typically be allowed to borrow 50% of the total capital needed. So in our example, again, if the total capital required to buy a 100 shares is $5 thousand, you can borrow half of that from your broker. You can bow 2500. So if you put up 2500 bucks of your own money and then you borrow the other 2500 from your broker. Then together you now have the $5 thousand to buy the shares. Moreover, a margin accounts you can also buy and short stock. So now you'll have the ability to get either bullish or bearish on any stock or ETF that you want. If you're bullish, you can just buy the stock, which you can always do. But now if you want to get bearish, if you want to make money when the stock price goes down, you can now short the stock. And specifically shorting is where you first borrow the stock from your broker and then you immediately sell that stock in the market for the current price, and then hopefully down the road when the stock price drops, that's what you want. You can then buy the shares back for the lower price, return the shares to your broker, and then make the difference in prices as your profit. So as a very brief example here, Let's back out and bring back the calculator. So if I wanted to short 100 shares of stock that was currently trading at 50 bucks per share. I first borrow those shares from a broker, all 100 shares. Once I have them, I can just immediately sell them in the market at 50 bucks per share. So 100 shares times 50 equals $5 thousand. So that brings in $5 thousand into my account because I sold them initially. That was the first step. That brings in money. And now let's say by tomorrow the stock price has dropped from 50 down to 40. And at that point I want to close this position for profit. So now I buy those shares back at the lower price at 40 bucks per share. So from this $5 thousand, I'm going to spend some of it to buy back those shares. So specifically bind back a 100 shares that are now trading at 40 bucks per share, going to leave me with $100 left over. And this is my profit now, because now I have those shares once again in my account. I can then return them to my broker and I keep the $1000 minus probably a bit of interests from having borrowed those shares for some short period of time. Your broker will always charge you interest when you borrow either money or stock from them. It's just part of the game. But in this example, if I close this position after just one day, the interests might be literally a few cents, Not a big deal at all, but that's how shorting works. And this is something you can only do in a margin account. Now lastly here, margin accounts are more dangerous.
3. Options: Okay, welcome back to the next lecture in this course. And in this video we're gonna talk about options, which is basically multi-dimensional trading as I referred to it. Because with options there are many different ways you can actually generate a profit as opposed with stock trading, as you saw in the last video, where you can only make money in one possible way. If you buy stock, the price has to go up. If you short stock, the price has to go down with options. That is not the case. There are actually three different ways you can make a profit with trading options. So let's dive in here. First off, I want to talk about the essence of options trading now. So first off here, options trading is all about trading these contracts. And that's what I'll talk about on the next slide. But you trade contracts which are tied to shares of stock. And you use these contracts to speculate on either short to medium term price movement or fear. And my fear, I quite literally mean fear about what may happen in the future in regards to the stock market, you can actually trade fear with options. Now as I said, there are three different ways to profit when trading options, which is why I referred to these products as multi-dimensional. The first way is through price movement, which is basically the same as Woodstock, so that one should be very familiar. The second way is through time decay, which is only applicable for selling options. And I'll explain more about what time to k is later in this video. And then the third way is implied volatility, which is basically a more technical way to refer to fear. Now before I dive in and show you in detail how you can make money with each of these three approaches. I first wanna give you a brief overview of what our options. So for some of you, this might be a bit of a review, others this might be brand new material. But I do want to spend a few minutes here just explaining in a very detailed fashion the correct way to understand what options are and how they work. So option contracts as a financial product, these are a form of derivative, meaning they derive their prices from something else, right? Options are contracts and the value of these contracts are meaningless without the value of the stock that's tied to, for example, or without the time left until the expiration date, or without the level of fear in the market, etc. All these things in more get factored into the price of the actual contract. And so the simplest and the best way to understand what options are is to view them as stock insurance, just like car insurance, for example. As you will see here on this slide, these two things are very, very similar. Now there are two types of options. We have put options and then call options, which we'll talk about in a second. So focusing on put options first, and these kinds of options give the buyer of the contract, the buyer of the put the right to sell 100 shares of some stock, whatever stock the contract is tied to you at the strike price by the expiration date. So all option contracts have an expiration date, just like your car insurance will also expire if you stop paying your car insurance company. So for example, if you pay for car insurance for six months upfront in one payment, then great. You are covered for six months. But after that time has passed and if you don't pay for another six months, your insurance will have expired. And the same concept applies for option contracts. Every contract you buy has an expiration date. So if you went to maintain your protection, you will have to continually by more and more contracts once the ones you currently own reached their expiration date. And the strike price here is best explained through an example. So let's say you logged onto your trading platform and you purchased 100 shares of some stock, doesn't matter which stock it is at 100 bucks per share. Now, as you recall from the previous video, when you buy stock, the only way you can make money is that the stock price goes up. And if the stock price actually goes down, at that point, you will start losing money. And that's where stock insurance can come into play, right? Because the whole point of buying insurance is to protect yourself from the bad thing happening. In this case, the bad thing is the stock price going down. So now let's say after you bought those 100 shares, you also bought a put option contract with a strike of 100 bucks. And you bought the whole contract for a total price of $200. So that 200 bucks is the cost of that insurance. And even though I don't have the expiration date for this contract listed here in our example. It's kind of irrelevant for this. But let's also say this put option contract you bought expires in one month. So now let's back out of the PowerPoint here. And I'll pull up the calculator for a second. So now let's fast forward to the expiration date of your put option contract one month from now. And the price of the stock that you bought at the time fell from a 100 bucks per share, it down to 50. So if you had just bought that stock into nothing else, this would be a very big losing situation for you, right? Just to be clear, if you bought that stock at a 100 bucks per share, and then you eventually sold those shares for only a price of 50. That's a loss of 50 bucks per share times 100 shares. That's an overall loss of 5000 dollars. That's going to hurt. But now with the put option, keep in mind, this contract allows you to sell 100 shares of stock at the strike price, at 100 bucks per share. So now it does not matter how far the price of the stock fell by the expiration date, because there's contracts still allows you to sell those shares and get rid of them at the same price that you bought them for, right? You bought the shares at a 100 bucks per share. And even though the actual stock price fell to 50 by expiration date, doesn't matter. You can use your stock insurance, your put option to sell those 100 shares at the strike price, also at 100 bucks per share. So ultimately that means you will lose no money on the stock. The only money you will lose is simply the price you paid for the put option that 200 bucks insurance is never free. You will always have to pay for it, and that is simply money you will never get back. But losing 200 bucks is certainly a lot better than losing 5000. So next up, let's come back to the PowerPoint here. And we'll talk about call options, which are just the inverse of put options. So in the case with calls, these give the buyer of the contract the right to purchase 100 shares of stock at the strike price by the expiration date. So the only difference here is call options give you the right to buy the shares, Whereas put options give you the right to sell the shares are just the opposite. Moreover, put options act as stock insurance when you buy stock, call options act as stock insurance when you short stock. So one more example here. Let's say you shorted 100 shares of stock at 100 bucks per share. So again, recall from the previous video when you short shares of stock, you actually want the price to go down. That's how you will make money. And then if the stock price actually goes up, that's where you will lose money. So that is the bad situation that you went to protect against with some stock insurance. So therefore, alongside shorting the shares of stock, you also bought a call option with a strike price of a 100, the same price at which you shorted those shares, and you bought the call option contract for 200 bucks. So very quickly here, Let's back out and then bring back the calculator. And I'll move this over here. So in a very similar fashion, let's say by the expiration date, you are totally wrong on this trade and the stock price actually increases from 100 up to 150. So now if you just shorted the stock into nothing else, well then in this case, you shorted the shares for 100 bucks per share. That takes in money. And then eventually you had to buy the shares back at a much higher price of 150. So that's a loss of 50 bucks per share times a 100 shares. Once again, that's an overall loss of five grand ouch. But now with the call option here, once again, you can actually close out your position for the same price that you opened it. So in this case, you shorted the shares at a 100 bucks per share, then the price goes to 150 by the expiration date. Doesn't matter though, because now you can use your call option, use your stock insurance to buy the shares back at the strike price of 100. So in the end, you don't lose any money on the stock. The only money you lose is simply the price you paid for the contract to a 100 bucks. So I hope those examples were pretty clear. This really is the best way to understand how options work. They were simply designed to be used as stock insurance. Now that being said, you don't have to actually use them as insurance. You can use them also as a purely speculative tool in the stock market. And I would say this is what most people use options for. So you don't actually have to own stock ahead of time or a short stock ahead of time to then buy option contracts. You can just go out and buy or sell them. I'll talk about that in a second. But you can just buy or sell these calls and puts whenever you want. So let's come to the next slide and we'll take a look at that. So now keeping in mind that we're going to use options just as a speculative tool to try and make money in the market, not necessarily as stock insurance. On this slide here we're going to focus on the first way you can make money with these financial products. And that is with price movement. Specifically the price movement of the stock that the contract is tied to. And in all the examples I'm about to show you, let's say the current stock price is 90 bucks, which you can see right there on the slide. So let's say you went into your trading platform and you just bought a call option, no stock involved whatsoever. You just bought the call with a strike price of a 100 bucks and you bought the contract for $200. And then by the expiration date, let's say the stock goes from 90 to 120. So this is actually going to be a very profitable outcome for you with this call option, specifically, your profit is going to be $1800. And that's because I just want to show my cursor here so it's easier to see. Because again, keep in mind, a call option gives the buyer the right to purchase a 100 shares of stock at the strike price. So that's what this negative 100 represents when you exercise your call option, basically saying that, hey, I want to use this contract. Well now you're first going to buy those shares at a price of 100 bucks per share. So the minus basically represents that's going to cost you money. Now once you have those shares, you can just turn around and sell them into the market at the current market price of 120. And that will obviously bring in money. So negative 100 plus positive 120 is just positive 20. You're going to make 20 bucks per share. You then multiply this by 100 because again, every contract is tied to a 100 shares, so 20 times a 100 is 2000. And then finally you just subtract from that the price of the call option, which was 200. That means you are leftover with an overall profit of $1800. Very nice. But now let's say going to our next example. Now you're going to be on the opposite side of the contract. In this case, you're going to sell the call option with the same strike for the same price. So this is one of the very cool things that comes with trading options. You can either be the buyer of the contract or you can literally create one and just sell it immediately. And in this case, let's say by the expiration date, the stock price has dropped further from 90 down to 80. Now from the buyer's perspective of this contract, because you always have to sell this thing to somebody else who wants to buy it. From the buyer's perspective, this option contract is useless. Why would the buyer of this column, should 12 purchased a 100 shares of stock at a price of 100 bucks per share. When they can just go out into the market and buy the stock at a much lower price of 80 bucks per share. So again, that's why this call option in this scenario is totally worthless. So come the expiration date, it's just going to disappear. Think about your car insurance, for example, if you pay your car insurance company for six months of protection of front, and during those six months you don't have any accidents. Well, then it's nice to have the coverage anyway, but that insurance was not needed during that time. So it's a very similar situation in this case with option contracts. So in this case as the collection seller, your profit is 200 bucks, the price you sold the option for at the beginning. So as a seller of options, you are essentially acting as the insurance company. And that's regardless of whether the buyer of the contract actually intends to use the contract as insurance or just to speculate in the market. So in cases like this where the insurance is just useless, you just keep the premium and walk away. What about for put options? Now, you go into your trading platform. You just buy a put option contract. No stock involved you by this point with a strike of 80 bucks and you buy the contract for $200 in total, then comes the expiration date, the stock actually drops down to 70. This is going to be a very profitable situation for a put option buyer. And specifically, your profit here is going to be $800. And that's because if I back out here again, because again, keep in mind, a put option contract gives the buyer the right to sell 100 shares at the strike price. But what if you don't have those shares in your portfolio to actually sell, right? I'm assuming here you just bought the put option and did not buy any shares of stock ahead of time. So down here, what this means is come the expiration date when you exercise your put option contract, you are going to short 100 shares of stock at the strike price. And that's because when you short stock, you initially sell the shares to open the position which will meet your obligations on this put option contract. You still sold the shares. You just had to borrow them from your broker first. So when you showed those shares at a price of 80 bucks per share, that's going to bring in money. So that's why I have 80 bucks here as a positive number. And once that's done, you can now go back into the market and buy those shares back at the current market price at only 70 bucks per share. So of course that will cost money, hence the negative 70. So 80 minus 70 is 10. You'll make a profit of ten bucks per share times the 100 shares. That's an overall profit on the stock of a $1000 minus the 200 bucks you spent to buy the put option contract in the first place. And in the end, that leaves you with an overall profit of $800. Very nice. And then finally here, instead of buying the put option contract, Let's say you sold it initially, same strike price, and you sold the contract for the same 200 bucks as with the previous example. And then come the expiration date, the stock price actually increases from 90 to 100. In which case, this put option contract is totally useless. There's no point in shorting the shares of stock at a price of 80 and then bind them back for a higher price of 100, you will lose money in a situation. So the buyer of this contract is just going to throw this option away. Which means for you as the seller, you get to keep the 200 bucks you sold it for and just walk away. Before I move on, I just want to give you a visualization of how option contracts look in your tritium platform in case you are brand new to this kind of thing. What I have pulled up here is just a simple price action chart of the company, apple. And if I go into the trade tab here, this is what's called the option chain. And so the first thing you see are all the expiration dates of all the different option contracts you can either buy or sell. So we have some contracts that expire in only six days, very short-term. We also have contracts that expire in a pretty long period of time, 762 days, a little over two years away, and then pretty much everything in between. So for example, if we go into the September expiration cycle in 34 days, click on that, unfolds the tab. And now these are all the different option contracts you can be trading. So on the left-hand side here, these are all the color options. And then on the right-hand side, these are all the put options. And then down the middle here, these are all the different strike prices that you can choose. So if I wanted to speculate on Apple stock going up and price by September 17th, I could just buy one of these call options. For example, maybe I want to buy the 150 strike call. So now that if I am correct, and by September 17th, if Apple goes from 149 word is currently to maybe 160 or even higher, I will have a very nice profit, as shown by the exact kind of example that I talked about here. So buying call options just by themselves, that is a bullish strategy. And then conversely, buying put options. If I was bearish on Apple stock, then I would buy a put, right? Because as you saw in this example, when you bought the put option contract and the price actually went down, you made a profit. And then on the flip side, selling these contracts will give you the opposite kind of directional position. So buying a call, as I said, is a bullish strategy. Selling a call is a barrier strategy. Buying a put is a bear strategy. Selling a put is a bullish strategy. And again, you can just walk yourself through these examples to understand that. Next up, let's come back to the PowerPoint here. This was definitely the longest part of the video and definitely the more complex aspects understand in regards to Options. Next step we have time to K, which is very, very straightforward. So time to k is simply a concept that illustrates the fact that the passage of time slowly deteriorates the value of all option contracts. And this time decay effect will continue to take place all the way to the expiration day. We're out of the money. Options have a value of 0. And out of the money basically refers to option contracts that are useless by the expiration date. So of course in those cases they're going to have 0 value. So the way you take advantage of this aspect of option pricing behavior is you specifically sell options, right? So if you sell a call option for a 100 bucks initially, and then maybe time to k reduces the price of that call down to 50. Well, at that point you can buy the contract back for that lower price and make a profit of 50 bucks. So then also here I want to make the point that you don't actually have to wait until the expiration date to book your profits or cut your losses. You can close your option position anytime prior to the expiration date. If you bought a call option, you can sell it anytime. If you sold the call, you can buy it back anytime. So I just wanted to make that point clear as well. For example, here, backing out, Let's come back to my trading platform. This column right here, this theta column will show you how much the prices of all of these call options in same thing here for the put options. By how much the prices of all of these options will drop per day. So in the case of this 150 strike call option, the theta value is negative 0.06, which means just from the time decay factor alone, this call option will drop by $0.06 per day, and that is on a per-share basis. So what that means is you basically have to multiply this number by 100 to get the full effect of what's going to happen with this option contract. Because again, this call is tied to actually a 100 shares of stock, not just one. So with a price of this call being about 340 bucks or so, just from the passage of time, that price is going to drop by about six bucks every single day. Now that being said, this time to k can be offset by an advantageous move in the price of the stock, right? Because as I showed you on previous slides, when the stock price moves, that will either make your option contract profitable or not profitable and buy a certain degree. So all else constant. If the stock price were to just stay the same, then yes, you would see the price of this call option slowly deteriorate day after day. And again, you take advantage of this by specifically selling options. And lastly, in regards to time decay here I do want to briefly show you this spreadsheet. This was some research I put together as part of another Skillshare course of mine. And that course is called options trading. The best time to try to Options. And this spreadsheet allows you to visualize very clearly how a time decay works. So for example, let's say we have a stock whose price is currently 50 bucks per share. And now I'm looking at a call option specifically with a strike price of 55. We also have two other inputs here, the implied volatility and the interest rate. Don't worry about these two for now. And then over here in this table, I basically apply the Black-Scholes option pricing model. This is a mathematical equation that you can use to price call option or put options. So I use that model based on these inputs here to calculate the theoretical price for that call option. And specifically based on a certain number of days until the expiration, That's what DTP stands for. So with a call option with these parameters, having one year left to go into the expiration date, the theoretical price for that call would be $13.14 on a per-share basis. So times a 100 shares, the full price for that call is one hundred, three hundred and fourteen dollars. And then fast-forwarding just one day. Now with only 364 days until the expiration date, you can see the price of that called dropped by two pennies, and then so on and so forth. And so finally, I've taken this data here and I plotted it onto a chart. And so here we go. This is the chart that I put together on the x-axis down here you can see all the days until the expiration date, starting from one year all the way down to expiration day. And then on the y-axis, this shows you the price of that call option based on a specific number of days until expiration. And the main thing I want you to take away from this chart here is simply the fact that this is a downward sloping curve. Does get steeper and steeper as you get closer and closer to the expiration date. And what that means is time to k accelerates when you do get very close to that exploration, right? Initially, with a lot of time left ago, it might be two bucks a day or three bucks a day. But then with only a few weeks left to go, it might be 56, 7 or 10 bucks a day. Specifically, the option will be losing that amount of money every single day. And again, if you want to take a deep dive into this particular concept, you can check out my other Skillshare course called options trading. The best time to trade options. It's a very, very cool concept. Let's come back to the PowerPoint here. And finally, the third way you can make a profit with trading options with implied volatility. And as I explained, implied volatility is basically a measure of fear or uncertainty about a company's future or about the stock market as a whole. If we're looking at the implied volatility for an ETF or some broad market index as opposed to an individual company stock. Now more technically speaking, you can use this implied volatility concept to actually calculate an expected price range for some stock at a specific point in the future. And that could be as small as just one day in the future, six months, a year, three years out, or anytime in between. And then specifically this price range is used. It gets factored into the prices of option contracts. And the way this works is if implied volatility, if this expected price range expands, then the prices of options will also expand. And then conversely, if the implied volatility contracts, then so will the prices of option contracts. So for example, let's come back to my training platform. And we'll go back to the charts here for Apple stock. And let me expand this one up here a little bit. There we go. So this chart down here shows you the implied volatility for Apple stock and specifically over the past one year. And right now you can see the implied volatility for Apple is 24.39%. Implied volatility is always a percentage. And moreover, by default, when you look it up in your platform here, the timeframe in the feature that it's looking at is one year. So basically what this means is one year from today, the market is expecting Apple stock to be either up or down by about 24.39%. So this is where that expected price range comes into play. This is an up or down price movement for Apple stock. Now of course, as you can see here, the level of implied volatility, the size of this price range can fluctuate quite wildly on a day-to-day basis. For example, back in late January of 2021, the implied volatility for Apple was all the way up to 56 percent. So again, that means from this point in time, the market was pricing in and expected move for Apple stock one year from this date, up or down by about 56 percent. Now when you think about it, a much larger expected price range means the market is much more uncertain about Apple's future, or perhaps is more fearful about Apple's future. Whereas compared to now with a much lower implied volatility, a much more narrow expected price range. Obviously, the market is getting a lot more confident about where Apple will be one year in the future. There's a lot more certainty here and a lot more uncertainty back over here. So that's why implied volatility is a measure of fear or uncertainty about an individual stock or about the market as a whole. So now coming back to our PowerPoint here, Let's go to the next slide with a few brief examples. So let's say Apple stock has an implied volatility of 20%. I know in my trading platform it was a bit higher than this. But let's just say for the sake of example, right now, Apple's implied volatility is 20 percent. Then because we are bullish on Apple stock, we buy a call option for a $100. The strike price does not matter for this example, nor does the expiration date, only the price of the actual contract. Then the implied volatility for Apple stock expands from 20 percent to 40 percent, which means the price of the call option might also expand to, let's say, a 150. So as a result, this is going to be a profitable outcome for you as the call option buyer. Because again, you bought the call initially for a 100 bucks, then sell it for a higher price of 150 and make the difference as profit, which is 50 bucks in this case. Now any second example, we're going to take the opposite approach. We're going to sell an option in this case. So now let's say you're looking at Twitter stock and the implied volatility for Twitter is 45 percent. Currently. At this point, you are bullish on Twitter stock, so you sell a put option for a price of 200 bucks. Again, the strike does not matter, the expiration date does not matter. And then at some point down the road, the implied volatility for Twitter contracts from 45 down to 20. So that is going to reduce the price of that, put maybe down to 150, which as a result gives you a nice profit of again, 50 bucks sold to put 4000 that took in money. You then bought it back for a lower price of 150 and therefore made the difference as your profit, again, 50 bucks. So those are the three main ways to generate a profit with trading options, they're a very dynamic financial product, which is why they're my preferred product to use in the stock market. And lastly here, I want to talk about the advantages of trading options Overstock. So first up here, as I've already explained, there are multiple ways to profit as opposed to just one way. Right? Because with stock, you must be right directionally to make a profit. There is no other way, but with options, whoever, you can actually be directionally incorrect and still make a profit, Right? Because for example, coming back to my trading platform here, and let's go back to the trade tab on Apple. If I were to sell this 155 strike call option, this is a better strategy because I want the stock price to be below the strike by the expiration date because that would render the call option useless, then that means Apple can actually move higher in price by a full $6 or almost $6. And I can still walk away with a full profit. So even though this is a bare strategy, I can still be directionally incorrect. Apple could still go higher. But if come September 17th, if Apple stock is at 154 bucks per share, let's say, then that's fine. This option contract would still be useless. And I, as the seller would still gets a walk-away and keep the full premium. This is not something you can do when trading stock. Let's come back here. Moreover, there are many, many different strategies that you can use with options, with stock, you can either just buy it or you can short it. That's it. But with options, of course, you can't just buy or short a color put, as I've shown you in many examples in this video. But you can also combine different options to create different kinds of strategies. So for example, there's also these short or long strangle. For me as an option seller, the short strangle is my favorite strategy. This one is selling both a call option and a put option at the same time. So real quick as one more example, Let's come back to the trade tab. In the case of Apple here, I might sell both the 155 strike call option and maybe the 135 strike put option. This is actually a directionally neutral strategy because with a short call again and what the stock price to be below the strike price by the expiration date. And then for a put option, a short put option. Specifically, I want the stock price to be above the strike price by the expiration date, that would make this put option contract useless. So by doing this, I basically have created a price range that I want Apple stock to a state in between. I want Apple to be above 135 and below 155 by September 17th. And that's what makes this a directionally neutral strategy. I just want Apple stock to move sideways. And that's a very cool thing that you can make money from the stock just going nowhere in price. Let's come back. So again, like I said, we have the short or long strangle. There's also the straddle strategy. We have credit spreads, debit spreads, iron contours, covered calls and cover puts, and many, many more. And I do have other Skillshare courses that cover all of these different strategies. But as you can see here, options are super dynamic and versatile product, unlike just stock by itself. And finally here there is also an embedded edge with implied volatility. Specifically, implied volatility is overstated more than 80 percent of the time. And I've done my own research on this that proves this fact. So what that means if the implied volatility for some stock is 40%, meaning a year from now the stock is expected to be either up or down by 40 percent. What you'll find is most of the time that expected price range is too large. Because when you actually fast forward a year, you might find that the stock actually moved up by only 20 percent, not 40. And so what this translates to is you're actually getting paid more as an option seller specifically, then you theoretically should. Because again, implied volatility is baked into the prices of options. So if the implied volatility is 40 percent, that's going to make the option contract you sell somewhat expensive. But in reality, if most of the time the actual moves of those stocks are less than what is expected. That means the implied volatility should have been smaller, means the prices of your contracts should have been smaller. So that's why over time it is very advantageous to be selling options specifically as opposed to buying options. And if you want to take a deeper dive into this concept, you can watch my other Skillshare course called options trading, understanding stock market behavior. It's a whole course dedicated to this specific concept. Now there's actually one more major advantage that comes with trading options, overstock. And that is with options, you can actually customize your probability of profit, your win rate, right? If you recall from the last video, when you're trading stock, your win rate is going to be pegged around 50 percent. Which also means your probability of profit on any given stock trade is also going to be around 50 percent with options. However, let's come back to my trading platform one final time. Again, let's say I wanted to sell this 155 strike call option. And now you'll notice over here this percentage, this 25 point, 26 percent. This is actually the probability that this option here, it will expire in the money, which basically means that the price of Apple stock would go from 149, Where is now and increase above the strike price. So in short, there's a 25 percent to 6% chance that by the expiration date, by September 17th, Apple stock will be above 155 bucks per share. Now keep in mind as a seller of this collection, I don't want that to happen. I don't want the price of Apple stock to be below 155. So ultimately putting this altogether now, if there's a 25 point, 26 percent chance that Apple will be above the strike price here. That means there's about a 75 percent chance that Apple stock will be below the strike price. And this is all by the expiration date on September 17th. So there's a 75 percent chance almost that I will make a profit on this trade, a full profit. And that is obviously much, much higher than a 50 percent chance that you're going to be stuck with when only trading stock. And if I wanted an even higher chance of profit, then I could just sell a call option with an even higher strike. Because the higher the strike that I choose, the more Apple stock has to move up as well, has to move against my position for me to eventually reach a losing scenario. So this is what I mean when I say that with options, you can really customize your probability of making a profit. It's a very, very cool thing. And so with that being said, that's going to conclude this video. I hope this one gave you a good overview and in-depth explanation of options trading and how it all works. And in the final lecture coming up next, we're going to talk about futures, which is basically going to be a hybrid between stock and options. So thanks for watching, and I'll see you in the next one.
4. Futures: Okay, welcome to the final lecture of this course on futures contracts, which as you'll see over the coming slides, these are basically going to be a combination between stocks in options. So first off here, what is the essence of futures trading? What are the expectations you should have, and what is it like to be trading these financial products? Now similar to stock trading, futures trading is also purely directional trading. You can only make money by getting the directional move of a certain product, correct? And so as a result of that, you should still expect about a 50 percent win rate. And again, from the stock trading video that you saw earlier in this course, You know why this is the case. And that's also why with futures trading, you must make sure that your average profits are greater than your average losses. That's the only way to overcome a 50 percent win rate. Now, futures are mostly used for either speculation, of course, or for portfolio hedging purposes. That's out of the scope for this course, but still wanted to include that on the slide here. Now the major advantages that come with trading futures contracts are two-fold. One, futures give you way better leverage, and I'll explain that on a future slide. And also you have way better trading hours with futures contracts also will be explained on a different slide. Now one of the major differences that comes with futures as compared to stocks and options is you cannot trade futures on any individual stocks. So you only trade these financial products on things like commodities, soybeans, wheat, corn, et cetera, or bonds, or broad market indexes, S and P 500, nasdaq, the Dow Jones, et cetera. There are no futures contracts on Apple stock, for example. Finally here, futures trading is generally reserved for more advanced traders with sizable capital. And you'll see why that is the case in a second. So obviously, if you're watching this course as a brand new beginner, you're just starting to get your feet wet in the stock market, then of course, futures are not going to be your first step. That's not what I would recommend, but it's still very important for you to understand what these products are and how they work. Because once you're ready to get involved with futures, they can be a great addition to your strategy and to your portfolio. So next slide here, what our futures contracts. So in a similar fashion to options, these are also a derivative. They are contracts that derive their value from something else. And so specifically the definition of what these products are is they are contracts, like I said, that obligate one to buy or sell a certain quantity of a product for a predetermined price at some point in the future. So with this definition in mind, these are actually very similar to options, because options involve the buying or selling of a certain quantity of product at some predetermined price, aka the strike price at a point in the future. But the main difference here is with futures, you are obligated. You must either buy or sell the product at that point in the future. And in particular, when you open a trade by buying a futures contract, you are obligated to buy that product. Then if you open a position by selling a futures contract, you are obligated to sell that product at that point in the future. But of course that is if you hold that position all the way until that expiration date, just like with options, you can get out of a futures position at anytime prior to that expiration date. So if you initially, if you just contract, for example, you can sell the contract at any point down the road. It's only if you hold that contract all the way to the expiration date that you are then obligated to either buy or sell the product. And so that predetermined price is the price of the contract. I'll show you examples of all of this in my trading platform in a minute as well. And then like I said, that point in the future is the expiration date. So hopefully this point you can see a lot of similarities between futures and options. However, futures are very static contracts. And what I mean by this is there's really only one main thing that gets factored into the price of futures contracts, specifically, the price of the underlying product, gold, silver, wheat, bonds, whatever. Whereas with options, these were very dynamic products because you had things like time decay, implied volatility, strike prices, et cetera, with features. There's none of that. The main thing that matters is simply the price of that underlying product. This is why futures trading is purely directional. And also why the only way to profit is to simply predict the price movement of that underlying product correctly. If you think the price of gold, for example, is gonna go up over the next few weeks or months, you can buy a gold futures contract. And if you are correct and that directional assumption, you'll make money. Or conversely, if you think the price of gold will go down over the next few months, you can sell a futures contract as an opening trade and once more, if you are directionally correct, then you will make a profit. Now there are also a few key concepts you must understand about features as well. The first of which is notional value. And this simply represents the full value of the entire contract, the value of the full quantity of goods that you would be technically obligated to buy or sell by the expiration date. And to figure this out, you simply take the price of the contract and multiply it by the quantity of the product. So for example, in the case of a gold futures contract, let's say the price of one contract is 1820 bucks. And so this number here actually corresponds roughly to the current market price of one ounce of gold. And I say roughly because there are a few other small things that do get factored into the price of futures contracts, they're pretty much insignificant. So 820 at the moment you look it up in your platform, is pretty much the current price of one ounce of gold. And so the quantity of ounces that are tied to every contract is 100. So again, if you were to buy a gold futures contract, and if you were to hold that contract all the way to the expiration date, at that point, you must buy 100 ounces of gold at a price of 1820 bucks per ounce. So that means the full notional value of the contract is a $820,000 thousand, right? 820 times a 100 is 182 thousand. So basically this is the amount of money, the amount of value essentially that you are controlling for trading one single futures contract in gold. It's obviously a very large amount, which is one reason why these are pretty much best reserved for more advanced traders with a decent amount of capital. That being said, as you will see, you don't have to put up anywhere near a $100,800 thousand to buy or sell one of these contracts. Next up we have tick size. And tick size is simply the minimum price movement for a specific futures contract. Now this is very unique for futures contracts, in particular, with stock prices. For example, the minimum price movement is $0.01. Same thing for option contracts, but for futures, That's not always the case. The tick size for a crude oil future is still $0.01, totally normal, just like everything else. But in the case of a gold futures contract, the tick size is actually 10 cents. So it's a pretty simple concept, but definitely be aware of this. And then finally here, there is a very basic formula that you can use to figure out the exact ticker symbol for a specific futures contract. Every product category like crude oil, gold, silver, etcetera, does have its own unique ticker symbol, as you can see there with the examples under tick size, the symbol for crude oil is forward slash CAL, for gold is forward slash gc. And every futures contract always begins with that forward slash. After that comes the actual product code. So Cl for crude oil, GC for gold, et cetera. Then you have the month code. This is the month in which the futures contract will expire. And then finally, you append to that the year, which basically together tells you the month and year that the contract will expire. So as an example, for a very specific goal futures contract, forward slash gc, V2, V1, that corresponds to the Gulf future expiring in October. The month code for October is v. Don't ask me why. That's just the way it is. Expires in October of 2000 and 2001. So let's back out of the PowerPoint here and come over to my trading platform so I can show you a few examples. So what I have pulled up is a simple price action chart showing forward slash gc, which by itself is simply the product category of gold. But of course, if I did want to see the price fluctuations for a specific futures contract, like the one I just showed you on the slide, I could type in forward slash gc V 21 and press Enter. And here we go. Again, you can see up here gold features October 2021. But generally speaking, if you wanted to just look up the price of gold in the futures market, you would just come in here and type in forward slash gc by itself. And then if we come over to the trade tab now, this is where you can actually see all the different futures contracts that you can be trading. And they're organized by their expiration dates. So the first one expires on September 21st, only a few weeks away from today's recording. And then October, which is the one I showed you in my example, GCC VI 21 and so on and so forth. And then over here, the bid and ask prices. These are the prices you will either pay or cell when you trade these contracts. So right now the market consensus is such that the price of one ounce of gold is just over $1800 per ounce. Now you may notice here that the price of these contracts does get slightly more expensive as you go further out in time, right? So the September contracts are trading at around 18071808, whereas the February 2022 contracts are training around 1812. Again, this has to do with the few other small things that go into the price of features. In this case, storage costs for gold, but no need to get into that here, the main thing that matters for the price of futures is simply the market's consensus for the value of that underlying product, gold in this case. So let's say if I come to the charts real quick, and perhaps I am bullish on gold over the next few months. Maybe I think the price of gold can get all the way back up to the peak of this short-term toughing pattern that happened a few months ago, where at around, let's call it 1900 bucks per ounce. I think this is the price that God can reach again once more in the next few months. So in this case, what I can do is simply go out and buy a gold futures contract. I'll come back to the trade tab here. And perhaps I'll buy this contract, the GC Z22 ones that expire in December. And I could buy this contract for right around 1811 bucks per ounce. So again, if I bought this contract and held it all the way until the December expiration date, I would have to buy 100 ounces of gold at this price, the price at which I bought the future today. Now of course, that's going to cost over $180 thousand. That's a lot of money. I don't wanna do that. I simply want to speculate in the short-term. Perhaps make a profit of a few 100 bucks or a few thousand bucks. So I can still buy this contract today. But if the price of gold does actually increase over the coming weeks and months, then of course, the price of this contract will increase as well. And then at that point, I can simply sell the contract in the market and book my profits. Maybe the price of gold goes from 1810 to 1900. So if I bought this contract at 110 and sold it at 9800, that's a nice profit. And of course, when I do that, there is no obligation for me to do anything, buy or sell the physical gold product by the expiration date. It's very similar to options. You can buy or sell options whenever you want and never actually have to deal with the stock come the expiration date. And that's all there really is to it in terms of just making a futures trade. Obviously, the trade itself will have to be a result of careful analysis from other using your indicators or charting tools, et cetera. But it's still very, very simple to either get long or short, a specific product or a general market index with futures contracts. Let's come back now. So next step, I want to briefly show you the various market sectors that you can actually be trading futures in. So first up, we have equities and interest rates. So for example, under equities there forward slash E S, that corresponds to all the futures contracts on the S and P 500, that broad market index. If you're bullish on the S and P 500, you can either buy shares of SPY, for example, or you could sell put options. Or in the case of features, you could buy a forward slash ES futures contract. And then forward slash and q is the nasdaq, YM is the Tao and RT. Why is the Russell 2000? Now if you have an interest in trading interest rates, basically if you want to be a bonds trader than you would go to that category. And those symbols, they're zt, ZF CAN, et cetera. They simply represent bonds that reach maturity in differing amounts of time, either a year from now five years from now 10 years, et cetera. Next step we have foreign exchange, energy and metals. So perhaps if you are interested in trading forex foreign exchange means then you can trade forward slash 6 E for the euro, or forward slash 06 be for the British pound, etc. We also have the energy sector, of course, and you solve forward slash C L in the previous slide for crude oil and natural gas and then metals. Gc is gold, SI is silver. And of course, there are many other products within these categories. I'm just showing you the main ones. And then lastly here we have agriculture as well. So forward slash zs is soybeans, ZW is wheat, and zc is corn. And again, many more others in this category. Let's move on. And now let's talk about the major advantages of trading futures overstock. And first up, we have leveraged. Now what is leverage? This simply means you only have to put up a very small amount of money to control the whole notional value of the contract. So like you saw with a gold futures, the notional value is over $180 thousand, but you don't have to put up anywhere near that amount of money to buy or sell one of those contracts. In fact, typically, you only have to put up between three and 12 percent of the full notional value to hold that position. So for example, if we say 10% to buy one gold futures contract, you would only have to put up $18 thousand, not $180 thousand. Now that is the initial margin requirement. It does get a bit more complex than that. And I do have a separate course on Skillshare that takes a deep dive into future specifically. And in that course I will show you in a lot more detail how all the margining requirements work for futures trading. But at least initially, you only have to put up a very, very small fraction of that total notional value to get into the position. So as you saw in the first lecture with stock is, is pretty similar to bind stock on margin. But with stock, of course, you're typically required to put up 50 percent of the full value of that stock position. I want to buy a 100 shares of stock for 50 bucks per share. The total notional value of all that is 5000 dollars. So in that case with the stock, I have to put up half of that amount. But with futures, it's only three to 12% of that full notional value amount. So you get way, way better leverage with futures overstock and really over anything else. Now of course, what that also means is your losses, as well as your profits, can be huge as a result. Because again, even if I only have to put up $18 thousand to control $180 thousand of notional value. My profits and losses will still be based off that full notional value amount. And you already saw in the first lecture of this course on stock trading, right? When I walked you through those few examples explaining how margin can magnify your losses and profits. Same concept here with futures, except it's even more magnifying. So that's why you really have to know what you're doing and be an experienced trader to effectively trade these products well and not blow up your account. And then lastly, the other major advantage that comes with features is way better trading hours. And specifically, you can trade most futures contracts Sunday through Friday from 06:00 PM to 05:00 PM Eastern Standard Time. So yes, futures contracts for the most part, there are a few exceptions, are open 23 hours a day from Sunday through Friday. Now, of course, the market is most active during the day and in particular when the US session is open from 09:30 AM to 04:00 PM Eastern Standard Time. But you still have this freedom to trade futures almost 24 hours a day. And so with that being said, that's going to conclude this video. I didn't want to go too in depth with futures in this course because one, they're definitely not something for brand new beginners. And then number 2, like I said, I do have a totally separate course that takes a much deeper dive into these products. So thanks for watching and I'll see you in the final little video coming up next just to wrap some things up and then I'll send you on your way.
5. Wrapping Up: Okay, congrats on finishing this course. And hopefully by now, you're feeling a lot more confident in your understanding of stocks, options, and futures, and can now make the most informed decision as to which ones you want to start trading. And to help you make that decision, you can take a look at the course project down below. And so with that being said, thank you so much for watching this course. I am Scott race again, and I do appreciate any and all feedback that you may have. Moreover, if you've got questions or if you need clarification on something, please ask away in the discussion section of this course below, and I'll get back to you as soon as I can. And I also encourage you to check out my other courses on Skillshare. I've got a lot of other classes on options trading, stock market investing, and a few computer science courses as well. And finally, don't forget to check out and subscribe to my YouTube channel and also follow me on Skillshare platform here, so that you'll always get notified anytime I publish a new course. So thanks again for watching and happy trading.
Scott Reese, Engineer & Investor
