Transcripts
1. Preview: Hello, traders and investors. Thanks for checking
out this course. My name is Travis Rose I'm a full time trader and investor, and I'm going to be your
instructor for this course. Options trading one oh one, a beginner's guide
to trading Options. So before diving into
the lessons themselves, I just wanted to make this quick preview to go over some of the things that we're going to discuss within this course. Because this is a beginner's
guide to trading options, we are going to start
from the basics, and we're going to
start with what are options, options versus stocks. We're going to talk about
call options and put options. We are going to
discuss strike prices, expiration dates,
what it means for a contract to be in the money
versus out of the money. We're going to go over
the option breaks and how we can use them to determine
an option contracts risk, as well as the probability of profit for that option contract. Then going to talk
about the difference between buying and selling, also known as writing options. We'll talk about contract
exercising and assignment, and then we'll get into
some of the strategies themselves that I use to
trade options full time, such as option spreads, ron condors, covered calls for consistent weekly
or monthly income, cash secured puts for income
on a regular basis as well, and then the two of those
strategies combine, which is going to make up what is known as the wheel strategy, which can be a very effective
income producing strategy in the options market. So if you're new to
options trading or you want to learn about
different strategies that you can use to consistently make money
from the options market, this is going to be a great
course to start with. So let's go ahead and get
started right away with lesson number one and start talking about what
exactly options are.
2. What Are Options?: All right, so to start
off this course, we are going to begin with
the basics of options. We're going to start
off first with what exactly option
contracts are. So if you already know
the basics of options, you know exactly what a contract in the options
market represents. If you know the difference
between calls and puts, you may want to go ahead and skip ahead a bit in this course. But for everyone else,
let's go ahead and get started with what
exactly options are. So an option is going to
be a contract representing 100 shares of an
underlying asset that gives the buyer the option, but not the obligation
to buy or sell at a specific price up to
a pre specified date. Now, for the sake of
keeping things simple, we're not going to worry too much about buying and selling at that specific price and before that specific
date just yet. That's going to be known as the strike price and the
expiration date, and we're going to
get into that a little bit later
on in this course. But for now, we're just
going to be thinking about options as
something that we can buy and sell the same way that we would buy and sell
a share of stock. And the reason that we
do this as opposed to just buying the stock
itself is because these option contracts can allow us traders a more
affordable way to trade high priced stocks with generally much more potential
for profit as well. So for example, let's go
ahead and take Apple stock. We can see that the current
price of Apple's stock at the time of this
recording is $139.44. So if we were to buy 100
shares of Apple at this price, that would cost us $13,944. Whereas on the other
side of the spectrum, in this example, what we can do is we can buy one
option contract. Again, that's going to represent 100 shares of the
underlying asset, the underlying
asset, in this case, being Apple for the
option premium of $39.90 multiplied by
100 because, again, it's representing 100 shares
of the underlying asset, giving us a total cost of
$3,990 per option contract. So essentially what we're doing
is controlling 100 shares of Apple with this one
option contract for $3,990 as opposed to controlling 100 shares of Apple and
having to put up $13,944. So the nice thing about this
is we're only risking that $3,990 on this trade, assuming everything
goes completely against us and the stock
absolutely tanks. And on the other side
of the spectrum, our maximum return is
potentially infinite because there is no limit to how high Apple's stock can go. So what we're looking at over
here on the right side of the screen now over here
all the way on the right, these percentages are
showing us the percentage that Apple stock is moving
either up or to the downside. Now, in the middle
here, the red and the green that we
see is going to be the profitability of
the option contract that we have selected
over here on the left. So we can see that, for example, if Apple stock over the next few months
were to go up 10%, our option contract
is going to be up over 36% in that
same period of time. That is one of the
big reasons why many people are drawn to
trading options because of that ability to make a much
greater percent return on your investment as opposed to investing in the
underlying stock itself. But you do have to keep in mind, of course, the same thing is going to be true
for the downside. So if Apple were
to fall 10% within the couple of
months that we were invested in this
option contract, we would lose over 30% in
our option investment. Now, don't worry later
on in the course, we are going to get into some
risk management strategies. So that way, you're not
going to have to worry too much about taking
these big losses, but it is very
important to know that with a greater
potential for profit, of course, that is
going to come with a greater potential
for loss as well. But anyway, this is
a very useful tool that we're using
here on this screen, and I'm going to be
giving you plenty more examples
throughout this course. So if you want to
actually try this out, it is completely free to use on options
prorofitcalculator.com. So I highly recommend
checking that out and putting your
newfound knowledge in the options market to use as we go along through these
lessons in this course.
3. Options vs. Stocks: All right. Now, when it comes to trading options as opposed
to trading stocks, there are some pros and
cons that I wanted to break down in this
section of the course. The first P we already
kind of talked about, which is just the fact that
when you're trading options, you can get started
doing so with much less money than
you would actually need to trade those stocks. So just very quickly again
for another example here, if we take the
example for Spy which is the ETF for the S&P 500, Spy actually has the options
chain with the most volume. So a lot of options traders
focus solely on Spy. And the current
price at the time of this recording is $389.82. So if you were to
buy 100 shares of Spy at that price because again, one contract represents
100 shares of the stock that would
cost you $38,982. Whereas on the other hand,
when you're trading options, if we take this call option, for example, the current
premium is $11.93. You, of course, have
to multiply that by 100 to get your total cost, and that's going to give
you a cost of $193. Obviously, that is much, much cheaper than the $38,982 than it would take to actually buy
100 shares of Spy. So that is one of the big
pros to trading options. Most new options traders don't just have $38,000 laying around. And the good news with options, you don't need that much money because the contracts
are much cheaper. Pro number two is going to be the greater potential
for returns. Now, this is going
to really depend on several different factors of the contract itself
that you're trading, things like the strike price
in the expiration date, which we're going
to talk about here in the future of this course. But those things, along
with some other factors are going to determine how much volatility
your option contract has when compared to
the underlying stock. But anyway, with all
of that being said, it is going to give you
greater potential for profit. That can mean that your
option is going to return potentially two times five times or even ten times or more what the underlying
asset is returning. So going back to the
example with Spy, the ETF for the S&P 500, it's not at all uncommon for
spy to go up maybe just 1%. And at the same time,
you see options in the options chain that
are going up 10%, 20%, even 50% or more, just from that 1% move in Spy. Okay. And pro number three is going to be that
there are tons of different options
trading strategies that are going to allow you to profit from any market condition. Obviously, the market doesn't just go straight up over time. There's going to be
dips and there's going to be pullbacks
along the way. And there's also going to be
these consolidation periods where the market kind of
just trades sideways, sometimes for a pretty
extended period of time. If you're trading stocks, it can be much more difficult
to actually make money in those periods when the
stock is just trading sideways and trading in a very small range
with low volatility. But that's why it's going
to be important for you to stick around
through the entirety of this course because we're
going to break down these different strategies that are going to allow
you to profit, whether the stock
market is going up, whether it's going down, or even if it's
trading completely sideways and not moving
much at all in general. Now, with all of
that being said, the one big con of
options trading is that because there is greater
potential for profits, that is going to also come
with greater potential risk. Now, in my opinion,
this really isn't even a con of options trading because at the end of the day, managing your risk and
keeping your losses small is rule number one with any kind of trading or with any
kind of investing. So we're going to
focus a lot on that. In this course, we're going
to talk about how you can manage your risk and
keep your losses small. And as long as you
remain disciplined and you use the things that we
talk about in this course, the greater potential
for loss when you're dealing with
options as opposed to stocks should not really even be something that you
have to worry much about.
4. Call Options: All right. Now, when it
comes to options trading, there are two different types
of options that you can actually select when you're getting into an options trade. The first of those is going
to be known as a call option. Buying a call option
is the options market equivalent of going
long or buying a stock. So when you're in the stock market and
you're trying to make a profit from the stock
that you're investing in, the goal is, of
course, to buy low, and then later on, sell at a higher price
than you bought. And that's going to allow you to profit the difference
between where you bought and where you sold multiplied by the number of shares
that you traded. So really, the same concept is going to apply to call options. When you buy a call option, the goal is to see a rise in the price of the
underlying asset, which is going to cause your options premium to rise as well. So if we go way back to the earlier section
of this course, when we talked
about this example here of the profitability
chart of Apple, we can see that the
profitability of this option as the price of Apple rises is going to become more
and more profitable. But if we look at the
price of Apple falling, we can see that our
option is going to become less and
less profitable. And that's because if you look over here on the left side, we can see that this is actually a call option,
meaning that, again, we want the underlying
asset, in this case, being Apple to rise in value, and that's going to cause the options premium to
rise in value as well.
5. Put Options: So on the other side of the
spectrum from a call option, we have what are
known as put options. Buying a put option
is the options market equivalent of going short
or short selling a stock. So for those of you that have some experience with
the stock market, you most likely know that
when you short sell a stock, the goal is for that stock to
actually decrease in value, so that way you can later on buy back the stock at a lower price. Again, profiting the difference between where you bought
and where you sold. The only difference with
short selling is that you're selling high first and
then buying low later on. So put options kind of
give us the ability to do the exact same thing without having to short sell
the stock itself. In other words, when
you buy a put option, the goal is to see a decline in the price of the
underlying asset, which will cause your
options premium to rise. So now, if we look at the profitability chart
of a put option, we can see that the green down here is under the
current price of Apple, meaning that as Apple's
price falls lower and lower, our put option is becoming
more and more profitable. And, of course, on the
other side of the spectrum, as Apple rises in value, our put option is
going to lose value. So you can see that just
having calls and puts alone is very
valuable because it allows you to profit whether the stock market is going up
or whether it's going down. Now we're going to in the
future of this course, talk more about the
different strategies, as opposed to just regularly buying and selling
call and put options. But once you understand some of the factors to look for
when you're selecting specific call and
put options such as the strike price and
the expiration date, then a lot of times you
actually don't even need to use these fancy strategies in order to profit from the market. You can simply look
at things from a basic technical analysis
perspective and decide whether you want to buy a
call option or whether you want to buy a put option
to profit from the market, either going up or going down.
6. Expiration Dates: All right, so now that
we know the difference between call options
and put options, it's time to talk about some of the things that
we're going to need to select every single time that we trade an
option contract, whether that be a call or
whether that be a put. And each of these following
things that we're going to talk about here
in the next couple of sections are going
to really play a big role in the way that that option contract
is going to trade, the risk that's going
to be associated with that option contract, how much volatility
that contract has, and so on and so forth. So one of those things is going to be what we're
talking about now, what is known as the
expiration date. Now the expiration date
is actually going to be the last day that an option
contract can be traded. Every single time that
you trade an option, whether that be a call or a put, one of the things that
you're going to have to select is the expiration date. Now the reason that
this selection is very important is because your expiration date is
actually going to play a big role in the amount of volatility that that
option contract has. The reason for this is
because option contracts with a closer expiration
are going to have much higher volatility than
an option contract with an expiration date that is maybe three months away or even
a year or further away. Now when we break up these into three different
sections here, as far as expiration dates go, we have weekly options. These are going to be very
highly volatile contracts expiring every week. Now, personally, I don't do much trading with
weekly options. However, I will say that if you're going to use them at all, strictly use them for
day trading only, and we're going
to talk about why exactly it's important
to only day trade these contracts in
the future when we start talking about
things like time decay. But nonetheless, it is
important to know that these weekly options
expiring in a week or less are going to be
very volatile and are going to be the highest risk and highest reward option. Following that, we have
monthly option contracts. These are going to be
less volatile, of course, than weekly options they expire at the end
of every month. And when you're trading
monthly option contracts, you can still use them to increase your day
trading returns, but they're also
going to be suitable for short term swing
trading as well. So if you're interested in
trading option contracts for maybe a couple of days
at a time, most of the time, the contracts that
you're going to be using are going to be monthly option contracts for
that type of swing trade. And last but not least, we
have what are known as Leaps. By definition, leaps are long term equity
anticipation securities, and these have over a
year until they expire, and they're going to be the
least volatile options, best for longer term swing
trades or investments. So, still, even though LeAPs are the least volatile
option contracts, they can still offer you a much better return
that you would see if you were to just invest in the underlying
asset itself. So maybe that underlying
asset would go up 10% over the span of a couple of months that
you're invested in it. Whereas if you were invested
in a EAP contract, again, the least volatile and the least risky type of auction
contract for investing, that EAP contract could
very easily go up 20 or 30% in the same
amount of time that the underlying asset
went up only 10%.
7. Strike Prices: All right. The other
thing that you're going to have to select every single time you trade an
auction contract, first, you're going to have to select
whether you want to trade a call or a put depending on whether you believe the
underlying asset is going to rise in price or fall in
price in the near future. Second, you're going to have to choose the expiration date. Your expiration date is
really going to depend on how much risk and reward you're looking for in that
specific trade. It's also going to depend on whether you're
day trading it, swing trading it, or investing it for a
longer period of time. Now the third thing that
you're going to have to select is going to
be the strike price. If we look at this options chain here on the right
side of the screen, we can see that we have several
different strike prices down the center of
this options chain. Now, technically speaking,
the strike price is going to be the price that
you'd be agreeing to buy or sell the underlying
asset if you decide to exercise your contracts or if you were assigned
for that contract, we're going to talk about
exercising an assignment of shares in the
future of this course. But for now, we're just not worrying too much about that and we're just thinking
of these option contracts as something
that we trade. But regardless of whether
or not you're using exercising and assignment
in your trading strategy, it is going to be very
important to select the right strike price whenever you're getting into
an options trade. So in order to really understand
the importance of this, we're going to kind of break up the options chain here into
really six main sections. First, on the left
side of the screen, we have all of our calls. So regardless of which trading
platform you're using, call options are
always going to be the options on the left
side of your options chain. And we can see first
here this section is going to be what is
known as in the money, commonly just
referred to as ITM. And the reason for
that is because these call options all have a strike price that
is actually less than the current price
of the underlying asset. So you can kind of think
of these strike prices as a target for your investment. And the goal is for that target to eventually go in the money, meaning that the price of
the underlying asset rises above that strike price
and above that target. Now, following the in
the money contracts, we have the at the
money contracts, and these are going to be the contracts with
the strike prices directly surrounding the
underlying assets current price. So we can see at this time, Spy is trading at $391.90. So the at the money contracts are going to be the ones with a strike price of 390 and $392. And last but not
least, we're going to have the out of the
money contracts. These are considered out
of the money because the underlying asset has not yet reached
that strike price. Basically, when we're
dealing with put options, we flip the in the
money and the out of the money around because when
you're buying a put option, your target is actually
going to be to the downside. So with put options, our out of the money
contracts are going to be below the current price
of the underlying asset. We're still going to have our at the money contracts
being the ones with strike prices
directly surrounding the underlying assets
current price. And then our in the money contracts are
going to be the ones that the strike price has
already gotten below. So again, whether you're
dealing with calls or puts, you can kind of think
of the strike price as a target for that investment. If you're getting
into a put option, your target is going
to be to the downside, and the goal is for them
to go in the money. And on the other side
of the spectrum, when you're dealing
with calls, your target is going to be to the upside, and the goal is still for
them to go in the money as the underlying assets price
rises higher and higher. Now, I know if you're
new to options, this may all sound a
little bit confusing, but just bear with me
throughout this course. We're going to
make this more and more simple and you're
going to be able to understand exactly
what this means and exactly how you can use all
of this to your advantage. And for starters,
we can say that if you're just getting
into options trading, one of the ways that
you can use the in the money at the money or out
of the money information to your advantage is the in the money contracts
are going to be much less risk and they're
going to be much less volatile when compared to the
out of the money contracts. Okay, so now we know that if we're going for a
very high risk, high reward type of situation, what we would do
is we would go for an option contract
that's expiring maybe in a couple of days and we would go for an out of
the money contract. Again, that's going to
have a ton of volatility because like we talked about
in the previous section, options that are expiring in the near future are
much more risky and much more volatile than those that are expiring
months in the future. And on top of that,
we know, of course, that out of the money
contracts are also going to be riskier and more volatile than contracts that
are in the money. And on the other side
of the spectrum, if we're simply looking to kind of maximize our
returns in the market, we're not looking to
do any high risk, high reward day trading. We just want to get into some
long term option contracts to maybe make 20% when the stock market
itself only makes 10%. What we would do in that case, is we would simply
look to buy deep in the money contracts that have an expiration date at least
one year in the future. Okay. Now, that is
just the basics of how you use strike prices and expiration dates to gauge which contract is going
to be best for you. Don't worry, once we
start talking about some more specific strategies in the future of this course, aside from just buying and
selling call input options, all of these things are going to start to come into play
a little bit more, and you're actually going to
understand how you can use these high risk out of
the money contracts to do a very low risk trading
strategy that's going to bring you consistent income on a
weekly or even monthly basis.
8. Option Greeks: All right. Now the next
thing that I want to talk about in order to
help you get started with your options
trading career is going to be what are known
as the option Greeks. Whether you're
trading a call option or a put option, regardless, there are going to be four main option Greeks that are going to kind of help you determine
that option contracts risk. And those Greeks are going
to be known as Delta, Gamma Theta, and Vega. Personally for the
strategies that I use and for honestly a vast majority of the option
traders that I know. Most of us tend to focus really
just on Delta and Theta. But over the next couple of
sections of this course, I'm going to break
down exactly what each of these means just so you have an idea of how you can use these option
Greeks to again, determine the option
contracts risk. They can also help
you do things like determine the probability
of that trade being a profitable trade and they
can help you gauge how much you stand to make on that trade if it
moves in your favor. Let's go ahead now and start
off with the First Greek, which is going to be Delta.
9. Delta: So the first option
Greek that I want to talk about is going to be Delta. Delta is one of the option Greeks that is more
commonly used. Some of the other ones
like Gamma, Vega, and Roe, for example, most
options traders don't really pay much
attention to them. In fact, really,
Delta and Theta are the two main ones that
everyone seems to focus on, and that's because they do
kind of, in my opinion, provide the most value for
us as options traders. But in the following sections, I just want to make
sure that everyone understands exactly what
each of these Greeks mean. So that way, if you
decide to kind of take on some other strategies that are taught outside
of this course, you're going to be able to use any of the Greeks
that you need for that strategy to help you understand risk and
analyze option contracts. But anyway, with all
of that being said, the first one Delta is simply
a measure in the change of an options price relative to a $1 change in the
underlying asset. So when we're dealing
with call options, again, we know that our premium for
those calls are going to go up at the same time that the
underlying asset goes up. So because of that,
when we're looking at the Delta for a call option, we're going to see that
it ranges anywhere 0-1. Sometimes depending on the
platform that you're using, it will be shown as zero to 100, whereas when we're
looking at put options, because we know they move
opposite that of the calls, they're going to be on a
scale from minus one to zero, sometimes -100 to zero, again, depending on the
platform that you're using. So simply put, what
that means is, if we have a Delta of 0.20, that just means that if the
underlying asset goes up $1, our call options are
going to gain a value of 0.20 for premium. So they may go from $1 to $1.20 or maybe they
go from $5 to $5.20. That's going to,
of course, depend on what the premium
was at first, but the Delta is
going to tell us how much we can expect
our action contract to change in value based on a $1 move in the
underlying asset. Now, the further that
you go in the money, the higher the Delta is going to be because deep in the
money contracts are less volatile and they
move more closely to the underlying asset than out
of the money contracts do. And this makes
sense because what you're going to notice
as you're scrolling through an option chain is the deeper in the
money that you go, the more expensive the premiums of the options are going to be. So it only makes sense for
them to have a higher Delta, because if they had a low Delta, then you would need
a massive move in the underlying asset in order for the
option contracts to make a worthwhile
change in price. Now on top of giving
you an idea of how much volatility you can expect in your option contract, Delta can also be
used to determine an options likelihood of being in the money
at expiration, which is commonly referred to as the probability of profit. So for example, if
we have an out of the money option contract
with a 20 cent Delta, that essentially means that
that option contract has a 20% chance of being in
the money at expiration, while a deep in the money
contract with a Delta of $0.90 has a 90% chance of being in the
money at expiration. So this can be very
useful information if you're using certain
trading strategies that require you to hold onto a contract all the
way until expiration. One of them, for example,
being cash secured Puts, which is a strategy
that we're going to talk about in the
future of this course. And using Delta for that specific strategy can
give you an idea of the likelihood that
you're going to make the maximum return possible
on that specific trade. Okay, so if we take this example here of an option contract, we are looking at a spy call
with a $386 strike price. So let's just assume that this is an at the money contract, and Spy is trading currently
at $386 per share. If Spy were to go from $386
per share to $387 per share, obviously, a $1 move in
the underlying asset. Because the Delta
is about $0.51, and the current price
of this call contract is about $6.90. When Spy goes up to 387, our contract is going
to go up to about 7:41. And again, we know
that because our Delta for this contract is $0.51. This also means that if we were to buy this and we were to hold this until the 527
expiration date, there's a 51% chance that this would be in the money at
the time of expiration.
10. Gamma: Now option Greek number two is going to be what
is known as Gama. Like I mentioned previously, I personally mostly focus
on Delta and Theta, and I know that the
vast majority of option traders do focus
mostly on Delta and Theta, but I do want to
just kind of cover the basis here and
give you an idea of what these other option Greeks actually allow you to do. So with GAA, what it
does technically is measures the rate and
change of Delta over time, giving you an idea of the
contract's volatility. So, in theory, if
Delta represents a contract's probability of being in the money
at expiration, AMA represents the stability
of that probability. Now, I know that sounds
a little bit confusing, but let's go ahead
and break this down into three sections
of an options chain. We have an in the money call, we have an out the money call, and we have an out
of the money call. So we can see that the Gamma for the in the money contract is going to be very similar to the Gamma of the out
of the money contract, but both of those are very different from the at
the money contract. We have 0.0 049
for in the money, 0.004 for out of the money, and 0.02 for at the money. The reason for this is
because Delta is going to change more for an
at the money contract if it goes deep in the money or deep out of the money
than it would if an option contract that is
out of the money goes to at the money or if it's in the money and goes
to at the money. GAA is just telling us how much we can expect the Delta to move as the price of the
underlying asset moves itself.
11. Theta (Time Decay): All right, moving on to
the third option Greek, this is going to be Theta. Theta, in my opinion, is the
most important option Greek. It's the one that I'm
going to reference the most throughout the
remainder of this course. It's also the Option Greek that we're going to
use the most for several of the trading
strategies that we talk about in the
future of this course. So it's very important
to kind of understand exactly what it means and what it does to an
option contract. So Theta simply put is
the rate of decline in the value of an option due
to the passage of time. In other words,
Theta is time decay. Theta causes options to lose value the closer that
they get to expiration. So if you're someone that
buys option contracts, odds are, you probably hate Theta because at
the end of the day, what it's doing is causing your investment in
that option contract, whether it's a call or put to
lose value as time goes on. So let's say, for
example, that you bought a call option in Apple. And over the
following week after you've just got into
that option contract, Apple starts off
at $120 per share. It spikes up to $130 per share, and then it falls back down to $120 per share at
the end of the week. Now, in theory, your option
contract should be at the exact same value because the underlying asset is also
at the exact same value. But because of Theta,
your option contract would have actually lost value over the span of that week, and you would be at a
loss on that trade. Now, how much Theta
is actually going to affect your
option contract is going to go back to
the expiration date and the strike price
that you choose. And the reason for
this is because all out of the money
options at expiration are going to be 100% worthless and they're
going to expire at $0.00. Obviously, that makes them much, much higher risk than the in
the money contracts because in the money contracts can still have value at expiration. So if we take a look at the profitability charts
that we see down here, we can see two call
options for Apple, both with the exact
same expiration date, the only difference
is going to be the strike price that we chose. Over here on the
left, we have an out of the money contract, and you can see that for
this option contract to be profitable at expiration, we need a much larger
move in Apple to the upside than the in
the money contract, which actually requires very
little move to the upside at all for this option contract to be profitable at expiration. So that is another
reason why out of the money options
are much higher risk aside from the
overall volatility that those contracts experience, the fact that they
end up expiring at $0.00 if they're still out
of the money at expiration, is just another thing to
factor in every single time that you decide to trade
out of the money contract. Now taking things a step further with time decay and with Theta, the closer that a
contract is to expiring, the more it will be
affected by Theta. So this goes back to what
we talked about when we broke down options
into weekly options, monthly options, and leaps. I mentioned that
leaps are going to be the best option
for anyone that's looking to hold onto a position for a
longer period of time, whether that be weeks or months. And one of the big reasons
for that is because when a contract expires
far in the future, over a year, it's going to be
affected by Theta much less than a contract that expires in maybe just
a couple of weeks. In fact, your
contracts are going to be affected most by Theta within the last 45 days of
that option before it expires. You can see that if we take
a look at this graph down here at 30 days
until expiration, option contracts still have 70% of their remaining premium. So that means that the
last 70% of premium, so that means that the last 70% of that premium is going to be burned by Theta in just the last 30 days
of its existence. Now, just like Delta
and just Gama, Theta can also be viewed as a number every time that
you analyze a contract. So if we take a look at
this call option here, this call option will
lose about $0.27 per day just because
of Theta alone. It's currently trading
at about $10.25. And if you were to
buy this contract right now, hold it overnight, and if the underlying
asset was going to be at the exact same price that
it was when you bought it, this contract would be
under $10 in just one day, simply because of Theta alone. So if you're buying and
selling calls and puts you know that you're going
to be affected by Theta one way or another. So I always recommend
to you check theta, make sure that it's not
astronomically high, and that you're not going
to need a huge move in the underlying asset just
to offset the theta burn. But before you lose hope
and you start to lose confidence and your ability to trade options successfully, don't worry because we are
going to talk about a way that we can actually use
Theta in our advantage, and we can actually
let Theta work for us rather than against
us in the future of this course once we
start talking about some of the different
options trading strategies.
12. Vega: Okay, now moving on to the fourth and final
option greek that I want to discuss
here in this course, we're going to talk about Vega. Vega is, again, another one of those option greeks that I personally don't use very often. And really, there is not
much of a need to use this, but it does bring up
something that is very important when it comes
to dealing with options, and that is implied volatility. So anyway, what Vega does is technically measures
the risk of changes in implied volatility or the forward looking
expected volatility of the underlying assets price. So in other words,
what VEGA does is tells us how likely or unlikely the implied volatility of that option contract is
to change in the future. And the reason that this
is important is because implied volatility
often just referred to as the IV can cause a very dramatic change in
the option contracts price. In other words, the
option contracts premium. So if a stock is experiencing very high relative
implied volatility, what that's going
to do is drive up the premiums of the
option contracts. So whether they're calls
or whether they're puts, they're going to rise in
value just because of the implied volatility being a little bit higher
than it usually is.
13. Implied Volatility (IV) & Option Premiums: Okay, so to dive into
implied volatility a little bit further,
just because, again, it can have a big
effect on the way that the option contract is going to trade and the premium of
that option contract, by definition, what implied
volatility is is going to be a forecast and magnitude of future movement in
an underlying asset. So in other words, it's how
much the underlying asset is expected to change based
on many different things. Really, it can be technical
indicators or it can be some kind of planned event that the company is
planning on releasing. Whatever that may
be, it's going to affect the implied volatility, and the implied volatility
is going to have a direct effect on the
premiums of our options. So volatility in
the general market can really be visualized
with the symbol VIX. So if we go ahead and take a look at this chart
here, we have Spy, which again is the
ETF for the S&P 500, and that's going to be the
chart up here on the top. And we're using the VIX as a
comparison here down below, represented by this orange line. So what you can notice
is that every time that there is a big dip or
a big pullback in Spy, at the exact same
time, the VIX or the volatility in the
general market spikes up. And the reason for that really
is because when there is a sell off or when the market
is starting to pull back, that can create a lot
of fear for investors, and fear is what causes the
volatility in the market. People start to panic sell, people start to
cut their losses. And that's why a spike in the volatility and
a spike in the VIX is going to kind of go hand in hand with a pullback
in the general market. Now what this means for
our option contracts is, again, when there is a
big spike in volatility, what that's going to do is drive the prices of our option
contracts higher, making it more difficult for them to actually be profitable, even if the price
of the underlying asset goes in your favor. So at this point, now that we know about the Option Greeks, we know that Theta is already working against us
as time goes on, and we also now
know that if we're buying a high implied
volatility market, we're going to have to deal with those inflated premiums
that are going to kind of come back down to reality once the volatility in the
general market settles down. Now you don't necessarily
have to use the VIX to determine the implied volatility
for the general market. It's just kind of a good way to gauge how much fear
there is in the market, how much volatility
overall there is. But you can get the
implied volatility for any specific symbol that you search in your trading platform. And one thing that you're
definitely going to notice over time is that
implied volatility, along with, again, the
options premium is going to rise significantly
before a planned event. So a great example
of this is when a company plans to
release their earnings, we'll see that the
implied volatility is going to increase higher and higher as the date gets closer and closer to that
earnings report release. And then we'll see
after the earnings are released, the premiums, along with the
implied volatility are going to drop significantly, and that's because the
uncertainty of what the earnings report is going to contain is kind of
then off of the table. So the forward
looking volatility is going to be
significantly lower. Now that big drop in the
implied volatility is often going to be referred
to as a volatility crush. Again, that can have
a massive effect on the prices of our option
contracts that we're trading. So a really great example
of this is we can see if we take a look at
these three screenshots here, we have Navdia stock, and it was up over 5%
on this given day. This was the day that Navdia actually released
their earnings report. So in theory, because
the stock is up 5% on any given normal day, that is going to be a
pretty significant move in the underlying asset, in this case, being Navdia. So we should see that
the call options are going to be
up significantly. Some of them should be up 20%, some of them even 50%, depending on their strike price and their expiration date. But what we see here is
these contracts are down 7%, these are down 18%. These ones are down 34%. These ones even being down 74%, even though the stock is
up over 5% for the day. We also see naturally
that the put options have also lost money because the
stock went against them, and on top of that,
they're dealing with the loss in value because
of implied volatility. So these are down 88%, 70%, 50%. But the reason that I wanted
to show this example is because this is a prime
example of a volatility crush. The premiums of these
contracts likely rose significantly prior to Navida
releasing their earnings. And now that they
released their earnings, implied volatility
drops significantly. So now, even though,
again, the stock is up 5%, these call option
contracts are dealing with that volatility crush and
are actually down when, in theory, they
should technically be up significantly for the day. All right. Now, when it comes
to determining when a stock has either high or low
implied volatility, what's going to be
more important than the implied volatility number itself is actually going to be something known as the IV rank. That is because if you think
about it, penny stocks, for example, are consistently going to have pretty
high implied volatility, and that's just
because penny stocks tend to be much
more volatile than the higher priced
blue chip stocks that have a much lower
implied volatility. So what an IV rank is going
to do is show you what the current implied
volatility is relative to its highest and lowest
point over the past one year. So for example, an IV
rank of 0% means that the implied volatility
is currently at the lowest that it's
been in the past year, whereas an IV rank of 100% means that the
IV is at its highest. So one thing that we can
do to find stocks with either a very high IV rank
or a very low IV rank, because there are benefits to
both of those depending on which strategy you're
going to use, Again, I know I keep saying
this, but we're going to get into that a
little bit more once we start breaking down
these strategies themselves in the
future of this course. But if we go to this
website that we have typed out down below at
the bottom of this screen, what this is going to do is
give us a list of stocks. So make sure that you're
on stocks slash ETFs. And then what we can
do is we can actually click over here on IV Rank, and that's going to arrange
these based on their IV rank. So right now, we have all of the lowest IV ranks at
the top of the page. We can change this
15-30 on the page. And we can also
click on this once again to now have all of the stocks with the highest
implied volatility rank at the top of our screen. And we can just go
through these, you know, seeing some that are 100%, seeing some that are in the
90s, seeing some in the 80s. These are all going
to be stocks with an implied volatility
that is almost at the highest point that it's been over the past one year. And because of that, like
we talked about previously, we know that we want to buy
when the implied volatility is low and then sell when the implied
volatility is higher, since that implied
volatility is going to spike up the premium of
those option contracts. So these stocks
with a high IV rank are going to generally
benefit someone that is selling or writing
the option contract rather than someone
that is buying it. Okay, but if you have
a specific stock that you want to find
the IV rank for, you can also come
to this website, and up here on the
top, you can search, for example, let's
take a look at Apple. Pull up Apple's
information here. And we can see the current
implied volatility is 35.8%. And if you look a
little bit below this, we can see that the
implied volatility rank for Apple is currently 61. So that means that it is a little bit above halfway between the lowest point and
the highest point that the implied volatility has
been over the past year.
14. Buying vs. Selling (Writing) Options: All right. So in this section, we're going to break
down the differences between buying and selling
or in other words, writing an option contract. So just like you can buy and you can short sell in
the stock market, you can also do buying,
of course, with options, or you can do selling, which is also referred to as writing, which is kind of the equivalent to short selling an
option contract. But first, let's go ahead
and focus on simply buying. And when you place in
order to buy a contract, what you're going to
be doing is buying to open and then later
on selling to close. So you can think of it as
buying to open your position and then later on selling those contracts to
close your position. And this is, a regular options
trade in which the goal is to see the options premium rise in order to buy
low and sell high. On the other hand, we
have the opportunity to sell to open and then
later on buy to close. This is known as writing
an action contract. It is the equivalent to short selling and action contract, so the goal is for the premium to actually decrease in value. So just like when you
short sell a stock, the goal in that case is to sell at a high price,
and then later on, the price of the stock hopefully
falls to a lower price, and you're able to buy back
those shares at a lower cost, profiting the difference between where you bought
and where you sold. And really, the same concept
can be applied to options. It is just generally going
to be known as writing an option contract rather than saying that you're short selling the
option contract. So if you think
about it, there are some very big benefits to
actually writing options. For example, writing options
allows us to use time decay or Theta and the IV
crush to our advantage. So like we talked about in the previous sections
of this course, two things that work
against option buyers is time decay and the implied
volatility decreasing, especially after some
kind of big piece of news is put out like
the earnings report, and then the implied
volatility is going to significantly decrease, which is going to decrease the premiums for the
option contracts. However, if you're writing an option contract and the goal is for that option contract
to actually lose value, then time decay and
implied volatility decreasing is actually going to allow you to profit
from the trade. Okay, so let's take a look
at this example that we have down here at the
bottom of the screen. In this example, we have UPRO and we can see over here that the theta for this specific
contract is 0.0 596. If UPRO were to trade about the same price
every single day, we would profit 0.0 596 per contract per day from
writing these put options. No, obviously, that
doesn't sound like much, but you have to remember that everything with options
is multiplied by 100 since it is representing 100 shares of the
underlying asset. So 0.0 596 times 100, and let's just say we're trading ten contracts at a
time rather than just one means that just by writing ten
of these contracts, we would be making $59.60 per day simply from
the time decay itself. That's not even factoring in the price of the stock moving, which ideally, we're going
to time it properly, and we're going to use
technical analysis to get into this trade when
the stock is going to move in our favor
anyway, but again, even if it doesn't, when you're writing
an option contract, a huge benefit is
that now we have the time decay or the Theta
working to our advantage. So if we take a look at
a profitability chart here of writing an
option contract, we are looking at UPRO. The current price at the time of this screenshot is $35.90. And the strike price
of the option contract that we're writing is $34, so it's almost $2 below the current price of
the underlying asset. Now, we can see that if we
take a look here at the chart, the current price is
right here at this line. So if it were to trade at this exact same price all
the way up until expiration, you can see that we
go from, of course, being break even when we
first get into the trade to being up over 6% at the
time of the expiration, even though the underlying asset didn't go anywhere
within that time frame, and again, that is just
going to be due to the time decay
working in our favor. And it also is going to
benefit us to the downside. If the trade moves
against us a little bit within the time frame
before the expiration date, that's not going to
change the fact that time decay is working
in our favor still. So it's going to give
us plenty of cushion to the downside to still make
this a profitable trade, even if we didn't necessarily
get the timing right.
15. Contract Exercising & Assignment: Alright, now, up until
this point in the course, we have just been
thinking of option contracts as something that you would trade very similarly to the way that you
would trade a stock. You're looking to
buy these contracts at a low price and
then sell them at a high price in order to profit the difference between where you bought and where you sold. Now, I say this because there is a complete different layer to actually trading options if you choose to go that route, and this is going to include
exercising and assignment, which is what we're
going to talk about here in this
section of the course. Now, again, if you want to,
you can focus on trading these contracts just the same
way that you would a stock, but it is very
important to know about contract exercising and
contract assignment, especially for some of the strategies that
we're going to break down here in just a few
sections later in this course. So anyway, with
all of that being said, first and foremost, what exactly does it mean to
exercise an option contract? Well exercising is going to be putting into effect
your right to buy or sell the underlying asset at your selected strike price. By default, any option contract that is in the money
at the time of the expiration date is automatically going
to be exercised after the market closed. However, if you choose to do so for one reason or another, you can choose to
exercise your contract earlier before the expiration
date actually happens. Okay, so what exactly
does this mean? Let's go ahead and
take an example here, and let's say that if
a trader decided to exercise one spy call with
a strike price of $350, they would then own 100
shares of Spy at $350. So, again, if you're
exercising that right to buy or sell at your
predefined strike price, once you exercise that contract, you're going to then be able
to buy at that strike price, regardless of what
the underlying price of the stock may be. So if Spy at the time, in this example was
trading at $360 per share and you decided to
exercise your call option, even though Spy is
trading at 360, you would still be able to
exercise your contract and own Spy at $350 per share. It is very important to
note that if you are going to take this route
of trading options, you're going to look
into exercising and owning the actual
shares of the stock itself, as opposed to just
owning the contracts. It is generally going to require you to have more money
in your trading account, because, of course, in order
to own 100 shares of Spy, after you exercise your call
option in this example, that would require
you to have about $35,000 in your account in
order to buy those 100 shares. Okay, now, on the other hand, because we know
that call options are what we would buy if we want the underlying stock or the underlying asset
to rise in value, if we were to buy a put option, the opposite is
going to be true. We want the price of
the underlying asset to actually fall down in order for our
option contracts to gain value and make us a profit. So with that being
said, if you were to exercise a put option, instead of actually buying
the underlying stock, what's going to happen
when you exercise your put option is it's going
to allow you to either, A, sell 100 shares of
the underlying stock if you already own 100 shares
of the underlying stock, or if you don't own any shares
of the underlying stock, exercising that put option
is going to allow you to short sell the stock at whatever price your
selected strike price is. Now, as far as your
break even price goes, you may think that if you are
buying at $350 per share, your break even is going
to be $350 per share, but you have to factor in
the premium that you spent in order to actually buy that contract in
the first place. So your break even price
is going to be calculated by adding the strike price and the option
premium for calls, and on the other hand,
for put options, you're going to subtract the option premium
from the strike price. So for example, if you were to exercise one call option with a $350 strike price that you
bought for $4.50 in premium, that means that your
break even price on that trade is going
to be $354.50. Okay, so all of this
is going to really start to come into
play when we start talking about covered calls and cash secured puts and even
things like Iron condors, these different trading
strategies with options that involve contract exercising
and contract assignment, a little bit more frequently
than we would focus on as someone that is just trading a regular
call or regular put. I will say that,
generally speaking, exercising an option contract is rarely the better option, and you're usually
better off by simply selling your calls or
selling your puts, especially, of
course, if they are already at a decent profit. One exception to that really
may be if the stock that you're trading options for pays a higher than
average dividend, you can choose to
exercise beforehand in order to actually own
shares of the stock. So that way, you're
able to collect that dividend payment,
and then later on, you could sell your
shares, and you would no longer obviously own
any option contracts. You would no longer
own any shares, but you would have been able to collect that dividend payment, and hopefully within
the time frame that you owned the stock, you actually were able to profit from the stock rising
in value as well. Okay, so now that
we know the basics about contract exercising, the other side of the
spectrum is going to be what is known
as assignment. So when an option buyer
exercises their contracts, the corresponding seller or the corresponding writer is required to fulfill
the buyer's rights. So in other words,
let's go ahead and take this diagram here that
we're going to build. On the left side,
we have our buyer and on the right side,
we have our seller. So if the buyer decides to buy $350 strike spy call, obviously, that means that someone on the other side of that
trade is going to sell one $350 strike spy call. Let's go ahead and say
that the buyer then decides to exercise
their call option. For one reason or another, they decide that they
would rather own 100 shares of Spy at $350 as opposed to just
owning this call option. Because of that, the seller
on the other side of that trade is then
again going to be required to fulfill
the buyer's right to exercise this call option
and to buy shares at $350. So the seller is then
going to be assigned. Now we're going to have a
buyer that owns 100 shares of Spy at $350 per share. And once the seller is assigned, they either had to
sell 100 shares of Spy if they already
owned 100 shares of Spy, or they're now going to
be short 100 shares of Spy at $350 per share. Okay, so it's important
to realize that if you're someone that is selling or
writing option contracts, you really do have no say in when your contracts
are assigned, and that can leave you short selling a stock at
a certain price when you really don't
want to be short on that stock at that
certain price. Generally speaking, if you're selling out of the
money options, whether that be a call
option or a put option, there's really not going
to be any incentive for the buyer of that option to
exercise their contract. So that is going to
be the safer route for selling contracts, especially when you think
about the fact that all contracts that
are in the money at the time of their expiration are automatically
going to be exercised, which means that for a seller that is still in that trade, holding onto those in
the money contracts is automatically going
to have shares assigned at the time
of the expiration. Now, very quickly,
just to make sure you fully understand
this process, let's go ahead and break
down how this works with a put option as opposed
to a call option. We have someone that is buying a $400 strike spy
put in this case. Obviously, there
has to be someone else on the other
side of that trade. So we have a seller
that is going to sell one $400 strike spy Put. The buyer of the contract decides to exercise
their put option. After that happens, the seller
is going to be assigned, and we now have a buyer
that is going to be short, 100 shares of Spy
at $400 per share, and because of that, the
seller of that contract is going to be forced to take
the other side of the trade, meaning that they
are now going to own 100 shares of Spy
at $400 per share.
16. Covered Calls: Alright, so now that we've
covered all of the basics, it's time to start diving into some options trading
strategies themselves. Of course, I just
want to reiterate, if you are someone
that just wants to buy and sell options contracts, the way that you
would buy and sell stocks, you can do just that. But there are tons of different options trading strategies
that you can use to kind of give
yourself a little bit of a better edge in
the options market. And the first strategy that
I want to talk about is going to be known as the
covered call strategy. This is a really nice strategy because it is very low risk, and if you're someone
that already is invested into the stock market, this can be a nice
way to collect some extra money, in a way, there's a lot of similarities to the covered call
strategy and earning income from the strategy to dividend payments that you have for
your stock investments. But anyway, what the
covered call strategy is is going to be writing
options or in other words, selling options
against an asset that you already owned in
order to collect premium. Now, primarily,
this is done with long term investments
that are not expected to move much
in the near term. So if you're invested in
some stock or some asset, and you believe that
that asset is going to trade sideways or maybe pull back a little bit
in the near term, but you don't want to sell
out of your position and you want to hang onto your shares for a longer term investment, then what you can
do is you can use the covered call strategy to actually allow you to make
money in the near term, even while the stock
is trading sideways or even while the stock is
going down a little bit. So how this process works is by selling an out
of the money call, you're able to collect the
entire call option premium if those call options remain out of the money
until expiration. And again, that's
just because we know that all
options that are out of the money at expiration
expire completely worthless. So if you're selling
these call options, the goal is actually
going to be for them to become worthless at
expiration, so that way, there is no expectation for you to buy to close out
of that position, and you're able to, again, collect 100% of the
premium that you sold. Now, if they become
in the money, they will be exercised
and you will be required to sell the shares
that you already own. And that's why this is
such a low risk strategy because you're already being
invested into the stock. And really, the
worst case scenario here is that your
calls go in the money, they get exercised, and
then you're no longer going to be invested in the
underlying stock. But again, because you
already own the shares, covered calls do not add any additional risk
to your investment, so they can be executed with very little
additional capital. All right, so let's
just break down an example really quickly
just to make sure that you fully understand how
covered calls work and how you can actually earn
income with covered calls. And to do that, let's
take an example of an investor owning 500 shares of the symbol UPRO they believe that UPRO for
one reason or another, is going to pull back
in the near future. But because maybe they have
a good average price on their investment and they
believe in it long term, they don't want to sell
out of their position what they can do is take
advantage of covered calls to allow them to make some
money in the near future while UPRO pools back or trades sideways without having
to sell their shares. So that way, they can
still take advantage of it in the long term when
it does continue to go up. So what they do
is they decide to sell five covered
calls that expire in one month for $1.50
in premium each. Now again, remember that when we're dealing with
option contracts, each contract
represents 100 shares of the underlying asset. So really, what this means
is they're collecting $150 per contract
that they sell. In other words, they're
going to collect $750 in premium, 150 times five, and they're still
going to be able to keep their 500 shares as long as those contracts remain out of the money
until expiration. Now, if they do go in the money, what's going to
happen is they're still going to be
able to keep that $750 in premium that they sold when they
open this position. But because their
option contracts are going to be exercised, they're going to be
required to sell their 500 shares if their
contracts go in the money. And really, that is the one and only downside of covered calls. Let's say that, for example, you bought into UPRO
at $30 per share, and you decided to sell covered
calls at $35 per share. But within the time frame
that you had this position, let's say UPRO spiked
up to $40 per share, the covered calls
that you sold at a $35 strike price
would be in the money. So you would be required to sell your shares at $35 per share, even though the price is
all the way up to 40. So it can limit your
upside potential, and that's why it's
important to mostly focus on this strategy in times of
uncertainty in the market. If there is a very clear bullish uptrend in the stock market, and if the stock
that you're invested in has a ton of upward momentum, there's no reason to really sell any covered calls
because there's going to be a much higher chance that those covered calls are
going to go in the money, and that's going to force you to sell out
of your position. Now, one very important thing to remember with covered calls is that at any time you can buy to close your
covered call position, if you would rather
take a small loss than have to sell your shares. So going back to this example
that we just talked about, if we sold our covered calls at $1.50 each for a total
premium of $750, and let's just say
that a few days later, UPRO decided to spike
up a little bit, and maybe it's starting
to get a little bit close to our strike price, and we're worried that our calls are going to go in the money. And now at that point,
these are going to have premium of $2, for example, we can then buy to close
these calls at $2, which is going to cost
us a total of $1,000. So if you subtract the $750
that we already received in premium from the
$1,000 that it's going to cost us to close
out of this position, that would mean that
we would have a total loss of just $250, which depending on the situation and the stock that
you're invested in, that may be the
right thing to do, rather than having to sell your shares when your
contracts go in the money. Okay, now, really the
most important aspect of covered calls is going to be
the covered call selection. Even if you already
own shares of a stock, you don't want to
just sell any call in order to collect
that premium. You have to be very
specific about the call that you select for
your covered calls. So when it comes to choosing an expiration date
for covered calls, I choose anywhere 30-45
days until expiration. And the reason for that is going back to what we talked about when we were going over
the Option Greeks, we know that Theta, which represents time decay, is going to have the
biggest effect on our options contracts
when there is about 30 to 45 days
until they expire. And because with covered calls, we want them to lose value and we want them to go to zero, it makes sense for
us to look to sell these covered calls within
that same time frame, so that way we can really have time decay working in
our favor the most. Okay, so the next thing that
we have to worry about, of course, is going to
be the strike price. And one way to go about this is to use some basic
technical analysis. So, for example, if the stock
that you're trying to use the covered call strategy on has a very clear level
of resistance at, let's say, $50 per
share, for example, and you believe that the
price of the stock is going to stay below that
level of resistance, you can choose a strike price that is just above resistance in order to hopefully have
them expire out of the money. Now, the way that I personally do it and the way
that I would probably recommend the most is going
to be to use the Delta. So very quickly jumping back to this previous
section here when we talked
about Delta and we were talking about
the option creeks, we said that Delta can
be used to determine an option's likelihood of being in the money
at expiration, which is commonly referred to as the probability of profit. So in other words, an out of
the money option with 0.20 Delta has a 20% chance of being in the
money at expiration, while a deep in the
money option with 0.90 Delta has a 90% chance of being in the
money at expiration. Now because of that, when we're dealing
with covered calls, we want our options
to, of course, have the smallest
chance of being in the money at expiration,
so that way, we can have them expire
worthless and we'll be able to collect 100% of the
premium that we sold. So, personally, I like
to look for a delta between 0.20 and 0.40, which means that, in theory, they're really only going
to have a 20 to 40% chance of being in the
money at expiration. Um, and obviously, you
can go much, much lower. You can go all the way
down to a Delta of maybe 0.05 or 0.10. And although those
are going to give you a much higher chance of collecting the entire
options premium, because they're so
far out of the money, they are going to have much
smaller premiums in general, so you're not going
to be able to make as much on those covered calls. And on the other side
of the spectrum, if you were to sell, you know, options with a
Delta of 50 or 60, those may have a smaller chance of expiring out of the money, but they are going to
have higher premiums. So if you're right
about that trade and you're right
about that selection, you would be able
to make more in option premium from
those covered calls. But anyway, for me personally, the sweet spot is looking for a delta between 0.20 and 0.40. And again, we want about 30
to 45 days until expiration. And those are the two
things that I look for when it comes to selling covered calls on any
positions that I already own.
17. Cash Secured Puts: All right. Now the next
options trading strategy that I want to cover that
essentially goes hand in hand with the covered call strategy that
we talked about previously is going to be what are known as
cache secured puts. Now in the following section, we're going to talk about
the wheel strategy, which is going to involve both cache secured puts
as well as covered calls. But in order to get into that, let's first talk about what
a cache secured put is. So this strategy is
going to involve writing a put option to collect premium while setting
aside capital to buy the shares if they
happen to be assigned. So the same way that we
talked about selling out of the money calls with the
covered call strategy, we're looking to sell
out of the money puts in order to profit from
these cash secured puts. The only difference
is really is that we are using now puts
rather than calls, and we also do not have a
long position that is going to cover us in the case that
our options are exercised, and that's why it's
important for us to have this money set aside, in case the shares are
going to be assigned. That way we make sure
that we can afford to actually buy those shares
and this is really important because writing
options that you cannot afford to purchase is known
as selling naked options, and this is going to
carry much higher risk. And generally speaking,
it's not even going to be permitted
by your broker. So if you don't have the
money to cover that option, in the case that it is exercise, this is probably not going to be the strategy for
you at the moment. And also, your broker most likely will not even
allow you to do it. Alright. Now, with all
of that being said, I wanted to jump
back over here to the options profit
calculator just to show you a quick example of
a cash secured put. So we're going to
go ahead and select the cash secured put strategy. Now, when it comes
to this strategy, it can be very expensive to buy 100 shares of some of the
bigger stocks like Apple, for example, or Spy, the ETF for the S&P 500, Amazon, all of these are
very high priced stocks. So in order for
you to be able to buy 100 shares of the stock, it's going to be pretty
capital intensive. So for most people
that are just getting started and they don't have a ton of money to get
into this strategy, I recommend looking for
lower priced stocks, things like UPRO, for example, which is what we'll use
here for this example, UPRO is the three times
leveraged version of Spy, but it is significantly cheaper. It's currently trading at
just below $38 per share. So when it comes
to this strategy, just like we talked about with
the covered call strategy, what we want to do is collect as much premium as
we possibly can. So we want to sell these
out of the money puts, and we want them to
decay down to zero, so that way we don't
even have to worry about buying to
close that position, and we can simply collect 100% of the premium
that we sold. In other words,
because we talked about time decay and
Theta being most effective in the last 30 to
45 days of an option's life, that is the timespan
that we want to stick to when it comes to
cash secured puts. So the current date
here is July 18, so we're going to look at
least a month in advance. Let's go ahead and
go with August 19, which is just over
one month from now. Again, going back to
the covered calls, we're going to look for
a strike price with a delta between 0.2 and 0.4. 0.2 or lower is going to give us the higher percentage chance of this working
out in our favor, whereas 0.4 or higher
is going to give us more premium that we're going to collect if the trade
works out in our favor. Now the options
profit calculator here does not show
us the option Greek, so we can't see
the Delta on here. But when you're doing
this, you can just pull them up in your
brokerage account, if you're using Robin Hood
or Etrade or TDeritrad, whatever it may be,
they're going to be able to show you the option Greeks. And I have this pulled up
right now on my phone, and we can see that
the $33 strike for this expiration
date, for example, has a Delta of 23, which is going to be right in
the lower end of our range, but it's going to give
us really good odds of this working
out in our favor. So we're going to
go ahead and select that $33 strike price, and we're going to go ahead
and click on Calculate. So we can see our
profitability chart down here and we can see our
estimated returns for this. We have a probability
of profit being 81.8%. We have a maximum
risk of $3,167. All that means is
that if this were to go in the money and
we were assigned shares, it would cost us $3,167
to buy those 100 shares, and it's the maximum
risk because if UPRO were to go down to $0.00, we would, of course, lose
100% of that investment. But obviously,
we're not going to be using this
strategy on a stock that has the potential really
of going down to $0.00. So you can kind of just ignore
that maximum risk there. And we want to look here
at the maximum return now, which is $133. And that is because
the premium for this contract is $1.33, which, of course, you have
to multiply by 100 because each contract
represents 100 shares. So in other words, even though the current price
of UPRO is $37.77, as long as within the
next month it stays above our strike price
of $33 per share, we're going to be able to
make $133 on this trade. Now, if you have a little bit
more money in your account, you can use five contracts, for example, and at that point, you would be making $665 as long as U PRO stayed
above $33 per share. So you can see that this is a very high probability trade, and it also is going to
give you a nice return on your investment that
you're able to pretty consistently make
on a monthly basis. Now obviously, though,
81% is not 100%, so there are going to be times where things kind of go wrong, and you may end up having
to be assigned shares, and that is again
why it's important to only do this strategy on a stock that you're
comfortable being invested in in case those
shares are assigned. Now to take things
a step further, there are going
to be times still where you're not really
comfortable being invested in the stock at the certain strike price
that you have selected. So that's where rolling is
going to come into play. When you're rolling
a cash secured put, it's a strategy of extending your position to a
further expiration date, as well as a different
strike price to prevent your puts
from going in the money. This can, of course, help you
from being assigned shares, and it can also reduce your cost basis for the stock if you do
end up being assigned. That way, you're able to
buy in at a lower price. So let's kind of break down
exactly how this works. Let's say that you have an existing position
here that has ten days until it expires
with a $50 strike price. Now, when you
originally opened this, let's say that you
received $1.50 per contract for a total
of $150 in premium. Now, in order for you to
roll this position to a different expiration date
and a different strike price, you're going to be
required to buy to close this position,
and in doing so, let's just say for this example
that it costs you $180, meaning that with the $150
that you received initially, you're going to be
taking a loss of $30 to close this position. However, when you're
rolling position, you're going to simultaneously
be opening a new position, again, that is further away and that has a different
strike price. So let's say that we go back to our 30 to 45 days until
expiration range, we choose a $45 strike put
with 30 days until expiration, and in doing so, we
receive $190 in premium. In this example, by
rolling this position, the trader not only added
20 days to their expiration in order to hopefully
give them time for their position to
work in their favor, but they were also
able to receive ten more dollar in premium because they're spending $180
here to close the initial. However, they're receiving $190 to open this new road position. And on top of that,
they're reducing their potential cost basis
from $50 per share to $45 per share in the case that their options end up being exercised and their
assigned shares of stock. So aside from being in
the trade a little bit longer than you may have
initially anticipated, there really are no
downsides here to rolling a position if it ends up getting close to
being in the money. Now, one very important
thing to keep in mind about rolling a position is that there is a
difference between a net debit and a net credit. When you're rolling position, it's very important that
you're receiving a net credit, which is going to
add to the premium that you're receiving
overall on the trade, and this is going to differ
from a net debit which is going to actually cost you
money to roll that position. Now, every once in a while, depending on your cost
basis and depending how far in the money
your contracts are, there may be a time
where it may be worthwhile for you to
actually spend money. In other words, use a net debit in order to roll your position. But I would say probably
95% of the time, it's very important
that you're not only moving your option to a
further expiration date, but that you're also
getting more premium collected when you're
rolling that position. So if we go back to
this example here, because it's costing us $180 to close our initial position, it would not make much
sense for us to roll this position if we're only
going to receive $170, for example, in premium, when we start to sell
this new put option. If the strike price that
we want to choose is only going to give us
$170 for this example, then what we can do
is we can go maybe 45 days in the future
instead of 30 or even 60 days in the
future instead of 30 because further away
expiration dates are going to have
higher premiums, and that way we would
be able to still sell our $45 strike price. But in doing so, we
would be able to receive a net credit rather
than give a net debit. Okay, but with all of that
being said, this strategy, the cash secured put
strategy is going to go hand in hand with the
covered call strategy. And in the next section when we talk about the wheel strategy, you're going to learn how
you compare these two together to essentially
set yourself up to receive a
consistent income stream from the options market.
18. The Wheel Strategy: All right, now moving on
to the wheel strategy, this is going to be
a combination of both the cash secured
put strategy and the covered call
strategy that we talked about in the previous few
sections of this course. So if you're confused on
one of those strategies, I do recommend going back and rewashing those sections
because, again, this really is just an options
income producing strategy that is just going to
combine those two. Okay, so to break down really
how this works, first, what we're going to
do is we're going to start off with the
cash secured puts. This way, by doing this, you
don't have to already own shares of the stock in order
to sell those covered calls. You can simply start off by
selling cash secured puts. Again, the goal of this
is for those options that you're selling to
expire out of the money. So that way, you're
able to collect 100% of the premium
that you sold. And really the strategy
is going to be for you to continuously over and over
sell these cash secured puts. As long as you're able
to collect that premium and they continue to
expire out of the money, you're just going to continue to sell these cash secured puts. But because that doesn't
happen 100% of the time, there are going
to be times where your strike prices
go in the money. And if that's the case, when
they expire in the money, you are then going to
be assigned shares, which means that you're
going to have to buy 100 shares per contract at the strike price
of your put option. So in that case, let's say that our options then go in the money, we
get assigned shares. We are now going to be
shareholders of the stock. So what we can do is we can flip over to covered calls now, and we can start to
sell our covered calls. At this point, it
is important to remember that it is
going to be best if you're only doing this
strategy with a stock or with an ETF that you're comfortable owning long term because if you are going to get
assigned shares, you can end up owning
shares of the stock for multiple weeks or even
multiple months at a time. And if that's the
case, you want to make sure that it
is a stock with a reputable underlying company that you are comfortable holding for a longer period of time. Okay, but once you are a
shareholder and you're starting to sell these
covered calls, again, you're just going to repeat
that process over and over, selling those covered calls, collecting that
premium, as long as those calls continue to
expire out of the money. However, if they
go in the money, what's going to happen is they
are going to be assigned, and that means that you're
going to be forced to sell the shares that you own at
your call strike price, which is really going to
take you back to step one, where you're now out
of your position, you don't own any shares, and you're able
to start again by going back to selling
cash secured puts. Okay, so that is the basis
of how this strategy works. You're going to again,
just be combining these cash secured puts
in these covered calls. And if it's done right
and you continue to use the proper expiration dates and the proper strike prices that we talked about in
the previous sections, we want to look for 30 to
45 days until expiration, and we want to look
for a delta 20-40. Combining that information
with this strategy can be a really great way
for you to earn actual income from
the options market. Okay, now, I wanted
to jump over here to the options profit
calculator, once again, to go over an example here
because at this point, you may be starting
to think that this strategy sounds a little
bit too good to be true. So I do just want to
make sure that you understand the risk of
this wheel strategy. So in order to do that,
let's go ahead and take an example here with UPRO. And let's just say
that a few weeks ago, we decided to write a $48 strike put expiring August 26 for UPRO. And let's just say that
shortly after we opened this position, UPRO
fell significantly, and now our put option
is going to be deep in the money because our
current price is at $39.80, and our strike price is
all the way up at $48. So it's over $8 per
share in the money, which means that
if it stays down at this price until expiration, we are going to be assigned
shares at $48 per share, and we could be
looking at an $8 per share loss on that position that we're going to be assigned. Now, first and foremost,
I want to remind you that you can always look to
roll your position, like we talked about in
the previous section when we were going
over cash secure puts. If you look to roll
your contracts, once the current
price of the stock starts to get very close
to your strike price, that can help you to
get your strike price down lower and lower. So that way, if you end
up being assigned anyway, it's going to be
at a lower price. Okay. But regardless, let's just say that we are assigned
in this example, so that way we can understand
the risk of this strategy. So when this becomes an
issue is then once we're assigned these shares
at $48 per share, if we're going with
the wheel strategy, the next step is going to
be for us to start to sell these covered calls in order to again start
collecting that premium. So if we're going
to do that, we go ahead and take a look at the
options chain over here, you have to keep in mind
that if you start to sell these covered calls
and your covered calls doesn't go in the money, you're going to be forced to
sell at your strike price. So if we are owning the
shares at $48 per share, we really want to sell
our shares then at $48 per share or higher, so that way we're not taking
a loss on this position. And like we see in this example, $48 is pretty far out of
the money for the calls. And because of
that, the premiums on these contracts
are pretty small. So if we're going to start selling these
covered calls then, we're not going to be able
to make a ton of money from the premium as long as they
remain far out of the money, but if we start to
try selling these closer to the money
strike prices, that's where we
then have to worry about our calls
going in the money and us being forced to sell at a lower price than
we own the stock at. So really, that is the
risk to the strategy, and that's why I prefer to do everything I can
to prevent myself from being assigned shares at a price that I'm not comfortable
owning the stock at. Most of the time, I will roll my positions for weeks or
even months at a time. So that way, if I
am assigned shares, it's not going to be at a very far out of the
money strike price. So that way I can still
make a decent amount of money on the covered
calls that I'm selling. But with that being
said, this is still a much lower risk strategy than most people do when it comes to options trading, and
it is one of the best, if not the best way
to produce income in the options market
on a weekly or even a monthly basis depending
on your expiration dates. So I do still highly
recommend this strategy, and I do still highly
recommend just doing cash secured puts or
covered calls on their own, if you choose to go that route, as opposed to
combining the two of them in order to
use the W strategy.
19. Option Spreads: Okay, now in this
section of the course, we're going to move
on to option spreads. Option spreads are a
little bit different because this is
going to be the use of two or more options to minimize risk in
the options market. So in other words,
instead of just buying a call when you believe
the underlying asset is going to go up
or a put when you believe the underlying
asset is going to go down, you can use option spreads to kind of help you
reduce your risk and still profit from these
bullish or bearish moves in the underlying asset. And this is going to be
done by simultaneously purchasing one contract
while writing another. Now there are many
different ways to take on option spreads, but for the purpose
of this course, being that it is
beginner friendly, and we're going to mostly
focus on the basics here, we're going to stick to what is known as a boll call spread. A bull call spread
is going to be a bullish option spread
strategy to profit from an upward move in the
underlying asset with lower risk than you
would have when you buy a call on a down. And really, that is the purpose of using these option spreads. They can help you to reduce
your risk and help you to more consistently profit
from the options market. Okay. Now with this
pull call strategy, the way that this is done is by purchasing a call option
while simultaneously writing a call option with the same expiration date but
at a higher strike price. Now if we go back over to the options profit calculator here to break this
down even further, we're going to select
on a call spread, and let's just take
for this example, spy. Now, as you can see with
this callpa calculator, we have a long call and
we have a short call, and we're going to select
first off our long call, let's just say that
for whatever reason, we decide that we want to go
about a month in the future. Today's current
date is August 1, so let's go ahead and select an expiration date
of September 2. And now we have to select
the strike price for the option contract that
we're going to buy. In order to do this, what
you're going to want to do is use some kind of
technical analysis. So the current price of
Spy here is $412.25. And what we want to do
is look for some kind of support, resistance,
trend lines, anything that gives
us an idea of a price that we believe Spy is going to stay above within the time frame
of our option spread. So if we decide that
there is a level of support maybe at 4:05, and we believe that for sure, we think Spy is going to stay above $400 per share
within the next month, then what we can do
is we can select 400 as the strike price for the call option that
we're going to buy. Now on the other side
of the spectrum, we want to be a little
bit ambitious here with the price that we select
for the short call, but we also want
to be realistic. We can see that by default, it's going to put us at the
exact same expiration date. And if we scroll down
here to the call options, we can see highlighted here is the call option
that we bought, which is obviously half
of this action spread, and the other half
is going to be the call option that
we decide to sell. Now, this one we
generally are going to want to select an out of the money call option
that we believe the price of the
underlying asset, in this case, being spy can rise up to within
the next month. So let's go ahead
for this example, and let's just say
$420 is going to be the strike price that we choose for the option contract
that we write. Now our spread or our net debit here is going to be 12 32, which means that our entry cost for this trade is
going to be $1,232, and that is also, of course, the maximum that we can lose, which is where the strike price is going to kind
of come into play. You can see our maximum
loss here is that 12 32 that it costs
to open the trade, and that's going to
happen at $400 or less. So if Spy falls below the price of the call
option that we bought, which is $400 and stays below that price
until expiration, we would then lose 100% of
the cost to open this trade, which again is $1,232. So that's why when
you're selecting that call option that you buy, it is very important
to make sure that you're selecting a
price that you believe the underlying asset
is going to be above at expiration just to help minimize your risk and
make sure that you're not going to lose the entirety
of your investment. And on the other side
of the spectrum, we can see the maximum
return here is $768, which is 62.3% of the
entry cost for this trade. And that's going to
happen if the price of the underlying is at $420 per share or higher
at the time of expiration. So that is, of course, the strike price of the
option that we sold. And that is going to be the best case scenario for this trade. Now, if we scroll down here, we can see the profitability chart, and we can see that
ADA is about 50 50. It's about 50%
profit and 50% loss, which is really one of
the big benefits of using this bowl call strategy as opposed to just buying a
call option on its own. Because if we go up here
and let's just say that we select a long call, again, for spy and we'll select the same expiration date of September 2 and select an
at the money call option, we can see that the entry cost here is a little over $1,000. But if we scroll down to
the profitability chart, in this case, we can see that it is a lot more red
than it is green. And that's because, again,
time decay is going to eat away at the premium
of this call option, and it's going to
require you to have a bigger move in the
underlying asset to the upside just in order
for that trade to not be at a loss when the
expiration date rolls around. So that's why these
option spreads can be a much better way to take on the options market and minimize your
risk while doing so, especially if you're
someone that is going to be swing
trading options, maybe holding onto
them for a few days or a few weeks at a time. In that case, you're
really going to be putting yourself at
a position where time decay is going to play a big role in the
profitability of that trade. So you would be much better
off by using an option spread as opposed to just buying a call or
put because again, those option spreads
are going to be much less affected by things
like time decay.
20. Iron Condors: Okay, now that we've
covered option spreads, the Iron condor is the next trading strategy
that I want to talk about, and really what this
is is going to be just a more advanced
pairing of option spreads. Now, by definition, an
iron condor is going to be an options trading strategy consisting of two call options. One of those is going to be long and the other one is
going to be short, as well as to put options, which is also going to
be a long and a short. All of these are going to have
the same expiration date, and all of these
are going to have different strike prices. And the goal is for the price
of the underlying asset to remain within the middle of these strike prices
until expiration. So in other words,
this is going to be the strategy that you
would want to take advantage of in a low volatility
environment when you expect the price of the
underlying asset to kind of trade within
a small price range. So maybe if you
find a stock that is trading within a
small price range, or maybe it's
trending very slowly either to the upside
or to the downside, and maybe you think
that you wouldn't be able to profit much from a bull call spread or from any other options
trading strategy. Now what you can
do is you can use the Iron condor to again, take advantage of that low
volatility and hopefully have the price remain within your strike prices until
the expiration date. Now when it comes to constructing
an iron condor, first, what we're going to
do is we're going to buy one out of the money put option with a strike
price that is below the current price
of the underlying asset. What this is going to do is protect our position
in case there happens to be a
large downside move while we still have
this position open. The next step is going to be to sell or to write an
out of the money put option with a strike
price that is closer to the current price
of the underlying asset. Following that, we're
going to sell one out of the money call option
with a strike price that is above the current
price of the underlying asset. And last but not least, we're
going to buy one out of the money call option with a strike price that is further
above the current price. This is then going to
protect our position in case there happens to
be a large upside move. And that is a really nice
thing about ron condors, even though we want the price of the stock or the
underlying asset to trade within a small
price range and to not have a big move to the
upside or to the downside. Obviously, things don't
always go 100% as planned. So having a long put
option as well as a long call option
to protect us from either an upside or downside move is what makes this such a great strategy and is what is going to limit our
risk in this trade. Okay, now, I know this sounds
a little bit confusing, but if you just think of this
as having two long options, one being a put below
the current price, and one being a call
above the current price, and in between those
two long options, you have two short options, with the goal being for
the price to ideally stay within those two short options within the middle here. That is essentially
all an iron condor is. Okay, so like the
other examples, I want to quickly break
down what an iron condor is going to look like here on the options profit calculator. So what we're going to do
is select iron condor. And I'm going to use
the example of SOXL. SOXL is a three
times leveraged ETF, which means that it is going to have a little bit
more volatility. But because of that,
the premiums for the octen contracts are
going to be higher, so there's going to be a
better potential profit if the trade happens
to work in our favor. Now remember what
we're doing with this iron condor is we're going
to have two long options, one being a long put
below the current price, and then we're going to
have a long call option that is above the current price. And between those
two long options, we're going to have
two short options that we want the price of the
stock to remain between. So if we select our long put, we're going to stick to the basics of what we
talked about when we were talking
about covered calls and cash secured puts. We generally want to look for 30 to 45 days until expiration, just so that way we can
really take advantage of the time decay that is
going to work in our favor. So with the current
date being August 8, I'm going to go a
little bit into September here and
select September 16, and then we're going to
select our put option, which is out of the money, below the current price
of the underlying asset. And let's just go ahead
and say that we want to select a strike price of $16. The next step is going to
be to short sell or to write a put option that is going to be still
out of the money, but is going to be a little bit closer to being
the current price. So we'll select $17. And the next step,
we want to go ahead then and buy the call option
that is going to be the furthest out of the money
to protect ourselves from any big upside move
that happens in this stock. So let's go ahead and select $24 and then the short option that we're going
to write has to, of course, be between the call options that we are buying. So it has to be closer to the current price of
the underlying asset. So we'll select $23. Now, in doing this,
once we calculate, we can see that
our profitability here is going to
be in the middle. And that is, again,
because we want the price of the underlying
asset to stay in the middle and to kind of trade sideways all the way up
until our expiration date. If we go ahead and expand
this a little bit further, let's go down to $14 and up to $26 and then
hit Calculate. We can see that the
loss in this trade is going to come into
play when the price of the underlying asset is going to either go above the price of the call option that we bought or below the price of the
put option that we bought. We're still going
to be limited to a maximum risk here in
this example of just $40. But it is important to
know that if the price does break out of the
range of your Iron condor, you are going to be
at risk of taking whatever your maximum
loss on the trade may be. Now, if you decided that maybe this is a little bit
too high risk for you and you wanted to have
a little bit more wiggle room, in this case, we can see that our
maximum return of $60 is going to be as long as the price remains within the
two short options, we have our short strike
price here of $17, and we have our other
short strike price of $23. So as long as the price
is between $17.20 $3, at the time of expiration, you would make the maximum
return here of $60. But again, if you
wanted this to be a little bit higher
probability and you weren't feeling very
comfortable about that, all you would have
to do is space out the legs of your Iron condor
a little bit further, so that way you
have a larger range for the underlying asset to stay between until your
expiration date in order for you to still
make the maximum return. So let's go ahead and move
these put options down a little bit to give you an idea of what
that may look like. We'll go ahead and move the
long put option down to 14 and we'll move the short
put option down to 15. And then we'll move the long
call option from 24 up to 26 and the short call
option from 23 up to 25. So now our range is going
to be all the way from $15 to $25 in order for us
to make that maximum return, and our maximum loss is going
to be if the price falls below $14 or rises above $26. Now if we take a look at
our profitability chart, you can see that our
maximum return has gone down from $60 to $41. So it is, of course, going to be reduced because we do now have a much better percentage chance of this being a
profitable trade. And again, you can see
that our maximum loss here is going to come
into play once the price of the underlying asset moves outside of the outer
legs of our Iron condor. Okay, so if you are going
to take advantage of the iron condor strategy in a
low volatility environment, I do highly recommend that
you plug in the legs of the iron condor here into the
options profit calculator just so that way
you can take a look at the profitability chart and you can fully understand what exactly is going to
happen in that trade, as well as the maximum return in the maximum loss that you
face for that specific trade.
Travis Rose, Stock Market Day Trader & Investor
