Today we are focusing on training options for the beginner. We’ve all been there. If you’re starting to ride a bike, you’re going to fall.
If you’re new at starting the trade options, you’re going to have some losses. Or you’re not going to know what you’re doing. That’s what we’re going to cover today.
I’m going to try to make it quick and easy because people like short videos nowadays.
But if you like more detailed stuff, be sure to check out our courses. There you can get up to 20-hour courses of in-depth option learning.
You have to think about this as the insurance business. Insurance is really what options are. You’re insuring stocks. Sometimes when you are insuring a vehicle, it’s a little bit different. Insuring stocks, you’re insuring options. This is you’re insuring stocks, or let’s look at a car.
If we look at insuring a car, there is a time issue involved. You buy insurance for one month, two months, three months, four months. You buy time. There’s a premium involved.
That premium costs you money. With time that premium decays. Eventually, you have to buy more premium. That way, you stay insured. Every time that insurance company makes money.
With options no different. You have the same thing. You have time, you have the premium, and it decays. And that’s where a lot of people lose money with options.
They buy a lot of options, and they hold them, it decays, and you lose money.
When it comes to the insurance business, there are two parts to it. You can insure the person, meaning you’re the business owner, so here you’re selling. Or you can be the buyer. Most people are buyers. You’re buying insurance.
But who makes the most money? Think about it.
If you’re buying insurance, are you making money? No, you’re buying it, and you’re losing money. You’re protecting yourself in case you get into an accident. But who has the biggest buildings in the workplace? It’s the insurance companies.
In options, the same thing. You can be a seller of premium, or you can be a buyer. What’s the easier approach? Well, it’s easier to be a buyer. Most people lose money when they buy insurance. And here the same thing – most people lose when they buy an option contract.
In our case, what we want to do?
We want to switch. We want to be the seller. We want to be an insurance company. And that’s what I’m going to show you here in the simplified version of how you make money in options.
Here’re the options basics.
The basics of options are essential to understand because you need to know how to speak the language. If we’re talking about phones, you have to understand what it means when I say an Android, Apple, or the screen. You have to know these kinds of words. If I tell you to restart your phone, you have to know these kinds of different things.
How do we talk basics of options?
First off, you have to know the stock you’re talking about. In our example, we’re going to talk about Netflix. This is a ticker symbol – NFLX.
Stocks are based on prices. For the options, you have all these different prices that come up. This is your trade grid. Here the stock price might be 180, 190, 200, 210, 220. Think of this is like where do you project or how much insurance are you looking to get?
Do I want a $250,000 plan? Do I want a $500,000 plan? It’s the same thing. How far do I want to go…
Are we looking at calls and puts?
Here’s a little bit different when it comes to trading options. Here stock prices can go up and down. If you’re normally a buyer, you’re looking for things to go up on the call side. If you’re a buyer of a put, you’re looking for things to go down on the put side.
Remember, there are four parts to the trade; just like in the insurance company, you could be the buyer and the seller. And here you could be the buyer and the seller of the calls. And you can be a buyer and a seller of the puts. You can buy these or sell these.
If you’re a buyer, you’re looking for things to go up. If you’re a seller, you’re looking for things to go down.
If you’re a buyer of the puts, you’re looking for things to go down. If you’re a seller, you’re looking for things to go up. It’s the opposite.
Let me highlight these for you. We’re going to go a buyer here on the call; this is green. A seller here is green because it’s going up. It’s just a little bit of a difference: a seller here and this one the buyer – the red one.
You’re looking for downside movement. Now you’re looking at these different prices. You decide, do you want to take a single directional bet? The single directional bet is what most people start with. If I say I’m looking for prices to go up, I want to be a buyer.
I want to do one of these right here at I’m estimating around $200 as maybe where Netflix will go. Maybe 220 depending on where the stock price is, you could buy it further out or even get it already where it’s passed.
That allows the movement of your return to be a little quicker. If this is $5.70 for that contract each option contract is worth or controls 100 shares, you multiply that times 100. Your cost would be $570.
It’s the same thing on the other put side. If this was $3.30 and it’s a hundred shares that you can control, it’s $330 that you would pay if you’re a buyer. If you’re a seller, it’s a whole different world.
Here’s your trade grid here – Netflix.
Here we have the date, the amount of time we have left just like you do with car insurance (30-60 days).
There are 138 days, here’s 45. Here’s our ticker symbol. Here are our days, calls, and puts.
Puts are on the right side. Calls are on the left side, and our strike prices are right here.
If I reduce this to let’s say 10, you can see there’s ten from the middle of the current price. The current price is 353. And that is called at the money. You could buy one of these, and in that case, you’re looking for the stock price to go up.
You could buy one of these, and in that case, you’re looking for a stock price to sell-off. You could also be a seller, which is the right approach. You want to be the insurance company, not the buyer of insurance usually.
When you’re trading options again, little or in-depth. But as a beginner tutorial here, let’s show you what that looks like. Buy a single and don’t worry about which one I choose. That’s a whole art on its own. But here is a trade example.
At expiration, you can see if you’re buying insurance when this expires, it expired.
You lose all that money, and you’re paying $2230. That’s because the contract cost 22.30 multiply times one hundred right, and that’s it.
The current line which is the white line today it’s right there with time it becomes worth less and less.
You could get out of it early anytime you want for as long as there’s a person on the opposite side of the trade. If this does explode to the upside (let’s say the stock price gets to 383), you could get out of it with a $1644 profit.
Remember, with the time you lose money. Every single day as I move the theoretical date forward white line gets closer to the green line. You start losing money, and the amount you lose is this theta. That is the per day that you lose.
If it doesn’t move at all, I’m losing $526. But if it does move, you make a little bit of cash. If I expected or estimated the stock to go down, I could buy a put. Buy a single do a put here it is. And now, you can see the same concept applies.
The thing is if you’re a buyer, you’re making money in the direction puts for downward calls for upward. But remember what we talked about that you normally don’t want to be a buyer because you’re losing this money. Well, if you’re the insurance company, we can sell this instead. And I could also sell this instead.
Now let’s say I’m looking for an upward movement in the stock. Which one do I sell?
Well, it wouldn’t be the call because that one upward movement, you have to be a buyer of that. It would be you to sell the put. This is what selling a put looks like. You make money when the stock goes up.
You also make money remember white line gets closer to the green line you make money; you make $16 a day as that continues to go up. If it goes against you, you lose money just like you would in any other investment.
With time that white line gets closer and closer to the green light, but you’re the insurance company. You’re making money as these things expire. And as they continue to expire you sell them the next month in the next month.
As an insurance business, where do you have the problem?
Well, if somebody gets into a big accident, you have to pay off. If these stocks do crash and pull back, you could have a huge problem. That’s one of the significant issues with options. If this can continue to go down, this is also called a naked spread that you’re selling.
If you’re looking for a downward movement, you could sell a call instead of buying a put. In this case, the stock can now go down. And even if it doesn’t go down, stocks stand still you make money; a stock goes down, you make money.
Even if it moves up a little bit, you still make money because of the premium decay. That’s the case as long as it’s not that strike price. I could insure it for less or more.
Let’s say I’d move this further this way. Or I could move it further up that way.
In this case, you’re safer. The safer you get as a position meaning now this stock can go all the way up to 398 400 because that’s my strike price there. Then it can go all the way there, and I still profit. But the downside is there’s a trade-off. The downside is I don’t make as much. The safer the position, the less you make.
Less risk = less reward!
But you’re making money. The stock stands still, you make money. The stock goes down; you make money. The stock goes up a bit; you still make money. If you do the same thing with selling the put, you could also do the same thing. Move it way wider. You can see how your range has increased quite a bit.
That’s how the right approach is to making money when it comes to trading options. And that’s the basic tutorial for a beginner’s guide and a concise amount of time.
You could get more into this. This is naked, and you need to protect it. That’s because now you don’t have any protection. If this one is selling a 300, what you can do?
You can buy protection, just like insurance companies. Buy insurance on the things they insure. In that case, I’ll purchase protection here, and now it caps my losses off.
Otherwise, if that stock does tank and continues to go down further, that becomes a problem. What you do is you go a little bit out, and you buy some protection. It caps your losses right there. And this is called a vertical spread. You can do many other types of spreads, but that’s the basics of looking at trading options and getting started with options.
It’s what you’re looking for as you’re getting into the options game. It simplifies things.
There are four parts to the trade:
- you could be a buyer of the calls
- you could be the seller of the calls
- you could be a buyer of the put
- you could be a seller of the put
There’re four different areas you could be in. And working those different contracts can create unique and various types of spreads. That’s a vertical spread there’s also you could do calendar spreads diagonal spreads. And that’s the typical better approach to trading options because you have a positive theta where you make money day in and day out if these stocks don’t even move.
You’ve learned some fundamental insights into trading options. If you want to go into more detail about trading options, check out our courses.
We pack a lot of knowledge into those courses about trading vertical spreads, the business of options, trading calendars, and iron condors.
