welcome back to my channel everybody
thank you for tuning in
and in this video it's going to be
basically an options trading 101 for
beginners
just how we can day trade options and
what i look for in options
to day trade them and how they compare
in relationship
to the underlying stocks that we do look
at i'm also going to go into think or
swim and break down
the options chain a little bit show you
what i look for and how you can read the
options
in think or swim and of course it's the
same with any other platform that you're
looking at
and like always i'm going to link my
instagram in the description below
definitely click that link and follow it
worth the follow i post
options trading tips tricks and i do
some deadly trade recaps too
and some good psychological lessons as
well that every trader should need to
know
link is in the description below
definitely worth the follow so going
back to the powerpoint slides
these are the slides that i do have in
the course and i'm just gonna briefly go
through them a little bit
not into too much detail before we go
into think or swim so what is exactly
an option contract so an option contract
grants the right but not the obligation
to buy or sell an
underlying asset at a set price on or
before a certain date
so what's important here is that you
understand what the set price means and
what a certain date means which we're
going to break down in a second
and there are two option contracts that
you could play for both sides
there's a call option contract or a put
option contract
when you're talking about calls these
calls are going to
increase in value when the underlying
asset increases in price
all options are are derivatives so their
pricing
gets influenced by another instrument
and in this case
options get influenced by the derivative
which is the stock
as the stock is moving up your calls are
going to move up
now on the right side we have puts so a
put is going to increase in value
when the underlying asset decreases in
price
so think of a put as short selling or
it's a bearish position
where you want to long a put when you
want the underlying stock to decrease in
value
as the stock is moving down your puts
are going to go
up in value okay so going back to that
definition
an option contract grants the right but
not the obligation to buy or sell an
underlying asset
at a set price so let's break down set
price
when we're talking about a set price
we're talking about the strike price
and a strike price is the price at which
the option contract
allows the buyer to purchase the
underlying stock at
i want you to think of options as a bet
think of it as a basketball game
so not only are you betting on something
that's going to happen in the game such
as
how long it's going to take for your
team to score let's say 80 points
you also are betting on you know how
long it's going to take for that outcome
to occur
if you think the cavaliers in a
basketball game are going to score 80
points
against the warriors then you're not
just taking that bet of the points but
you're also betting on when it's going
to happen
it's going to happen in the first
quarter that's less likely to happen
therefore you can get option contracts
for much cheaper it's going to happen
at the fourth quarter you know that's
more likely you're going to score 80
points in the first quarter in the
fourth quarter
uh so those contracts are going to be
more expensive because the bet is going
to be more in your favor
so set price is the strike price
now certain date down here is the
expiration a certain date
contracts expire that's when your bet
has to to
fulfill that outcome by it is the last
day the options valid
and there's three things you could do
you could choose to exercise you could
close the position for a profit
or you could let it expire worthless for
a profit or a loss
so with options you not only have to be
right directionally
but you have to be right with a time
frame that you're looking at
or else your bet is going to go to zero
and basically you lost the bet and your
investment is going to be gone but i
don't want that to trick you with
options because there are two
there are multiple ways you can trade it
like i said you hold into maturity
and you exercise the contract which is
the most common way for investors
not the way i trade the way i trade it
is point number two i trade before the
contract expires
options are derivatives so they move
like a stock and they follow the stock
price
if the stock is going up you know 10
minutes ago where i bought the contracts
they could be worth a dollar two dollars
three dollars more in price
and i could just sell it just like i
would with a normal stock
and that's exactly how we trade so go
into the options chain and going to
any platform that you're looking at
options with you're going to see a bunch
of different contracts you could play
now in the middle here we have the
strike price and the strike price is
what i was talking about before about
being its
set price which is where it allows the
contracts
allows the buyer to purchase those
contracts uh
for the underlying stock now this is not
the way we trade but
knowing the strike prices are important
because they are
something we call in the money or out of
the money we're going to break that down
as well
to the left of this we have expirations
now expirations are that
certain date or that time frame that
we're looking for before those contracts
go to zero
now in the money is everything that
is purple out of the money is everything
that is black
without the money and in the money means
is that if you're talking about a call
side
and in the money contract means that the
stock price
so we're looking at apple right now is
at 375.68
a strike price that is in the money
means the current stock
is over the strike price so look at all
these strike prices
on the left side left side are calls
right side are puts
when we're talking about calls that are
in the money the stock price
is above the stock strike price so
apple trading at 375 68 means that
apple 370 strikes apple 360 strikes are
in the money they are worth more because
of the outcome
of them staying in the money is much
higher so you have to pay a premium for
that bet
when i trade i do not trade in the money
contracts
i only trade at the money or a couple
out of the money that have high
liquidity
so out of the money for calls now this
is for calls only
out of the money means that the current
stock price is going to be below
the strike price so apple's at 375
the 377 and a half calls or out of the
money
three ninety strike calls out of the
money now
that doesn't mean this is a major point
right here for beginners because i know
this is a common question that does not
mean that
the stock price has to be above the
strike price
for you to make money that is not the
case i could buy let's say in this case
the 400 strike calls
which is 25 away from what the current
stock stock price is
and if the stock goes up a dollar two
dollars whatever these 400 strike calls
that are at a dollar eight right now
might be worth a dollar twenty or a
dollar thirty
so they're going to go up in value as
long as the underlying stock goes up in
value
and there are other influences as well
like the greeks and
certain things that's a whole different
topic to talk about
that's going to influence the options
price and when we talk about options
pricing we're talking about the option
premiums
now on the put side it's a little
differently so on the put side you have
in the monies still in purple
but what in the money on puts is that
the current stock price
375 is below the strike price
so everything or let's
say below in this case when the stock is
below the current strike price
then those are in the money and out of
the money is when the stock
is above the strike prices um so i only
play
out of the money contracts i do not play
in the money really at
all and then you also have to look for
liquid contracts so before we get into
liquid contracts
an example of contracts that expire
worthless is
everything that is out of the money
let's let's actually go back to the
example that i
brought up with the definition of an
option contract so it grants the right
but not the obligation to buy or sell an
underlying asset at a set price
on or before the certain date those are
the two important keys
the set price is the strike price and
the certain date is your expiration or
the time for you have for your
bet to be worth some type of money so
the expiration in this case like i said
is july 31st
2020 and everything
doesn't matter if you're talking about
calls or puts everything that is out of
the money
by the time the contracts expire are
going to be worthless they're going to
be zero
and everything that is in the money is
going to have some value
because you could exercise those
contracts now that is not the way i
trade
the way i trade is very simple if i am
bullish or bearish on a stock
i'm going to put apple in this case
so let's say i am bullish apple just
random example right and i want to buy
calls so what i'm going to do here is go
to the call side and let's
just in this case i'm going to play one
out of the money uh i'm going to put the
option chart here
and now we're talking about calls so we
want the price of the stock to go
up for our option contracts to go up in
value as well
so let's say we're bullish apple and we
want to buy the 374 mark
and we sell hypothetically speaking at
the 376 point
which is about 0.50 of a percent on the
stock price
it went up two dollars now instead of
buying the stock we buy the option
because we're talking about a bullish
position we want the stock of apple to
go up
so we're going to buy calls in this case
there's two
price charts on the left and right on
the left is the option chart and on the
right is the stock chart they look
identical because
like i said they an option is a
derivative it follows exactly to the
pricing of another
instrument and in this case it's apple
stock so instead of buying the stock at
374 we could have bought it at
six dollars and then we could have sold
it at
i don't know whatever this high is at
665.
so you don't have to hold these to
expiration you can buy it
and you know 20 minutes 30 minutes later
sell it for a profit
we could have bought it at six dollars
and 30 minutes later could have sold it
at 660.
so they have the same pricing as
basically of a penny stock
and yes one contract lets you control
100 shares
um but you do not have to hold these
into expiration for you to make money
you know these contracts at that at that
point are out of the money
yet they still increased in value
because of the underlying stock
also increased in value and also
the premiums right here you have to
times it by
a hundred per contract so if i buy one
contract
at six dollars and i don't know 50 cents
uh then it's gonna cost me six hundred
dollars six hundred fifty dollars
because
one contract lets you control basically
a hundred shares of the stock
if they do have value by the time of
expiration and you do want to exercise
those contracts so yes they have the
same pricing of like a penny stock
so it's basically a penny stock of a
blue chip stock
but you also have to take into
consideration there's much more risk
with options because your premiums can
go to zero
if you trade close to expiration you
know you let the greeks get into the way
um and also one contract is basically
you get to control 100 shares but you
buy and sell it like a normal stock
buy it at six dollars sell it at 660. um
so i hope this video cleared up a couple
of things
if i missed anything drop a comment in
the in the comments
section below if you want me to make
another video about maybe greeks
um about how to make a td ameritrade
option account
whatever you guys want me to make i can
make a video on i'm always looking for
suggestions
if i missed something in this video you
know please feel free to let me know
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