Options Trading For Beginners: Complete Guide with Examples

Summary

Highlights

• Options trading involves agreements to buy or sell stocks at set prices within certain timeframes. 📅
• Learning about call options can increase investment profitability if the stock price rises. 🚀
• Put options can serve as a tool for expecting or hedging against stock declines. ⬇️
• Covered calls and cash-secured puts can provide a stream of income, making them favorable strategies for investors. 💰
• Timing and strike prices are crucial in options trading to balance potential profits and risks. ⏱️

Key Takeaways

• Options are contracts between buyers and sellers, offering a way to buy or sell stocks at predetermined prices. 📜
• Call options enable buying stocks at a set price within a timeframe, beneficial if the stock price rises. 📈
• Put options allow selling stocks at a set price, used when expecting a stock price drop. 📉
• Covered calls provide steady income generating by selling call options on owned stocks. 💸
• Cash-secured puts involve selling puts options backed by sufficient cash, aiming to buy stocks at discounts. 💵

Overview

Chapters

• 00:00 - 00:30: Introduction The chapter titled "Introduction" provides an overview of a comprehensive guide to options trading for beginners. It covers important concepts such as call options, put options, covered calls, and cash secured puts. The introduction emphasizes the value of these insights for investors who wish to enhance their capabilities in the stock market. Viewers are encouraged to take their time and possibly revisit certain parts of the video, as absorbing the information may require multiple sittings.
• 00:30 - 21:40: Call Options Explained In this chapter titled 'Call Options Explained', the concept of options is broken down to its fundamentals. Options are described as contracts, specifically dealing with them from the buyer's perspective. The chapter is designed to help the audience understand this financial tool by stripping the concept down to a basic level. It emphasizes maintaining clarity for beginners and encourages subscribers to follow along as it begins with the explanation of call options, portraying it as a deal between two parties.
• 21:40 - 51:40: Covered Calls In this chapter, the concept of Covered Calls is explored using Yelp stock as an example. The current price of Yelp is approximately $35.84, rounded to $36 for simplicity. The scenario presented is that of offering a call option, which gives the buyer the right to purchase Yelp stock at $38 per share within 30 days. The cost for maintaining this option is 80 cents. This chapter delves into the mechanics and financial implications of such a trading strategy.
• 51:40 - 80:30: Put Options Explained The chapter titled 'Put Options Explained' begins with a discussion on determining whether a deal to purchase a put option is beneficial. The author emphasizes the uncertainty of predicting stock price movements within a given timeframe. Using Yelp stock as an example, the chapter details a scenario where an investor buys a put option for 80 cents, allowing them to purchase Yelp at $38 within 30 days. To profit, the stock price must exceed the predetermined price by the option's expiry date. In this case, if Yelp's price rises from $36 to $42 within the timeframe, the investor profits.
• 80:30 - 105:00: Cash Secured Puts This chapter explains a scenario where you would make good money using a cash secured put strategy. It involves buying a call option, which grants the right to purchase stock at a predetermined price within a set timeframe. The given example uses Yelp, with the option to buy at $38, while the stock hits $42, ensuring a profitable opportunity as buying the stock at the option price is cheaper than the market price.
• 105:00 - 106:40: Conclusion and Invitation to Website The chapter explains a real-life scenario using the Robin Hood platform where a stock can be bought at $38 and sold at a going rate of $42, resulting in a gain of $4 per share. However, considering the option cost of $0.80, the net profit would be $320.

Options Trading For Beginners: Complete Guide with Examples Transcription

• 00:00 - 00:30 thank you so much for joining me in this options trading for beginners video this is your complete guide to options in the stock markets this includes call options put options covered calls and cash secured puts if you want to become a more powerful investor in the stock market then watch this video this knowledge will level you up now for this video I want to tell you no rush take your time there's certain parts of this video that you're going to want to rewatch and it's most likely going to take taking more than one sitting for
• 00:30 - 01:00 you to digest all this information that's going to be normal so please subscribe and we're going to start with call options okay so let's break this down to the fundamentals so what are options options are simply contracts they're options contracts so it's essentially a deal between you and another person so I want to show you this from the perspective of the buyer so in our example you will be the buyer of the opt options contract and again
• 01:00 - 01:30 this is a call option now we'll just pick any stock and in this example we'll use Yelp stock so the price of Yelp is at $35.84 but to keep it simple let's just round it up and say that Yelp is at $36 a share so what if I tell you I'll give you the option to buy Yelp at $38 to share in the next 30 days and for you to have that option you pay me 80 sense so
• 01:30 - 02:00 is that a good deal or is that a bad deal well honestly it's hard to say because we don't know if the stock price of Yelp will go up or down in the next 30 days but let's just say that you buy that contract for 80 C and now you have the option to buy Yelp at $38 within the next 30 days so here's how you win the price of Yelp right now is at $36 so let's say that within the next 30 days the price price of Yelp hits 42
• 02:00 - 02:30 then in this situation you're going to make good money because here's what's going on so the options contract that you bought was a call option so you paid for the option to buy a stock at a certain price within a certain amount of time now in our example Yelp hits $42 so you have the option to buy Yelp at $38 so would you buy Yelp for $38 in this situation so the answer well it should be a of course you would because
• 02:30 - 03:00 you could buy it for 38 and then immediately sell it for the going rates of $42 and then you end up with a gain of $4 a share so here's what your profit would look like you buy Yelp at 38 you sell it for 42 but you have to remember that you paid 80 cents to have this option so you net a profit of $320 and I want you to know that this is a real life example you could take a look for yourself so this is the Robin Hood platforms all platforms will look
• 03:00 - 03:30 pretty similar to this so you see at the bottom right where it says trade Yelp options which I outlined in Red so you click on that and it takes you to this so don't I just want to say don't be intimidated I'm going to walk you through this and it's going to be very easy to understand so these are the options contracts at different price points if you want the contract to be at 38 then 38 will be your strike price so as you can see here you're going to see the options contracts with different
• 03:30 - 04:00 strike prices 35 36 37 38 39 that's just the limit of my screenshot so you can go for an options contract with a strike price at $50 or even at 20 but I'm going to explain the difference to you in just a little bit but for right now let's just focus on you buying the call option at a $38 strike price and take a look for yourself that options contract is selling for 80 so was our example of Yelp going to
• 04:00 - 04:30 $42 in the next 30 days possible well take a look for yourself so I've highlighted in red in the top left Yelp has gone up by almost $7 in the past 30 days now let's go back to the topic of you winning and making money so Yelp is at $36 currently you bought the call option with a strike price at 38 and that option will cost you 80 so if Yelp goes above $38.80 in the next 30d days then you're
• 04:30 - 05:00 going to be at a profit so maybe like who knows Yelp could go up to 40 it can go up to 42 maybe 50 it could go to 100 I mean that would be unrealistic but it's not impossible if Yelp skyrockets then you're going to make so much money because you're going to have the option to buy it at 38 so if you buy the call option then you want Yelp to go up as much as possible as fast as possible because if you think about it's very straightforward if Yelp goes to $100
• 05:00 - 05:30 you can buy it for 38 and then sell it immediately for 100 so I just want to point out that that's the happy scenario where everything works out and you make a lot of money but we have to talk about the flip side of the coin we have to talk about how you can lose money and how you can get absolutely destroyed so the danger is that you have a limited amount of time before your contract expires and in that time if the stock if the price of the stock doesn't do what you want it to do in that set amount of
• 05:30 - 06:00 time then you're going to end up with a worthless contract so I have to show this to you so here's how the unhappy scenario plays out Yelp is at $36 right now you bought the call option to have the option to buy Yelp at $38 in the next 30 days if Yelp is at $38 or below then your contract is worthless so I want to demonstrate the good and bad scenarios for you there are four scenarios so so here's scenario
• 06:00 - 06:30 number one Yelp is at $36 a share currently you have the option to buy it at 38 within the next 30 days and let's just say that the stock price it goes down to $30 in this scenario your contract is terrible it's worthless why would you use your contract to buy Yelp at 38s when you could just buy it on the open market for 30 and remember you paid 80 cents for that contract so you wasted your money and you lose so here's
• 06:30 - 07:00 scenario number two Yelp is at 36 you have the option to buy it at 38 within the next 30 days and let's just say that the stock price it goes up to 37 in this situation it's the same it's the same thing why would you use your contract to buy Yelp at 38 when you can buy it on the open market for 37 so yes the price of Yelp stock it did go up it went up from 36 to 37 however it didn't
• 07:00 - 07:30 go up enough because it's still below the strike price on the contract so you wasted 80 cents to buy that contract I the stock went up but not enough and you still lose moving on to scenario number three so Yelp is at 36 you have the option to buy it at $38 within the next 30 days and let's just say that Yelp goes up to $38.50 so in this scenario you can buy Yelp for $38 and you could sell it for $38 50 so that is a gain of 50 so
• 07:30 - 08:00 congratulations however you still lose money because you paid 80 for the contract so your true cost basis it's $38.80 and you can sell it for $38.50 so you still lose but at least it's not a total loss so here's scenario number four so Yelp is at 36 you have the option to buy it at 38 within the next 30 days Yelp goes above your cost
• 08:00 - 08:30 basis of $38.80 and then you're going to be at a profit and the more it goes up the more money that you'll make so basically in this situation you want the price to Skyrocket for example the best news would be Google decides to acquire Yelp for $60 a share and Yelp stock it skyrockets in price within your 30 days now here's the thing I want to tell you this because this is so important with call options or options contracts in general you can buy and sell them just
• 08:30 - 09:00 like a stock so in our example if Yelp goes to $60 a share you don't literally have to buy Yelp for $38 and then sell it for 60 you can just sell the options contract itself but if Yelp is at 60 and you want to buy Yelp for 38 and just hold on to it you can exercise the option and buy it for 38 and just hold on to the stock and then your options contract it'll disappear from your account account and
• 09:00 - 09:30 then you'll end up with the Yelp stock now let's go back to the options screen so I want to explain this whole option chain to you that's what they call this so you can buy call options at different strike prices so let me tell you what is going on here okay I want to ask you a question it's pop quiz time so I'm going to give you two offers you tell me which one sounds better to you Yelp is currently at $36 so here's my first offer in the next 30 days I'll give you the op option to buy Yelp at 38 and my
• 09:30 - 10:00 second offer in the next 30 days I'll give you the option to buy Yelp at 39 so which one sounds better to you of course option number one sounds more appealing because I would rather have the option to buy Yelp at 38 instead of 39 therefore the contract at 38 a $38 strike price is more appealing okay but here's the thing these circumstances they're factored into the price of the option contract now I want you to
• 10:00 - 10:30 compare the contract at 38 versus 39 the contract at 38 is selling for 80 the contract at 39 is selling for 55 so if you want to buy a contract with a higher strike price the contract will be cheaper that's because it's less probable that Yelp will hit 39 compared to 38 so in this case they need to offer you a cheaper price so take a look at the $37 strike price that's trading for
• 10:30 - 11:00 $115 that contract it's more expensive because it's not that far-fetched that Yelp will go from 36 to 37 within the next 30 days now I want to teach you about the duration of the options contract so if you're thinking that this thing this whole thing everything that we're talking about if you think that it sounds risky because well you don't know what's going to happen in the next 30 days with the ELP stock if that's how you think then I would say you're absolutely correct I would agree with you because 30 days is not a lot of time
• 11:00 - 11:30 but what if I told you the Yelp is at $36 I'll give you the option to buy it at 38 but I'll give you that option for 7 months so that scenario it would be more appealing to you because you have more time for Yelp to go up however those favorable conditions they're taken into consideration therefore if you want more time on your contract and you're going to pay for it so take a look for yourself I circled at the top your
• 11:30 - 12:00 ability to choose the expiration dates of the contract so we're using the same strike price at 38 for a contract that expires in 7 months this contract is going to cost you $3.90 so compare that to the contract that expires in 30 days that's going for 80 cents if the expiration date of the contract is sooner then the contract will be cheaper if the expiration date is farther out then the contract will be more expensive now I must clarify this
• 12:00 - 12:30 one last thing because it's very important options contracts are for 100 shares so if you buy one options contract of Yelp at a $38 strike price then you're buying the option to buy 100 shares of Yelp at $38 and the contract price it's quoted at 80 cents right so that's 80 cents a share but you have to remember that you're dealing with 100 share increments so if the options contract says 8 0 then
• 12:30 - 13:00 the options contract will cost you $80 so if you buy five options contracts it's going to cost you $400 now I hope that this has helped you to better understand call options now in this next segment we're going to proceed to covered calls so covered calls we're still going to be dealing with call options but we're going to be taking it one step further and this will help you to decrease your risk and generate passive income so I'm going to explain to you why stock market investors love covered
• 13:00 - 13:30 calls and then I'm going to show you how to do it if you think that covered calls are complicated they're not I'm going to break it down for you nice and easy and then you're going to become a much better investor in the stock markets and I just want to say that personally I'm a big fan of covered calls because it gives me a steady stream of income now let me tell you the good and the bad of covered calls so the good thing about a covered call is that you will be paid income now this could be weekly income it could be monthly income annual income
• 13:30 - 14:00 it's your choice you get to decide you make money by selling the call option so I want to be very clear about this in this scenario you cannot lose money by selling the call option so you can lose money on your stock but you cannot lose money on the sale of the call option it is guaranteed money even if you're a beginner you will make money by selling the call option but there's a tradeoff the bad thing is
• 14:00 - 14:30 when you sell the call option you are limiting your upside potential if your stock goes up so don't worry I'm going to draw this out for you I'm going to be very clear about this I'm going to show you the math now I want to clarify this for you in the previous examples we were dealing with call options and you are the buyer we're still going to be dealing with call options but in these examples you will be the seller there are three scenarios where you sell call
• 14:30 - 15:00 options scenario number one you buy a call option and then you sell it scenario number two you sell a call option and scenario number three you buy a stock and then you sell the call option this is a covered call so let me explain to you a covered call and how you make guaranteed income and we're going to use a real life example a real stock the real price the real call option prices I thought that this would be best because I want to show you that
• 15:00 - 15:30 this entire conversation is legit we're going to be dealing with Intel stock ticker symbol INTC at the time of making this video Intel is at $32 a share a little bit over but we'll call it 32 to make it easy and we're going to use the intel Call option that expires in about 2 months and that call option with a $34 strike price is selling for $11.50 so again what I'm showing you is a real
• 15:30 - 16:00 life example so these are actual numbers keep that in mind that's important because you're going to see how much money you can make and it gets kind of wild okay so here's the situation let's say that you buy Intel at 32 and I give you an offer so I Brian want the option to buy Intel from you at $34 within the next two months so if you're going to give me that option if you're going to give me that option then you're not
• 16:00 - 16:30 going to give me that option for free so you're going to tell me okay Brian if you want that option then it's going to cost you a $150 and I tell you that okay you got yourself a deal let's do it so I pay you $150 to have that option to buy Intel from you at $34 within the next two months so in other words you sold me a $34 call option that expires in two months for $150 okay so why would I do
• 16:30 - 17:00 this why would you do this let's work out four scenarios and I'll show you the math so scenario number one the share price of Intel goes down so you bought Intel at $32 a share and let's say that in two months Intel Falls in price by $2 it goes from $32 to30 so in this scenario I'm not going to use the call option that you sold me because why would I buy Intel from you at $34 four when I could just buy it on the open
• 17:00 - 17:30 market for 30 so in this scenario you sold me a contract that turned out to be worthless for me okay so for you Intel Falls from 32 to 30 you lose $2 on the stock right but you made $150 by selling me the call option so you hedged and you're only down 50 instead of $2 so it's a good thing that well in this scenario that you sold me the call option moving on to scenario number the share price of Intel does nothing so
• 17:30 - 18:00 you bought Intel at 32 after 2 months it's the same nothing happened it's still at 32 in this scenario you didn't make money you didn't lose money on the stock the price stayed the same but you sold me the call option to buy Intel from you at 34 and I paid you $150 to have that option but I'm not going to exercise that option because I'm not going to buy Intel from you at 34 because I could just buy it on the open market for 32 so in this scenario
• 18:00 - 18:30 congratulations to you your stock did nothing and you made $150 and let me tell you making a $150 in this type of transaction in two months is not bad because a150 divided by 32 which is what you paid for Intel that's a gain of 4.6% so you made a gain of 4.6% in 2 months so if you annualize that that's a rate of return of 28% and again again these are real numbers so this is how
• 18:30 - 19:00 awesome options are and the results get even better in the next scenarios so I'm going to show you scenario number three Intel goes up by a little so you bought Intel at 32 let's say that Intel goes up from 32 to 33 in this scenario you made money on the stock because Intel went up from 32 to 33 Additionally you sold me the call option to buy Intel from you at 34 but the share price of Intel is at 33 so
• 19:00 - 19:30 I'm not going to exercise my option because even though the stock price went up I would rather buy Intel in the open market for 33 rather than buy it from you for 34 so this is an awesome scenario for you because you made $150 by selling me the call option and your stock went up by a dollar so you're up $2.50 in 2 months that's a 7.8% gain in 2 months annual realiz that's a rate of return of
• 19:30 - 20:00 46.8% scenario number four the price of Intel shoots up so you bought Intel at 32 Intel shoots up let's just say from 32 to 40 so you have to remember that you sold me the option to buy Intel from you at 34 within the next 2 months and it shot up to 40 so you know what I'm going to do you know what I'm going to do with the call option that you sold me I'm going to use it I'm going to exercise it I'm going to buy Intel from you at 34 and I'm going to sell it on
• 20:00 - 20:30 the open market for 40 so even though the price of Intel shot up to 40 you are forced to sell it to me for 34 so that was the contract that was the deal I paid you $150 for that option so you bought Intel at 32 you sell it to me for 34 so you make $2 of gain on the stock and I paid you $150 to buy that call option from you so you make a $150 there you walk away with a gain of 350 in
• 20:30 - 21:00 total that's an 11% gain in 2 months annualized that's a rate of return of 66% that's pretty awesome now with that being said I want to ask you a question and just think about this honestly would you be upset if this happened to you because you made an 11% gain in 2 months but if you never sold that call option then your stock would have went up from 32 to 40 and you would have an $8 gain on the stock but you did a covered call
• 21:00 - 21:30 and you made a total gain of$ 350 so you sold yourself short you still made money but you would have made more money if you never sold me the call option but of course you didn't ex you didn't expect the share price to go up so high so quickly so I guess it's just a matter of your point of view whether you'd be kicking yourself or not over the situation but that is the risk of writing a covered call again you cannot lose money by selling the call option
• 21:30 - 22:00 the downside is that you are limiting your upside potential okay so I hope that you're still following along I hope that this is all clicking but I have to show you two very important variables with covered calls the strike price and the duration but first if you're finding this helpful please give this video a thumbs up I'm just trying to be helpful if you can help me with a like I'd appreciate it so much and thank you very much I appreciate it now let's modify the variables and see how the numbers work out let's change the duration of
• 22:00 - 22:30 the contract which is the expiration date of the call option so the $34 call option two months out is selling for $11.50 but what if we changed the duration to 6 months out now I want you to know this the more time the call option has the more expensive the call option will be and that means that you as the seller would collect more money so let's look at the call options on Intel 6 months out instead of 2 months
• 22:30 - 23:00 and here are the prices for the call options 6 months out as you can see the $34 call option 6 months out is selling for $261 so if you sell that call option then you you would receive $261 but here's the thing you may be thinking okay but you can sell the $34 call option two months out and make $150 so over the next 6 months months why not just sell the $34 call option
• 23:00 - 23:30 for $150 every two months that way you'll make $150 $150 a150 and then after 6 months you'll end up with $4.50 so that sounds better than selling a single call option 6 months out and making $261 right so that would be true if 2 months from now the $34 call option we still selling for the same price at $150 and then two month months after that if the call option was still selling for
• 23:30 - 24:00 $150 so in that scenario yes you would make more money by selling a two-month option and then another two-month option and then another two-month option instead of selling a six-month option however the price of the call option is constantly changing if the stock price of Intel Falls from 32 to 28 the $34 call call option 2 months out would probably sell
• 24:00 - 24:30 for around 50 or even less so that's the risk that you're taking by going with a shorter call option if you lock yourself into a longer call option then you know how much you're going to make in 6 months if you go with shorter time frames then you don't know how much that $34 call option will be selling for when the time comes you may get a better price you may get a worse price so that's the risk now let's change change another variable let's change the strike
• 24:30 - 25:00 price so you can sell the $34 call option 2 months out and make a150 or we can change the strike price to 38 and sell that option for 50 if you go with a higher strike price then you're giving yourself more upside potential to make money on the stock in the event that your stock goes up so just think about it you're guaranteed 50 cents in two months time if intel shoots up to
• 25:00 - 25:30 38 sure you're going to make less money by selling the call option because you're only going to make 50 cents instead of $150 but you're going to make more money from the stock going up because if intel shoots up to 38 you're going to be forced to sell Intel at $38 but if you sold the $34 call option then you would be forced to sell Intel at 34 but you probably realize the downside if you bought Intel at 32 and it did a whole bunch of nothing let's just say that after 2 months it stayed
• 25:30 - 26:00 at 32 well if you sold the $34 call option then you could have made a $150 instead if you sell the $38 call option then you're only going to make 50s so that's the Dilemma so for the call option the closer the strike price is to the current price the more expensive the call option becomes the farther the strike price the cheaper it becomes okay now let me show you how to write a covered call in order to write a covered
• 26:00 - 26:30 call you need to buy the stock first and then sell the call option so do not buy a crappy stock because you don't want to make money by selling the call options but lose money on the stock so that's like dropping quarters to pick up pennies so find a good stock that you think will go up and if you remember with options you're dealing with 100 share increments so in this Intel example in order to do a covered call you need to buy 100 shares of Intel
• 26:30 - 27:00 first and then you sell the call option so let's just say that you already own 100 shares of Intel in this scenario you would just place a single order sell to open one contract select the expiration dates and the strike price the price of the option and that's it piece of cake very easy if you have 500 shares of Intel and you want to write covered calls on all 500 shares then it's going to look like this sell five call options
• 27:00 - 27:30 and just so you know you don't have to write covered calls on all your stock if you have 500 shares of Intel you can write one contract you can write three contracts whatever you want and you're going to notice that it says $750 that's how much money that you're going to make from selling five covered calls so here's the math the $34 call option is selling for $150 so that's a $150 a share multiply that by 100 shares
• 27:30 - 28:00 and that's $150 for each call option contract multiply that by five call options that you're selling and you make $750 150 a contract times five contracts equals $750 so as I said to you before you need to buy the stock first and then sell the call option but I want you to know that many brokerage accounts will allow you to buy the stock and sell the call option at the same time so it'll be simultaneous so it would look like this
• 28:00 - 28:30 you're completing two actions at the same time by the stock sell the option now let me finish by telling you what happens after you write the covered call as soon as you sell the call option you receive that money immediately so if you sold the $34 call option two months out for $150 which would equate to $150 then you would receive that $150 in your accounts immediately so it's
• 28:30 - 29:00 automatic it's going to appear in your account it's going to appear there like magic so you don't have to do anything now after 2 months let's say the price of Intel ends up at 35 which is above your $34 strike price then you would be forced to sell your Intel stock at 34 and your Intel shares would be sold automatically you don't have to do anything they take care of it for you if the price of Intel ends up below 34 for then the call option that you sold
• 29:00 - 29:30 expires worthless and it's automatically eliminated so you don't need to do anything your brokerage account takes care of everything for you and you have to remember that you got paid Upfront for selling the call option now I want to give you these last tips the premium is a fancy way to say the price of the options contract so if the $34 call option is selling for $150 then $150 would be the premium if you're selling the option the more premium the better because as the seller
• 29:30 - 30:00 you want to get paid more money for writing the contract in terms of how options are priced I want to explain this to you in a nutshell more time on the contract means more premium the closer to the strike price means more premium the more volatile a stock is means more premium so regarding volatility this makes sense because just think about it if a stock is going up or down like crazy then you deserve to be compensated more
• 30:00 - 30:30 for locking yourself into a contract at a certain price because who knows what's going to happen to the stock within your duration so when you're looking to write covered calls make sure that the deal makes sense because you have to remember the downside is that you're limiting your upside potential during the contract's duration so if the risk is not worth the reward then don't do it I know that the appeal of guarantee income is great but if it's not worth it just don't do it use your best judgment I
• 30:30 - 31:00 trust you and if you want to find good covered calls it's like shopping you have to shop around for good deals sometimes there won't be any good deals other times there will be a lot of good deals so usually there are a lot of good deals on a lot of good stocks just use your best judgments and you'll get the hang of it I hope that this has been helpful and I want to tell you this if you need to rewatch certain parts please do so because that is normal and that that is expected I'm just happy that you're taking the time to improve
• 31:00 - 31:30 yourself and learn this to become a better investor because this is going to be a game Cher and it's going to give you more opportunities to make more money we are now moving on to put options and put options will be the well you can think of it as the complete opposit of call options but I'm going to break this down for you nice and easy I will explain to you what are put options how you can make a lot of money with put options and how you can lose a lot of money with put options as well so let's start from scratch what is
• 31:30 - 32:00 a put option A put option is a contract between a buyer and a seller so let's pretend that I'm the seller and you are the buyer so in other words I am selling the put option and you are buying the put option now let's choose a stock DAV Buster stock ticker symbol is pla y play dve Busters is currently trading at $44.96 but to make it easier let's just say it's $45 a share and I want to make
• 32:00 - 32:30 a deal with you what if I told you within the next month I will give you the option to sell David Buster stock to me for $40 and I'll buy it from you so you don't have to sell it to me but you can if you want to that is your option but I'm not going to give you that option for free if you want that option you'll have to pay me45 and let's just say that you agree you'll pay me 45 to have that option so
• 32:30 - 33:00 ultimately you bought the David Busters $40 put option with a one Monon exper for 45 so it sounds fancy but it's very straight forward but you have to remember that right now David Busters is at $45 a share so you're not going to go buy it for 45 and then sell to me for 40 because if you did that then you would lose money you would lose $5 a share so you wouldn't do that so the question is
• 33:00 - 33:30 how do you make money so you want David Buster stock to crash within the next month if DAV Buster's stock Falls to let's just say $30 a share then you would be so happy because if David Busters Falls to 30 a share then you can buy David Busters on the open market for 30 and then you could immediately sell it to me for 40 and then you would make a gain of $10 a share and you have to remember that you paid 45 to have this
• 33:30 - 34:00 option Therefore your true profit would be $955 so that would be an awesome rate of return because with 45 you made $955 and I want you to know that this is a real life example those are real numbers take a look for yourself this is the options chain for David Busters ticker symbol p y we go about one month outs we open that up and you get this so
• 34:00 - 34:30 don't be intimidated this is very easy to read so we're looking at the $40 put option that's selling for 45 you refer to the ask at 45 cents because if you're trying to buy the put option the seller is asking for 45 so you look at the ask now let me give you a different example to show you how you lose money so let's just say that you bought the same put op you bought the $40 put option expiring in one month if
• 34:30 - 35:00 David Busters does not fall below $40 in a month then your contract will be worthless so to demonstrate David Busters is at $45 a share let's just say that the stock Falls to 41 then in this situation your contract would be worthless because why would you exercise your option to sell it to me for 40 when you can sell it on the open market for 41 so if the stock does not
• 35:00 - 35:30 fall below your strike price before the expiration then you wasted your money on buying the put option so in this example you paid 45 cents for nothing and wasted your money now I need to tell you about the duration of the contract and I'll teach it to you like this I'm going to give you two offers and you tell me which one sounds better to you offer number one you can sell David Buster stock to me at $40 within the next month
• 35:30 - 36:00 offer number two you can sell DAV Buster stock to me at $40 within the next 5 months so you tell me which offer sounds better to you and it's going to be offer number two offer number two sounds better because you have more time for Dave and Buster's stock to fall below 40 however this favorable Condition it's taken into consideration and I'll show you so take a look for yourself here are the options contract tracks on Dave and Busters for the put option one month out
• 36:00 - 36:30 the $40 put option is selling for 4 now I want to show you the same $40 put option but 5 months out so we open that up and we see this the same $40 put option is selling for $2.40 which is a big difference compared to 45 so regarding the duration the more time on the contract the more valuable the contract is so the more expensive of it is time equals money so you can check
• 36:30 - 37:00 the same $40 put option that expires in a week and you're going to see that the contract will be cheaper you can check the same $40 put option that expires a year and a half from now and that will be much more expensive now I want to tell you about the strike price I'm going to give you two offers again and you tell me which one sounds better to you offer number one within the next month you can sell me your DAV and Buster stock for 40 offer number two
• 37:00 - 37:30 within the next month you can sell me your David Buster stock for 45 so which offer sounds better to you so in this situation of course offer number two is going to be better for you because you would rather have the option to sell me DAV Buster stock at a higher price however this is also taken into consideration so take a look for yourself this is the put option one month out the $40 put option is selling for 45 the $45 put option is selling for
• 37:30 - 38:00 $11.90 the higher the strike price the more valuable the put option is so compare that to the $35 put option which is selling for 15 therefore a higher strike price is more expensive and a lower strike price is less expensive now I want to remind you that with options you're dealing with 100 share increments so if you buy the dve Busters $40 put option for 45 then you are buying the option to sell
• 38:00 - 38:30 100 shares of D Busters at $40 a share and that put option will cost you $45 because that put option costs 45 cents a share multiplied by 100 shares equals $45 so if you want to buy the Dave Busters $40 put option expiring one month out for 45 this is how you do it the stock symbol for David Busters is p
• 38:30 - 39:00 a y buy to open because you're buying a puts you're buying one contract you choose the expiration dates you choose the strike price and you're buying a put the price of the contract is 45 but remember you're dealing with 100 share increments so it costs $45 to buy the put option now if you want to buy 10 put options you would just change a number of contracts to 10 and that would come
• 39:00 - 39:30 out to $450 in total that's because each contract costs $45 and you're buying 10 of them last thing I want to tell you is this let's say that you buy the dve Busters $4 put option and the stock Falls to 30 you don't literally have to go out and buy 100 shares at 30 and then use your put option to sell your 100 shares at 40 you can just sell the put option itself as if you were selling a
• 39:30 - 40:00 stock and this is what it would look like sell to close if Daven Busters Falls to 30 a share the $40 put option would trade for around $10 so you would type in the price that you want for the put option no different than selling a stock and you would make $11,000 per put option that's because you make $10 a share multiplied by 100 shares which equals $1,000 and remember you bought the put option for 45 so the put option cost you
• 40:00 - 40:30 $45 and now you can sell it for 1,000 so you probably realize two things number one if things work out well then you can make a lot of money but number two if the stock price doesn't cooperate with you in your given time then you lose now this is very important what I showed you is the most basic way to utilize a put option but this is not the only purpose of a put option now in our next segments
• 40:30 - 41:00 I'm going to show you how to use put options to decrease your risk and generate passive income so you can do this with cash secured puts let's say there's a stock at $10 a share and you think that it's a good buy at 10 but you can create a situation where you can buy that stock for N9 and if it turns out that you can't buy it for nine then you will get paid some money so essentially with a cash secured put you can buy the stock at a discount
• 41:00 - 41:30 and if you can't then you're going to walk away with some money now if you think that sounds too good to be true it's not I'm going to show you the good and the bad with cash secured puts so personally I believe that the pros outweigh the cons but I'm going to show you both sides of the story and you can be the judge so we're using a real life example let's use ticker symbol s i which is serious the satellite radio company so Sirius is currently at $4.89
• 41:30 - 42:00 a share and let's say that you think that it's a good buy at $489 a share so you can buy the stock at $4.89 and just hope that it goes up so that's one way to make money but another option is that you can do a cash secured put so here's what happens essentially you sell a put option by doing so you lock yourself into an agreement as follows Sirius is at $489 a share within one month if Sirius Falls to 450 or below
• 42:00 - 42:30 you will buy Sirius for $450 and it doesn't matter if Sirius goes to $450 $449 $4 or $3 if Sirius Falls to $450 or below you will buy Sirius for $450 but within one month if Sirius does not fall to 450 or below then you will not buy it however regardless of which
• 42:30 - 43:00 scenario occurs you will be paid 32 cents for agreeing to this therefore regardless of whether you end up buying serus for 450 or not you will be compensated 32 now I'm going to walk you through three scenarios and you'll see how this plays out for you and you'll see the pros and cons of a cash secured put and keep in mind that these are real numbers so you're going to see how how much money that you can make but first let me show this to you so that you know that
• 43:00 - 43:30 these examples are legit these are real numbers so we're using Sirius S II which is at $4.89 a share here's the options chain for serious and we're going to use the options that are expiring in less than one month it's in 22 days but we'll just call it one month to keep it simple and here are the prices on those one month options contracts so take a look at the 450 put option those are selling for 32 so keep this in mind that we're
• 43:30 - 44:00 using real numbers in our examples scenario number one Siri stock stays above 450 now remember the deal siries at 489 if Siri Falls to 450 or below in one month then you are obligated to buy Siri at 450 but if it doesn't go to 450 or below over the next month then you will not buy Siri in this scenario Siri stays above 450 so Sirius could go up it
• 44:00 - 44:30 could go up from the current price of $489 to $6 or Siri could do nothing from $489 and stay at $489 Siri could go down a little bit from 489 to 451 regardless in any of these events the price remains above 450 therefore in this scenario you do not end up buying Seri stock but you still get paid 32 so if you think about it you did
• 44:30 - 45:00 really well nothing happens you didn't end up buying anything or doing anything and you made 32 cents but what was the risk here the risk was that you could end up buying Siri for 450 and what was the reward 32 so if you make 32 cents by risking 450 that is a return on investment of 7.1% in one month that is an annualized rate of return of
• 45:00 - 45:30 85% and remember these are real numbers scenario number two Sirus stock Falls to 450 or below so let's say that after 1 month Sirius Falls to 440 in this situation you are obligated to buy Siri for 450 and because you buy Siri for 450 and it's Fallen to 440 you are down 10 cents however you have to remember that you were paid 32 cents to take on this deal
• 45:30 - 46:00 so in reality you bought Siri for $450 but if you factor in the 32 cents that you were paid then you really bought Siri for 418 and if the price of Siri is at440 then you're actually at a profit of 22 but I want you to put this into perspective because remember when you saw Siri at489 you like the stock and you thought that it was a good buy at $4.89 but by going with a cash secured
• 46:00 - 46:30 put you bought Siri for 418 so you got a much better deal on the stock you got in at a 15% discount and remember we're dealing with real numbers so this is why a lot of investors love cash secured puts because they pick a stock that they want to buy and they get to buy the stock at a discount and if not then they're going to walk away with some money so it's a win-win situation but I want to tell you the danger of a
• 46:30 - 47:00 cash secured put I want to show you the nightmare scenario so here's scenario number three Siri stock plummets so Siri at 489 and remember the deal if Siri Falls to 450 or below you are forced to buy it at 450 in one month if Siri plummets to $1 you will be forced to buy Siri for $450 50 so yes you did get paid 32 for making
• 47:00 - 47:30 this deal so your true purchase price is 418 but still the stock fell to $1 this means that you are down $318 which means that you're down 76% so here's my recommendation if you're thinking about doing a cash secured put I would recommend doing it on a stock that you think is already a good buy but you have to put things into perspective so if you thought that Siri was a good buy at $489 and you bought it at $489 if it falls to $1 then you would
• 47:30 - 48:00 be down 79% if you do the cash secured put then you would be down 76% so even though this is a nightmare scenario with a cash secured put it's not like you would have been spared or done any better if you bought the stock outright but I want you to still be aware of the danger now let me show you how to execute a cash secured put so it doesn't matter which brokerage account that you're using they'll all be similar
• 48:00 - 48:30 you go to trade options and then you'll see an order screen that looks similar to this in order to create a cach secured put you will place a single order and then you choose the ticker symbol of the associated stock in our example we're using Sirius ticker symbol Si I we're going to be selling the put option therefore we select sell to open you choose how many put options that you want to sell in our example we're
• 48:30 - 49:00 selling one contract but remember one contract is equivalent to 100 shares of stock you'll select which put option you're selling in our example it's the put option expiring on August 18th so this was the put option expiring 22 days out you select the strike price in our example we used the $4.50 strike price and of course we are selling a put option so we select put I would
• 49:00 - 49:30 recommend doing a limit order because if you do a market order you could end up selling the put option for a bad price and fill in how much you want to sell the put option for in our example 32 cents was the going rate so I'm just going to use 32 cents and remember one put option equals 100 shares a stock that's why you'll receive $32 for selling one put option because if you sell one put option you receive 32 cents per share and 32 cents multiplied by 100
• 49:30 - 50:00 shares equals $32 and time and force I filled in day this means that if the order doesn't fill today then it's going to cancel itself automatically you can switch this to good till canell but that's up to you so I told you it's very easy and straightforward to execute a cash secured put in a separate video we'll cover how to shop around for good deals on cash secured puts so this is something that you'll get better at with
• 50:00 - 50:30 experience now I want to tell you this if you made it this far then I know I know for a fact that you are serious about becoming a better investor so I encourage you to please check out our website I'm going to leave a link for you down below I'm always looking for good options I'm always looking for good deals so please stop by thank you so much please subscribe and I wish a very nice day happy investing