Learning Options Trading

Learning Options Trading

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  • 13:24 Options Trading Explained – Complete Beginners Guide (part 1)
    • Other Title: Options Trading for Beginners (part 1)
    • In this Options Trading for Beginners video, you’ll learn the basic definition of call options and put options, and how investors and traders use them in various ways. You’ll also learn about strike prices and expiration dates.
  • 10:50 Options Trading Explained – Complete Beginners Guide (part 2)
    • Other Title: Options Trading for Beginners (part 2)
    • In this Options Trading for Beginners video, you’ll learn what it would actually look like to buy and sell call options and put options. You’ll learn how to read an option chain to find options at different strike prices and expiration dates.
  • 32:02 Understanding Option Prices – Complete Beginners Guide (part 3)
    • Other Title: Option Pricing – In-Depth Guide (part 3)
    • In this video, you’ll learn all about how options are priced. You’ll learn about how stock price, time to expiration, and volatility of the underlying stock are the three main factors that affect an options price. Furthermore, you’ll learn how changes in each of these factors will affect the options price each day.
  • 07:31 Options Trading: Understanding Option Prices
    • Options are priced based on three elements of the underlying stock.
      1. Time
      2. Price
      3. Volatility
    • What are options, option pricing, how to trade options,
    • option trading basics, options explanation, stock options

Two types of Options

  • 13:24 Options Trading Explained – Complete Beginners Guide (part 1)
  • the following information must be credited to the above mentioned video

Call

  • Gives option holder the right (but not the obligation) to BUY shares of stock,
    • at an agreed upon price, on or before a particular date.
  • You want the stock price to go up.

Put

  • Gives option holder the right (but not the obligation) to SELL shares of stock,
    • at an agreed upon price, on or before a particular date.
  • You want the stock price to come down.

Strike Price

  • The “agreed upon price” at which the stock will be bought or sold.

Expiration Date

  • The “particular date” at which the option contract will expire.

Example of a Call Option

Bought Option
TYPE     STRIKE    EXPIRATION
Call      120      30 days from now

Owning this Call Option will allow you to purchase stock …
at 120 per share (strike price) …
anytime within the next 30 days (expiration date) …
no matter where the stock price is at !

No matter what happens to the real stock price.
If the stock price goes up or down, you can buy it at the “strike price”.

Example: if the stock price goes up to 135.00
you can buy the stock at 120.00

Example of a Put Option 

Bought Option
TYPE     STRIKE    EXPIRATION
Put       120      30 days from now

Owning this Put Option will allow you to sell stock …
at 120 per share (strike price) …
anytime within the next 30 days (expiration date) …
no matter where the stock price is at !

No matter what happens to the real stock price.
If the stock price goes up or down, you can sell it at the “strike price”.

Example: if the stock price goes down to 100.00
you can sell the stock at 120.00

  • 02:17 at video
  • 13:24 Options Trading Explained – Complete Beginners Guide (part 1)

Why would someone want to purchase an option.

Why buy a Put Option

  • 02:48 Gives option holder the right (but not the obligation) to SELL shares of stock,
    • at an agreed upon price, on or before a particular date.
  • Video uses Car Insurance as an example
    • you have to pay for the insurance policy.
  • If your an investor
  • you just bought 100 shares of XYZ company @ 125.00
  • 03:37 total cost of this investment is $12,500.00
  • since a stock could go to zero, your total risk on this investment is $12,500.00
  • 03:58 its like purchasing insurance on this investment
  • by purchasing an option contract
  • specifically for this example,
  • we would buy a “PUT OPTION”
  • he reviews: A Put Option is
    • The right (but not the obligation) to SELL shares of stock,
  • at an agreed upon price, on or before a particular date.
  • 04:18 recap: you own 100 shares of XYZ company @ 125.00
  • you want to buy insurance on this investment
  • you buy a Put Option
  • 04:30 If you bought an option, someone had sold it to you.
  • but who
  • the answer is: any other trader who is willing to be paid to take on your risk
    • just like an insurance provider
  • 04:40 that’s the basic idea behind options
    • an investor has “risk”, he’s willing to pay someone to take away his “risk”,
    • and the person who gets paid, now assumes that investor’s “risk”.
  • 04:55 Let’s look at a real example
  • you bought 100 shares @ 125.00 = $12,500.00 of XYZ stock
  • and you also purchased a put option as insurance
  • the price of this insurance is determined by several factors
  • you will learn about these factors in chapter 3
  • for now say it cost $500.00 for this put option
  • this gives you full-coverage insurance for 30 days

lets look at two different scenarios

The First Scenario

  • 05:22 after you buy the stock and the put option
  • the stock price goes up from $125 a share to $132 a share
  • so you made $700 (7.00 X 100 shares of stock)
  • that’s a profit of $700 on the stock you owned
  • you also paid $500 on an options contract, that now has no value to you
  • your net profit is only $200.00
  • 05:51 at this point your probably saying, what a rip-off
  • and the person who sold you the options says: thanks for the easy money
  • because they got to keep the $500 that you paid them

The Second Scenario

  • 06:03 after you buy the stock and the put option
  • the stock price goes down from $125 a share to $113 a share
  • the share price now is $12 cheaper than when you initially bought it
  • because you own 100 shares, you lost $1,200.00
  • however, thankfully, you bought a put option as insurance
  • you go to the person that sold you the option, and you say:
  • remember our contract, even though the stock is at $113.00
    • you are able to exercise your option
    • to sell your shares at $125 per share
    • you lost nothing on the stock.
  • Your only lost in this scenario
  • is the $500 you paid for the put option
  • much better than the $1,200 you would have lost
    • if you did not purchase this option contract
  • 06:54 Remember that the person that sold you this option, had an agreement with you
  • they were obligated to purchase your shares from you
  • at $125 per share
  • so they got to keep the $500 that you paid them for the put option
  • but they are now sitting on a $1200 loss, on the stock that they own
  • 07:11 they can hold the stock and hope it goes back up
  • or they can sell it at the current market price of $113
  • for a total net loss of $700
  • That’s all options are
    • they are simply insurance for an investor.
  • That’s why they even exist in the first place.

Options = Insurance

  • 07:27 a few thoughts may be running in your head right now
  • you might be saying: But I don’t want to buy insurance on my stock portfolio.
  • or maybe you don’t own any stock ………
  • reserve