Options Basics & Fundamentals
September 6th, 2018
August 30th, 2018
July 12th, 2018
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Today we're going to take a look at what profit potential you can expect from trading iron condors.
We will cover three main points:
- Why is it important to know your profit potential
- what determines your profit potential when trading iron condors
- How to increase your profit potential with iron condors
February 9th, 2018
I would share with you how to set up a diagonal trade - meaning a diagonal options trade. That way you can tweak your risk on Amazon.
We'll take a look at Amazon - how to set up a diagonal and why you may want to choose to do a diagonal. I like the foundation of the diagonal from looking at a calendar spread. If you're familiar with calendars, diagonals are somewhat similar.
Keep in mind. It's all based on selling premium. When you sell premium, that's really what you're doing. You're the first premium of sale and then what you're doing is you're buying protection to hedge or reduce your risk. When it comes to diagonals, you're buying it later out in time, just like with the calendar, and that allows you to adjust your risk.
We're going to take a look at Amazon in our trading panel. Keep in mind this is just for educational purposes. This is not recommendations to set up this exact trade. You might be watching this video sometime in the future, but I want to show you how to construct it.
First, let's take a look at the market, and you can see we've had a massive down move here just even today on the SPX down a hundred points. I'm not saying you want to do this right away, what I'm saying is let's take a look at how to construct one and when the time is right, you can make tweaks and modifications.
With that in mind, you might want to allow things to digest if you're watching this video the minute it's out or available.
Anyway, when we look at Amazon, you can see we're starting to pull back and sell-off. So, let's say, I'm looking for this to go a little further. I could say this is going to go down to about 1200, that's my goal and thought process. Let's say it topped out. I want to be in the trade for maybe 15/20 days, it could be 10, depending on your time horizon.
But here's how you go ahead and set up and construct the diagonal.
I go into the March ones or the March 18, which is 36 days out. Usually, what you do is you construct about 50 of these different strikes. Let's do 1340. What I'll typically do is sell a single, we'll analyze the trade, and now you could see when you sell a single you have a pretty much-unlimited risk when the stock goes down.
Then what you need to do is if you go in and buy protection, go ahead and buy a single over here and now I'll analyze this because I want protection. You could see right here. It creates kind of a funky little graph that looks like this. This would be a calendar because it's the same strike price. It's the same strike that I've chosen, so it would be considered a calendar.
I could go ahead and enter this as a calendar trade together, or you could do it individually.
If we go to March, buy a calendar, analyze the trade and we have the March 16th and the April 20th. There's our calendar trade, and you can see it looks very similar. It's just a little bit closer to the white line, and that's because we're doing it as a spread. It makes it a little bit better actually.
If I'm bearish on the position, I could go ahead and change this to custom. So instead of a calendar, I could go ahead and shift one of these. Instead of going from 1370 and 1370 - selling one and selling the same one, I could switch this to 1360, and you can see how it starts to rotate it.
I could go ahead and go the other way, and this will go 1390. You could see it shifts the other direction. This is diagonal so that I could go to 1400. I could go ahead and tilt it a little bit more. I could go ahead and tweak this based on my risk of how bearish I want to be.
January 11th, 2018
Today, we're going to talk about the option and what we're going to do and discuss is talk about selling put option contracts.
Selling put is similar to looking for upside in a specific stock. It is a little bit different when you're dealing with selling option contracts rather than buying options contracts. Yes, you can sell options contracts. It's not that you have to buy a put or buy a call.
Some people don't understand that you can be a seller of options, just like people at a dealership will sell you a car before it's even on the lot. The same thing here with option contracts, you can sell them also if you don't have them. You're selling these contracts to other people that are interested in buying them.
The issue is, of course, you will have to deliver what you promised based on the contract, and I'll show you what that looks like in the risk profiles and pictures which will make a lot more sense as we go through the lesson.
What is a put option contract?
In general, when you're buying a put contract or buying a put option, it means that you're looking for the stock to go down. In other words, you have a bearish outlook.
That's what happens when you're buying a put contract now.
When we're selling a put option, what this usually means if you're looking for the stock actually to go up. You're bullish. And that's what we're going to be discussing right now. We're going to be looking at the sell side of the put option contract.
It's a little more confusing for some people. Just understand that there are four parts to a trade:
- you can be a buyer of a put
- you can be a seller of a put
- you can be a buyer of a call
- you can be a seller of a call
So there are those four parts to trading an option contract. You can be on any one of those sides when you're trading options.
If you want a quick little cheat sheet, here's the way you want to look at
If you're a buyer of a call, you want things to go up. A buyer of a put, the same thing, if you have the basics down, you're looking for that price actually to go down in the stock.
If you're a seller, it works opposite. If you're a seller of a call, you want prices to go down because if you're a buyer, you want prices to go up. So being a seller, you wish to the opposite of what the buyer wants.
The seller of a put is the same thing. It's opposite to the buyer of the put. So, if you're a seller of a put, you want the prices to go up.
Long story short, these are the combinations that you have available. There's your quick reference guide.
Let's take a look at the risk profile picture
We have our primary zero line here on the chart, and anything above that zero line is profit. Anything below that zero line is a loss. So profit and loss are dictated here on the left.
Now on the bottom, these numbers are the stock prices. As a stock price head tire, you can see what happens to the graph. Our profit stays the same when we sell a put. We have a max profit that we can make right there at that exact point.
The problem with selling contracts is you have an unlimited loss. When it comes to selling a put, your unlimited loss actually can only go down a zero because the stock price can go to zero.
When it comes to options, you have two main things on the profit picture.
You have a profit picture of the line at the expiration of that contract, and then you also have a line that today with a time that line gets closer and closer to the line that expiring. So you have that decay.
The good thing about selling a put contract is this line gets closer, so you make more money as it gets closer to that expiration.
Take, for example, you are selling this put contract, and you're over here at this price point. At the zero line, right around the $22 range.
With time, that line will get closer and closer, and at expiration, you make quite a bit of money. If that stock price goes up to let's say $35 a share within the next 24 hours, your profit potential would be a little bit higher.
But if you can hold it up until expiration, you actually would make the most from that contract. It doesn't matter if the stock stays above 25 and it's 25.05, or if it's 60 or a 150, you will make the same amount.
The issue with selling something is you're tapping or creating a max profit potential. Whereas, if you're buying a call or buying a put, you have more unlimited profit potential.
If you bought a put, you're looking for unlimited profit potential as the stock goes down, up and throws a zero point.
If you're buying a call, it's going to look slightly different. You're going to get a chart that looks something to this effect, but then you still want the stock to go up, but at least you have that unlimited upside potential. Whereas, when you sell a put, we make a maximum on our contracts, but when you're buying a call, you make an unlimited amount.
The problem with buying a call over here in the top right section if you're losing money day in and day out whereas when we're selling this put we make money day in and day out.
Let's take a look at selling a put option contract on a trading platform
The first thing I want to do is go ahead and buy a single call just so that way you can see what that looks like.
If we buy a single call, you can see I'm still looking for upside, but my upside potential is pretty much unlimited. It's going to be upside my max risk - is negative, about $153, which you can tell by this little green amount in the lower left or also the amount that I'm buying that contract for that's buying a call contract.
If we're buying a put contract, you're looking for that stock actually to head lower. And again you get unlimited to the downside right up until it hits zero, but the problem is we lose $2.52 every single day.
If we turn this into selling a put contract, you can see I get that upside exposure. What I want is this stock to go up to the upside or stay above at least this 145/146 level because our contract is at 145. As long as that stock stays above 145, I'm perfectly fine right now.
The issue, of course, is if this continues to move lower and lower in price, I can lose quite a bit of money because again this is a naked option contract. I'm selling something naked because I'm selling a single.
Ultimately, most traders do is they're selling contracts similar to this, and they're collecting the data from it, letting those contracts expire day in and day out.
January 3rd, 2018
Today, what I'd like to do is share with you how to buy a put option. Now, this is an excellent video for you to watch if you're looking just to get started in trading options or investing in options or you have some fundamental questions about options. We're not going to cover everything about options in this video. It's just a quick little insight to just getting started at looking how you would place a trade to buying a put option.
What is a put option?
When you're buying a put, it means you are looking for the stock to go down. Basically bearish and means you have a slight bearish position.
If you're a seller of a put, it means you're looking for the stock to go up, which is bullish.
In this video, we're focused on the buying side of buying a put. It means you're looking for that contract to go down the stock to go down so that way you make a little more money from the put contract.
Ultimately, that's what people do when it comes to trading options.
Why would they want to buy a put?
If you own stock - let's say I own 500 shares of Netflix, and I want to hedge it or protect it, what I may want to do is buy a few quick contracts so that way if that stock goes down at least they make a little bit of money on the puts. The puts aren't going to replace me getting out of the stock entirely, it's not going to negate my position totally, it will only protect a little small part of it.
You can do one put or two puts or three puts - typically it's based on loss of a hundred. So, if you do one put it covers 100 shares, that's just the way option contracts work.
If you have 500 shares of let's say Netflix, and you want only to protect one or two hundred shares, you could get one or two puts - which will cover 100 or 200 shares regarding protection.
Ultimately, that's what a put is if it's a downward exposure subtly.
Here's a quick little cheat sheet for you
If you're a buyer of a put, you want that stock to go down. If you're a seller, things work a little bit backward. If you're a seller of a call, you want that stock to go down, and if you're a seller of a put, you want it to go up.
Buying a put option
If we look at a risk profile picture and what it looks like for when you buy a put
On the left side, I have either a profit or loss depending on if I'm above or below this zero line.
On the bottom, I have the price of the stock
When you look at this profit line, the black line is the line at expiration because contracts have a specific timeframe of expiration. This pink or purple line is the current today line, and with a time that line gets closer and closer to the black line.
If we break this apart and start evaluating and looking at where would I be at a $20 strike price if you bought a put you'd be in the profitable range. If that stock continues to go lower, so let's say the $15 range, again you'd be a little bit higher regarding profit. But if it gets into the $30 range, you be in the losing territory. If it goes in the $40 range, again you'd also be in the lost territory.
That's how you read this up the picture. When you look at buying a put, you can see the direction that you're based on and focus on. You want a downward move in the stock price, and you want to do it as quick as possible because that pink line is getting closer and closer to the black line.
Let's look at how to buy a put option on screen or a trading platform
In this example, I have a paper trade account here with Netflix. This is the think or swim platform. I have $2230 in fake money profits, and I'm going to use this here as an example I have 100 shares.
Here's my fundamental analysis of where I'm at now. I got this stock around this price point. You can see this red hash mark or the one 2972 priced level. That's what it is on this on the price okay now.
With time, that stock moved up, and now I am profitable $2233. It allows me to go ahead and fully cash out of this position or if I believe Netflix still has a longer potential for the future. I could hedge it or protect it by buying a put contract.
What I can do is going to Netflix, and I could say well I want protection for about sixty days. I could say I bought it at 130, so if I want to protect it at 135, I could go ahead buy a single contract somewhere around there. It'll cost me a little bit for that protection.
This protection will cost me $279. You can see that multiply it times one hundred. $2.79 times 100 is $279. So here I'm spending $279 to protect my profit which puts me at the $135 level.
It's not going to offset the full difference of what I lose because on that $314 in profit, but I'm going to lose much more of that actually in the regular stock, but this helps compensate me a little bit for that loss.
That's what puts ultimately allow you to do.
If you look at the stock position 140, my profit would only be $1011 compare that to $2233.
I'm mainly reading about $1200 if that's not going to 140. But if I have the put, remember I would make up $314. The reality is I wouldn't be at 1011 I'd probably be at 1315 regarding negative, which is still you know I'm still losing quite a bit of money, but it's not as bad.
So, I make an extra $320 or so by holding on to these puts. If things become a disaster, of course, at expiration, I could go ahead and put that stock to someone else, and that's another approach or way of doing it.
If you combine these things, you can see that I'm still going to be always profitable, at least $250 at expiration simply because of where my price is already now.
For many people, they only go on and buy a put, so they don't even look at owning the stock. That's not uncommon.
That's ultimately what a put allows you to do. And to place this order, what I can do is right-click confirm and send. There are all the details right there, and all I have to do is hit the send button submit it, and it's going to go into the queue and put on that trade for me.
I'm risking $2300 because it's the $23 put multiplied times one hundred, hence the $2300. That's the green line at the bottom. That's how much I'm risking.
A potential that I can make from here is $2300. If that stock head down to, let's say, 930/940, I make $2300 which is I make whatever I risk. The one-to-one risk-reward ratio which is fantastic and that the power of option.
If it goes down to about 900, which for Amazon's a ninety point sell-off, it could happen in four or five days, it probably wouldn't happen in one day, but it's possible you make about $4000 now.
That's just seeing the money spotlight. Keep in mind you're also losing theta time and time again, so with time, that white line will get closer to the green line. You're going to be losing money each day that stock or options stand still and within a couple of weeks, you could be down about $1500.
So keep that in mind, as you're trading or buying put contracts.
December 27th, 2017
I will go into detail about selling a call option.
For many people, they don't understand that you can sell options without having the stock or without owning the other options side of the trade. Selling call options or selling options, in general, is more popular amongst professionals than buying options contracts and that is because you can allow the time value or the time decay to work in your favor.
In either case, understand that there are four parts to trade.
- You can buy a call
- You can sell a call
- You can buy a put
- You can sell a put
In our case, we're going to talk about selling a call option.
Selling a call option is very similar to selling a car that is not on a lot. Dealers or car dealerships - they often sell vehicles that aren't even on the lot because you might want it in a different color, you might want different see different color seats, different little details and bonuses, add-on and unique features that they may not have on the lot.
What they typically do is the car they sell it to you, it's already sold, but they order it make it for you. That's ultimately what happens with selling call options.
Let's take a look at in more detail about selling a call option - look at some profit pictures and risk profiles and then also look on-screen. How we can execute that trade and order.
What is a call option?
When you buy a call, it means you're looking for the stock to go up. You have a bullish outlook, that's an upward direction.
When you're selling a call, it means you're looking for the stock to go down. It's a bearish outlook.
Typically, many people, the way they approach selling calls is they already have a stock position and then what they do is they sell upside calls, also known as they covered calls strategy against it.
Here's a quick cheat sheet for you as far as looking at what happens.
When you're a buyer of a call, you want stock prices to go up. When you're a buyer of a put, you want stock prices to go down.
If you're a seller of a call, you want prices to go down for that call. If you're a seller of a put, you want stock prices to go up.
Taking a look at our risk profile picture here it is when we talk about selling a call.
The biggest issue or problem that we have here is the unlimited loss potential that we can get if that stock price continues to head higher.
The way that you read these risk profiles is again you have the profit here on the left and the loss and here is our zero line. Anything above that zero line is a profit-making, below that is the loss. Our stock price is towards the bottom - so as the stock price goes up, we lose money, and we can lose an unlimited amount based on this.
The black line is our call contract at expiration. This pink line continues to get closer to our black line with time. So over time, it gets closer and closer.
What happens here is we make money day in and day out, as that stock does not move or it moves to the downside.
Selling a call is actually like buying a put, as you can see. However, the difference is you have a cap or max profit. You can't make any more than that.
If you sell a pair of shoes for $75, that is pretty much all you can get. You can get more in the future. You're just making $75. All you can do is maybe lower your purchase price.
In our case, what's happening is when we sell a call, we're looking for a downside move, not an upside move. Ultimately, with time, that line continues to get closer and closer to expiration. That's what we make on the profitability side. If we move downward, then we can make our full max profit potential.
Anyway, that gives you a little bit of insight into a risk profile picture of selling a call.
Let's take a look at how to sell a call on an options trading platform
I want to show you what buying a put looks like on a risk profile picture.
You can see here I have a downside move. I need the stock or this option really to move to the downside.
Here's our price level, here's our zero line.
You can see that there's my current price at the 154. I want that stock to move down because that's what I make more money. As I move my mouse, you can see there's my profit. If I move it down, there's my loss.
What I can also do is move this to 150, which is a little bit closer. I can move it to even 155 - which gives me a little bit more acceleration there on the profit potential. So that way, if it goes to 145, I make $650.
The problem with this is if you're buying a put. If the stock stands still, I'm losing $3.18 every single time. And with time continuing to move forward, you can see the losses here continue to add up.
As I continue to move the time and date forward, I continue to lose more and more money. I need this stock to move. If it stands still, I lose money because I'm below that zero line.
I need to move above that price point of about 151. If it goes down or actually if it goes to the upside, I lose money. If it stands still, I lose money. The only way I make money if it goes down, it has to go down in a pretty big way about four or five points on this stock.
With a call option, what's different is if I go ahead and let's say I sell this 160 call option and we'll do a single. Again, take a look. I'm assuming the opposite side of the call or the call trade. Buying a call would be this way. I'm looking for unlimited profit potential here with buying a call.
You can see the advantage of selling a call because what happens is if a stock stands still, you make money. So if it's right here, if it goes down, I make money. And if it goes up a little bit, I still make money and make my max profit up to 160, but I still make some money up to 161/162.
You can see how the probability of success increases with this. Unfortunately, you don't have that unlimited upside money potential. In this case, you can make $200-300 if that stock explodes to 186. Now, the chance of that happening is unlikely, but you do have on the unlimited potential and a cap max loss of 163.
Whereas, if you sell the call you have an unlimited loss potential which is naked. You need to have an advanced option on level and capability could be able to do this.
For most people, they sell these call contracts because they own let's say 100 shares of McDonald stock. For example, if I had 100 shares of McDonald stock, I could go ahead and sell a call contract against it.
What this allows me to do is think of it like two trades the McDonald's stock, I make money from it from going up the call contract, I make money from it from staying under that 160. So if this McDonald's stock doesn't do anything and stand still, I usually don't make any money. But because I have that call contract from selling it, what it allows me to do is make that additional $150 from just pretty much sitting still. If it continues to go up, I make my appreciation from my stock, but I lose a little bit of money from that option contract especially as it continues to head higher.
Now, the difference is because I have 100 shares of stock if it goes beyond it what they'll do is they'll take away my hundred shares of stock. That's ultimately the dangers, whereas, if you sell this without stock, you're continuing to go into a bigger and bigger loss because you own the stock at that 160 dollar price point okay.
If you didn't own the stock, that's where you have the problems.
But when you own the stock, maybe take your stock away at 160, so if it's at 164, they make it elsewhere. You still get to keep that 150 dollars, and you get to sell your stock at 160. But if you want that stock and you want it back, you'll have to repurchase it out 164.
That's the downside, but we'll get more in detail into covered calls in another video.
For now, understand and recognize that when you sell a call contract, you're looking for prices actually to go down or you need it to stab you know below a certain.
Selling calls is a downward direction bias, that's what you're looking for you're technically bearish on the position, or you're neutral. If you want to stand still and hang out right there below a certain price level, then this is the position to put on now.
You could do it a little bit closer. Let's say you were at 155, in that case. You'll make more money. But you pretty much have that break-even at that 158 and your max at 155.
If you go wider, if I go to 160, I make less. I make 150, but I'm safer meaning I have a more significant range or a wider range. If I go to 165, I can go even wider. Now, I only make $51 on this one, but my chance of success is a lot higher.
You have to play with those probabilities based on your situation and risk levels, but that's ultimately what you're looking at with a call contract.
December 21st, 2017
Today, what I'd like to do is go in detail about:
- What it means on buying a call option;
- and How you can execute that trade.
If you're new to options trading - if you're just getting started, this is an excellent video to watch. There's a handful of other videos that I have regarding the basics of options trading. By all means, take a look on my website at https://tradersfly.com/.
What is a call option?
- When you're buying a call, it means you're looking for the stock to go to the upside - a bullish direction
- You can also sell a call, which says you're looking for the stock to go down or it's a bearish position.
There's four parts to those trades:
- Buy a call
- Sell a call
- Buy a put
- Sell a put
For people that are looking to buy a call, they're typically looking for a stock to go up and they have a bullish outlook.
Here's my cheat sheet for looking at the different direction
If you're a buyer and you're looking for a call, you typically want stock prices to go up.
If you're a buyer of a put, you want stock prices to go down.
If you're a seller of a call, you are in a similar situation of buying a put because you want stock prices to go down.
And if you're a seller of a put, you want stock prices to go to the upside because you're taking the opposite side of the trade.
Let's take a look at the Risk Profile Picture of buying a call
In our case, on the left side is our profit and then we have our loss based on the zero line. Anything above that zero line is a profit and can be low.
If the stock price starts out at $35, that's our starting point - that's the zero line, and a stock price goes up to 40. At this price point, we draw it across, and that's our profit point.
If we go into the $50 range, that's our profit point. A little bit higher.
What is the pink line and what is the black line?
The black line is at expiration - that's when that contract expires.
The pink line is today.
If that price went a day to the upside, I would make the most or the maximum amount. However, the problem is that with time, that line gets closer and closer to that black line. That pink line gets closer and closer to the black line.
You are playing against time when you're dealing with buying a call position.
That's the tricky part for many traders, and that's why they lose a lot when it comes to options because they buy a call. If the price goes down a little bit plus they lose some of the time value, and it gets to 30, they're at a loss not only from the price perspective but also from the time value perspective.
That's how this profit picture works. It's easy to understand. We even look at them once, you get the hang of looking at profit picture. Simple terms, anything above that zero line, if you fall into this range. This price point you're looking at, you're at a profit. If you're below that range here at a loss because that is your zero line. Right here on this black line, that's your maximum risk. That's your maximum loss as well.
On buying a call, you have unlimited profit potential because you're looking for an upside move. You have an unlimited profit potential in this example and this scenario in a situation. That's a lot of times why people buy a call contract.
However, it's not always the most profitable simply because you need that stock to move. We show you some examples here with looking at selling a call versus buying a call. In this case, if the price standstill, you lose money. If it goes down, you lose money. The only time you make money is if it goes up and in your favor quite a bit.
Let's look at how to buy a call option contract on a trading panel and platform
Here, I am using the think or swim platform. You could do this in any other brokerage platform if you want. This is just paper money or fake money.
Let's say I wanted to trade Nike as an example and I want to purchase a call contract at a $55 a share. The typical way or the traditional mentality is that I can do go ahead and buy a single and because I'm choosing the 55 strike price where it also gives me 59 days.
I analyze this you'll notice the profit picture right here on Nike, as I spread it out, they'll start to look like the drawing or the diagram that I showed you earlier. Removing a few of these slices so you can see the live price.
Make sure the date is today.
You can see looking at this at the bottom is the Nike strike price. Those are all the prices. The current price is right here 51.54/51.56. I'm looking at 55 as my strike price, so I need it to get here and higher to cover that bid-ask spread a little bit and that's that tick mark right there.
The primary way that most people do this is I'm targeting 55. If it gets to 55 or above in that 60-day time frame, I can buy the stock even if it's at 56, and I can buy the stock at 55. That's what it allows me to do. That's the traditional way.
Most people who are options traders, they do just the trading within options because what happens is as this get into the $55 range, you're actually at a profit. In this case, about $120. That's if it happens tomorrow.
With time, that white line will get closer to the green line, and it may only be $90. But in general, you could simply get out of the contract that can collect your money. That's another option.
November 23rd, 2017
June 1st, 2017