Transcript for:
Options Trading Overview

welcome to options trading for beginners the ultimate in-depth guide my name is Chris and I will be guiding you through the world of options trading today even if you don't know a single thing about trading options there's a lot of different sections in this video so be sure to refer to the chapters down below and also you can download a PDF presentation of this entire video featuring all of the slides and Graphics so be sure to grab a copy of that PDF down below so you can follow along and study the examples in this video let's dive in and start with defining options what are options so the textbook definition for what a stock option is is a financial tool that allows the owner the right to buy or sell 100 shares of stock at a fixed price before a specific date this is all going to make a lot more sense as we continue so bear with me there are two types of options calls and puts let's go through some very simple examples so I can demonstrate to you how call options and put options can profit versus changes in a Stock's price here we are looking at a Tesla call option example and we are looking at a period where Tesla's share price Rose significantly and then traded back down a little bit and then started to Trend higher yet again call option prices go up and down as the stock price goes up and down and also of note is that the stock price increased 145% over this entire period and this specific option increased inreased 400% over the same exact period options traders buy calls when they believe a stock will go up in the future as we see in this chart here I like the stock if they are correct they can make a far higher return on the option as compared to shares of stock and if they are wrong they can lose the entire amount paid for the option in this example the stock price went up about 150% and this specific call option increased by 400% which is more than three times higher than the actual stocks return presenting a much greater opportunity for profitability for those that purchase call options in Tesla over this period let's flip the script and talk about put options really quickly in this example we are looking at a put option again on Tesla put option prices go up when the stock price Falls and go down when the stock price Rises so put options move inversely to the stock price whereas call options move with the direction of the stock price options Traders buy puts when they believe a stock will fall in the near future and if they are correct they can make money from the put price increase as the stock price Falls and if they are wrong they can lose the entire amount paid for the option in this period we can see that Tesla's stock price Falls by 23% and this particular Tesla put option increases by 100% so this is a really cool opportunity to use put options which is when the market is falling you can utilize put options to profit from the decline in stock prices with that being said if you own a large portfolio of stocks you can use put options to protect against losses on your shares of stock so there are ways that you can use options not just to speculate but to reduce the risk that you are exposed to so we've gotten a little bit ahead of ourselves we have to back things up and talk about key terms I just wanted to show you some simple examples of how call options and put options move relative to the stock price and the opportunities that they present to options Traders but now we have to go through all the specific details so we can deeply understand options and we're going to do that by starting with key terminology let's dive in so every option has a strike price expiration date and a contract multiplier and we're going to talk about these in depth we need to learn these terms to understand option prices and what they ultimately represent the strike price is the specific price at which an option owner can buy or sell the asset the option is tied to so in this video we're talking about shares of stock so if I own a call option with a strike price of $125 I have the right to buy shares of stock at $125 no matter what the stock price does so here I have this simple visualization where we're looking at a strike price of $125 and we can see the stock price is going up and down and as the stock price goes up and down my option allows me to buy shares here and as we might imagine this contract's ability to buy shares at 125 is going to get a lot more valuable as the stock price Rises so that's a first hint as to why call options go up in value with the stock price the second thing to know is that all options have an expiration date the expiration date is the final day an option exists and can be traded and an option's final value is going to be determined on the expiration date if iy buy a call option with a strike price of 125 that expires in 30 days I only get exposure to this call option's price changes over this 30-day window and so that means when I buy or sell an option I am going to have to choose a time frame for which I think the stock is going to make a specific movement the third thing we need to talk about is the option contract multiplier a single share of stock with a price of $120 can be purchased with $120 in cash but options are different if an apple option is listed at a price of $5 I actually need $500 to buy the option and that's because standard Equity options such as options on Apple Tesla or Nvidia for example can buy or sell 100 shares of stock at the strag price and so this 100 shares is the options contract multiplier in this image here we can see that the call option has a listed price of $1 52 but we can see that it says the max loss potential and the buying power or the amount of money we need to purchase this contract is $152 and here's how to interpret the difference between the options price and its actual value basically what this is saying is that for a cost of $152 per share the contract can buy 100 shares of stock at the strike price and if we pay a $152 per share fee for the right to buy 100 shares at the strike price we are going to pay a total of $152 so the options price is essentially you can pay this per share fee for the ability to buy 100 shares of stock at this fixed price through the options expiration date now that we've gone through the key terms let's go through some more call option examples specifically buying call options a call option grants the owner the ability to buy 100 shares of stock at the strike price on or before the options expiration date and call prices go up with the stock price because the value of buying shares at the strike price which is fixed goes up as the stock price Rises the risk graph tells us how much we can make or lose on a specific option position depending on what the stock price does and in this specific example we're looking at a 250 strike call option with 60 days until it expires at the time of enture and we purchased this option for $554 and that means we actually are paying $554 for this option if the stock price does not increase we'll lose money on the trade as time passes which we'll talk about a little bit more later the maximum loss when you buy a call option is the amount you pay for the option which is $554 in this example the break even stock price at expiration is 25554 which is the strike Price Plus the initial option purchase price so one of the downsides of buying options as opposed to buying shares of stock is we need the stock price to increase or decrease in the case of puts we need the stock price to move in our favor by a certain amount for us to get our money back by the time of expiration for now it's enough to know that for every option position there's a break even at expiration which is simply the stock price at expiration that will lead to no profit or loss on your trade the maximum profit when you buy a call option is theoretically unlimited so we can see here on this risk graph we just have this curve that goes up and the right and if we were to continue extending the stock price up into Infinity this curve would continue going up into the right because since there's no limit to how high a Stock's price can go there is also no limit to how valuable a call option can get the key Point here is that buy and calls has limited loss potential and unlimited upside potential giving you a lot of reward potential for the risk that you are taking now let's go through a Tesla call option example and go through all the specific details that we've talked about thus far the stock is of course Tesla the expiration for this particular trade is January 19th 20124 and the amount of days until expiration when um this trade was entered is 381 days so a common term that you will hear options Traders talk about is days to expiration or DTE and this is simply how many days the option has until it expires the call strike price in this case is $100 and the call price at the beginning of the period is $35 knowing the contract multiplier of 100 we need to multiply this price by 100 to get the Call's actual cost or value of $3500 so basically a Trader who buys this call option gains the right to purchase 100 shares of Tesla stock at $100 per share that's the strike price on or before the expiration date of January 19th 2024 for gaining this ability a new Trader would need to pay $3,500 at the Call's current price when I say a new Trader I just mean a Trader who does not yet own this option if they want to own this option they need to pay $3,500 for it at the current market price at the beginning of this trade period in this graph we are looking at the stock price versus the call options price on the bottom we can see the call option strike price here at the strike price of 100 and we can see Tesla's stock price over the entire period at the beginning of 2023 Tesla shares were trading for a little over $100 and the calls price that we're looking at which is the January 2024 was trading for an initial price of $35 or a cost or value of $3,500 and as Tesla shares Rose after buying this call option we can see that the call options price increased in value and why is that it's because the ability to purchase shares at a bigger discount to the stock price became more valuable so if we look at the difference between the stock price and the strike price we can see that the calls price follows that Trend so as the stock price gets further above the strike price the calls price gets more valuable and as the stock price comes back down the calls price also comes back down key takeaways here number one is to Simply note how the call Price goes up with the stock price because the value of buying shares at $100 the strike price changes as the stock price changes so every single day there's a different call Price and that's coming from the different stock price that we're seeing and how that changes the Call's value number two is that option prices change every day as the stock price changes and this is important to understand because you can buy or sell options whenever the market is open and that means that you can enter an option position and you can close it within the same day if you'd like like or you could hold this for a 20-day period or a 30-day period as long as the option hasn't yet expired for example you could have purchase this call in the beginning of the period for $3,500 and you could have sold it a few weeks later for $5,000 securing a $1,500 profit on that trade on the other hand let's say you chase this move up higher in Tesla and you purchase this call option here for $125 or a cost of $12,500 $0000 as Tesla's price went down and this call options price followed let's say you sold it down here for $7500 then you would lose $5,000 on that trade so the key takeaway here is that you don't have to hold an option all the way until expiration you can enter and exit the position whenever you would like to now I've been talking about how a call option can buy shares of stock at the strike price and that's where the options price or value comes from but what do I actually mean by using the option if I buy this 100 strike call when Tesla is at $110 a share and I hold this call option until Tesla gets to $275 a share if I want to use this call option to buy shares of stock that is called exercising a call option and if you exercise a call option you are effectively removing the call option from your account and you are receiving 100 shares of stock with a purchase price equal to the strg price which in this case would be $100 so if I exercise my call option when Tesla is at 275 I will buy a 100 shares of Tesla for $100 per share or a total position cost of $10,000 but with the stock price at $275 I could then turn around and sell my Tesla shares for $275 a share and liquidate my position or sell my position for $27,500 therefore I would make a gain of $17,500 on that stock transaction but since I paid $3500 for the option initially my net gain would be a positive $114,000 however I don't need to actually exercise the option buy shares of stock and then sell the stock position to realize any gains because as we can see the call Price has increased to $175 or a total value of $17 $1,500 and so if I buy this call option here for $3,500 and it goes up to $17,500 in value to realize the profits on this position I can simply sell this call option for $175 which means I will sell the position for $17,500 in value and my gain will be a positive $114,000 on the trade the reason I'm telling you this is because 99.9% of the the time as options Traders we will not be exercising our options because to realize profits on our position we can simply close the option position at the higher more favorable price when we are buying options we're going to talk more about exercising options later on in the video since it is important to understand exercising options since fundamentally that is where option prices and values come from but for now just understand that as options Traders we make money from buying options and selling them at higher prices if you buy a call option and the share price Falls so will the value of the call option and if the stock price is below the call strike price at expiration the call option will expire worthless and you will lose the entire premium you paid for the option if we go to this next slide we're looking at a Tesla call option with a drag price of 225 and we're looking at an expiration of April 21st 2023 at the time of entering the trade there were 65 days until expiration the initial option purchase price was $21.30 or $2,138 in this example the stock price begins at $214 on February 15th 2023 and the call strike price is 225 so we need the stock price to go up but unfortunately the stock price trickles lower and hits $165 at the end of this period as we can see on the bottom here as the the stock price goes lower and its expiration date gets closer this call options price slowly loses value and ultimately heads to zero at the time of expiration and the call option is worth $0 at expiration because there's no value in the Call's ability to buy stock at $225 when the stock price is at1 167 so I don't need to buy shares with this call option and buy shares at 225 I can just buy buy shares directly at 165 and since the call option is not providing any value and there's no more time left for the stock price to increase to give it value it expires with a value of zero and this trade ends with the maximum loss potential and so this failed Tesla call option purchase highlights a big risk of buying options and that's that you will lose 100% of your investment if the stock price ends below your call strike at expiration the stock price did not go to zero but the option did and this means that options trading is more risky than stock trading or investing in stocks because your option value can go to zero while the stock price does not go to zero so therefore a similar investment in the option and shares would result in a much higher loss in the option if we put $10,000 into both of those positions $10,000 in the shares would have gone to $7,700 at the end of the period but if we put $10,000 in the calls that would have been $0 at the end of the trade period And so you have to be really careful when you're buying options because if they expire worthless then you are going to lose everything that you put into those options at this point in the video we are going to move on from call options and talk about put options but if you'd like a deeper dive into call options with a lot more examples be sure to check out my call options for beginners video which I will link in the description below the second type of option is called a put option and a put option grants the owner the ability to sell 100 shares of stock at the strike price on or before the options expiration date and because of this ability to sell 100 shares at the strike price as opposed to buying 100 shares like a call option can put option prices move inversely to the stock price this means that their prices go up when the stock price Falls and that's because the value of selling shares at the strike price which is fixed goes up as the stock price Falls and if we look at this very simple graphic that I created we can see that this is the puts strike price which allows us to sell shares at this price and as the stock price Falls since we are able to sell shares at a higher premium to the current stock price the put options price will go up to keep things very simple when you buy put options you want the stock price to go down and for that reason buying put options is a so-called bearish strategy because bearish strategies make money when stock prices fall in this graph we are looking at the risk profile of buying a put option so this simply shows us the money that we can make and lose when buying a put option as the stock price changes to different levels and in this specific put option example we're looking at a put with a strike price of $250 and 60 days to expiration and the stock price was at $250 at the time of Entry the simulated put entry price was $66.56 and this means that we would pay $6 $656 for this option which is also our maximum loss potential and this is going to happen if the stock price increases the break even stock price at expiration is $243 44 which is the strike price of 250 minus the entry price of $66.56 and this just means that when we buy a put option we need the stock price to decrease before the option expires in order for us to break even on the trade at the time of expiration but if we look at this higher line here which is basically the p&l at the time of entering the trade we can start making money as soon as the stock price starts to fall the max profit potential when buying a put option is the strike price minus the amount we pay which is $243 44 C which occurs if the stock price goes to zero so if the stock price goes to zero the put option is going to be worth its strike price or $250 since it can sell shares at 250 when the stock price is zero and that has a benefit of $250 per share but since we paid $656 for this contract if we buy something for $656 and it goes up to $250 our gain on the trade is $ 24344 now this is unlikely to see the max profit since it's very unlikely to see a Stock's price go to zero when you buy a put option but the main takeaway here is that when you buy puts you have significant profit potential when the stock price Falls and limited loss potential when the stock price increases now let's look at actual examples of buying a put to see how this strategy Works in practice in this chart we're looking at a Tesla put option and at the beginning of the period the initial stock price was 214 the put we're looking at has a strike price of 200 with an expiration date of April 21st 2023 and that gives it 65 days to expiration at the time of entering this trade the initial option purchase price was $17.55 which means we are going to pay $1,755 for this put option in this example the Tesla shares began at 214 and we can see that as the stock price fell the put price increased and since the stock price fell well below the put strike price we can understand the puts price increase as the increased value of being able to sell shares at $200 when the stock price is down here at 172 or so and the Very very simple takeaway from this chart is just to show that as a Stock's price Falls a put options price will increase because it is getting more and more valuable especially at the stock price plummets below its strike price and over this entire period Tesla's share price fell uh 23% and the put options price increased by 100% highlighting the opportunities that arise when stock prices fall and Traders are buying put options of course every trade can lose money and so here's an example of a put purchase that lost the maximum loss potential the initial share price at the time was 11364 and we're looking at a hypothetical put purchase with a strike price of $100 the expiration was March of 2023 with 72 days to go the option purchase price was $883 or a cost of $883 in this example the stock price increased over the entire trade period and we can see that the puts price lost value consistently over time and that's because as the stock price got further above the put strike and expiration got closer it became less likely that the put would ever become valuable by expiration driving the put's price to zero and that's because with the stock price getting higher and higher up here the probability of this put option becoming extremely valuable before expiration diminishes as the stock price gets higher above its strike price and its expiration date gets closer and closer and at expiration with shares at 180 there's no value in a put option with a strag price of 100 because we don't need to sell shares at $100 when we can simply sell shares at the current stock price of 180 and so that's why this put option expires worthless up to this point in the video I have described an options value coming from the ability to buy or sell shares at the option strike price which is called exercising the option so when we own a call option if we exercise the call option that means I'm choosing to purchase shares at the call option strike price and I'm basically converting my option position into a stock purchase at the call options strike price but an important concept to know as a beginner options Trader is that you do not have to exercise options to realize your profits let's say I have a call option with a strike price of $15 and let's say the stock price shoots up to $120 this means that if I exercise my call option I will convert my call option into a stock position by purchasing 100 shares of stock at the strike price of 105 so if I exercise the call my Call option disappears from my account and in exchange I get 100 shares of stock for a purchase price of $15 per share but since the stock price is at $120 that means I could sell the shares at $120 per share and realize a $15 gain per share and so the important thing to understand here is that an options price will always include the exercise profit or intrinsic value which is what it's called which we'll talk about in just a minute in its price so an options price will always include whatever gain that you can make by exercising the option and closing the resulting stock position in this scenario where the stock price is 120 and we have a call with a strike price of 105 this call option is going to be worth at least $15 which is the amount that we can make from exercising the option purchasing shares at 105 and selling them at 120 since that would give us a $15 gain this option is going to be priced with a minimum value of $15 and that's because I can personally use this option to exercise it buy shares at 105 and sell the shares for 120 therefore making a $15 per share gain and so since I can use the option personally to realize that benefit if I sell this option to somebody else I'm going to include that benefit in the sale price of the option let's go look at some charts to verify what I'm saying is true so here we're looking at QQQ stock price versus the call options on the q's at this point in time I have pointed out that qqq's ETF price is at $310 on the lower part of the graph we are looking at the price of a 290 strike call option on QQQ at the time of the stock being at $310 we can see that the 290 calls price is $24 and this lower line here is the exercise profit which is also called intrinsic value which we'll talk about in just a few minutes which is essentially how much money can I make from exercising the option purchasing shares at the strike price and then selling them at the current stock price so with the stock price at 310 if we were to exercise the option we would buy shares at 290 per share and then we could sell 100 shares at 310 per share therefore securing a $20 profit per share and as we can see the calls price is $24 which includes this $20 of value that we could make from exercising the call and then closing the resulting stock position and what this means as I've said in the previous slide is we do not have to exercise the option to secure that profit we can simply sell the call option to somebody else and if we look further on in the graph we can see that as qqq's stock price continues to increase we see that the call options price is always above the exercise profit if we go to a put option example on this chart we're looking at nvidia's stock price and we're looking at a put option with a stag price of 475 here I've pointed out that at this point in time the stock price was at 442 and the put strike that we're looking at is 475 so what this means is we could buy shares of stock at $442 and we could exercise the put therefore selling our shares at $475 per share and therefore make a per share gain of $33 as we can see this put options price is worth over $50 which is more than enough to cover that exercise profit we can make so actually we'll talk about this later but if we were to exercise this option we would only get $33 in value right here but if we sold the opt we would get $52 and so there's a lot of scenarios where it actually doesn't make sense to exercise the option but we'll talk about that in just a little bit for now it's enough to know that when you're trading options you are going to profit from the price changes of the option at which point you can just close the option by selling it closing it out and you don't have to exercise the option to secure your profits at this point you generally know how call option and put prices move in relation to the stock price but there's more you need to know before you start trading options it's not as simple as just saying call options go up when the stock price goes up so just go buy some calls and you're going to make money if the stock price goes up there are actually ways that you can lose money when the stock price moves in your favor and for that reason you need to understand the other parts of the options price and what influences an options price so you can make better trading decisions and lose less money from Trading mistakes as a beginner option prices are made up of these two possible components which are referred refer to as intrinsic and extrinsic value intrinsic value is the part of an options price that is explained by the gain that it provides the owner if they were to exercise it and that is the exercise profit that I had labeled in previous slides for example if Tesla's stock price is at $225 and we are looking at a call with a strike price of $100 this means that the call owner can buy Tesla stock $120 $5 below the current stock price and therefore this 100 strike call option has $125 of intrinsic value here's another example let's say we have Nvidia with a stock price of$ 4632 and we're looking at a call option with a strike price of 385 if the call owner exercises this call they will buy stock at 385 and then they can sell the stock at 4632 therefore making a gain of $21.32 per share therefore we would say that this 385 call option has $21 and 32 cents of intrinsic value call options have intrinsic value when the stock price is above the strike price so to make this simple just think to yourself is buying stock at the call strike price a better deal than buying stock at the current stock price and here is a very simple visualization if the the stock price is below the call strike price the call does not have intrinsic value because buying shares at the strike price Which is higher than the stock price is not a better deal if the stock price is above the strike price of the call now buying shares of stock at the strike price is a better deal than the stock price and therefore the call option has intrinsic value the formula to calculate a call option's intrinsic value is therefore the stock price minus the strike price when the stock price is above the strike price if the stock price is below a call option strike price its intrinsic value is zero so intrinsic value can either be positive or zero but intrinsic value is never negative and if we go back to that QQQ chart with the 290 strike call option we can see the calls price in relation to its intrinsic value we can see that when the stock price is at 310 the call option has $20 of intrinsic value since the strike price is $20 below the stock price when the stock price goes up to 320 now the intrinsic value is $30 since the stock price is $30 above the strike price when it comes to put options put options have intrinsic value when the stock price is below the puts strike price again to make things simple just think is selling stock at the put strike price a better deal than selling stock at the current stock price if selling at the put strike price is a better deal than the current stock price then the put option has in intrinsic value therefore the formula to calculate put options intrinsic value is the strike price minus the stock price if we were visit the Nvidia chart where we're looking at a 475 steg put we can see that when Nvidia stock price gets to 410 we can see that the $475 put has $65 of intrinsic value since the stock price is $65 below its strike price but as we can see when nvidia's stock price rallies up to 490 now we can see the put strike price is out of the money meaning the stock price is above its strike price and therefore selling shares at the current stock price is now a better deal than selling at the strike price of the put and on the bottom chart we can see that the put's intrinsic value is zero since the stock price is above its strike price again a put option can only have positive intrinsic value it cannot have negative intrinsic value and therefore if the stock price is above its strike price its intrinsic value is zero but options with no intrinsic value can still be valuable and in fact there are many times where options with no intrinsic value can be really expensive in this chart we are looking at nvidia's stock price versus a 500 strike call option and this call option has 183 days to expiration we can see that at the beginning of the period the stock price is at $430 and the call strike price is at $500 $100 which is $70 above the current stock price so the stock price has a ways to go before the stock price is above the strike of 500 but even though the stock price was $70 below the strike price of the call at the beginning of the period the Call's price was $40 meaning its value was $44,000 so this is a call option with no intrinsic value but it is really expensive so why was the call still worth $4,000 or more with a stock price at $430 and the reason is that option prices without intrinsic value but lots of time until expiration will have extrinsic or time value and to understand extrinsic or time value you just have to understand that there's time left for the stock to move and increase the options price before it expires so since there's 183 days before this call option expires that means there's 183 days for NVIDIA to go from $430 a share to let's say $600 a share and if that were the case then this 500 strike call option would be extremely valuable because it would take on lots of intrinsic value so even if an option does not have any intrinsic value right now if it has lots of time until expiration the options price is still going to be really positive and can be very expensive in some cases as we're seeing here and the way to interpret that is that there's lots of time left for the stock price to move in favor of the option and give it intrinsic value before it expires and so extrinsic value is the part of an option's price that exceeds its intrinsic value if we look at this image here we are looking at Tesla with a stock price of $ 25750 and we are looking at a put with a strike price of $270 we can see that the puts price is $22.50 and this specific option has $12.50 of intrinsic value because Tesla's share price is $12.50 below the strike price of this put however since the options price is $22.50 that means the additional $10 of value that this option has in excess of its intrinsic value is its extrinsic value so where does extrinsic value come from well I've already kind of hinted at it but extr transic value in option prices comes from the amount of time until expiration and the expected stock volatility and more specifically it's the combination of time and stock volatility that drive the extrinsic value levels in options let's look at another example this time in apple of an option that was never intrinsically valuable but still had lots of value despite not being intrinsically valuable here we are looking at a call with a strike price of $180 and at the beginning of the period this call option had $180 2 days until expiration at the beginning of the period Apple shares were at $130 and that means they were $50 below the call strike price of 180 at the beginning of the period the calls price was $125 and knowing that call options only have intrinsic value when the stock price exceeds the strike price this 180 strike call option never had any intrinsic value over the entire period but despite having no intrinsic value this call options price increased 7 and a half times from $125 to $940 at the high point when Apple shares hit $175 when the call had about 122 days left until expiration the reason this Call's price went up so much is because the stock price increased rapidly towards the strag price and the call Price surged in response to the higher probability of becoming intrinsically valuable before expiration so before the option had 182 days to expiration the stock price was 130 but then the stock price ran up to 175 which is only $5 below its strike price and it still had 122 days to expiration and because of that the options price exploded in value since the probability of being in the money at expiration or seeing the stock price above its strike price increased significantly but even though the options price increased so dramatically over this period as we can see the stock price ultimately ended below the call strike price of 180 and we can see that the Call's price went from $940 all the way down to Zero by expiration at the time of an options expiration an options price will only include the intrinsic value that it has as we saw in the Apple example the options extrinsic value went up and down as its probability of expiring in the money or with intrinsic value went up and down but ultimately the option price trended towards its intrinsic value by expiration and that is why the option trended to a value of zero so if an option's price never has intrinsic value it doesn't matter if the options price goes from $1 to a million dollar it will lose all of its value by expiration if it does not have any intrinsic value and what that means is that because an option will only be worth its intrinsic value at expiration it's price will always Trend to its intrinsic value over time in this chart we are looking at Tesla and we are looking at a 250 strike call and a 280 strike call and we can see Tesla's share price ends above the 250 call strike but below the 280 call strike and I want you to notice how the 280 call ultimately Trends to a price of zero since it expires out of the money or with no intrinsic value but the 250 call Trends to a final value of $25 and that's because at the time of expiration the stock price is $25 $5 above the call strike price and that means that the call option has $25 of intrinsic value and at expiration all that will remain in an options price is its intrinsic value if we go to a put option example now we are looking at Amazon and we are looking at a 145 strike put and a 130 strike put we can see that Amazon share price ends below the 145 put but above the 130 put and because of this notice how the 130 puts price ultimately Trends to a price of zero because it does not have any intrinsic value at the time of expiration but the 145 put Trends to its final intrinsic value of $12 and that's because at expiration the stock price is $12 below the 145 strike and therefore the 145 strike put has $12 of intrinsic value and here's another chart I threw in there where I simulated option prices over time to filter out all the stock price changes and here we are looking at a stock with a price of 150 and we're looking at a 150 call and a 145 call we can see that the 150 calls price trends to a value of zero since it has no intrinsic value whereas the 145 call having $5 of intrinsic value ultimately Trends to a final value of $5 and if we do the same exercise for puts we're looking at a stock price again of 150 when we're looking at a 157 1 half strike put and a 150 strike put so notice how the 1572 strike put ultimately Trends to its intrinsic value of $77.50 whereas the 150 strike put having no intrinsic value ultimately Trends to a value of zero extrinsic value is so important so I want to keep talking about it for just a few minutes to give you more things to think about the first I want to say is shorter term options are cheaper because there's less time for the stock price to move and therefore for there's less time for the option to see a big price change and as time passes since we know that an option will only be worth its intrinsic value at expiration that means all of the options extrinsic value will be lost and the loss of extrinsic value over time is referred to as time Decay here we are looking at two 350 strike call options in different expiration Cycles with different amounts of time until expiration here in the 49-day EXP operation cycle we can see that the 350 strike call is trading for a value of $1,073 but if we go to the expiration with 448 days to expiration we can see that the same 350 strike call option has a value of $4,420 now if we were to imagine buying this $448 de call option for $4,420 and time passed the stock price stayed the exact same and the q's expected volatility stayed the same if this option got to 49 days to expiration we could estimate that its price would be $1,073 and therefore if we bought this option for $4,400 and 400 Days passed without a movement in the stock price we would estimate that we would lose about $3,400 and that would be called a loss from time Decay so as the option is getting closer to spiration without a favorable stock price Movement we are losing money slowly over time from time Decay and that is exactly why when you're buying options you have a time limit the clock is running against you you need to see a favorable movement in the stock price to offset the losses from the options loss of extrinsic value as its expiration date approaches in this chart we are looking at Google and we're looking at a call option with a strike price of 140 we can see that the 40 call is purely extrinsic value and that's because the stock price is never above the strike price and we can see that the entirety of the 140 calls value is lost as time passes and it expires worthless I want you to notice how the stock price started around 132 or 133 and ultimately ended at around 137 so the stock price actually increased over this entire time period but this call option with a stag price of 140 lost 100% of its value and this is because even though the stock price was increasing the options price was decreasing from the loss of its extrinsic value over time and since we got to expiration and the option did not have any intrinsic value it expired with a final value of zero so this is a demonstration of how you can be right directionally on a trade when you're buying options but since the movement did not happen fast enough in your favor you still lost money the next thing I want to talk about when it comes to extrinsic value is that options on high volatility stocks will have more extrinsic value than options on low volatility stocks here I've pulled up a return comparison between Google and XLV which is the healthcare ETF and I just wanted to point out that over this time period Google's share price has gone from down 24% to up 24% while XLV has experienced price changes of -4% to plus 12% so XLV has much lower volatility as compared to Google's stock price and if we go to this next slide if we look at the stock prices we can see that Google is at 12217 and XLV is at 1235 so the stock prices are virtually the same so let's go ahead and look at two call options on these stocks and compare their prices when we go to the 84 day expiration cycle in Google and we look at the 125 strike call we can see that the 125 strike call is trading with a price of $610 when we go to XLV and we go to that same exact expiration cycle the 125 strike call is trading for $3.30 and the big takeaway from this slide is that since Google has higher stock volatility than XLV we can see that Google's option prices are much more expensive than XLV and this is a good comparison because they have a very similar stock price we're looking at the same strike price and the same amount of time expiration but Google has a call Price that is almost twice as much as XLV and that simply stems from Google's higher levels of stock volatility now we are going to talk about some options trading terms that you will often hear which are referred to as money so there are three moneyness options trading terms that describe an option strike price in relation to the stock price so when options Traders talk about the strike price of an option in relation to where the stock price is they will use these three terms which are in the money at the money or out of the money an in the money option or itm option is any option that has intrinsic value this is referring to any call option with a strike price below the current stock price and any put option with a strag price above the current stock price at the money or ATM refers to an option with a strag price that is at or very close to the current stock price so for example if the stock price is 385 $5 and at the money call would be a call option with a strike price of$ 385 and lastly out of the money or otm refers to an option with no intrinsic value so out of the money options consist of 100% extrinsic value and out of the money option would be a call with a strag price above the stock price or a put with a strag price below the current stock price here we're looking at the trade page of Nvidia we can see the current stock price is 42388 this means that in the money call options have strikes below 42388 which would be the 420 strike price and below the in the money puts would have strikes above 42388 which would be the 425 strike and above and in the case of at the money options with nvidia's stock price at 42388 and seeing our available strike prices of 420 425 and 430 in this instance we would say that the 425 strike price is currently at the money since it is the closest strike price to nvidia's current stock price and lastly out ofth the money options are options with no intrinsic value and this means that for call options the strike price is above the stock price so since the stock price is 42388 the out of the money calls in this image have the strike prices 425 and above and for the puts that means that the 420 strike and below are out of the money puts with the stock price at 42388 so that's it for moneyness we have in the money at the money and out of the money or itm ATM and otm for short you will see these terms very frequently when talking to options Traders or reading options trading content so I just wanted to familiarize you with these terms thus far we've talked exclusively about buying calls and buying puts but for every buyer there is a seller Traders can short stocks which means that they are selling shares of stock that they don't own with the goal of buying them back at a lower price Traders can also short options which means that they are selling an option without owning it first short Traders are betting against the price increase of the asset that they are shorting and that means if I short a stock I make money if the stock price Falls because then I can later close the position by buying back the shares at a lower price so I'm selling high and buying low as opposed to buying low and then selling high and similarly if I short an option that means I make money if the option price Falls and I can buy back the option for a lower price technically shorting refers to borrowing and it comes from the stock world so if you're shorting stocks you're essentially borrowing stock and then returning it later at a lower price ideally but with options we are not technically borrowing an option so to be more specific all options trades can be either bought or sold to open and then conversely they can be bought or sold to close so there are four terms to understand the first is buy to open or BTO this is when you initiate a new position by purchasing an options contract when you buy to open you are either buying a call option or buying a put option as an opening trade then we have sell to open or St sell to open is when you are selling an options contract as an opening trade which is what we're talking about here in regards to shorting options when we sell to open we are initiating an options trade by selling the contract we do not own it first we are selling it and our goal is to buy it back at a lower price which would be a buy to close order and lastly we have sell to close or STC which is when you exit a position that was initially purchased so if you bought a call or put option and you now want to sell it then you would use a sell to close order here's an example of a call option in Apple so here we have a 180 strike call option in apple with an expiration of December 2022 we can see that the options price went from $1 to over $9 when Apple's price went from $130 to$ 175 let's say a Trader wanted to bet against the price increase of apple and they did so by shorting a call option let's say they shorted the call option here when it was $6 therefore they would have collected $600 into their account but as we can see the option price went up to over $9 and if the call options price goes to $9 therefore it has a value of $900 per contract they would have an unrealized loss of $300 since the call contract increased in value from from when they shorted it however as time passed Apple stock price went back down and at expiration for this call option the stock price was well below the strike price of 180 and we can see that this call option ultimately expired worthless therefore the trader who shorted it for $6 saw its price go to zero and therefore they would have ended up making $600 on that short call position if we look at this risk graph we are looking at how much we can make or lose when and shorting a theoretical 260 strike call option and this call option has an entry price of $215 and 60 days to expiration the stock price at the time of Entry is $250 and as we can see here if I short this call option and the stock price begins to increase then I will start to lose money on this short call position but if the stock price stays below 260 and ideally Falls lower I start to make money on this position at the time of expiration we can see that as long as the stock price is below 260 which is the call strike price this position will make $215 at the time of expiration however as the stock price goes up if it goes to 265 or 270 then I will start to see some serious losses on this position the short call strategy has theoretically unlimited loss potential to the upside and that means if I were to extend this stock price chart all the way to the right to Infinity the losses on this position would continue to grow and so short and call options is a super high-risk strategy that I generally do not recommend in this next example we're looking at a super big loss when shorting a call option and this is in Nvidia in this example we're looking at a 320 strike call option with 46 days to expiration and the stock price was at $ 28910 at the time of Entry the entry call Price was $85 and so if I shorted this call option I would have collected $85 into my account unfortunately nvidia's share price went way higher and at the time of expiration the stock price was at $ 42692770484 example experienced a final loss of $9,888 per call option sold now let's switch gears and talk about shorting put options shorting put options is an option strategy where you sell put options you do not own because put option prices fall as the stock price increases this means that shorting a put option is a bullish options trading strategy when shorting put options you make money over time if the stock price goes up or at least remains above the strike price of the put through the expiration date but just like short and call options short and put options has significant loss potential to the downside since if a Stock's price collapses after you short a put option the put options price is going to increase dramatically and you are going to have big losses on that position here we're looking at a risk graph of shorting a put option with a strike price of 240 and the stock price at entry is 250 the call option has 60 days to expiration and entry put price is $2.50 and so if I short this put option for $2.50 I collect $250 into my account and we can see that as long as the stock price is above $240 at the time of expiration this trade will make $250 however if the stock price decreases significantly over the trade period we can see that I have big loss potential to the downside and the losses will continue to grow as the stock price Falls further and further below the strike price of the put the worst case scenario is to see the stock price go to zero at which point the put option will be worth its strike price which in this example is240 so if I short this put option for $2.50 the worst case scenario is that the stock price goes to zero in which case this put option will be worth $240 and that would obviously be a gigantic loss in this example we're looking at shorting a put option with a strike price of $275 in Nvidia the stock price at entry was around $290 and this put option had 46 days until expiration the entry put price was around $13 which means if I shorted this put option I would have collected $1,300 into my account as we can see the stock price initially did fall lower and briefly touched the strag price of 275 and we can see that this put options price actually increased to $17.50 which would present an unrealized loss at the time of around $450 however we can see that nvidia's price did soore higher and at the time of expiration nvidia's stock price was way above the put strike price of 275 and therefore this put option expired worthless and in this last example we're looking at a huge loss when shorting put options which is in QQQ and this was when the stock market crashed in 2020 so we have an entry stock price of 200 $22. 38 the put strike price was $ 215 57 days to expiration the entry put price was $423 as we can see QQQ fell off a cliff and traded down to $170 and as we can see the puts price reached a value of $45 at the lowest point and so since the put option was sold for $423 and it reached a high price of $45 the unrealized loss at this point would have been around $4,100 per put option shorted at expiration the put was worth its intrinsic value of $24.60 and that would result in a final p&l of minus $2,037 per put option shorted I generally do not recommend shorting naked options which means to short a call option or short a put option without protection The Only Exception would be if you are shorting cash secured puts which which essentially means you're shorting put options with the expectation that you might get assigned on that put option and purchase 100 shares of stock at the put strike price in which case you're keeping enough cash available in your account to fulfill that share purchase of 100 shares at the puts strike price other than that if you want to short options I generally recommend that it is done with a spread so that means selling a call spread or selling a put spread I just did a video on put credit spreads and I have lots of videos on my Channel about other types of call spreads and put spreads and iron condors and all of those things which include short options but other than that I generally do not recommend shorting naked Options under any circumstances due to the high risk low reward nature of the strategy we're going to go through a live demonstration of shorting an option and closing that position at the end of this video when I do the live trading demonstration on the tasty trade brokerage software so stay tuned for that the next stop on today's video is about implied volatility and realized volatility implied volatility is a very common term you will hear when trading options because it does heavily influence the profitability of your option positions so what is implied volatility put simply implied volatility is the expected magnitude of a stocks price changes as implied by the stocks option prices so implied volatility is just what does the market think about the volatility of this stock going forward and we measure that by looking at the option prices so the option prices on a particular stock will tell us what the market is expecting in terms of volatility going forward and so what I've done here is I've created this table and I'm comparing spy which is the S&P 500 Index ETF to Nvidia the reason I compared these two is because they have the same exact stock price and so it makes for a very clean comparison when looking at their option prices I looked at the 40-day expiration and I looked at the 450 strike call option in both of these stocks in spy the 450 call with 40 days to go was $8 and in Nvidia the 450 strike call with the same amount of time to expiration was trading for $34.50 this gave spy an implied volatility of 177% and it gave Nvidia an implied volatility of 60% so here's just an image of the trade pages of spy and Nvidia and again we're looking at the 40-day expiration cycle and the 450 strike calls in each noting that the Spy price and Nvidia stock price are virtually the same and since nvidia's call option is four times more expensive than spy's call option nvidia's implied volatility is much higher than spy's implied volatility but why does this happen well if we go to this next slide I took the daily percentage changes of spy in Nvidia from August 2018 until August 2023 so this was a 5-year period as we can see the green bars are spies daily price changes and the gold bars are nvidia's daily price changes and we can clearly see that nvidia's volatility is much higher than spies volatility and this results in more expensive Nvidia option prices AKA higher levels of implied volatility so the realized volatility or the actual volatility of a stock is going to heavily influence the implied volatility or the option prices if a stock is not very volatile the stock is going to have very cheap option prices because the stock is not moving around much and therefore there's not a high likelihood of seeing a big stock price movement that leads to a big option price change since stocks like Nvidia and Tesla have such high stock volatility meaning they move around so much on a daily basis that means there's potential to see huge price changes in the options and therefore the options will trade at much higher valuations so why does implied volatility matter changes in observed or expected stock volatility will have an impact on option prices AKA implied volatility and therefore trade profitability so since a Stock's expected volatility or observed volatility if that changes that is going to impact option prices and if option prices are changing of course the profitability of any option Position will also be impacted let's explore how popular option strategies perform when implied volatility increases and decreases so that we can clearly understand what the impact on an option position's p&l will be when implied volatility increases and decreases in the following graphs we're going to be looking at simulated strategy profits and losses based on the following inputs we're looking at an entry implied volatility of 20% and I'm going to simulate changes to 10% and 30% implied volatility so I'm going to simulate very large changes in implied volatility so we can clearly see the impact on option position p&l the days to expiration will be held constant at 60 and the stock prices will vary so we can see how a change in the stock price and a change in implied volatility will impact an option positions p&l in this example we're looking at the stock price at 200 and I'm looking at a 200 strike call with 60 days to expiration we can see this green dash line is the expected p&l of this option position with implied volatility at 20% Which is the implied volatility at the time of Entry we can see if the stock stays right at 200 of course we don't have any change in p&l but if we get a change in implied volatility we are going to see big changes in the call option positions p&l if implied volatility increases to 30% we can see that without a change in the stock price this option position is going to profit by over $300 just from a change in implied volatility a change in implied volatility means that option prices have expanded and expectations of higher levels of stock volatility going forward so if you buy an option and implied volatility increases that is going to benefit your option position because the market is expecting higher levels of volatility going forward which will lead to an expansion in option prices holding all else equal but on the other hand if imp volatility decreases say to 10% we can see that this call Position will lose about $300 even if the stock does not move and so when you're buying options if you see a decrease in implied volatility especially a big decrease in implied volatility your position is going to lose money or it's going to have a negative p&l impact because when you're buying options you want the option prices to expand and a decrease in implied volatility if is representative of a decrease in option prices because the market is expecting less stock volatility going forward the same is true when buying put options so here is a graph of buying a 200 strike put the stock is at 200 and entry IV is at 20% again if implied volatility increases this put position is going to benefit immensely from the increase in option prices that is being driven by an expectation of higher stock volatility going forward but if we have a decrease in applied volatility we can see that the position will lose money and that's because the option prices are shrinking because the market is expecting less stock volatility going forward so the lesson between buying calls and buying puts is that anytime you buy options outright you want implied volatility to increase in this next example we are looking at a short straddle which is when you short a put option and shorted call option at the same strike price the goal of the strategy is to see the stock price remain right at the strike price that you sell or at least somewhere close to that strike price here we can see if we enter at 20% IV if implied volatility collapses to 10% this option position is going to see big profits because a decrease in option prices is synonymous with a decrease in implied volatility and so if we short these options at the 200 strike and implied volatility collapses that means the option prices have fallen and when we shorting options we want the prices of the options to fall and so if implied volatility Falls since that means the option prices are collapsing we will make money on this position and on the other hand if implied volatility increases to 30% we will start to see losses on this position because an increase in implied volatility means that the option prices are expanding because the market is expecting higher levels of volatility going forward and higher expected volatility means that there's a lower probability of the stock price remaining right at our short strike over time so to recap this an increase in implied volatility means that option prices have increased all else being equal and option prices inflating means that the market is expecting more volatility going forward a decrease in implied volatility means that option prices have fallen again all else being equal if not much time has passed and the stock price has not moved but option prices have decreased substantially that means implied volatility has fallen dramatically and this means that option prices deflating suggests the market is expecting less volatility going forward so here if we have this wider stock distribution or expected stock volatility this is going to be reflected by high option prices and if we have a big decrease in the expected volatility that means the market is now expecting a much more narrow distribution of potential stock prices going forward and this will be reflected in the option prices by the option prices is shrinking so anytime we short options meaning we are selling them as opening trades since we want the option prices to decrease when we short options we want implied volatility to decrease when we enter short option positions next up I want to talk deeper about exercise and assignment earlier in the video I talked briefly about it but I did not dive deep into the details because I wanted to save it for later in the video and also because options are very rarely exercised by the option owners and the reason for that is what we're going to discuss right now so as mentioned in this video exercising an option is when the option owner or buyer uses the option and buys or sells 100 shares of stock per option contract at the option's strike price and so exercising the option effectively converts the option into a stock position with an entry price equal to the options strke price as an example if I have a 150 strike call option and I exercise the call I am going to convert this call option into a stock purchase of 100 shares with a purchase price of $150 per share and if I have a 125 strike put option and I exercise it I am going to convert the put option into a stock sale of 100 shares with a sale price of $125 per share and so here's a very concrete examp example of what this would look like if I were to exercise an option let's say I have one contract of a 150 strike Apple call in my account and I exercise this call option if I exercise this call option it will be converted into 100 shares of Apple stock with a purchase price of $150 so the call option will disappear from my account and what will remain is 100 shares of apple with a purchase price of 150 per share but for every option buyer there is an option seller and when I exercise an option if I exercise a call and I'm buying 100 shares of stock that means someone on the other side of that trade meaning someone who is short a call option is going to have to short or sell the 100 shares of stock that I buy when you short an option you're taking on an obligation if the person who bought the option decides to exercise it you can be assigned this means if the call owner exercises as an option they're going to buy 100 shares of stock at the strike price and this means a Trader who is short that same call option will sell 100 shares of stock at the strike price and with puts if a put buyer or owner exercises their put they are going to sell or short 100 shares of stock at the strike price and this means a Trader who has short that same exact option is going to have to buy 100 shares of stock at the strike price and so with any given option position there could be thousands of different traders that are shorten option and so if I have one contract and I exercise the option there could be a thousand other Traders with the short position in the option that I exercised and so the way that the person is determined or who gets assigned is through a random process from the options clearing Corp which you can read about on their website it's a pretty involved process but all you need to know is that the trader who gets assigned on a short option position is selected at random it is important to note at this point that any option that is in the money by one penny or more at expiration will be automatically exercised this means that if the stock closes at expiration at $150 and 1 cent if I own the 150 call I will automatically exercise that call and therefore purchase 100 shares of stock at $150 per share if I was short the 150 call and I held it through expiration and the stock price closed at $501 I would be assigned on this option and this means I would sell 100 shares of stock per call contract at $150 per share in regards to puts let's say the stock price closes at $149.99 if I own the 150 put this means the put will automatically be exercised and I will therefore sell 100 shares of stock at $150 per share and if I was short that same put option I would be assigned and I would buy 100 shares of stock at the put strike price of 150 therefore it is my recommendation to always close option positions before expiration to avoid any unwanted stock positions via the automatic exercise and assignment and to give you some examples of what an option position would look like after assignment let's say I have one one short 145 call in apple if I get assigned on this call option my position after assignment will be 100 shares of short Apple stock at $145 and if I was short an Amazon put with a strike price of 155 and I got ass signed on this put I would be left with 100 shares a positive 100 shares of Amazon stock with a purchase price of 155 if you do have an existing stock position your position quantity will be affected by the number of shares that you buy or sell through exercise or assignment for example let's say I own a 100 shares of apple and I'm short a 140 strike call option on Apple if I got assigned on this 140 call that means I would sell 100 shares of stock at the strike price of 140 but since I already own 100 shares of Apple that means my position after assignment would be none so this short call assignment would effectively sell the shares that I already have and after assignment I would have no position in apple if I had 300 shares of Apple stock and I got assigned on one short call option then I would be left with 200 shares of Apple stock NOW the natural response when talking about assignment is to worry very greatly about short option assignment for new options Traders the thought of having the obligation to buy or sell 100 shares of stock is really really scary so I want to talk about when you should worry about early assignment and why you don't have to worry about early assignment in 99% of cases let's say we're looking at a stock price with 166 and the call strike price is 160 let's say that this Call's price is $10 and that means from what we've already talked about in this video $6 of this Call's price is intrinsic value since the stock price is $6 above the strike price and that means the additional $4 of value that the option has is extrinsic value this gives the call a value of $1,000 anytime you exercise an option you are essentially giving up the option value in exchange for the stock price at the strike price so if this call owner exercises the call they will essentially consume this call option that is currently worth $1,000 and they will end up with 100 shares of stock at $160 per share let's say I purchased this call option for $5 initially and the call Price goes up to $10 the stock price is currently at 166 if I exercise the call I will consume this call option I will end up buying 100 shares of stock at the strike price of 160 and then if I immediately sold the shares for 166 I would have a $600 gain on the stock transaction that I just did but since I paid $500 initially for this option I would be left with a net gain of $100 now if compare that to Simply selling the call option for its value of $1,000 if I sell the call for $1,000 and I have an initial purchase value of $500 I'm left with a gain of $500 and so a Trader who bought this call for $5 initially would rather sell the call option instead of exercising it and this means that the trader who has short this call option would have virtually no risk of assignment and what I want to point out here is that the value that is lost the difference between the value that you get when you exercise the call and sell the shares versus just selling the call option for its current value of $11,000 is the extrinsic value when you exercise an option you are going to lose whatever extrinsic value the option has and that's because when you exercise an option the only value that you truly get is the intrinsic value which in this scenario is $600 and this $600 represents buying 100 shares of stock at 160 which is the strike price and then selling the 100 shares at 166 which is the current stock price and because of this to gauge early assignment on a short option look at the option's extrinsic value and in the money short option with little to no extrinsic value is at high risk of assignment since there is little to no loss of value if the owner exercises that option so here if we go and look at a real example in Nvidia we can see nvidia's stock price is at 40855 and I just circled the 350 strict call option which has a price of $69 based on the stock price and strike price we calculate that the call options intrinsic value is $585 and that means that the Call's extrinsic value is $10.45 and so if a Trader exercise the 350 call given these prices they would sacrifice $1,045 for no reason at all and for that reason a Trader who is short this call option has virtually zero risk of early assignment despite the call option being nearly $60 in the money with that being said what conditions lead to an option being in the money with little to no extrinsic value the first is that the option is extremely deep in the money before expiration but as we just saw the more time to expiration the further in the money the option needs to be to reach close to zero extrinsic value the second scenario scario is that the option is in the money with little to no time left before expiration but there is one scenario in particular where early assignment is highly likely and this is when you are short and in the money call option before a stock pays a dividend if the dividend the stock is paying out is greater than the extrinsic value that exists in your in the money short call option you are at very high risk of early assignment so here if we have a dividend of 58 cents and we are short and inth the money cost with extrinsic value of 30 that means that the option buyer they are going to have an incentive to exercise the call option purchase shares of stock and collect the dividend by exercising the option they are going to lose the 30 cents of extrinsic value but they are going to then own the shares which means that they will be able to collect the dividend of 58 as a call option owner you are not entitled to any dividends on the stock to get a dividend on a stock you have to own the shares and so if a call option owner has an in the money call and it has extrinsic value less than the amount of the dividend then they will have an incentive to exercise the option take the stock and then collect the dividend to summarize the early assignment worry options are rarely exercised because they often carry a lot of extrinsic value in their prices and when an option buyer exercises the option they will sacrifice the extrinsic value that exists in that option and so the more more extrinsic value an option has the less likely it is for someone to exercise it and so if you are short and in the money option with lots of extrinsic value then you have virtually no risk of early assignment but the lower the extrinsic value gets while that option is in the money the higher your risk of assignment gets and I just wanted to leave you with one quote from the OIC website where they said that historically more than 72% of all option contracts are closed before expiration and another 22% expire out of the money and the remaining 6% get exercised I've only been assigned in an option one time and that was in apple and it was due to a dividend scenario that I just described in the previous Slide the next topic that I want to talk about is the option Greeks what are the option Greeks the option Greeks are estimations of an option's price given changes in different variables like the stock price the passage of time and changes in volatility the first Greek that we are going to cover is Delta Delta measures an options estimated price change given a $1 change in the stock price for example if we have a call price of $5 and the calls Delta is a positive 50 this means if the stock price increases by $1 the calls price is estimated to increase to $5 50 and if the stock price Falls by $1 the calls price is estimated to decrease by the amount of its Delta which means the call price is estimated to fall to $4.50 call options always have positive Delta because a call options price moves in the same direction as the stock price which is something that we've already talked about but I want to go and look at a chart to visualize Delta if we go to a p&l simulation of a call option and and in this chart we're looking at a 250 strike call option with various amounts of time left until expiration and at various stock prices the key thing to pay attention to here is the upward sloping line of buying a call option and the p&l associated with this slope as the stock price goes up we see that the p&l slopes upwards and if the stock price Falls we see that the p&l goes downwards so this upward slope here is reflecting positive Delta Del of buying a call option and all this means is that when we buy a call option the position has positive Delta which means that if we see an increase in the stock price the call options price is expected to increase and this will lead to profits for us as an option buyer for put options we see the opposite so again Delta measures and options estimated price change given a $1 change in the stock price put option Deltas are negative since put option prices move in the opposite direction as the stock price for example if we have a put price of $5 and the puts Delta is a30 this means if the stock price increases by $1 the put price is estimated to fall to $4.70 so that's the put price and then we take out the option Delta of -30 so if the stock price goes up by $1 we subtract 30 from the current price and we get a new estimated option price of $4.70 if the stock price Falls by $1 the put price is estimated to increase to $530 so since the put Delta is a -3 cents if the stock price goes down we effectively subtract the Delta but since the Delta is negative if we subtract a negative number we are actually adding it and so that means that the stock price Falls by $1 we get an estimated new put price of $530 if this seems a little complicated the most most important thing to understand here is just the general direction of the put price versus changes in the stock price and we can visualize this by looking at a put option p&l simulation of buying a put option here we can see the opposite of the previous chart which was looking at buying a call option in this chart we can see that there is a slope upwards and to the left and this means that if the stock price is falling we see that the put p&l is getting better the put p&l which is reflecting an increase in the put options price is increasing as the stock price Falls and so this is just telling us that there is negative Delta this means as the stock price Falls we are making more and more money and that means we have negative Delta and on the other hand if the stock price is increasing we are losing money the second Greek that I want to talk about is Theta Theta measures an options estimated extrinsic value increase over the passing of one day so if volatility Remains the Same and the stock price Remains the Same and the only thing that's changing is the passage of time then we will see a decrease in an option's extrinsic value and we've talked about this before because we know that at expiration an option will only have intrinsic value which means all of its extrinsic value is lost through expiration an option's intrinsic value does not Decay and so Theta is only related to an options extrinsic value for example if we have a call price of $5 and the call Theta is a ne10 if one day passes the calls price is estimated to fall to $4.90 all else being equal and if we have the passage of 5 days the calls price is estimated to fall to $44.50 all else being equal but of course there are other variables and with every passing day the stock price will be changing and there will often be fluctuations in volatility Theta is just telling us and isolating the passage of time and so if we buy a call option and our Theta is -10 cents it is just telling us that all else being equal our exposure to the passage of time is a 10cent loss per day again we can visualize Theta by looking at a put option p&l simulation of buying a put option here the blue dash line is if we buy this put option with 60 to expiration and then these other lines are reflecting a passage of time so the green line below it is reflecting 30 days left and then the red line is 10 days left until expiration and so going from the blue dash line to these other lines reflects a passage of time as we can see if we buy this put option with a strike price of 250 when the stock price is at 250 if the stock price Remains the Same but we have a passage of time which we can visualize by going to each of these other lines we can see that the p&l of the position decreases and at the time of expiration which is this white line here if the stock price is at 250 we will see a loss of over $500 on this position and this is reflecting negative Theta we can also see that if the stock price goes to about $247 and 30 days pass even though we had a decrease in the stock price which is good when you're buying a put option in this simulation we would have no expected profits or losses because that $3 stock price decrease happened over a 30-day period and essentially with the p&l being at zero this means that the stock price decrease the profits from the stock price decreasing were offset from the losses of extrinsic value over that 30-day period And so basically we need the stock price to decrease more than $3 if it is over a 30-day period now here is a real example of looking at an option group reek specifically Delta and Theta when we ceue up an option position so here I have coinbase selected and I just clicked on the 150 strike call option expiring in 35 days and we can see that this call option price is $13.7 and the platform says the Delta is a positive 5322 I want to note how the Delta column here shows the delta in decimal format and this 053 just means that the options price change is expected to be 53 for a $1 change in coinbase however a 53 C change in the option price actually reflects a $53 profit or loss on our option position since the options actual value is 100 times the listed price here so if we get a 53 C change in the option price that is going to mean a $53 profit or loss on the option position and so this Delta of POS positive 5322 means that if coinbase goes up by $1 after we buy this call we are expected to make $53 but if coinbase falls by $1 after buying this call we are expected to lose $53 this Theta of negative 20.6 to means that I am expected to lose $20.62 per day if the stock price does not move and implied volatility Remains the Same if we move over to buying the 150 strike put option we can see that the platform is saying that this put purchase has a Delta of 4710 this means that I'm expected to make $47 in profits if coinbase falls by $1 after I buy the put and I'm expected to lose $47 if coinbase increases by $1 after I buy this put and again a negative put option Delta means that the put options price will increase as the stock price Falls and the put options price will decrease increase as the stock price increases the Theta of 9.6 means that I'm expected to lose about $19.60 per day if the stock price does not change and implied volatility Remains the Same one thing you might notice here is that if we take the Theta of minus 19.6 6 and we multiply it by the time left until expiration or 35 days we get a total Theta loss of 68 8 so if I lose let's just call it $20 per day over 35 days that's going to come out to a loss of $700 but this option value is around $1,500 and the reason that it doesn't line up perfectly with the total option value is because the Greeks change with the passage of time and so as time passes and as this option gets closer to expiration the Theta value is going to increase that means over the course of this 30 5 days the Theta is not going to remain at $19.60 it is actually going to increase as we get closer and closer to expiration but the Theta value and the Delta value at any given moment is just an estimation of that option's price exposure to the passage of time and the change in the stock price as of right now now there is a difference between an option specific Greek value and your portfolio Greek value for example let's look at this Marathon call option position that I have so I have 15 contracts of the 20 strike calls expiring in January of 2025 we can see that the Delta of this position says a positive $1,236 this means that if Marathon goes up by $1 this position is expected to make $1,236 CS so the position Greek is different from the individual option Greek and what I mean by that is if I go into the options specifically the January 2025 options and I look at the 20 strike calls we can see that the Delta is a positive 68 so how do we get from 68 to a position Delta of $1,024 to get from the individual option Delta of 68 to my portfolio level Delta of 1024 in this Marathon call position first we have to convert the options Delta into a position level Delta what I mean is that if the option price is expected to increase by 68 C that means if I own one contract and the stock price goes up by $1 that 68 C increase in the option price is going to be reflected by a $68 gain in my option position so basically we just have to multiply the option Greek of 68 * 100 and this gives me the portfolio level option Greek and If I multiply this by 15 contracts I get 1,020 which is approximately the Delta level here so basically what this means is that since I own 15 of these calls and each of these calls is expected to gain $68 if the stock price goes up by $1 then my total position is expected to increase by around $1,020 if Marathon goes up by $1 and conversely if Marathon goes down by $1 I'm expected to lose the amount of this Delta we can see that today the stock price has increased 25 cents so if I take 1,020 and multiply it by .25 we get a total value of 255 and as we can see here my p&l on the day is exactly $255 now it just changed to 285 but it's approximately correct another thing to note about Delta is that it is effectively share equivalency what I mean by that is if my Marathon option position for example has a Delta of positive 1,119 this means that if Marathon stock goes up by $1 my position is expected to increase in value by $1,119 and the opposite is true if the stock price goes down by $1 my position is expected to lose1 $ 1,119 and that's the same as if I were to own $1,119 shares of stock to show you what I mean if I click on the ask price of marathon shares this cues up an order to buy shares of stock if I change this to 1,119 we can see that the platform says my Delta is a positive 1,19 and this just means that this will be my profit if Marathon goes up by $1 and this will be my loss if Marathon goes down by $1 however to purchase this amount of shares I will need to pay around $25,000 and if I go back to the positions tab we can see that the net lick or the value of my position in Marathon is $115,000 by using these long-dated call options I have approximately the same exposure as owning 1,00 shares of stock but I have that exposure for a much lower cost of $155,000 as opposed to $25,000 so one of the big benefits of options is that you can get the same p&l exposure as X number of shares of stock for a much lower cost if you're interested in expanding your options trading toolkit I invite you to check out datadriven options strategies which is a course that I've been building that focuses on identifying options trading strategies with a strong track record the course includes option buying and monthly option selling strategies to cater to different trading Styles account sizes and trade time frames and the library of content is only going to continue growing as a member you'll get access to exclusive videos where I present the setups and data behind various option strategies including how and when to adjust trades to minimize losses as well as real trade entry and exit demonstrations I've been spending countless hours doing the research and creating the content for this course and I'm really happy with how it's coming together and the response has been overwhelmingly positive if you're interested check the course page in the description below we're going to dive deeper now into the tasty trade brokerage platform and I'm going to give you a walkth through of the primary sections of the platform how to navigate it and then how to open and close an option position using this software so let's get started I use tasty trade for my brokerage but for every brokerage they're going to have similar core functionality but they may be in different places and accessed in different ways but here let's walk through the most important sections of the trading platform on the very left hand side we have the watch list which is where I'm going to keep track of the stocks that I want to pay attention to and you can of course make your own watch list I have one just called core names all these different stocks that I am personally keeping an eye on in between this watch list section and the main platform section we have these navigation tabs here the one I'm on right now is the positions Tab and this shows me my current positions or portfolio and then we can see the different tickers the information here and then some other information related to these positions under that we have the trade Tab and this is where all of the options live so here I've clicked on the trade Tab and currently on the very top of the platform I have Tesla selected so this is the search box I can search for a different symbol to look for and once I do so it will automatically populate this information here and all the other platform information with this symbol so here we're looking at Tesla we can see the stock price is currently around 23380 and the shares are down about $610 today below that we have the different expiration cycles that we can trade for Tesla options we can see that we have expirations all the way from zero days to expiration which expir today all the way out to 777 days until expiration or over 2 years away we have a couple expirations here here with an orange W next to them and these expirations are a little bit darker in color and this is just designating that these are nonstandard expirations and the W stands for weekly expiration Cycles non-standard means that they are not the standard monthly expiration cycles that occur on the third Friday of each month the standard monthly Cycles would be December 15th 2023 and then all of these other expirations here which all occur on the third Friday of their respective months in the middle we have the number of days until expiration and then once I click on one of these expirations we can see the options for that stock so if I click on December 15th 2023 this opens up all of these Tesla options in this expiration cycle there's a lot going on here and it's pretty overwhelming so I'm going to reduce the number of strike prices that the platform shows me by going all the way up to the top right here where it says strikes and I'm just going to open up 10 strikes I could of course change this back to a higher number if I wanted to see more strikes but for now I just want to open up just a few strikes to make this a little less overwhelming for you in the middle here we have the strike prices of the options and then on the left of the strike prices we have call options on the right of the strike prices we have put options and then we have the bid and the ask price which are the two prices that we're going to talk about and then we have have some other information here which I don't want you to be concerned with right now the bid price is the highest price that somebody is willing to pay for an option or a stock and the ask price is the lowest price someone is willing to sell an option or stock for and when it comes to trade execution if I want to buy an option I have to go to those who are selling it if I click on the ask price of any option this is going to set up an order to buy this particular option note that clicking on these prices does not execute a trade it just simply sets up an order to do so so if I click on the ask price of the 235 call we can see at the bottom of the platform it populates some information on the very left it gives me information about this order specifically the contract quantity which is one the expiration cycle the strike price which is 235 the option type which is a call and the order type which is a buy to open order this means I am trying to buy this call option that I do not have a position in which means I'm opening a new trade by buying it that is a buy to open order the price here in the middle is the mid price and we can see that this price is changing as the share price changes so the mid price is the midpoint between the bid and the ask price and this is a great place to try to fill orders because it is more favorable than going straight to the ask or the bid price for example if the ask price is $8.20 and the mid price is $810 I of course would rather buy at that lower price so whenever you're buying or selling an option it is a good practice to try to start at the mid price and then move to a higher or lower price depending on if you're buying or selling the higher price here would be the natural price so here on this right side we see Nat and this price is higher than the mid price and if I try to buy an option at the natural price which is the ask price this is going going to fill the trade immediately but of course I want to get the best possible price for my entry and so starting at the mid price is a good place to start since this price is moving around a lot if I wanted to lock it I could click this lock and this would lock the price and I could go ahead and send this order if I was really firm on getting filled at this price the max profit is infinity since there is no theoretical limit to how high a stocks price can go and since call option prices go up with the stock price there is also theoretically no limit to how high a call options price can go giving this position a theoretical Max profit of infinity the max loss is $825 which is because if I buy this for $8.25 and it goes to zero my loss is going to be $825 the buying power effect says $825 DB which means debit which means my buying power effect will be reduced by $825 if I buy this option so let's say I have $1,000 of available funds for allocating to new trades and if I buy this call option my buying power effect will be reduced by $825 which means I will effectively tie up that amount of money for this particular position and that will reduce my available funds for trading by $825 if all of this looks good I can go ahead and hit review and send if I hit review and send it does bring up some additional information it says I'm trying to buy one Tesla option with the details that we walked over before and then it says my stock buying power and option buying power and then all this other information here it says the order type is limit at 805 this means I'm trying to enter a limit order which means I do not want to get filled on this trade unless it is at this price or better and since I'm buying if I routed this trade this means I would not get filled in this trade unless I could buy this option for $85 or lower Tif means time and force and it says day this means that if I enter this order and I do not get filled on this trading day this order will be cancelled and so that means when the Market opens tomorrow I will have to enter a new order since this order will have been cancelled automatically since it only is in effect for this trading day if we take the estimated trade cost and add the commission and the estimated fees we get a total trade cost of 80612 this means my estimated buying power effect is reduced by $862 for entering this trade and again this means if I have a $1,000 of available funds and I enter this trade that available funds amount will be reduced by $86 since I have to tie up the money in this trade to account for the potential loss of $85 on the trade page you will notice that I have some other columns other than the bid and ask price the bid and ask price will remain there no matter what but you can customize these other columns for me I have the Delta volume open interest and the last price listed as my columns but if I wanted to change one of these columns I could simply click on it and then I could change it to a different value Delta is just the Delta of the option so if we look at the particular expiration and go to a specific strike price we can see the Delta of each option if we go to the volume column this is going to tell us how many option contracts have traded on this current trading day so if we go to the 21 strike call option in the 32-day expiration with uh the stock being Marathon digital the 21 strike call has a total volume today of 1360 contracts so 136,000 contracts you'll notice that these half strikes here specifically the 20 and A2 and the 21 and a half strikes have much lower volume than the 20 21 and 22 strike contracts and this is typical when you're trading options most of the time the round number strikes will have the most amount of trading volume and for that reason I would recommend sticking to trading these options with higher amounts of volume specifically these round numbers like 20 and 21 as opposed to trading the 20 and a half or 21 and a half strike prices in this particular instance the next column over is open interest and open interest is the total number of option contracts that are open between two parties and what this really means is that if we start at an open interest of zero meaning the options are freshly listed there are no current option positions that are open between two parties but if I were to purchase one of the 20 strike call options as an opening trade and then another Trader were to sell that same option as an opening trade then open interest would go up by one so when we see open interest here of 225,000 this means there are 225,000 open contracts at the 20 strike calls in the January 2024 expiration so open interest is an indicator that there's lots of activity in those options but if I then sell my call option as a closing trade and a Trader who is short that call option buys back the option as a closing trade then open interest will fall by one contract this other column last price is simply the last price of the option traded for but I could change this to another value specifically let's go ahead and look at change chg this change column or chg simply tells me how much these option contracts at various strike prices and expirations have changed on today's trading day with the current change in the stock price and really quickly we can validate what we've learned in this video namely that call option go up when the stock price goes up and put options fall when the stock price goes up and that's because Marathon today has increased by $160 and so if we open up all these different expiration Cycles we can see that basically every single call option at every single strike price and expiration increased in value today because Marathon increased by $1.60 which is a big move for a stock that is less than $20 and if we go to the put side we can see that all of the put options at various strike prices and expiration dates we saw that those contracts lost value which makes sense because put options lose value as the stock brace goes up there are also some other tabs on this platform such as the charts which are super helpful to watch obviously so if you click on the chart and you can change the time frame to look at different time frames and we are currently looking at Tesla but if I wanted to look at a different stocks chart I could simply click on the ticker in the watch list so if I click on coin this will bring up the chart of coinbase and if I click on TLT we can see the chart of TLT here then I can also change the time frame I can go ahead and hide my indicators if I want to hide my indicators and this is just a very easy way to go ahead and check the charts and navigate the platform so one feature I love about tasty trade is that when you do click on any ticker in the watch list it automatically populates all of the platform details for for that ticker so if we go back to the trade page now we are looking at TLT options as opposed to Tesla options if I click on spy we change all of the information to spy the next tab that is really cool is the financials tab which if we go to Apple for example and we go to the financials tab we can see all the different news statements that are coming out with apple we can look at their financials um we can see their revenue their net income we can look at all their key stats and ratios and also analyst projections and forecasts for this particular stock so this tab allows you to get a really quick idea about a company's fundamentals we've gone over the basics of the platform but now I want to actually execute an options trade meaning to put it on and then close it and I'm going to do this in QQQ in a very shortterm expiration cycle specifically the one with one day left until expiration I'm going to buy this 386 strike put option and currently the price is around $178 uh but since this is a short-term option the price is changing pretty quickly so I'm going to lock in a price of 120 and send the order and I did get filled on that put option purchase and I just bought the 386 drag put in QQQ for $120 now we can see in my positions tab this position is showing up and I'm going to go back to the Chart just to see what we what is going on so I just placed a L at 386 which is my put options strike price so ideally I want to see QQQ continue to fall uh but we will see what happens over the next few moments if I go back to my positions tab we can see that I have one contract of the 386 strike putut expiring in one day from now the trade price or my entry price is $11.20 and the Mark or the current market value is $127 or $126 and to the right of that we can see my p&l open is $6 and my p&l day is the same the p&l open is how much I've made or lost since opening the position the p&l day is how much I've made or lost on this current trading day and since I just open this option position today the values are the same I could put a stop-loss order on this put purchase by right clicking and hitting close position which will set up an order to sell this option I can change the order type to a stop limit order this will pull up two prices the first being a stop price which is the price that will trigger this stop-loss order for example let's say I put in a stop price of 60 cents this means if this put Falls to a value of 60 cents this will trigger the stop-loss order but I've put in a limit price of 55 cents which means effectively that I do not want to sell this option unless I can get filled at a price of 55 cents or higher since I'm selling it and this is just to protect against a bad fill when using a market order now if I go back to the position tab we can see I do have a working order which is a stop loss order with a trigger price of 60 also of note is that QQQ is at 38672 and since I entered this position when QQQ was around 38650 since QQQ has gone up in price that means I have lost money in my put purchase since when you buy a put option we want the stock price to go down and since the stock price has gone up I do have small losses on this put option purchase I'm going to cancel that stop-loss order that I had and I'm going to show you a different way to do that which is by using a bracket order if I right click and hit bracket this pulls up an order to set a profit Target and a stoploss and if one of these orders is hit it will cancel the opposite order I just changed the close at profit price to $1.50 and I'm just going to set the stop trigger price at $1 this means if the price Falls to $1 my stop loss will be triggered and I will sell the option but I can also change this to a limit stop price and I can set the stop limit to 97 so basically if the option price Falls to a dollar it will trigger a limit sell order of 97 cents which means I will not get filled on this sell order unless I can do so at 97 cents or better if I hit review and send and send this order it will effectively route both of those orders which means I will have a profit Target and a stop-loss order on the same option and there we go so we can see I have a limit sell order at $1.50 that's my profit Target and I have a stoploss order that is triggered if the option price Falls to $1 also we can see that QQQ is now at 38635 and I'm currently up about 7 cents on this position since the option price has risen to $127 or $129 now but now I want to go ahead and close this trade so I'm going to cancel the bracket order that I previously set up I can do that by right clicking hitting cancel complex order now I can go back to the trade page and I can click on the bid price which sets up an order to sell the option and I just changed the price to 125 which was a limit sell order and there we go I just got filled on that because the price did increase to $1.25 and now we can see that I've effectively closed out the position and I made $5 on that trade since I bought the put option for $1.20 and sold it for $125 I want to walk through an example of shorting a put option so you can see what it actually looks like to short an option using real trading software and how you can close that position out and how the final p&l is determined for this example I'm going to be looking at xlu simply because it's a low priced low volatility ETF and that means the option prices will be cheap and the risk will be minimal for this example so here I'm opening up the December options expiring in 2023 and they have 35 days to go and for this I'm going to short the 60 strike put off option so here I've clicked on the bid price of that 60 strike put option and we can see that with the price of $16 the max profit potential is $106 the max loss potential says it is around $5,900 which would only be the case if the stock price went to zero but since this is the utilities ETF the likelihood of going to zero is basically zero and so this is a relatively safe way to short putut options since you have a lot of risk involved when shorting a naked option like shorting this 60 strike put with no other options used as protection you do need to put up a high margin requirement which is simply the amount of money that you need to tie up to account for potential losses when entering the position so here we can see that the margin requirement or buying power effect says $1,182 and this just means that to short this put option for $16 I need to put up or tie up $1,182 to account for potential losses on this position so I did get filled on this trade for an entry price of $16 and this means my maximum profit potential if this put option were to expire worthless would be $106 but for the purpose of this example I'm just going to wait and see what the put option price does as xlu price changes and then I'm going to close out the put option for just a couple pennies just to demonstrate what it looks like to enter and exit a short option position here we can see the put options price has actually decreased to $15 and since I shorted it for $16 it says my open p&l or p&l since opening the trade is a positive $1 and that's because XL U's price has increased very slightly since entering the trade so to close this trade I just have to rightclick on the option and hit close position and this will ceue up an order to buy back this short put option and I just sent an order to buy back the put option for $14 and we're going to see if that gets filled but as we can see the order is not yet getting filled it is a working order which means I'm trying to buy it back for $14 the market has not yet gone to that price and so my order is not yet filled but if the put options price does drop to 104 then I will get filled on the this trade so I just need xlu to increase slightly or I need some more time to pass for the options price to decrease a little bit and then I will get filled on this trade and successfully close it out so it's not getting filled and I just want to close it out so I'm going to right click hit replace order and then I'm going to increase the purchase price to $15 which brings my profit to $1 and that went through so in this example I successfully shorted a put option for $16 and I bought it back for $15 therefore securing a $1 profit a huge $1 profit on this trade example this is not how I would actually go about trading short options I just wanted to demonstrate a very simple trade entry and trade exit using real trading software so that you could see how this strategy Works in practice The Brokerage platform used in this example is tasty trade and tasty trade is generally running special funding promotions which you can check out in the link down below if you love the work that I do here on this channel using the link in the description below is a phenomenal way to say thank you in this section of the video I want to talk about some of the options trading tools that I use to assist me in my trading whether that's finding trading ideas looking at charts or using options analysis software to better understand my positions and potential things that I can do with my positions the first tool that I like to use is called option net Explorer and this is Prim primarily options analysis software and I use this for back testing specific options strategies for example if I wanted to test how a particular option performed during a specific stock price movement I could use option net Explorer to test that strategy and look at the performance of that strategy and see various statistics around that position for example if we went to Nvidia and went to the beginning of 2023 we can see that Nvidia went up up a lot so Nvidia share started around $140 and over the first half of the Year nvidia's share price was over $400 so that's obviously a huge move and so I could use something like option net Explorer to see how a strategy would have done in Nvidia this is the interface for option net Explorer currently I have Nvidia selected and I can use this calendar to go back to a specific date in 2023 so if I went to January 3rd uh 2023 and went to Nvidia options we could test various option strategies on Nvidia for instance if we went to the March expiration which had 73 days to expiration and I looked at buying a call option with a strike price of 150 I could model that position and see how it performed over the coming months on option at explore the call options are on the top and the options are on the bottom and I could navigate to the different expirations using this panel here if I go to the 150 strike call option we can see that the mid price is $12.65 and this option had a Delta of around positive 49 I could model purchasing one of these contracts by just typing one in the model column and hitting enter and this brings up a chart on the left which is modeling the position of buying a 150 strike call option in Nvidia as of January 3rd 2023 and in the March expiration cycle and so this is just modeling the position but if I want to commit this trade and then follow its performance I could go up to commit trade hit commit trade enter a price of 1265 which is the current mid price or was the current mid price of that option and I could hit save and this would lock in this position with an entry price of 1265 and then I could click forward in time using these buttons at the top here so if I click next trading day we can start to see how this position would have performed so just one day later we can see up here that Nvidia shares went up $434 so the share price went up 3% and at the bottom here we can see that this call option increased in value by 15% and had a p&l of a positive $184 without even clicking through the dates though we can visualize how this position might perform by simply looking at this graph so if we highlight over $160 per share then it's telling me that the position is estimated to have a profit of $945 or a positive 75% but what I love about this software is that you can have projection lines so we can use for example three projection lines which will give us pnl estimate at various points into the future the t+ 0 line is effectively what is the p&l of this position today so no time has passed meaning t plus 0 or time plus 0 means at the current trading day and so this is this topmost line here but then we have these other lines t+ 24 and t+ 48 and these correspond to particular dates in the future and as we can see those future lines are a bit lower than the current line and this is visualizing the loss of extrinsic value in this call option at different points into the future so for example if we look at this t plus 48 Line This is 48 days into the future meaning that this option is going to be much closer to expiration since that t+ 48 line is in February 21st 2023 and we're looking at March 2023 so t plus 48 gets us into mid-February which is going to be a lot closer to expiration as compared to right now and we can see that at this current moment this position is up $190 but if Nvidia goes up to $156 over a 48 day period meaning that in 48 days from now if Nvidia is at $156 this position is actually expected to have no profits or losses and this is just visualizing the time to K or the loss of extrinsic value as time passes and based on different Nvidia stock price movements so if we continue to go into the future here we can start to see different levels of performance so if I continue clicking forward obviously Nvidia is ripping and we can see that this option position is starting to see really healthy profits so on January 11th 2023 if we go and look at this 150 strike call now we can see the mid price is $20.43 and that is about $8 higher than what we bought this option for initially specifically it's $776 more in value from the entry price of this option in time with the position up $776 I could also model an adjustment to this position specifically what I would want to look into is what if I were to short a call call option at a higher strike price against the call option that I already own this is getting a little bit outside the scope of this video because this would be creating a option spread which I do have a full video on called vertical spread option strategies for beginners which I would highly recommend but basically what I want to show you is how this software can model adjustments for you so let's say I were to short one contract of the 165 call option collecting $12.50 or $1,255 into my account for shorting this option and what this does is it populates a second risk graph which models the added position so the blue line here is the original long call position of just purchasing the 150 call for $12 66 and the green line here or this other shape here is modeling the 150 call purchase plus shorting the 165 call and basically what this shows me is that if I were to make this trade I would effectively remove all of my downside risk from the position because originally I bought the 150 call for about $12.50 and then since the stock price has gone higher now this 165 call is trading for a value that's very close to what I paid for the original 150 call and that means if I short this 165 call I will collect money into my account that is approximately the same amount that I paid out originally for buying the 150 call and so what this means is that if both of these options go to zero then my net loss is going to be wrapped right around zero which is what this platform is telling me and so if I were to commit that trade and sell that option for $12.55 now we can see that the downside on my position is wrapped right around zero which again means that if both of these options were to go out worthless since I paid around $12.50 for the 150 call and then shorted the 165 call for about $12.55 this is telling me that my position effectively has no risk when we account for the initial payment of the 150 call and what I collected for this 165 call if you're interested in using option net Explorer there is a link in the description below where you can save some money and get a discount for the software using the project Finance referal link which does help support the channel no Hard Sell whatsoever I do understand it is somewhat expensive but like I said if you just play around this for a couple months I think you can learn a great deal about options trading mechanics by messing around with different option positions running them through different stock price movements and seeing how those positions performed in those circumstances the next tool that I think would be very helpful for you as a beginner options Trader is playing around with an options pricing calculator and this is an entirely free tool I will leave this tool down in the description below it's a really cool tool I have no idea who built it but it does definitely help understand options strategy payoffs and options pricing when you change the different inputs in this calculator so for example we can start the underlying price at 100 this is the stock price we can set the exercise price which is the strike price of the option and we can keep that at 100 as well we can keep dat to expiration at 30 interest rates at 5% and dividend yield we could change that to 0% and then we can quickly calculate the price of this option and it will also give me a payoff graph for the options price right now and at expiration and at different stock prices into the future so on the top right here we can see that based on these inputs the theoretical call price is $36 but what if we were to increase volatility to 30% if we recalculate that we can see that the theoretical option price is $3.60 and so basically what that means is if I bought this call option and implied volatility was 25% and then implied volatility increased to 30% I would see a profit on my option position since as we talked about earlier in the video if you buy an option and implied volatility or the expected magnitude of a Stock's price fluctuations goes up that means the option prices have inflated to account for that expected higher levels of volatility simply by changing the variables in this calculator and recalculating the theoretical option prices you can quickly understand how option prices will move and respond to the changes in the variables in this calculator so I would highly recommend playing around with a free tool just like this options pricing calculator to get a better understanding of how option prices work the next important topic that I wanted to quickly cover is which stocks or options should you trade or which stocks or options are good for trading just because a stock has options it does not mean that they should be traded and in fact in my universe of stocks that I actually trade or the universe of options that I actually trade it's probably less than 20 ticker symbols or stocks or ETFs I recommend only trading options that are highly liquid or have lots of trading volume in open interest and tight bit ask spreads so in terms of liquidity liquidity means that you can enter and exit the position with very little friction or slippage trading liquid options will make it far easier to enter and exit positions without losing a lot of money from slippage so by slippage what we mean is if you buy an option at the ask price and sell at the bid price how much money are you are you going to lose from that transaction so in this first example the bid price is 110 and the ask price is 12 that means if I want to instantly buy this option and then instantly sell it I have to buy at the ask of 112 and then to instantly sell it I can sell it at the bid price of 110 and if I did that I would lose 2 cents on that order and my slippage would therefore be 2 cents so slippage is how much do you lose by buying at the ask and selling at the bid and you want that number to be very slim in this next example if I did the same thing if I bought at the ask of 150 and sold at the bid of $1 my slippage is 50 and this is going to be a really bad option to trade because this means that just to enter and exit the position I'm probably going to lose a lot of money and therefore I need the option to increase a lot just to recover that slippage cost wide bit ask spreads like this option are not ideal for active trading it is okay to break the rule if you were to buy this option because you thought maybe it was going to be a 10x trade or something and go to $10 but if you were actively trading options with wide bit ask spreads like this you are going to incinerate a lot of money just from slippage costs alone I put together a short list of stocks and ETFs with liquid option markets as of December 2023 for stock or Bond index ETFs we have spy and SPX which are two products that track the S&P 500 Index QQQ is the NASDAQ 100 ETF which is a techn te ology focused ETF iwm is the Russell 2000 so this is a small cap stock ETF and then we have TLT which is the 20 plus year us treasuries ETF these products are highly active and highly liquid meaning that they are great products for active Traders since they have so much volume that you can very easily enter and exit positions with little slippage costs in terms of individual stocks we have Amazon Apple Tesla um a bunch of other names these are just a few individual stocks that I have personally vetted and have liquid option markets but if you trade upst or upstart just make sure that you understand what the company does very strong earnings these stocks are what they do I don't even know them what do they do uh excuse me what does upstart do uh well I'm I'm I'm sorry what kind of company is it yeah I'm not you're you're breaking up I put together a watch list of these stocks and really quickly I just want to go through them just to show you what I mean so if I click on spy and I go to the January 2024 expiration we can see that the volume is in the tens of thousands at certain strikes the open interest is also super high in the tens of thousands of many cases and we can see that these options have one penny wide bid ask spreads that means if I were to buy one of these options and then sell it immediately I would only lose one penny from the slippage cost or buying at the ask and selling at the bid if we go to iwm we can see these options are also very tight just a few pennies wide we go to TLT we can see a couple pennies wide bit ask spreads volume in the hundreds to thousands in many cases and open interest in the tens of thousands Apple if we go to the 30-day cycle again these options are very tight lots of volume lots of open interest I should mention that the more expensive the stock The Wider the bid as spreads will naturally be and that's because the options are simply more expensive and if we calculate the slippage cost as a percentage of the total option cost if we have a 1% slippage on a $1 option that means that the bid ask spread would be one penny wide but if we have a $15 option if the slippage is 1% that means that the bid ask spread is 15 cents in terms of trade execution a best practice is to try and fill the trade at the mid price so if I click on the ask price of this Netflix call option with a strike of$ 490 the bid is $15.75 and the ask is $15.90 when I click on the ask price on tasty trade it sets up an order to buy this option and the default price will be the mid price so a best practice would be to try and fill this order at the mid price and then if you don't get filled on that trade you can cancel and replace the order and change the mid price by one increment against you so if I'm trying to buy this option if I don't get filled at1 1580 then I would have to cancel that order replace it and then I would increase the price to1 1585 I would send the order and if I didn't get filled there after a few minutes then I could cancel and replace the order and I could increase the price yet again so always try to fill trades at the mid price first or maybe even better and then if you don't get filled on that order after a few minutes then go go ahead and change the order price increase the price if you're buying it and decrease the price if you're selling it which would be a less advantageous price for you and adjust those orders in small increments until eventually you do get filled this is especially important if you are for some reason trading IL liquid options with wider bid ask spreads we've covered a ton of content in this video but I wanted to give you some recommendations for the next videos to check out on my channel since there are videos on my channel that will help you further solidify the topics that I talked about in this video but perhaps with slightly different explanations and different examples on my channel the videos that I would recommend checking out next are the best options trading strategies for beginners where I walk through a handful of options strategies that I think are suitable for brand new options Traders and in that video I lay out many examples of how they work and why I think they are suitable for beginner Traders I would also check out option Greeks explained for beginners where I walk through the four primary option Greeks and give more in-depth examples and explanations of how those four Greeks work then I would check out how to understand option prices simply which is going to further enforce how to understand option prices which will help you make more informed decisions when trading options I would also watch mastering implied volatility what options Traders need to know this is a deep dive into implied volatility which is a super important concept to understand as an options Trader and that is a more in-depth video that walks through how implied volatility works and how it impacts popular options trading strategies I would highly recommend watching my vertical spread option strategies for beginners the four vertical spread option strategies combine buying and selling call and put options and if you understand the vertical spread option strategies in addition to buying and selling call and put options then you are equipped to understand every option strategy that exists I really hope that you enjoy this video and you had a bunch of light bulb moments and that you understand options trading much better than you did before it took a ton of time putting together this video and doing the editing and everything like that and so if you wanted to support the channel I would greatly appreciate if you wanted to try out any of those products or services please use the link down in the description below and if you do end up opening a tasty trade brokerage account if you use the link down below that is a phenomenal way to support the channel and say thank you thank you so much for watching once again my name is Chris from Project finance and I will see you in the next videos [Music] [Music]