Options Trading for Beginners: Total Guide with Examples!

would you rather be forced to spend $5,000 on 100 stocks just to make a 1% return in a single month or would you rather spend $200 on that same 100 stock

that's being leveraged and receive a 50% return in the same month that is the power of trading options contracts but the problem that most everyone has with options trading is that it's really

complicated and if you make the wrong mistake it's going to cost you a lot of money so in this video my goal is to give you a course on options 101 to give you the basics of what it's all about

provide you some of the terminology and the concepts within options and then give you some of the examples of what it looks like real world and a quick disclaimer that options trading is meant

for higher level investors that truly understand the risks and they can separate their emotions from the logic of investing and if you have a personality that is prone to gambling then please just do yourself a favor and

just walk away now and I'm dead serious when I say that because my goal of this channel is to help educate others to make better decisions with their Investments and for those of you that are ready for options trading then I

want to give you the basics to really help get you started the entire process for options will probably take about 10 different videos or I may just set up a one-on-one course to give viewers more

of a Hands-On education if you would just let me know your thoughts in the comments on which one you'd prefer now I'll give you an overview of how I'm planning to break down this video and I'll start by explaining in very plain

English and some analogies what option contracts are then I'll explain call options put options and then I'll walk through some analogies listing out all the terms along the way to truly paint

the full picture and then I'll finish the video by walking through an example on a brokerage site using all of the discussion points that we've already discussed options are Financial contracts they give you the right but

not the obligation to buy or sell a specific quantity of an underlying asset at a predetermined price before a set date and a major asteris here a single

option contract consists of 100 shares of an asset which could be individual stocks bonds or exchange traded funds remember a single contract is always worth 100 shares and whichever broker

that you are using it will list out the totals in the process but you always want to keep this in mind this is referred to as the contract multiplier where each contract is always worth 100 shares of the asset and if you're

curious if you can trade options within an IRA the answer is yes but it depends on your IRA and of course the brokerage site that it's with so you'll want to do your own homework to find out about your

specific situation now I'd mentioned that options are leveraged meaning that you are managing 100 stocks in the contract but for a fraction of the price of the actual cost of the stocks this

provides you leverage in buying power and unlike stocks options contracts have an expiration date and that's why it's referred to as a contract to help illustrate this better let's say that

you or your kid wants tickets to Taylor Swift where they're going for a fixed price today at $100 a piece and there's an option option to reserve your tickets

in advance if you put down $10 today the concert happens to be in 30 days so the deal locks in your price for those 30 days and if the ticket price goes up to let's say $150 well you happen to be

locked in for $100 since you put down the deposit and you got a great deal but if the tickets go down to let's say $75 you'd obviously choose not to buy the tickets at the fixed price of $100 and

you would only lose the $10 from the deposit so being more direct at most your loss is only limited to the $10 from your deposit but the potential profits or the Savings in this example

are theoretically unlimited since there is no ceiling to how much the tickets could go up to now let's say you had paid the full ticket price of $100 30 days prior instead of putting down the

deposit your upside is also theoretically unlimited but what if the concert was cancelled 5 days out then you would lose your full $100 that you paid for the ticket and that's a heck of

a lot more to lose than just the $10 from a deposit in a nutshell that is how options contracts work now I'll begin to map this out using the terminology that investors use in the actual process and

keep in mind that I am only scratching the surface because this is only options 101 now there are two main types of buy option contracts and they're referred to as calls and puts where the term call

means that you want the option to purchase the asset for an agreed upon price in the contract at any time within the expiration date and that agreed upon price in the contract is called the

strike price let's show this visually so that it makes a little bit more sense there's a stock whose price is $100 today but in one month I believe that stock is going up to $111 because I

think it will go up to $110 I want to buy an options contract below $110 in The Brokerage site that's offering the options contracts they'll have a wide array of contract strike prices and

that's the price we are putting a deposit down for where the strike price is more expensive when it's below $100 and it gets less expensive when we move above $1100 this is because the

likelihood of a stock going extremely high in a month becomes less likely and the contracts become cheaper I'm going to buy the strike price of $15 at a contract price of $1 and keep in mind

that there's a contract multiplier which makes it 100 shares so the contract premium is now $100 and when we graph this out over the3 days the stock price

climbs then it dips down at day 10 and then it climbs up again at day 25 to about $107 and the horizontal black line is my strike price that I purchased in the

call contract the contract expires in 5 more days and everything above the strike Price Line represents potential profits but we do need to account for that $100 that we paid for the premium

and the dotted red line is our break even price at $16 where everything over that happens to be true Prof profit I'm not sure what the stock will do in 5 days so I really

have just two choices that I can make right now my first choice is I can choose to exercise my call option which means I'm choosing to buy the 100 stocks

right now for $15 each for a total of $10,500 which is a lot of capital that I would need right there on the spot to buy them and the second choice is to sell my call option contract to the

market for $107 since I don't really want to put down $10,500 I select the second choice I bring in $200 from selling my contract so when we take into account my $100

premium that I paid for the contract subtract it from the $200 profit I'm left with a $100 total profit that would make for a 100% return in less than 30

days now please keep in mind that I am oversimplifying this to really help paint the picture and overall this makes for a great contrast between owning stock and buying call options if we own

the 100 stocks and the price went from $100 to $17 the potential profit if we sold the stock is a 7% return but that's a lot lower than the 100% return from

the call option and that's why call option trading can be extremely lucrative if you understand the risks and you know how to manage the contracts now what if we didn't take any action

and we let the contract go the full 30 days and the stock drops down to $105 well you can see that at $15 it's below our break even of $106 that takes into

account the premium that we paid so in this instance I would not exercise the contract meaning I would not buy out the 100 shares at $105 each and I also would

not choose to sell my call option either because it isn't worth anything in this scenario I'd let the contract expire worthless and I would choose to Forfeit

my $100 premium and just call it a day this happens to be a call option that I missed the mark on and in the end I lost some money now if you choose to invest in options there are some broker es that

offer you some benefits that you may not even realize for instance I want to point out today's sponsor public.com offering a first of its- kind rebate model where you can receive between a 6C

and 18c rebate per contract traded depending on your prior month's trading volume there are also no commissions or per contract fees when trading options on public for frequent Traders this can

amount to hundreds of dollars in savings each month something else I also appreciate about public is that they provide a resource center with a library of educational videos explaining different strategies and the

fundamentals of options and you'll get a chance to see their site in action when I walk through some examples later on now let's discuss some Trader lingo associated with the call option trading

in looking at our example anything above our strike price in green is called in the money and anything below the strike price in red is called out of the money when you're in the money you can make a

profit or you can buy the asset at a discount at the strike price and when you're out of the money you're you're not going to want to exercise the call option because the strike price is higher than the actual stock price and

when the stock price is close to the strike price then it's called at the money I also call this Purgatory because well it's pretty dead and it's not really going to go anywhere when buying

a call option you are a bull because you expect the stock price to go up and this type of contract is purchased when you expect prices to rise over time but let's say that you're bearish and you

expect stock prices to stay the same or go down this is when you may want to buy a put option contract this works exactly like the call option but more similar to the upside down in stranger things

because everything is reversed buying a put option gives us the right but not the obligation to sell 100 shares at the strike price and even though you are selling the stock you technically do not

need to own the physical stock you simply own a contract giving you the right to sell the leverage stock at the strike price like I had said it's truly the upside down version of buying a call

option with buying the put option we have a listing of strike prices and their contract price or premium same scenario as before when we have a stock at $100 but I think it will go down to

$90 and I buy that put option contract at 75 or a premium of $75 because of the contract multiplier being for 100 shares when we look at this chart we have our

Flatline of our strike price of $90 but our Break Even dotted line is at $89.25 due to our. 75 cents a share premium that we had paid the stock price has

gone up and then way down to $85 at 15 days in remember we can exercise our contract to sell the 100 shares at any time during that one-month window of

this particular contract quick quiz can you remember what that area in the red is called now I hope that you're were able to guess it right as out of the money which means this green section below the strike price is considered in

the money and because I don't want to be too greedy I choose to exercise my right to sell the put contract 15 days in where my strike price of $90 minus the market price of $85 leaves me with a

profit of $500 because it happens to be for $100 shares and then of course we need to remove our premium of $75 to give us a total profit of

$425 in a bearish market it's pretty obvious that buying put contracts can generate a lot of money even though the market is in Decline and this greatly reduces a person's liabilities by buying

put options versus actually owning the stock because the most that you could possibly lose with buying a put option is the premium itself whereas owning the stock or the asset it carries the risk

of going all the way to zero and losing it all so far I've spoken to buying a call option and also buying a put option now there is another layer altogether where a person can sell a call option or

sell a put option but those carry a lot of risk with them and I won't get too in depth but here's my quick cheat sheet for call options when buying you happen to be the bull but in selling you are

the bear buying you happen to pay upfront and selling you receive a premium upfront in selling the max profit is unlimited but in buying the max profit is maxed out at the premium

that was received and here's The Clincher where the max loss for buying a call option is limited to the premium that was paid but in selling call it is potentially unlimited if the stock price

goes up and well you happen to be just missing out on that goodness and I'll have that same type of cheat sheet up on the screen now for the difference between buying a put option versus selling a put option and in selling a

put option you carry a lot of risk because you are obligated to buy the 100 shares if the buyer exercises the contract and your max loss is unlimited and this is where a lot of people can

get themselves into trouble if they don't know what they're doing hey let's review what we've discussed to this point options contracts are different from owning an asset because they have an expiration date and when we buy

options contracts we select a strike price for where we expect the asset price to go to at some specified date listed in the contract and buying options have a contract multiplier

meaning that each contract is for 100 shares and it's considered to be leveraged meaning you have control over 100 shares at a fraction of what the actual stock prices worth the total

price paid for a contract is referred to as the premium with buying a call option contract we are bulls and we expect the stock price to go up and with buying a

put contract we happen to be bears and we expect the stock price to be going down when buying a call option and remember this is when we are bulls when the stock is above the strike price we

are in the money and when the stock price is below the strike price we are out of the money and when the stock is right around the strike price well we happen to be in purgatory or at the

money so far we've covered the barebone basics of options trading 101 now let's take a look at how options look like as a demonstration on public.com I'm a big

fan of the interface and you'll see why so I'm choosing options on the side and then this is the landing page on the screen there are a lot of equities to choose from but for demo purposes I'm

selecting my options button to look up the stock of Tesla and like I said I'm just picking one as a demonstration and I am verifying that I have the buttons selected for buy and call now I want to

select expiration to give me a contract expiration date and then I move over to the drop- down and I'm going to select 90 days out and when I make that choice it shows the current stock price right

there in the Middle with the green line section and in the upper left corner it lists out the strike prices these are all the different strike price contracts for future stock prices so for the

strike price of $400 it lists an asking price on the far right side at $29.5 and moving over a little further the break even at this strike price and

the asking price is $429524 to break even and even more to move into the money so let's click on the plus symbol right next to the asking price of

$29.5 and as you can see it brings up the breakdown which is clean and easy read I have a limit order and it is constantly fluctuating which you can see I like to pick a price between bid and

ask but for Simplicity I'll just keep it at the ask price it lists the quantity of the contract at one which represents 100 shares and that's why the estimate order is at

$2,920 down below that it has a graph where it lists the break even prices and my Max loss based on the premium price and I can move the line across to see visually what it look looks like when

the stock price goes up and the potential profit at a specific stock price also moves with it from here I would submit the order and I could review the details but since this is just a demonstration I think that gives

you the overall gist of what it looks like public has a seamlessly designed interface and when you sign up using my link you can automatically earn a 6 Cent rebate per contract traded and based on

your monthly trading volume you can earn even more check out public public.com BWB or by clicking on the link down in the video description I have now given

you a very highle review of options 101 where I covered the most common terms and the contracts associated with those options like I mentioned earlier if you want me to make several more in-depth

videos on the strategies and greater details just let me know in the comments or if you want me to create a one-on-one course well I can look at doing that too overall I hope that you feel a little

bit more educated on options trading and thanks so much for watching