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@@amcbirds Do the calculation yourself before belive this method. It seems to make sense to trade options this way, but if you are smart enough to do a deeper calculation you will see you are losing money to do this. Try to run the number if you have 100 shares at an average $70, because to sell the call, you have to own 100 shares of the stock. You would get more return if you just hold shares in the 1 2 4 scenarios. and in scenario 3, you are not making any money from trading option.
I watched 15 other videos containing the same information. But, the difference in you're video, is that you give examples after the content that you are trying to teach. This information is explained in very clear, concise, basic terminology that anyone could understand. Thank you for also teaching the concept of options trading in order!!
Great advice 4 "pick a stock, any stock." The fact that your profits are capped, as well as your losses, is the issue. I suggest placing more emphasis on the Underlying. This means you have to do your homework so that the probability of success is nicely in your favor. One winner can cover ten losers. I use verticals when I'm less certain, straight buys when I'm convinced of direction & time.
This entire series is amazing, I love that it’s broken up into digestible portions and the graph visuals with minimal personal anecdotes and bullshit. Great series!
As someone who has done both, I would definitely recommend using vertical spreads as opposed to simply buying naked (single) options. The limited profitability is much worth the trade off for the amount of risk you incur. Spreads are more affordable, offer more flexible break-even points, and your P/L is much less volatile. If you continue to only buy single options, even if you are right in the long-term, you most likely will be stopped out and/or find it very difficult (and most of the time unwise) to hold a position that could easily lose 50% value overnight. Buy Spreads!
I have a solid understanding of how to trade stocks profitably, but am now looking at Options. I just watched like 10-15 videos on "Options for beginners" and absolutely none of them even took the time (or simply were unable) to explain what an option was or how it worked. It's late May 2020, so it looks like this video is almost 4-years old now. Thanks for keeping it up! Was totally lost until I watched your video.
The first time I looked at this video , I didn’t know anything about options and this video was mind boggling . I dabbled with options for a couple weeks and revisited this video and now it makes perfect sense. Thanks for making this video
Wow! I can't believe I just got through the whole video understanding everything! It took me about 2 hours pausing the video and thinking and reading comments below, playing it over and over until I clearly understood it well. Thanks again for doing these amazing videos.
Wow, that's amazing. Two hours of watching this? Maybe I'm fooling myself with my comprehension, but I set the speed on 2x and understood everything on the first pass. It's not rocket science.
Great video! Question, If you sell a call option to create a spread then you cannot sell your purchased lower call option if the stock price moves upwards before the expiration date. Wouldn’t you need to maintain that call option to fulfill the written sell order until the expiration date? Whereas, if you just purchased a call option you’d be able to sell it immediately.
By far the best video on how to trade a long vertical spread anywhere on the internet. Clear, concise, easy to understand. I was trading long vertical spreads for the first time on TOS literally the same day I watched this video. Thanks for this awesome educational video. You rock!
Wow this is an amazing video and a real eye opener. I was looking at just buying calls if I'm bullish on a stock. I see now that buying the spreads is a real eye opener and no brainer. Many thanks, this is one of the best videos I've seen on the advantages of buying spreads. Thanks.
The best explanation for vertical spread. I have been looking for how the options play and so tired of listening many clips which contain lots of talking and very little useful information. Greatly appreciated
I've been trying to understand options for a while .. but I was getting more lost the more I watch videos.. until I just saw your video .. you explain it in a real amazing way, easy to understand and in a short period of time.. just from this virtual spread example.. I have more dots connected and have a much better understanding.. if I need to explain it to anyone I'll send them your video .. THANK YOU! wich you all the best.
Jason yang, no, the 70 strike call increased in value from 7.50 to 9.50, thus netting a 200 dollar gain, plus the 250 dollar premium for selling the 80 strike call, and expiring worthless, would result in a 450 dollar gain.
@@alexauker7118 options can be bought or sold, Robinhood doesn’t allow selling naked options, but they do allow option selling in combination with a long option.
@@alexauker7118 A vertical spread is where you buy one option and write (sell) another. It can be risky to sell an option because of the potential for "undefined" loss, but that risk is offset by buying another option that is in the money. This makes it a less risky trade.
my experience with options is basically selling covered calls. I like your explanation of spreads, using the four different scenarios. This shows me clearly why a spread is useful. Thank you.
Awesome to hear! Covered calls are for sure one of the first strategies that attract a lot of people towards the option market and digging further. We're glad to hear our video helped!
Love your video! How does a debit spread compare to a credit spread? Are there times when one is better than the other? And if so, under which scenarios? Thanks
Hello! We tend to be on the credit spread side of things. With credit spreads we keep time decay on our side, and with neutral time decay bets we can take the "importance" of picking direction out of our trading decisions. Hope that makes sense!
NO BS , straight to the point, and clearly explained. Outstanding presentation. Your videos stand out on this topic and methodology. Thank you very much.
Thanks for making this video that I finally understand the options trading. options trading has really transform a lot of people, making money make me live a luxury life and give my family the best
Huge fan, very very useful tutorials. Yours is the only one go to option for me whenever I'm in doubt. Taking baby steps in options trading. One request pls... Pls release a tutorial on what is out of money and in the money terminologies. You have only two tutorials in the basics of options stored and these terminologies aren't covered there. Pls pls release one more tutorial to bridge the gap.
You misunderstand. He bought a vertical spread, and a vertical spread is made using Buy and Sell Call simultaneously. In this scenario, the Buy Call option is made worthless hence you loss money, but your Sell Call option made you money because you collected premium for it. Options are pretty complicated to beginners and it will take a while to understand. The Sell Call and Buy Put option have the same concept but different function. They both make you profit if the stock goes down but the process is different. The difference between a Sell Call option and a Buy Put option is that the function of a Sell Call option is to collect premium. A Sell Call will make you money as long as it doesn't go past the strike price. Let's use the video as an example. Notice how in scenario 1,2, and 3 Vertical option the Short 80 Call @ 2.50 netted you +250 even if the stock is priced at 79.50, 75.00, 50.00, that is what we call the premium. You would profit if the stock goes down but its limited profit, its function is to lessen your risk if you deemed the stock to be slightly bullish and you think it might go down instead. A Buy Put option would make you a big profit if it goes down. Consider scenario 3. If you Buy Put option at 80 and the stock goes down to 50.00, you would probably get around +3000 (more or less due the greeks, premium, volatility, itm, otm etc...)
@@D3STINY22 I thought that to. But think about it this way. If xyz is currently at $75, would you rather buy it at $70, $75, or $80? Obviously $70. So there is more value in being able to buy shares lower than current market price. You also need to account for premiums & your break even price etc.
@@mbnova1995 I don't quite follow, but I assume you're talking about buying a call option when it was $70 then xyz went up to $75. That would indeed provide much value but the premium you would have to pay for a naked Buy Call option would be much heavier and the time decay would be against you. Also things to consider would be, What if XYZ didn't go to $75? What if it stayed around $70 or perhaps lower? The Vertical Spread simply aims to mitigate risks. Supposed you did buy a naked call option. (Assuming IV percentile with be
@@D3STINY22 what he was trying to say is that of XYZ was currently at 75 why wouldn't you buy calls at 70 dollars since you're getting the stock cheaper. As opposed to buying 80 dollar calls
@@D3STINY22 hi sir. Can you help me understand his example at 1:30? So we buy a call option for $750, and we also sell a call option for $250. But where did the call for $250 come from? Does this assume we've already purchased that option and can now sell it? When did we acquire it? Also, why would someone buy that call for $250 from you? Seems the stock has very little time left to pass $80. I'm so confused.
0/10 not enough shitposting Looking over my education from wall street bets this has to be the simplist educational video that actually explained everything properly, brilliant work
But couldn’t that short call at 80 get exercised and you’d get assigned the contract, thus those shares? How do you avoid getting assigned those shares, since selling a call is an obligation to buy, not the right. This video was phenomenal, but that’s the question that remains for me. How to avoid assignment of the shares when/if it raises above the strike of 80? Thanks so much for your time and in answering this!
I think if that leg of the option gets assigned then that means you would close your other leg to profit and the profit/loss would be the difference. That's why you have the other leg of the option otherwise it would be naked and have unlimited loss potential.
That's what you want to happen. If both options are ITM, early assignment is a good thing (excluding ex-div dates). You can exercise your long option to cover the assignment and realize max profit.
@@AzNMadnessXXXXXXX but what if you dont have the money to actually buy the 100 shares at the 70 in the first place...do they just take that option from you and youre fine? or can you just not do that if you dont have the money
@@BlackPanther4577 but what if you dont have the money to actually buy the 100 shares at the 70 in the first place...do they just take that option from you and youre fine? or can you just not do that if you dont have the money
In the 4th scenario , you should use $90 price at expiry - then profit is 166% but spread has 100%. That explains much better than a $85 price at expiry.
1. Cherrypicked example where stock price 79.50 ends up just below the short call strike price of 80 2. Only happens if you let time decay reduce your option value to 0 3. Still severely reduces gain potential, it depends how much of a bargain you can get the short call for. I can see this being useful however as an insurance in case it goes against you. 4. I feel like if you’re right most of your trades the extra 33% return is important but I suppose it just depends on your risk aversion.
I guess there may be one more scenario you didnt mention. What would happen if after the price rose the call you’re selling was exercised? Would it pull directly from the call you bought and you would still make profit in the vertical spread?
Great Video. But when I try it on stock A today, it’s about 70$, the sell call leg is very cheap while the buy call leg is very expensive. Turns out it only saved me a few dollars but limited my profit a great chunk. No use this strategy. PS, I use similar range as yours, 65$ buy call, 75$ sell call. So seems your example is ideal scenario, too good to be true!
This is a good video about the advantages of getting into a long vertical spread. But, what I don't know yet is how you get out of one. Assuming that it's going to be a profitable trade, do you have to physically close out your potential (like you would have to do with a stock in order to realize the gain), or do you just let it ride and the profit will be realized without you doing anything with it?
I wasted so much time watching video on the same subject. But, you're video is to the point that you give examples after the content that you are trying to teach. This information is explained in very clear, precise, basic terminology that anyone could understand. Thank you for also teaching the concept of options trading in order. Great, Keep it up.
Can I close the short 80 Call on the vertical spread that I sold early? and still pocket some premium, especially if I do it when stock price hits $78.
Thanks a lot @Sky view Trading- i might have gone through 5-6 online videos to understand Bull call option and last got this video which made me clear my doubts. Nice technique of explaination and use of example with different scenarios . Hoping to see more of financial concepts videos.
Very well explained, thank you very much. I could incorporate this with my stock buying, and use the options to make extra money, then at the end of the month, I could place the winnings back into my stock to let it compound on it's self. Thank you again.
Pattern recognition, stock picking, when to buy or sell, what to do when the market is crashing? A few important things to answer before every newbie should ask before getting placing a trade. I feel lucky to have enrolled in my trade program when I did I've been receiving so much from it. I'm more into six figure investments this year. Thank you Noud
I know how lucrative the market is my day trading neighbour just moved out with his stocks profit. Lately I've been trying it but it's feels like high school economics all over again. I'd really love to record some profit to I tried swing trading but I managed to burn up 50% of my capital trying. How have you been doing this?
I tell newbies nothing can substitute the one on one experience of partnering with a pro analyst, asking questions and clearing up doubts videos won't do that.3 years ago I was started investing with my current FA Sir Noud mika, he predicted we invest in some stocks with momentum, stocks that would triple their net worth in the nearest future. I did not regret making that investment. I've made a comfortable $550k on ev stocks alone
@@raheemabdul-malik9794 you talk like it's easy to come across legit pros like yours. I've been on this for a while now and I know it's experienced that win. How can I get to this Mr Mika ? Pls share
@@RyanRamboer-sv3pm Throughout last year I was out of a job cause of the pandemic so I was giving my time to growing my portfolio. I lost $80k when EV and amc crashed in February. But I still gathered courage again. Noud made sure Stocks and crypto got me around $870k last year alone. I'm up again this year.
Thanks this really cleared this up for me! Subscribed. I guess the bearish inverse of these examples would be buying a put at 80 (ITM) and selling a put at something like 65 (OTM) right? Also, do you let the options expire in this case? Thanks!
If options are Out of the money at expiry, then you dont do anything as they expire worthless. If they are both in the money, then again the expire in the money and offset. If they expire between the strikes, then you need to manage the trade otherwise you will end up short 100 shares and have unlimited risk to the upside so either buy 100 shares on expiry or sell the put that has value on expiry date.
Literally the simplest explanation on the internet. I share this with all newbies (right after i send them my blog post). They usually like your video better :'( Well done!
Truly smart Wilson, I have always entertained the thought of changing how I make a living. I’m in search of an alternative to make extra cashflow. Maybe options trading will do for now
Victoria It is quite simple, you go for a short/ long term investment, try investing in forex, stocks and options trading. There are experts in these fields and it would help you a lot having one to guide and mentor you to success. I also work with an expert, in the person of Charles Alen and I’ve been making sufficient progress.
If you wait to expiration, they will both be worthless...and you're out $500. Better to role or exit the position or issue a short vertical. Be wary of short option contracts. The seller can exercise at any time and you'll get a margin call either short or long 100 shares/contract. I stick with the long game and chart analysis.
omg it has taken me weeks and minths to learn Options and i was so confused. But watching the Vertical SPread, made me understand OPtions 100000% better than i did 20 minutes ago. I was so confused 20 minutes ago. Boyyyyyyyyyyyyyyy not No More.. I got that.
Your videos are awesome and super helpful for a rookie like me trying to learn. My question is what are the exit choices? Specifically for a bull put and bear call credit spreads. I know that if taking max profit you can let them expire and keep the credit. BUT if the market goes the other way, can you let them simply expire and take a max loss OR do you have sell/but to cover your positions??? Many many thanks!
WIth Verticals, you can let them expire OR you can close them as long as BOTH legs are either ITM or OTM. (you can't have one ITM and one OTM). However, we highly recommend just closing all positions prior to expiration if any option is ITM. It keeps things simpler and will also save you money on exercise fees.
Sky View Trading but if you are exercised wont you have to cover the 100 share price at the current stock price. Like if Spy was 180 isn't that 18000$?
Do NOT hold spreads past expiration if there is any chance your short leg could go ITM. Let’s say you have a 10 wide spread OTM and it suddenly goes ITM by $9 after hours. Your OTM long option will expire at 4pm, but you short leg will get assigned. Not common but not a risk to take.
Two questions. 1. Can you be early assigned in a vertical spread on the calls you are short? 2. In the scenario when it’s going to $80 can you take the short off early and stay long the calls by itself?
Yes - you can be assigned early on the short option. The choice is always there to buy back the short option early and have unlimited gain potential. This is usually done when the short option is close to zero and has limited gain left. I like to leave a GTC order to buy back the short option for .05 cents just in case it drops close to zero. But just remember you have a resting order in the system if you decide to unwind the spread.
If I trade on my own knowledge and experience I lose (overall) I hate to admit it but that is a fact, I have some good wins but at the end of the year I had less than what I started with. This is frustratingly difficult
Q: it seems hard to find the breakeven point. sometimes is short call + entry price; sometimes is short call -entry price, etc... It seems all depends on what trading strategy you use. How to find breakeven point fast and right within all the strategies? Does this such way even really exist, I wonder?
Hey! I thought you might find the following interesting: When I first tried to learn options two years ago this was the first video I found. I must be honest in that while the info you provide is great, the idea of capping your gains by a spread seemed too conservative for me. Fast forward to today- I now have been profitable every year I've traded options and have a very firm grasp of them. I no longer think spreads are lame, but instead...there is an optimal time for them. For example, on a stock like $SHOP that has been known to carry lots of momentum and make erratic runups and crashes, long options (not spreads) are a great plan, especially during times of low volatility. Right now for example, when the VIX is at 20 and premium is expensive, Buying bear put spreads or bear calls is saving my butt! I also Love the fact that if you buy a Bull Call spread and the price goes down on you, you can buy out of your short call, bank that premium and wait until your long call regains value again and now make gains without a ceiling (pending the expiry you chose). Thanks for making a few of these videos free and available- they've had a tremendous impact on this important part of my life!
A lot of trading wisdom in your post, but can you please elaborate on "Right now for example, when the VIX is at 20 and premium is expensive, Buying bear put spreads or bear calls is saving my butt!", as for buying out a short call when price goes down on bull call spread , i did not know you can do that. Thanks.
@@brianlaqra3930 Yes. The VIX^ is a gauge that monitors implied volatility in the options market. So to simplify, generally if this gauge is over 20, premium starts to get more expensive. That means you'll have to risk more capital to go long or short, or settle for a shorter (cheaper $) expiration date you don't really want. I was saying now that I can trade spreads, I'm able to go short or long on longer dated contracts affordably because I'm selling premium as well as buying, therefore creating a MUCH smaller net debit. To Summarize: When options become expensive, buying/selling spreads allows you to buy with less capital and lower your max loss.
5:38 if you sell an $80 call aren't you obligated to sell the 100 stocks at 80 if the price goes above the $80 strike price and the buyer executes the contract? so wouldn't you potentially loose a lot more than $250?
@@randy52000 how would you recommend trading if you had bought naked puts (all in the money) and want to cover? Just sell some out of the money calls of the same size?
@@kennethrohan US Stock Options are not cash settled. Only the SPX is cash settled. The individual stocks require delivery of stock upon exercise. If the buyer exercises their right, you will need to give them 100 shares of stock / option. If you own the 70 call, you are protected and can also exercise your right to buy 100 shares at 70 and the short 100 shares at 80 will be offset when the stock is delivered to you at 70. You are never at risk because you own the 70 call.
Hi Nice video. I have seen in one of your lesson on how to avoid assignment risk of selling puts. You mentioned something like buying the option at current market price and selling the original puts again. Not very clear. Would you mind to kindly explain again with an example (numbers) on how to do this ?
Yeah this makes no sense. The guy spent 1000 bucks (7.50+2.50*100) then he made 50 bucks on the short at 80 bc final price was 79.50 and he made 200 on the long. Which means his money in is 250 and money out is 1000. Which means he lost 750 on this trade.......... No?
Bill Russell the one fundamental I think you got wrong is that he sold the 2,50 option. You can "borrow" stocks and sell them immediately through most brokers knowing you'll have to buy it back in the future to replace it (if it expires worthless you'll essentially pocket the whole sale value). He uses that to his advantage if it goes south.
U taught me how to do vertical credit spreads and that’s all I do. Collecting premium instead of having time decay is a thing of beauty plus it’s not naked so when it goes against you, you can’t get destroyed
Think of an option as an instant insurance contract. When you buy/long a 70 Call @7.50, someone on the other side of the transaction is selling/shorting it to you for $750 (like an insurance premium). So when you sell/short an $80 Call @2.50, you get an initial "insurance premium" of $250. And if the option expires IN-the-money, then you pay the owner who collects his "insurance" payout. See 4:28… That's why it's important to AVOID *selling* "naked" options, because if the stock nose-dives or rockets, then you'd be stuck paying a tremendous "insurance" payout. FYI: this is what big bankers were doing to cause the Great Recession, which required bailouts… they were selling "uncapped insurance"
The Homeless Salvation basically a debit spread would work for buying close to the money but out of the money options that you don’t want to pay a lot for.. a debit spread lowers the cost of playing an expensive option close to the money, this allows you to play it for cheap, capitalize off a small move toward the direction you hope it moves..and by playing it cheap you also cap your profit which isn’t bad because time decay isn’t going against you.. so a little bit less profit is worth having a debit spread instead of leaving with a depreciated option contract
The Homeless Salvation a credit spread is different and you go out the money and hope it doesn’t pass that option., hope it expires worthless and out of the money.. credit spreads could clap you and take your money if you play it close to the money.. so more risk, so credit spreads are good for selling premium without having to cover it with thousands of dollars.. you get less money but since it most likely expires worthless then you get to profit.. but be careful with credit spreads because it could take a lot of money so make sure they are high probability plays. earnings season could definitely make a stock move huge amounts , which would probably destroy a credit spread and take the collateral you put.. but then if you play credit spreads close but out of money.. then you get to play it for cheap in hopes that it doesn’t move a lot.. if it does then it takes ur profit but caps your loss at a small amount like 20 or 30 dollars.. and that 20 -30 dollars you risk allows you to have a good reward like more than 100 as long as it doesn’t go in the money.. if it does then you lost 20 or 30 depending what you risk... but yeah remember out the money = more money down, higher probability of it expiring worthless.. and low money down = low probability of expiring out the money and higher profits..
Love the videos but one thing I dont understand with the vertical spread - how can you sell a call option you don't own? I thought a call was buying a contract which gives you a right to buy stock before expiration. And put the right to sell a stock before expiration. with the ability to sell the contracts once you own them. How do you sell a contract you dont own yet?
Thank you for such a realistic example and a bonus of showing the trading platform. super excellent . can't wait to try it next week will be my first vertical trade.
The 70 call is "long" meaning he's BUYING the option to buy the stock at $70. The 80 call is "short" meaning he's SELLING the option to buy the stock at $80. When the stock only reached $79.50, the 80 short call is "out of the money" meaning the person he sold the option to buy the stock at $80 won't exercise that option, because they'd be buying the stock through the option more than the current stock price. Doing this balances risk while putting a ceiling on profits.
@@seraphir4662 thanks for your answer. I’m very new to options trading so I have questions. Why would someone want to buy the option to buy the stock at $80? And from what I understand I thought the break even would be at 75 if he bought the call option at 70 for $750. What am I missing? So a “long” call is a call option that’s strike price is below the current stock price? And a “short” call is? Lol sorry I’m struggling to grasp this but I’m very interested in learning. Thanks in advance to you or anyone who responds to this explaining it more.
@@jsun7972 A long call is when an investor is expecting a stock to go up in market price. A short call is when you're expecting it to go under the market price.
Honestly, how simple was this video on a very sensitive topic? It is easy to see people scared off from some of the videos I've seen. This video is informative-concise. I am not afraid (hahahaha..!). Peace :)
Buying vertical spread seems like a better way for directional trades. I've always buy/sell single calls or puts. Does doing a vertical spread counts as 2 trades towards pattern day trading rule? I have less than 25k in my account.
Alex, we definitely believe it's a good strategy for directional trading. It will only count as 1 day trade IF you enter the trade with 1 order (meaning, you don't leg into the trade) like we showed at 6:16 on this video. Hope that helps!
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It doesn't make sense on slice 3:13. You cannot count the profit of short 80 call twice. The profit should be 0. Because you already counted the $250 profit in your initial cost of $500 ($750-$250). So, the return should be 200/500 = 40%.
No, the slide is correct, I promise. We were breaking up the trade into each leg to demonstrate how the trade works. We did not count the profit of the 80 Call twice. The $250 was not factored into the initial cost on this slide because we showed that the cost of the 70 strike call was 7.50... (If we were to factor that into the initial cost, then the cost would have been 5.00, not 7.50).
Hi, I enjoyed your video but I just have a few quick questions. In scenario 1 you say that 'at the expiry date' the long 70 call is worth 9.50. My question is how exactly do you manifest that theoretical value into real value? I understand that the call option is worth 9.50 but that is only if someone is willing to buy that call option right? Do people really buy a call option 'at the expiry date'? And if no one is willing to buy it then is that option essentially worthless (that is unless you exercise your right to buy the share at $70 and subsequently sell it at $79.50 meaning that you would in fact own the share for a brief period of time)? Sorry I don't know if that makes sense but hopefully you can clear that up for me. I am from Australia btw. Thanks
Hey Scott, the call will be worth 9.50 because if the call were less than 9.50, you better beliee there would be people willing to buy it at the expiration date because it would be free money (which doesn't exist of course). If the stock is at 79.50, and you could somehow buy the 70 strike call for less than 9.50, then you could acheive a risk free profit immediately... You'd buy the call, let the call turn into long stock, then sell the stock at 79.50. Hope that makes sense. Basically, there WILL be bid on that call option even at the expiration date if it is in-the-money (meaning the stock price is higher than the call option's strike price).
I usually don't leave comments, but could not resist on this well put and we'll explained videos. And giving the example at the end of the video WOW it made my day. Great job!!
stock price 70 > then buy call at 75 (further date, 2 weeks, back month), and Sell call at 80 ( closer date, lets say 1 week, front month) or use optionstrat app on iphone. good luck
When you trade options, long press (tap and hold) the first call option. Long pressing will enable you to add another option to this order. Once you selected the first call, you want to sell the second one, so make sure you select "sell" at the top option; then select the call you are writing (selling). Robinhood will automatically detect that you are doing a call spread. You will be able to checkout this order.
Great video explaining all the different scenarios. So if I buy Vertical Call and let it go to expiration, would the short call get assigned ? Under what scenario or circumstances will the short call get assigned? Thanks.
hi great vids with scenarios. but at 3:11, can you explain your profit? at the beginning of the video, your total expense was $500 (750-250). your long call result was $200 (950-750) and your short call result (200 gain) was already factored in at the beginning expense. so wouldnt your profit be only $200? am i missing something here? hope someone can elaborate!
Sure, breaking down the two profits was mostly just meant to help understand how we made money. But if you want, you can just consider the price of the Vertical Spread as a whole to determine how much money we made. The Vertical cost us $500 (750-250), as you mentioned. And at the expiration, we were able to sell the Vertical for $950 (950-0). So we made a net profit of $450. The net price of the vertical can be determined by taking the difference between the two option prices. Hope that made sense! Let us know if we can clarify anything else.
I haven´t yet got how you did achieve $200 with the Vertical Spread Buy CALL 70 @ 7.50 and how did achieve $250 with the Sell CALL 80 @ 2.50. Sorry! but also enjoy a lot of your videos, and thank you for sharing your experience with us
for the 70 Strike: We buy for $750 and sell for $950 which gives $200 profit for the 80 Strike: We sell for $250 and since the stock price didn't go above 80 we keep the $250 Only $500 was at risk and $450 was made
Thanks for the great content! I am new to option trading and it is very comprehensive and easy to digest. Where I struggle is to understand how you make profit from vertical spread if the cost of the contracts is 500 and the max return is 500.
For Vertical Spreads, do you need to Close or Exercise both Short 80 Call and Long 70 Call positions? I always get confused whether if traders need to close our or exercise the Long and Short positions (either during or at expiration)
As you know trading options is profitable,i don’t even trade i just invest and get good profits in return,she is a licensed broker reach her out for assistance
Thank you for a clear explanation. Just a short question. In the example at the end @6:34 if the stock prices goes up to 18.95 before the expiration date, it would be ideal to close the trade as that would be a most profitable scenario. Is it possible to do this. Thanks again.
Glad you enjoy! Many new TH-cam videos coming out in 2017 so stay tuned! In the meantime, check out our 3 free video series on our site. Just input your email and you'll receive the videos to your inbox. And don't worry, we won't spam your email :) Peace!
I understand this however wouldn't the vertical spread be less effective due to Theta (time deterioration)? Does this video account for theta? Just wondering thanks
I'm sure you know about buying and selling shares. All that options does is bundle a bunch of shares into a contract and put an expiry date and price tag on it. "You are allowed to buy 100 shares of stock XYZ at price ABC before date 123". That contract has a bid/ask price based on the current stock price, the time until expiry, implied volatility related to its past volatility and other factors such as earnings, and the relation between supply & demand on that particular contract. There are mathematical models that tells us roughly how these factors should weigh into the actual contract price, but much like driving a car, there's more to it than raw numbers; you can get a "feel" for how valuable you think time should be, or implied volatility, or any other one of these factors. Now, buying calls simply means you're benefiting from the stock price going up, but as indicated, that's certainly not all that impacts stock price. In fact, in some cases, the contract value can still end up lowering even though the stock price moved in the "right" direction. You are fighting against time decay and the reduction of implied volatility. In options terminology, this is called being "short theta" and "long vega". That's a real pain in the ass. If nothing happens to the stock over time, you lose money twice; IV (implied volatility) goes down, and time decay keeps chipping away at your contract price. Eventually, if nothing happens, your contracts are worthless and you end up losing 100% of your initial investment. Long vertical spreads are really not much more than a way to finance this endeavor where you lose 100%. To me it's like getting rid of a gambling addiction by making sure you don't bet away the deed of your home. You're still doing something that is inherently not profitable, but hey, you got some of that money back in the process! Buying options, in my opinion, is only useful if the "time" aspect is useful to you because you're hedging against another time-contingent asset. For example, if I am considering buying a stock before earnings in a month, I would have to either wait and hope the price doesn't inflate leading up to earnings, or I would have to use up quite some capital that realistically won't do much for an entire month. In that case, options are a sensible way to greatly increase capital efficiency and use the limited time window to your advantage. In most other scenario's, it's like gambling in a casino. Most apparent edges in the market really aren't an edge at all. You are at an inherent disadvantage because the low-risk nature of an individual options contract, as well as the unlimited pay-off and fantastic capital efficiency, come at a great cost called option premium. This is simply the original price of the contract. If instead, you "write" (short) them, you are collecting premiums and getting paid for the fact that you are supplying these things to others on the market. And by financing as well as hedging the endeavor with exactly the strategy mentioned here - the vertical spread, but SHORT instead of long - you are collecting premiums in a capital-efficient and limited-risk setting. I do encourage you to save a little money and try it yourself! It's fun and engaging, if not also profitable when done well! - Not a financial advisor -
Wow I’m highly impressed! At first I was that investor who didn’t see it as an investment, but giving me that extra layer of safety, it’s a wonderful investment 😎👌🏻
This is glorious, been searching for "options and futures tutorial" for a while now, and I think this has helped. Have you heard people talk about - Jenameron Penny Smackdown - (Have a quick look on google cant remember the place now ) ? Ive heard some pretty good things about it and my colleague got cool success with it.
This was great, thanks, I have been researching "how to trade in option" for a while now, and I think this has helped. Have you ever come across - Jenameron Penny Smackdown - (do a google search ) ? Ive heard some unbelievable things about it and my buddy got great success with it.
This is just superb, I been tryin to find out about "financial spread betting strategy" for a while now, and I think this has helped. Have you ever come across - Wenason Xeyliana Equalizer - (should be on google have a look ) ? Ive heard some extraordinary things about it and my m8 got amazing results with it.
A call option is the right to buy the underlying stock (not an obligation). So in reference to the video, buying the option with strike price 70 means he has the right to buy at 70. Vice versa for selling at strike price 80. Subsequently, selling the option with strike price 80 means he has to sell Jane the underlying stock at 80 given that Jane chooses to exercise that option. So if Jane doesn't exercise the option, Jane will have to pay an option premium to him regardless. Cause he wouldn't sell an option to anybody if he doesn't get rewarded in any form of payment
Great video! However, if your a smart trader, you will sell before the expiration date. YOU CAN STILL PROFIT without hitting the breakeven if you sell before the expiration date. I personally never hold until expiration date.
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🚨 Hey all! Thanks for supporting the channel! If you’d like to see a more in depth breakdown of our current trading systems, we put together a quick video here - skyviewtrading.co/3rSXvWI
How is $77.50 break even?
Is this also called a debit call spread ?
LEARN I DID. imma watch twice, to make sure i got the math down pack
I think a diagonal credit spread is far superior than a vertical spread. Facts.
Is the max loss still 500 even if your short leg gets assigned before or at expiration?
This is the most crisp and clear cut explanation I have ever seen on the option trading. For the beginners this video is a gem. Keep rocking.
The clearest description of vertical spread I've seen
Agree.
I watched about 4 vidoes on this topic and this is by far the best..
Yes without a doubt
This is the best of best, period, . Simple, clear..... Thank you!
@@amcbirds Do the calculation yourself before belive this method.
It seems to make sense to trade options this way, but if you are smart enough to do a deeper calculation you will see you are losing money to do this.
Try to run the number if you have 100 shares at an average $70, because to sell the call, you have to own 100 shares of the stock.
You would get more return if you just hold shares in the 1 2 4 scenarios.
and in scenario 3, you are not making any money from trading option.
After buying naked calls and getting absolutely hammered, I sincerely thank you for this video.
Buying a call is not a "naked" position
@@Art-uz3fk I think he means with margins.
@@Art-uz3fk it's "naked" in this context. it's also called naked in the video and in tastytrade's video about spreads
I think he means long calls.
I watched 15 other videos containing the same information. But, the difference in you're video, is that you give examples after the content that you are trying to teach. This information is explained in very clear, concise, basic terminology that anyone could understand. Thank you for also teaching the concept of options trading in order!!
Great advice 4 "pick a stock, any stock." The fact that your profits are capped, as well as your losses, is the issue. I suggest placing more emphasis on the Underlying. This means you have to do your homework so that the probability of success is nicely in your favor. One winner can cover ten losers. I use verticals when I'm less certain, straight buys when I'm convinced of direction & time.
Put 'Calendar Nifty August || 3% Profit in just 2 days - th-cam.com/video/l_05gtMi0rU/w-d-xo.html
This entire series is amazing, I love that it’s broken up into digestible portions and the graph visuals with minimal personal anecdotes and bullshit. Great series!
As someone who has done both, I would definitely recommend using vertical spreads as opposed to simply buying naked (single) options. The limited profitability is much worth the trade off for the amount of risk you incur. Spreads are more affordable, offer more flexible break-even points, and your P/L is much less volatile. If you continue to only buy single options, even if you are right in the long-term, you most likely will be stopped out and/or find it very difficult (and most of the time unwise) to hold a position that could easily lose 50% value overnight. Buy Spreads!
Does your short call need to be covered? As a beginner, I would be nervous about it getting exercised and not having the stock.
I have a solid understanding of how to trade stocks profitably, but am now looking at Options. I just watched like 10-15 videos on "Options for beginners" and absolutely none of them even took the time (or simply were unable) to explain what an option was or how it worked. It's late May 2020, so it looks like this video is almost 4-years old now. Thanks for keeping it up! Was totally lost until I watched your video.
he saved my life lmao
This is awesome to hear, thank you so much!
The first time I looked at this video , I didn’t know anything about options and this video was mind boggling . I dabbled with options for a couple weeks and revisited this video and now it makes perfect sense.
Thanks for making this video
I'm hoping eventually I will get a better understanding of it
Wow! I can't believe I just got through the whole video understanding everything! It took me about 2 hours pausing the video and thinking and reading comments below, playing it over and over until I clearly understood it well. Thanks again for doing these amazing videos.
That's awesome Alvin! Make sure to check out our 3 free video series on our website :)
I will. Thanks! :-)
Wow, that's amazing. Two hours of watching this? Maybe I'm fooling myself with my comprehension, but I set the speed on 2x and understood everything on the first pass. It's not rocket science.
@@peaceonearth8693 Well you dont know how much prior knowledge that dude had. But everyone else now knows in what shape your character is :D
Great video! Question, If you sell a call option to create a spread then you cannot sell your purchased lower call option if the stock price moves upwards before the expiration date. Wouldn’t you need to maintain that call option to fulfill the written sell order until the expiration date? Whereas, if you just purchased a call option you’d be able to sell it immediately.
By far the best video on how to trade a long vertical spread anywhere on the internet. Clear, concise, easy to understand. I was trading long vertical spreads for the first time on TOS literally the same day I watched this video. Thanks for this awesome educational video. You rock!
Wow this is an amazing video and a real eye opener. I was looking at just buying calls if I'm bullish on a stock.
I see now that buying the spreads is a real eye opener and no brainer. Many thanks, this is one of the best videos I've seen on the advantages of buying spreads. Thanks.
Agreed.
The best explanation for vertical spread. I have been looking for how the options play and so tired of listening many clips which contain lots of talking and very little useful information. Greatly appreciated
Glad it was helpful! Thanks for watching!
Best Video I Have Seen Explaining Option Trading And I love That You Show The Way You Would Buy It Too! 5 STARS
I've been trying to understand options for a while .. but I was getting more lost the more I watch videos.. until I just saw your video .. you explain it in a real amazing way, easy to understand and in a short period of time.. just from this virtual spread example.. I have more dots connected and have a much better understanding.. if I need to explain it to anyone I'll send them your video .. THANK YOU! wich you all the best.
You are so welcome!
@1:53 you say youre going to sell at $250. Well, how can you sell it? Did you buy it beforehand?
He opened a buy option that cost $750 and opened a sell option that paid $250. If I'm learning this correctly that is lol
Jason yang, no, the 70 strike call increased in value from 7.50 to 9.50, thus netting a 200 dollar gain, plus the 250 dollar premium for selling the 80 strike call, and expiring worthless, would result in a 450 dollar gain.
I still don't get how he sold a sell option at 250. Did he buy it beforehand?
@@alexauker7118 options can be bought or sold, Robinhood doesn’t allow selling naked options, but they do allow option selling in combination with a long option.
@@alexauker7118 A vertical spread is where you buy one option and write (sell) another. It can be risky to sell an option because of the potential for "undefined" loss, but that risk is offset by buying another option that is in the money. This makes it a less risky trade.
my experience with options is basically selling covered calls. I like your explanation of spreads, using the four different scenarios. This shows me clearly why a spread is useful. Thank you.
Awesome to hear! Covered calls are for sure one of the first strategies that attract a lot of people towards the option market and digging further. We're glad to hear our video helped!
Love your video! How does a debit spread compare to a credit spread? Are there times when one is better than the other? And if so, under which scenarios? Thanks
Hello! We tend to be on the credit spread side of things. With credit spreads we keep time decay on our side, and with neutral time decay bets we can take the "importance" of picking direction out of our trading decisions. Hope that makes sense!
NO BS , straight to the point, and clearly explained. Outstanding presentation. Your videos stand out on this topic and methodology. Thank you very much.
Usual Feed 8,bfs
Thanks for making this video that I finally understand the options trading. options trading has really transform a lot of people, making money make me live a luxury life and give my family the best
Huge fan, very very useful tutorials. Yours is the only one go to option for me whenever I'm in doubt. Taking baby steps in options trading. One request pls... Pls release a tutorial on what is out of money and in the money terminologies. You have only two tutorials in the basics of options stored and these terminologies aren't covered there. Pls pls release one more tutorial to bridge the gap.
You stated that XYZ was at $75 so if I bought a CALL how is that going up by going down to $70? Isn't that a PUT?
You misunderstand. He bought a vertical spread, and a vertical spread is made using Buy and Sell Call simultaneously. In this scenario, the Buy Call option is made worthless hence you loss money, but your Sell Call option made you money because you collected premium for it.
Options are pretty complicated to beginners and it will take a while to understand. The Sell Call and Buy Put option have the same concept but different function. They both make you profit if the stock goes down but the process is different. The difference between a Sell Call option and a Buy Put option is that the function of a Sell Call option is to collect premium. A Sell Call will make you money as long as it doesn't go past the strike price. Let's use the video as an example.
Notice how in scenario 1,2, and 3 Vertical option the Short 80 Call @ 2.50 netted you +250 even if the stock is priced at 79.50, 75.00, 50.00, that is what we call the premium. You would profit if the stock goes down but its limited profit, its function is to lessen your risk if you deemed the stock to be slightly bullish and you think it might go down instead.
A Buy Put option would make you a big profit if it goes down. Consider scenario 3. If you Buy Put option at 80 and the stock goes down to 50.00, you would probably get around +3000 (more or less due the greeks, premium, volatility, itm, otm etc...)
@@D3STINY22 I thought that to. But think about it this way. If xyz is currently at $75, would you rather buy it at $70, $75, or $80? Obviously $70. So there is more value in being able to buy shares lower than current market price. You also need to account for premiums & your break even price etc.
@@mbnova1995 I don't quite follow, but I assume you're talking about buying a call option when it was $70 then xyz went up to $75. That would indeed provide much value but the premium you would have to pay for a naked Buy Call option would be much heavier and the time decay would be against you. Also things to consider would be, What if XYZ didn't go to $75? What if it stayed around $70 or perhaps lower? The Vertical Spread simply aims to mitigate risks.
Supposed you did buy a naked call option. (Assuming IV percentile with be
@@D3STINY22 what he was trying to say is that of XYZ was currently at 75 why wouldn't you buy calls at 70 dollars since you're getting the stock cheaper. As opposed to buying 80 dollar calls
@@D3STINY22 hi sir. Can you help me understand his example at 1:30? So we buy a call option for $750, and we also sell a call option for $250. But where did the call for $250 come from? Does this assume we've already purchased that option and can now sell it? When did we acquire it? Also, why would someone buy that call for $250 from you? Seems the stock has very little time left to pass $80. I'm so confused.
0/10 not enough shitposting
Looking over my education from wall street bets this has to be the simplist educational video that actually explained everything properly, brilliant work
But couldn’t that short call at 80 get exercised and you’d get assigned the contract, thus those shares? How do you avoid getting assigned those shares, since selling a call is an obligation to buy, not the right.
This video was phenomenal, but that’s the question that remains for me. How to avoid assignment of the shares when/if it raises above the strike of 80?
Thanks so much for your time and in answering this!
I think if that leg of the option gets assigned then that means you would close your other leg to profit and the profit/loss would be the difference. That's why you have the other leg of the option otherwise it would be naked and have unlimited loss potential.
That's what you want to happen. If both options are ITM, early assignment is a good thing (excluding ex-div dates). You can exercise your long option to cover the assignment and realize max profit.
@@AzNMadnessXXXXXXX but what if you dont have the money to actually buy the 100 shares at the 70 in the first place...do they just take that option from you and youre fine? or can you just not do that if you dont have the money
@@BlackPanther4577 but what if you dont have the money to actually buy the 100 shares at the 70 in the first place...do they just take that option from you and youre fine? or can you just not do that if you dont have the money
In the 4th scenario , you should use $90 price at expiry - then profit is 166% but spread has 100%. That explains much better than a $85 price at expiry.
1. Cherrypicked example where stock price 79.50 ends up just below the short call strike price of 80
2. Only happens if you let time decay reduce your option value to 0
3. Still severely reduces gain potential, it depends how much of a bargain you can get the short call for. I can see this being useful however as an insurance in case it goes against you.
4. I feel like if you’re right most of your trades the extra 33% return is important but I suppose it just depends on your risk aversion.
I guess there may be one more scenario you didnt mention. What would happen if after the price rose the call you’re selling was exercised? Would it pull directly from the call you bought and you would still make profit in the vertical spread?
You made it so simple to understand the complex stuff..thank you
Great Video. But when I try it on stock A today, it’s about 70$, the sell call leg is very cheap while the buy call leg is very expensive. Turns out it only saved me a few dollars but limited my profit a great chunk. No use this strategy. PS, I use similar range as yours, 65$ buy call, 75$ sell call. So seems your example is ideal scenario, too good to be true!
This is a good video about the advantages of getting into a long vertical spread. But, what I don't know yet is how you get out of one. Assuming that it's going to be a profitable trade, do you have to physically close out your potential (like you would have to do with a stock in order to realize the gain), or do you just let it ride and the profit will be realized without you doing anything with it?
I wish you were my high teacher back in the day!!! You explain things some simple and effective
Can we practice with virutal money on the thinkorswim trading platform?
webull
Yes! It's call thinkorswim paper money!
I wasted so much time watching video on the same subject. But, you're video is to the point that you give examples after the content that you are trying to teach. This information is explained in very clear, precise, basic terminology that anyone could understand. Thank you for also teaching the concept of options trading in order. Great, Keep it up.
Glad it was helpful! Thanks for the kind words and for watching!
Can I close the short 80 Call on the vertical spread that I sold early? and still pocket some premium, especially if I do it when stock price hits $78.
Hi, which expiration date should I buy/sell the call options?
Thanks a lot @Sky view Trading- i might have gone through 5-6 online videos to understand Bull call option and last got this video which made me clear my doubts. Nice technique of explaination and use of example with different scenarios . Hoping to see more of financial concepts videos.
Thanks a bunch! Many more videos currently in the works right now. Stay tuned!
Very well explained, thank you very much. I could incorporate this with my stock buying, and use the options to make extra money, then at the end of the month, I could place the winnings back into my stock to let it compound on it's self. Thank you again.
Pattern recognition, stock picking, when to buy or sell, what to do when the market is crashing? A few important things to answer before every newbie should ask before getting placing a trade. I feel lucky to have enrolled in my trade program when I did I've been receiving so much from it. I'm more into six figure investments this year. Thank you Noud
I know how lucrative the market is my day trading neighbour just moved out with his stocks profit. Lately I've been trying it but it's feels like high school economics all over again. I'd really love to record some profit to I tried swing trading but I managed to burn up 50% of my capital trying. How have you been doing this?
I tell newbies nothing can substitute the one on one experience of partnering with a pro analyst, asking questions and clearing up doubts videos won't do that.3 years ago I was started investing with my current FA Sir Noud mika, he predicted we invest in some stocks with momentum, stocks that would triple their net worth in the nearest future. I did not regret making that investment. I've made a comfortable $550k on ev stocks alone
@@raheemabdul-malik9794 you talk like it's easy to come across legit pros like yours. I've been on this for a while now and I know it's experienced that win. How can I get to this Mr Mika ? Pls share
Mail
@
@@RyanRamboer-sv3pm Throughout last year I was out of a job cause of the pandemic so I was giving my time to growing my portfolio. I lost $80k when EV and amc crashed in February. But I still gathered courage again. Noud made sure Stocks and crypto got me around $870k last year alone. I'm up again this year.
Thanks, great video!
Q. When I buy Virtical spread (options) do I have to be careful about the HIGH/LOW IV, or NO?
Thanks this really cleared this up for me! Subscribed.
I guess the bearish inverse of these examples would be buying a put at 80 (ITM) and selling a put at something like 65 (OTM) right?
Also, do you let the options expire in this case? Thanks!
If options are Out of the money at expiry, then you dont do anything as they expire worthless. If they are both in the money, then again the expire in the money and offset. If they expire between the strikes, then you need to manage the trade otherwise you will end up short 100 shares and have unlimited risk to the upside so either buy 100 shares on expiry or sell the put that has value on expiry date.
Literally the simplest explanation on the internet. I share this with all newbies (right after i send them my blog post). They usually like your video better :'( Well done!
I like to acquire shares by selling PUTs. You get paid to try and get shares at a discount.
Great explanation but aren't you worried about the huge potential downside of getting exercised on the uncovered Short Call at 80?
Options trading is indeed a profitable investment. Using a managerial system is the best way to go about it.
Absolutely a better choice. At least you get to minimize the risk.
Truly smart Wilson, I have always entertained the thought of changing how I make a living. I’m in search of an alternative to make extra cashflow. Maybe options trading will do for now
Victoria It is quite simple, you go for a short/ long term investment, try investing in forex, stocks and options trading. There are experts in these fields and it would help you a lot having one to guide and mentor you to success. I also work with an expert, in the person of Charles Alen and I’ve been making sufficient progress.
We met on IG: expert _ trader22 search his handle!
That’s an astonished profile!
I’m a beginner and this seriously helped me so much. I’ve been doin research before option trading and I’m definitely going to use this
If you wait to expiration, they will both be worthless...and you're out $500. Better to role or exit the position or issue a short vertical. Be wary of short option contracts. The seller can exercise at any time and you'll get a margin call either short or long 100 shares/contract. I stick with the long game and chart analysis.
omg it has taken me weeks and minths to learn Options and i was so confused. But watching the Vertical SPread, made me understand OPtions 100000% better than i did 20 minutes ago. I was so confused 20 minutes ago. Boyyyyyyyyyyyyyyy not No More.. I got that.
Your videos are awesome and super helpful for a rookie like me trying to learn. My question is what are the exit choices? Specifically for a bull put and bear call credit spreads. I know that if taking max profit you can let them expire and keep the credit. BUT if the market goes the other way, can you let them simply expire and take a max loss OR do you have sell/but to cover your positions??? Many many thanks!
WIth Verticals, you can let them expire OR you can close them as long as BOTH legs are either ITM or OTM. (you can't have one ITM and one OTM). However, we highly recommend just closing all positions prior to expiration if any option is ITM. It keeps things simpler and will also save you money on exercise fees.
Sky View Trading but if you are exercised wont you have to cover the 100 share price at the current stock price. Like if Spy was 180 isn't that 18000$?
Do NOT hold spreads past expiration if there is any chance your short leg could go ITM. Let’s say you have a 10 wide spread OTM and it suddenly goes ITM by $9 after hours. Your OTM long option will expire at 4pm, but you short leg will get assigned. Not common but not a risk to take.
Two questions. 1. Can you be early assigned in a vertical spread on the calls you are short? 2. In the scenario when it’s going to $80 can you take the short off early and stay long the calls by itself?
Yes - you can be assigned early on the short option. The choice is always there to buy back the short option early and have unlimited gain potential. This is usually done when the short option is close to zero and has limited gain left. I like to leave a GTC order to buy back the short option for .05 cents just in case it drops close to zero. But just remember you have a resting order in the system if you decide to unwind the spread.
If I trade on my own knowledge and experience I lose (overall) I hate to admit it but that is a fact, I have some good wins but at the end of the year I had less than what I started with. This is frustratingly difficult
Yeah true john
I have had worse experience too but I know you win some and lose more
Everyone has a bad experience but what matter is how you get it done, trade with other expert experience and learn a thing or two from these outliers
What is your experience?
Do you mean trading with an expert online?
Q: it seems hard to find the breakeven point. sometimes is short call + entry price; sometimes is short call -entry price, etc... It seems all depends on what trading strategy you use. How to find breakeven point fast and right within all the strategies? Does this such way even really exist, I wonder?
Bruuuuuhhhhhhh how long did it take me to find a video that explains this spread well lol thank you!!!!
Hey! I thought you might find the following interesting:
When I first tried to learn options two years ago this was the first video I found. I must be honest in that while the info you provide is great, the idea of capping your gains by a spread seemed too conservative for me. Fast forward to today- I now have been profitable every year I've traded options and have a very firm grasp of them.
I no longer think spreads are lame, but instead...there is an optimal time for them. For example, on a stock like $SHOP that has been known to carry lots of momentum and make erratic runups and crashes, long options (not spreads) are a great plan, especially during times of low volatility.
Right now for example, when the VIX is at 20 and premium is expensive, Buying bear put spreads or bear calls is saving my butt!
I also Love the fact that if you buy a Bull Call spread and the price goes down on you, you can buy out of your short call, bank that premium and wait until your long call regains value again and now make gains without a ceiling (pending the expiry you chose).
Thanks for making a few of these videos free and available- they've had a tremendous impact on this important part of my life!
A lot of trading wisdom in your post, but can you please elaborate on "Right now for example, when the VIX is at 20 and premium is expensive, Buying bear put spreads or bear calls is saving my butt!", as for buying out a short call when price goes down on bull call spread , i did not know you can do that. Thanks.
@@brianlaqra3930 Yes. The VIX^ is a gauge that monitors implied volatility in the options market. So to simplify, generally if this gauge is over 20, premium starts to get more expensive. That means you'll have to risk more capital to go long or short, or settle for a shorter (cheaper $) expiration date you don't really want.
I was saying now that I can trade spreads, I'm able to go short or long on longer dated contracts affordably because I'm selling premium as well as buying, therefore creating a MUCH smaller net debit.
To Summarize: When options become expensive, buying/selling spreads allows you to buy with less capital and lower your max loss.
5:38 if you sell an $80 call aren't you obligated to sell the 100 stocks at 80 if the price goes above the $80 strike price and the buyer executes the contract? so wouldn't you potentially loose a lot more than $250?
Options are cash-settled, so you only have to pay (or receive) the difference in cash.
You can potentially lose more money, just in this example he lost $250 because the stock price reached 85 and there was an 80 call
everything above 80 is offset by the long 70 call. Doesn't matter if it goes to 200, your profit will be caped at 500, as long as it is above 80.
@@randy52000 how would you recommend trading if you had bought naked puts (all in the money) and want to cover? Just sell some out of the money calls of the same size?
@@kennethrohan US Stock Options are not cash settled. Only the SPX is cash settled. The individual stocks require delivery of stock upon exercise. If the buyer exercises their right, you will need to give them 100 shares of stock / option. If you own the 70 call, you are protected and can also exercise your right to buy 100 shares at 70 and the short 100 shares at 80 will be offset when the stock is delivered to you at 70. You are never at risk because you own the 70 call.
Hi Nice video. I have seen in one of your lesson on how to avoid assignment risk of selling puts. You mentioned something like buying the option at current market price and selling the original puts again. Not very clear. Would you mind to kindly explain again with an example (numbers) on how to do this ?
would ypu have to buy the 2.50 call first, and how would you make 250 on it if it expires worthless? this is the only thing confusing me :(
He didn't buy it. He sold it.
@@Cjur how did he sell it if he didn't buy it
Yeah this makes no sense. The guy spent 1000 bucks (7.50+2.50*100) then he made 50 bucks on the short at 80 bc final price was 79.50 and he made 200 on the long. Which means his money in is 250 and money out is 1000. Which means he lost 750 on this trade.......... No?
Bill Russell the one fundamental I think you got wrong is that he sold the 2,50 option. You can "borrow" stocks and sell them immediately through most brokers knowing you'll have to buy it back in the future to replace it (if it expires worthless you'll essentially pocket the whole sale value). He uses that to his advantage if it goes south.
@@JoaoPedro-xn2ul but when he sells he eventually has to owe the person he borrowed it from and that costs him 250 no?
U taught me how to do vertical credit spreads and that’s all I do. Collecting premium instead of having time decay is a thing of beauty plus it’s not naked so when it goes against you, you can’t get destroyed
Glad to hear we've been able to help!
Im very confused. How are you selling an option you dont own?. I buy the long and sell the short. But where does the short come from??
Think of an option as an instant insurance contract. When you buy/long a 70 Call @7.50, someone on the other side of the transaction is selling/shorting it to you for $750 (like an insurance premium). So when you sell/short an $80 Call @2.50, you get an initial "insurance premium" of $250. And if the option expires IN-the-money, then you pay the owner who collects his "insurance" payout. See 4:28… That's why it's important to AVOID *selling* "naked" options, because if the stock nose-dives or rockets, then you'd be stuck paying a tremendous "insurance" payout. FYI: this is what big bankers were doing to cause the Great Recession, which required bailouts… they were selling "uncapped insurance"
Jake B so you recommend vertical spreads instead of regular options every time? When otherwise?
The Homeless Salvation basically a debit spread would work for buying close to the money but out of the money options that you don’t want to pay a lot for.. a debit spread lowers the cost of playing an expensive option close to the money, this allows you to play it for cheap, capitalize off a small move toward the direction you hope it moves..and by playing it cheap you also cap your profit which isn’t bad because time decay isn’t going against you.. so a little bit less profit is worth having a debit spread instead of leaving with a depreciated option contract
The Homeless Salvation a credit spread is different and you go out the money and hope it doesn’t pass that option., hope it expires worthless and out of the money.. credit spreads could clap you and take your money if you play it close to the money.. so more risk, so credit spreads are good for selling premium without having to cover it with thousands of dollars.. you get less money but since it most likely expires worthless then you get to profit.. but be careful with credit spreads because it could take a lot of money so make sure they are high probability plays. earnings season could definitely make a stock move huge amounts , which would probably destroy a credit spread and take the collateral you put.. but then if you play credit spreads close but out of money.. then you get to play it for cheap in hopes that it doesn’t move a lot.. if it does then it takes ur profit but caps your loss at a small amount like 20 or 30 dollars.. and that 20 -30 dollars you risk allows you to have a good reward like more than 100 as long as it doesn’t go in the money.. if it does then you lost 20 or 30 depending what you risk... but yeah remember out the money = more money down, higher probability of it expiring worthless.. and low money down = low probability of expiring out the money and higher profits..
This is great, keep posting videos. You explain very clearly and love all the different strategies.
Love the videos but one thing I dont understand with the vertical spread - how can you sell a call option you don't own? I thought a call was buying a contract which gives you a right to buy stock before expiration. And put the right to sell a stock before expiration. with the ability to sell the contracts once you own them. How do you sell a contract you dont own yet?
Love your videos especially on spreads. Hope you have some new videos coming down the pipeline thanks again!
richy r oh we have a TON in the works scheduled to come out in 2017. Stay tuned! :) thanks for the positive feedback!
Sky View Tradin
Thank you for such a realistic example and a bonus of showing the trading platform. super excellent . can't wait to try it next week will be my first vertical trade.
I dont get it, how does he still profit from the short 80 call?
The 70 call is "long" meaning he's BUYING the option to buy the stock at $70. The 80 call is "short" meaning he's SELLING the option to buy the stock at $80.
When the stock only reached $79.50, the 80 short call is "out of the money" meaning the person he sold the option to buy the stock at $80 won't exercise that option, because they'd be buying the stock through the option more than the current stock price.
Doing this balances risk while putting a ceiling on profits.
@@seraphir4662 thanks for your answer. I’m very new to options trading so I have questions. Why would someone want to buy the option to buy the stock at $80?
And from what I understand I thought the break even would be at 75 if he bought the call option at 70 for $750. What am I missing?
So a “long” call is a call option that’s strike price is below the current stock price? And a “short” call is? Lol sorry I’m struggling to grasp this but I’m very interested in learning. Thanks in advance to you or anyone who responds to this explaining it more.
@@jsun7972 A long call is when an investor is expecting a stock to go up in market price. A short call is when you're expecting it to go under the market price.
I am so new to options, so basically with vertical spread I am buying both a call and a put?
Great Job explaining vertical spread options my friend. I greatly appreciate it.
how do you sell the strike 80 call if you havent bought it before?
Honestly, how simple was this video on a very sensitive topic? It is easy to see people scared off from some of the videos I've seen. This video is informative-concise. I am not afraid (hahahaha..!). Peace :)
good video, but aren't you at risk to be assigned if you BUY CALL expire ITM? or does the OTM SELL Call Protect you from getting assigned?
Buying vertical spread seems like a better way for directional trades. I've always buy/sell single calls or puts. Does doing a vertical spread counts as 2 trades towards pattern day trading rule? I have less than 25k in my account.
Alex, we definitely believe it's a good strategy for directional trading.
It will only count as 1 day trade IF you enter the trade with 1 order (meaning, you don't leg into the trade) like we showed at 6:16 on this video.
Hope that helps!
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Could you please explain why in scenario 2, time decay is not a factor for option 1 and why it is a factor for option 2? Thank you.
It doesn't make sense on slice 3:13. You cannot count the profit of short 80 call twice. The profit should be 0. Because you already counted the $250 profit in your initial cost of $500 ($750-$250). So, the return should be 200/500 = 40%.
No, the slide is correct, I promise. We were breaking up the trade into each leg to demonstrate how the trade works. We did not count the profit of the 80 Call twice.
The $250 was not factored into the initial cost on this slide because we showed that the cost of the 70 strike call was 7.50... (If we were to factor that into the initial cost, then the cost would have been 5.00, not 7.50).
Hey , comparing the Long Vertical Spread vs the iron condor ? what is better comparing risk and return ?
Hi, I enjoyed your video but I just have a few quick questions. In scenario 1 you say that 'at the expiry date' the long 70 call is worth 9.50. My question is how exactly do you manifest that theoretical value into real value? I understand that the call option is worth 9.50 but that is only if someone is willing to buy that call option right? Do people really buy a call option 'at the expiry date'? And if no one is willing to buy it then is that option essentially worthless (that is unless you exercise your right to buy the share at $70 and subsequently sell it at $79.50 meaning that you would in fact own the share for a brief period of time)?
Sorry I don't know if that makes sense but hopefully you can clear that up for me. I am from Australia btw.
Thanks
Hey Scott, the call will be worth 9.50 because if the call were less than 9.50, you better beliee there would be people willing to buy it at the expiration date because it would be free money (which doesn't exist of course).
If the stock is at 79.50, and you could somehow buy the 70 strike call for less than 9.50, then you could acheive a risk free profit immediately... You'd buy the call, let the call turn into long stock, then sell the stock at 79.50.
Hope that makes sense. Basically, there WILL be bid on that call option even at the expiration date if it is in-the-money (meaning the stock price is higher than the call option's strike price).
@@skyviewtrading Thanks for the explanation
I usually don't leave comments, but could not resist on this well put and we'll explained videos. And giving the example at the end of the video WOW it made my day. Great job!!
Show us how this vertical spread is done in Robinhood.
stock price 70 > then buy call at 75 (further date, 2 weeks, back month), and Sell call at 80 ( closer date, lets say 1 week, front month) or use optionstrat app on iphone. good luck
When you trade options, long press (tap and hold) the first call option. Long pressing will enable you to add another option to this order. Once you selected the first call, you want to sell the second one, so make sure you select "sell" at the top option; then select the call you are writing (selling). Robinhood will automatically detect that you are doing a call spread. You will be able to checkout this order.
Great video explaining all the different scenarios. So if I buy Vertical Call and let it go to expiration, would the short call get assigned ? Under what scenario or circumstances will the short call get assigned? Thanks.
hi great vids with scenarios. but at 3:11, can you explain your profit? at the beginning of the video, your total expense was $500 (750-250). your long call result was $200 (950-750) and your short call result (200 gain) was already factored in at the beginning expense. so wouldnt your profit be only $200? am i missing something here? hope someone can elaborate!
Sure, breaking down the two profits was mostly just meant to help understand how we made money. But if you want, you can just consider the price of the Vertical Spread as a whole to determine how much money we made.
The Vertical cost us $500 (750-250), as you mentioned. And at the expiration, we were able to sell the Vertical for $950 (950-0). So we made a net profit of $450.
The net price of the vertical can be determined by taking the difference between the two option prices.
Hope that made sense! Let us know if we can clarify anything else.
Thanks for the clarification I was confused too. Maybe use green for credit and red for debit. Regardless very clear videos. Keep it up cheers!
Thanks for the tip. We will consider doing that in the future.
More videos coming soon!
I haven´t yet got how you did achieve $200 with the Vertical Spread Buy CALL 70 @ 7.50 and how did achieve $250 with the Sell CALL 80 @ 2.50. Sorry! but also enjoy a lot of your videos, and thank you for sharing your experience with us
for the 70 Strike: We buy for $750 and sell for $950 which gives $200 profit
for the 80 Strike: We sell for $250 and since the stock price didn't go above 80 we keep the $250
Only $500 was at risk and $450 was made
My favorite strategy. Such good returns, so relaxing. No worries of assignment.
What happens if the 80 call gets exercised and you have to buy $8000 worth of Shares?
Then you exercise your $70 call and get those shares for $7,000, making $1,000.
@@FirstLast-dp7no What if you don't have that much in your portfolio?
@@alext4786 If you don't have that much then you should probably not trade options 🙄
Good video! But you never mentioned that vertical spreads cost more because your doing 2 transaction, hence double the commission fee
i need to see someone do this live in a video. I've watched this so many times but i don't get it
Here's a great video for that:
th-cam.com/video/AFJt5lZzxxw/w-d-xo.html
Thanks for the great content! I am new to option trading and it is very comprehensive and easy to digest.
Where I struggle is to understand how you make profit from vertical spread if the cost of the contracts is 500 and the max return is 500.
The max return is infinite
Thanks for your videos. I learned a lot. Love your voice btw. :-)
For Vertical Spreads, do you need to Close or Exercise both Short 80 Call and Long 70 Call positions? I always get confused whether if traders need to close our or exercise the Long and Short positions (either during or at expiration)
You will never understand how profitable options trading is until you start investing in the market
Even with the price fluctuation people are still benefiting and earning through trading options,how is that even possible?
As you know trading options is profitable,i don’t even trade i just invest and get good profits in return,she is a licensed broker reach her out for assistance
Erinsawtell1 @ g m a i l , inst a gram Erinsawtell1
@@milakiauder3070 the price fluctuations are exactly how it's possible to profit lol.
sean they try so hard now to look like a genuine person trying to help
Excellent explanation. Made it clear and simple.
Thank you for your information I'm looking forward your future video. Thanks again for doing these amazing videos.
Thank you for a clear explanation. Just a short question. In the example at the end @6:34 if the stock prices goes up to 18.95 before the expiration date, it would be ideal to close the trade as that would be a most profitable scenario. Is it possible to do this. Thanks again.
Thanks for making a vid even I can understand on this subject.
Thank you for the kind words! Glad you enjoyed the video.
Clear, concise yet thorough definition of this strategy!
I’m going to have to rewatch this over and over
Javier VEVO same I didn’t understand shitt
How long do you hold these options for? Until they expire or do you close out the position any sooner?
i've learned so much from you, thank you so much man.
Glad you enjoy! Many new TH-cam videos coming out in 2017 so stay tuned! In the meantime, check out our 3 free video series on our site. Just input your email and you'll receive the videos to your inbox. And don't worry, we won't spam your email :) Peace!
I understand this however wouldn't the vertical spread be less effective due to Theta (time deterioration)? Does this video account for theta? Just wondering thanks
I've never felt so stupid as when he said trading options was simple to understand.
I'm sure you know about buying and selling shares. All that options does is bundle a bunch of shares into a contract and put an expiry date and price tag on it. "You are allowed to buy 100 shares of stock XYZ at price ABC before date 123". That contract has a bid/ask price based on the current stock price, the time until expiry, implied volatility related to its past volatility and other factors such as earnings, and the relation between supply & demand on that particular contract. There are mathematical models that tells us roughly how these factors should weigh into the actual contract price, but much like driving a car, there's more to it than raw numbers; you can get a "feel" for how valuable you think time should be, or implied volatility, or any other one of these factors.
Now, buying calls simply means you're benefiting from the stock price going up, but as indicated, that's certainly not all that impacts stock price. In fact, in some cases, the contract value can still end up lowering even though the stock price moved in the "right" direction. You are fighting against time decay and the reduction of implied volatility. In options terminology, this is called being "short theta" and "long vega".
That's a real pain in the ass. If nothing happens to the stock over time, you lose money twice; IV (implied volatility) goes down, and time decay keeps chipping away at your contract price. Eventually, if nothing happens, your contracts are worthless and you end up losing 100% of your initial investment.
Long vertical spreads are really not much more than a way to finance this endeavor where you lose 100%. To me it's like getting rid of a gambling addiction by making sure you don't bet away the deed of your home. You're still doing something that is inherently not profitable, but hey, you got some of that money back in the process!
Buying options, in my opinion, is only useful if the "time" aspect is useful to you because you're hedging against another time-contingent asset. For example, if I am considering buying a stock before earnings in a month, I would have to either wait and hope the price doesn't inflate leading up to earnings, or I would have to use up quite some capital that realistically won't do much for an entire month. In that case, options are a sensible way to greatly increase capital efficiency and use the limited time window to your advantage.
In most other scenario's, it's like gambling in a casino. Most apparent edges in the market really aren't an edge at all. You are at an inherent disadvantage because the low-risk nature of an individual options contract, as well as the unlimited pay-off and fantastic capital efficiency, come at a great cost called option premium. This is simply the original price of the contract. If instead, you "write" (short) them, you are collecting premiums and getting paid for the fact that you are supplying these things to others on the market. And by financing as well as hedging the endeavor with exactly the strategy mentioned here - the vertical spread, but SHORT instead of long - you are collecting premiums in a capital-efficient and limited-risk setting.
I do encourage you to save a little money and try it yourself! It's fun and engaging, if not also profitable when done well! - Not a financial advisor -
Wow I’m highly impressed!
At first I was that investor who didn’t see it as an investment, but giving me that extra layer of safety, it’s a wonderful investment 😎👌🏻
OPTIONS ARE NOT INVESTING!!!!!
are you sure you did not mean short 70 and long 80?
This is glorious, been searching for "options and futures tutorial" for a while now, and I think this has helped. Have you heard people talk about - Jenameron Penny Smackdown - (Have a quick look on google cant remember the place now ) ? Ive heard some pretty good things about it and my colleague got cool success with it.
This was great, thanks, I have been researching "how to trade in option" for a while now, and I think this has helped. Have you ever come across - Jenameron Penny Smackdown - (do a google search ) ? Ive heard some unbelievable things about it and my buddy got great success with it.
This is just superb, I been tryin to find out about "financial spread betting strategy" for a while now, and I think this has helped. Have you ever come across - Wenason Xeyliana Equalizer - (should be on google have a look ) ? Ive heard some extraordinary things about it and my m8 got amazing results with it.
Ya wtf I'm confused noe
A call option is the right to buy the underlying stock (not an obligation). So in reference to the video, buying the option with strike price 70 means he has the right to buy at 70. Vice versa for selling at strike price 80.
Subsequently, selling the option with strike price 80 means he has to sell Jane the underlying stock at 80 given that Jane chooses to exercise that option. So if Jane doesn't exercise the option, Jane will have to pay an option premium to him regardless. Cause he wouldn't sell an option to anybody if he doesn't get rewarded in any form of payment
Great video! However, if your a smart trader, you will sell before the expiration date. YOU CAN STILL PROFIT without hitting the breakeven if you sell before the expiration date. I personally never hold until expiration date.