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Investing Guru: "Well you see, you put a small amount of money down based on your theory as to the way things are gonna go. You make a large amount of money if you guess right and lose it all if you guess wrong." Me: "Oh so it's gambling"
@Luís Andrade That's not how gambling works at all... gambling is never random. There's always an edge and the casinos always ensure that they have the edge. Look at any casino game, they have well known and documented odds of any event happening. Then the casino sets up breakevens and strategies in their favor... When it comes to options contracts, its exactly the same way. The fundamental price of an options contract is based on the likelihood of a stock price movement in either direction in a particular amount of time, and the premium is based on that math. If you educate yourself and set up proper strategies, you play the casino hand. If you don't educate yourself and yolo naked calls and puts well out of the money, you play the poor sap that walked in the door because of the flashing lights and cute waitresses.
What I am hearing is I should remortgage my home and pile it half into SPY call options, and half as an offering to the Holy Powell and his QE superpowers. Literally can't go wrong.
Just in case anyone had not figured out why this does not work themselves: The people selling you the call option will charge you a large enough fee that you won’t actualy make larger expected return than just buying SPY. No free lunch!
@@georgesmith4768 This isn't true what so ever, options give you more leverage. He said this in the video and it's correct. Looking at SPY, which is currently $409.40, a $412 strike call which expires on 5/3/21 is $398. If SPY goes up to $420 on expiry, the call will DOUBLE in value and a share would be worth only 3.1% more. The reason people lose so much money on OTM calls is that if SPY went up only to $411, the call would be WORHTLESS while the share would be worth 0.5% more. People on wall street bets buy a bunch of OTM options, hope for some massive move in the underlying, it doesn't happen, and they lose everything. Of course if it does they are rich since again you get more leverage.
I rarely comment on videos; however, I had to given that one of the comments he showed was "Why does this guy look so much like Conan O'brien." Props to you for giving me a laugh
I think Plain Bagel is the best channel I found about investing. Richard actually educates me rather than telling me to invest blindly. Or flooded with a masked ad. 😑
The first option I ever seriously considered buying was a put on GME earlier this year. It would have made me a lot of money, but I eventually decided against it. Totally unprecedented market conditions aren't a great time to get started in options trading. Nothing wrong with being very cautious with options.
I like to think of options as lottery tickets (calls) or insurance policies (puts)... in either case the ones who make money are the lottery operators (call sellers) or insurance underwrites (put sellers).
If you're going to trade options, BE CAREFUL! I'm new to them in general, and I made sure to load up on as much information as I can before I started trading them for real. Believe me: they are NOT for the faint of heart. It can wreck you when you see your option losing money, because the loss can come just as rapidly as the gain. I'm fortunate that I haven't lost money on them yet, but I've come close, and if not for setting limits to sell them and strokes of luck when the price brushed those limits, I'd be down by a lot already.
Options are an especially useful tool as a smaller part of a broader portfolio. But many people seem to have a portfolio of exclusively out of the money YOLO options lol
I found my biggest problem with options (as an amateur) is that the more successful I become, the more I "bet" on a company. Then I lose all progress I gained. When I trade options, what has helped me is to just trade 1 or 2 contracts at a time (since I'm not working with a ton of buying power). Options have become a really nice source of income though. It helps a student like myself make a few hundred a month.
position sizing is the number one reason people blow up accounts by yolo-all in bets Actual option traders risk 2% at a time and have max 30% exposure, and are mostly net sellers not buyers (outside some controlled trades like debit spreads)
Great video, I only sell 'covered call' 15%+ strike price options on my consumer staples stocks to boost my returns. If a such a 'slow' sector stock tanks, I get to keep my stock (as I would for the long term) If a such a slow sector stock hits 15%+, then, I will be forced to sell my position. This is fine as selling would have been intentional anyways to re-balance my holdings away from a such a crazy increase) Only if all consequence is intentional.. I would recommend options.
I am a complete beginner who is studying hard to understand as much as I can, have not yet traded but $20. Though I do agree the terminology was a bit advanced in the last video -especially towards the end- but that doesn't take the fact that it's filthy rich in information. I go back to that video a few times a week as I keep learning more. Thank you for this one also
Good overview of options, and definitely one I'll point people to in the future. One thing I will add for anyone that is new is that there is a ton of nuance with options, and you really shouldn't dip your toe in until you have spent a substantial amount of time learning and understanding options. You need to know your fundamentals down cold.
well as you become more experience with investing you'll learn a great use for options can be to buy "insurance" for your stocks. For example, if you owned 100 shares of SPY and it is trading at say 300$ right now which puts its total value at and you thought there is a chance a large downturn in the market will happen in the next month like what happened with covid. you could buy options put which might cost you 600-1200$ and what that does it is Caps your potential downside like if the market were to tank 30% like it did last year. so instead of losing 10,000 in one month, you would have only lost your premium and the difference between 300$ and your strike, and even better now that you have sold your shares at above market value you can buy even more. And if the market doesn't crash your only out your premium, so its a great way to hedge risk in the event of large market turmoil
Actually, buying options except to close a position is a tough road. As 4 out 5 options expire worthless. I sell short term calls and puts and let the time decay work in my favor. My average is 9 out of 10 expire worthless so I collect the premiums every week.
@@vitsadelhole Its just that 30 % market downturns happen like once every 10 years. Paying large premium over and over again would incur more loss to you in the long run.
Thank you for this video. I saw the first one, but I really appreciate this more in-depth return to the topic of stock options. Especially the part about the downsides!
Pro using a Buying Put to hedge and sometime if they feel Market too bad they just Buying Put , normal peoples using for quick money, in short time without knowing the direction , in a large group I asked few very important questions about Options and only one person answered. I can say 80% peoples don't know about options but they doing it
I think options can be very helpful when used appropriately. Writing covered calls and cash secured puts is a nice way to make money waiting to sell the underlying, or waiting to buy the underlying. And buying puts can help lock in potential profits or create a type of stop loss on a long trade. Buying calls... I haven't found a risk off use for those yet... other than if you find yourself holding too many puts for security and not in many or any long positions... they can hedge an unbalanced put portfolio. Create a type of strangle trade.
Calls can be paired with a short position to reduce your downside. Open a short position, buy out-of-the-money calls, and if the price goes up you use the calls to cover your short position and put a cap on your potential losses. Of course, that's a short-term trading strategy, not long-term investment. But it is one way calls can hedge risk.
Also you can sell covered calls, it’s my favorite options trade. It only limits upside potential for owning a stock, but in every other case besides a lot of growth in your stock, you will make more money than someone simply holding it without selling covered calls. Even if someone makes a bunch of money off of the call you sold, you will still make money.
Options are like jet fuel. If you know what you're doing, they can be a very powerful tool. If you don't know what you're doing, they can blow up in your face.
@@levnikitin7432 If you own 100 shares of a stock and are worried about it going down, you can buy a put that guarantees you the ability to sell at that strike, even if the underlying plummets. You can then sell a call against your 100 shares to offset the cost, which also limits your upside. This is called a "collar" position and is actually far LESS risky than simply owning the shares, because you trade unlimited upside for far more limited downside.
I'm surprised there wasn't much discussion of option strategies - these are some of the key reasons options are so popular. Individual options are pure risk, but option strategies are AMAZINGLY USEFUL and can be fairly safe (i.e. zero cost collar) On an unrelated, is there a reason this channel doesn't talk about asset classes other than equity, such as bonds? I imagine some basic education on bonds would be quite useful for the average boomer investor
As a value investor I started considering to sell put options. I felt that in your video you touched only upon buying options. Have you considered to make one about selling put and call options?
Thanks! Very clear explanation. I'm just confused about your example at 9:50. Why would buying the call option make you more money than buying the stock and holding when it moves up? In your example you mention 20% return on a $1000 investment (100 shares at $10) when the stock goes to $12; so far makes sense. Then you say with the call option you make $1000 which is a 100% return. But your example then moves to show buying 1000 shares for $10000, then paying $1000 in premium, and profiting $1000, which is just a 10% return, compared to 20% if you bought the stock.
Yeah, this part isn't right. "Doubling your investment" assumes that you sell the option, rather than exercise it. If you're buying the call option with the expectation of exercising it, you're effectively saying you want protection just in case the price per share drops to less than $9. In that case, you've limited your loss to $1. The leverage in the example is how much you risk versus how much you make.
Very good work with this! Lots of people on RUclips gloss over these financial instruments without making it clear that things like options can be rather risky. Thanks for an excellent video!
I did this recently with Astra. They had their first launch being broadcast and I am holding a long position on it, but to hedge losses I opened some short term puts to protect against the possibility of a failed launch driving the price lower. Launch did fail and the price dipped 20%.
Any chance you could do a video on value averaging Vs dollar cost averaging? Vs lump sum investing. I've seen many pros and cons of value averaging, some saying studies are pretty much unanimous on my being a better method of investment and other people claiming it doesn't account for liquid cash deposits on the side that can't be invested. I'd love to hear your thoughts on it. Thanks
It can vary by employer. Typically your agreement with them (your contract or incentive program documents) will specify how you earn the options (the “vesting” period or requirements), what the strike price and expiration date are, and how to execute the options (for example: Do you buy the shares directly from the company or on the open market? Do you have to come up with enough cash to cover the strike price, or do you just give the order and they’ll exercise the options for you?) And of course they’ll always be call options because the point is to align incentives. If you help them be profitable and increase their share price, you get paid more.
Hey man can you do a video explaining swaps? Better yet, one that explains how total return swaps killed archegos management. Credit default swaps, total return swaps, interest rate swaps…
Credit Default Swaps are used as an insurance if underlying bond defaults. It is usually issued by the bank and, in case that the company, whose bond you own, defaults on that bond, you get to exercise the CDS, which means the issuer bank will take that bond away from you in exchange for its original value. Of course, as with any other insurance, you also need to pay some premiums to the CDS issuer on pre-determined time period basis and in case the bond doesn't default and you manage to sell it back to the issuer company, you will not get back your CDS premiums that you payed along the way.
Unless you trade swaps for an institution this is way above anything you ever need to know. Its also very complicated. I took a college course in international finance and calculating costs/profits on swaps was no picnic.
I've had about five years of profitable trading and I use options. I wish more people could do so responsibly. I'm up 40% this year and those gains are virtually entirely options based. Iron condors, call credit spreads and now slowly transitioning to more and more LEAPS positions with the anticipation we'll pivot. Also running the wheel on stocks I want now. Might not do the upside part of the wheel on all of them though, but I'm potentially buying stocks that are dirt cheap even cheaper thanks to receiving a premium. I avoided options for so long as I just saw unnecessary risk but I'm glad I've embraced them. All my stock holdings are still down this year, I believe. Maybe CROX is up? I don't even know.
Thank you for the good video! I heard that some people buy LEAPS (1-2 years) deep in-the-money (0,7 delta or more). Looks like you buy 2x stocks for the same price with fixed downside. But as soon as not all people do this I think there is something that I miss in it. What's the downside of this strategy?
70 deltas suggest that you have 70% chance of getting at least your money back. That's 30% chance that you will lose everything every 1-2 years. In a decade, then, you can count on losing everything. 70% * 70% * 70% * 70% * 70% = 16.8% chance that you get your money back or better if you choose 2-year intervals and 2.8% for one-year intervals.
@@UmTheMuse assuming there is no change in fundamentals* I like to think of delta how many shares you control a .7 delta would mean you control the equivalent of about 70 shares. Thinking of delta as a percent chance of making money isn't the best way to conceptualize delta in my opinion.
@@alexlu9564 .70 does not imply 70% of the value of the underlying; it's 70% of the change in the underlying. This is huge because the effect is nonlinear. In other words, if you own a call option and the underlying goes up a small amount, it is true that your call option will scale proportionately, but your delta will also increase (by an amount known as gamma). This is fantastic when the stock price goes up. My point, though, is that there is a chance that the stock price will drop past your strike price. If this happens, you will almost certainly lose most if not all of everything you gambled (and yes, options are speculative gambles on the underlying when not used for hedging). Furthermore, if you try this strategy enough times, you're bound to have this happen to you at some point, even if the expected value is positive. Please keep your position sizes small
@UmTheMuse yes I agree with your point but the same can be applied to % of getting money back. However my point was that thinking of delta and using it to calculate that you have a 16.8% of profiting in the long run isn't exactly how it actually turns out when buying leaps. Because even 1 leaps trade can net you 2x or more in return which can offset the price of many years of losing money on leaps. Furthermore buy assuming that delta is percent itm neglects the fact that fundamentals can change dramatically in a few years in which most fundamentals do.
@@alexlu9564 If I roll 2 dice what are the odds that I roll 2 sixes? It's always 1/6², no matter how many dice you rolled before. This isn't quite true for options or stock trading because there's no guarantee that each event is independent, but since you can't predict how one event affects another, you might as well treat them as independent events I think. So, even though your outlook will shift the closer you get to the expiration, you can't use that information when you buy the option
Good point - I avoided LEAPs just because they have a few different quirks around them that I think warrant their own discussion. That being said, you pay a higher premium up front for the longer time period, and three years may still not be long enough for SOME positions to play out, so there is still a little bit of risk around their expiration date.
i knw im late to the party but with the part about selling naked call options. For my information retail investors mostly wouldn't be able to do that due to high margin requirements from brokers and so many sell covered calls, so that their risk isn't infinite but what they paid for the shares. I think that is a big diff in doing a naked call and a covered call and anyone that does option trading should look into the risks for them. Also i try to keep option trades less than 20% of my portfolio so that "all my eggs are not in one basket"
Great video, really educational. You talked about put options can be a way to protect capital but can it be a good way with small risk to make money from the premium with a stock that doesnt move. For example, if i own 100 share of a stock wich give for the moment 40%, it reached its all time high and due to its vocation i dont see it going up or down. Could it be a strategy to be a writer for a call and in the wort case you keep that 40% and best case you earn the prenium? Correct me if i am wrong
Up until now I’ve only heard of stock options in the form of alternate compensation offered by employers. For example, my previous employer (a start-up tech company) gave its employees stock options in that company from time to time before it went public that would vest after the employee remained with the company for four years. I assume in this case that the “premium” you mentioned is the years of employee service?
What Richard was talking about are standard options traded on public exchanges. Options you get as compensation from an employer are a different class of security, so somewhat different interpretation is required. "Premium" doesn't really apply for equity compensation, although I suppose the "fair market value" that is used for tax purposes by both your employer and yourself has similarities to premium.
I just sell covered calls on stocks I own, with strike price of what I would've wanted to sell them for. I also sell put options on stocks I want to own, with the strike price I'm already willing to pay for the stock.
Same. Like why not get a guaranteed 1-2% premium of cash with a 10%+ gain sale price locked in. Like, oh no my contract got exercised and now I have 12% more cash on hand to reinvest whatever will I do.
Although I would agree that options are neither for the risk intolerant or those entirely unaware of the mechanics of options. It can be a good way to have a meaningful position without a large capital requirement (due to the leverage). For example, for the last few years I've had ITM call leaps (1yr+ expiration) for QQQ and SPY (nasdaq and S&P ETF) and hedged against the Theta (time decay) with monthly short calls that lower my cost basis. Even during a volatile period like March 2020 I wasn't completely blown out of the water because of it. Anecdote aside, while its important to warn investors about the risks of any decision, I think its ultimately a disservice to suggest that these decisions should be left to professionals. I always appreciate your content, looking forward to the next one.
I'm still trying to wrap my ahead about trading stock options without owning the underlying security. What happens when you want to exercise a call option ITM and you don't have the money to buy the lot of shares. Do you have get a loan or go on margin to exercise the option?? Also, I don't understand how you can offset the cost of options by buying more options.
@@MrSupernova111 In essence you never want to exercise your options for the sake of the trade alone. Because of time value (extrinsic) you will always get at least as much by selling it back to the market as you would from exercising. I.e. $90 Call option on a $100 dollar has an exercise profit of $10 but could be resold for $10.15 lets say. If you were going to use options for long term you'd probably have the capital for it, but if you didn't your broker automatically liquidates your position to cash because it's ultimately a profitable position. as far as offsetting cost I don't offset one option by buying another I sell a similar option with different characteristics. In that example I'm long a call that expires in over a year but I'm short monthly calls. I still get exposure to the long call but the premium from the short calls offsets my basis every month that I roll it. Hope that helps.
@@mrcosmojones880 . If I understand correctly, "exercising the option" is not the only option. Someone who owns a "call option" ITM could also sell the option in the open market and liquidate the position without ever owning the underlying lot of shares. Does that sound correct? Does that sound right? The other part makes sense.
3 года назад
Hey Richard. May I ask how you animate your animations? Do you do that in your video editing software?
Thank you for always teaching us the the world of Investing and one day Henry is going to thank you for posting all of these videos that he will be able to learn from in the future.
Thanks for posting this! Loving learning with you @theplainbagel Wondering if you're still following GME etc. Glad to have some great CanCo & I have questions about being a Canadian on youtube, if you don't mind.
I only trade options in IRA/Roth accounts. I took several years to ensure I really understood them. I traded small and infrequently at first which showed me where my knowledge was lacking (haha) without risking much loss. I still mostly trade small but much more frequently. Zero commissions have enhanced my net profitability (though there are still per contract fees). Not having to consider taxes helps too. I use my taxable accounts exclusively for long term buy and hold positions, particularly no/low dividend stocks.
Anytime this channel does an exclamation point on a video a sound plays, this happens at 6:17 in this video, does anyone know where this sound was popularized? I recognize it but I can't remember what it's from.
If you’re new, you’re gonna want to start out buying puts or calls, doesn’t matter, as long as make sure you’re buying out of the money options so you can later get *in* the money, which is where you want to be and please don’t do any of this.
After trading options for 2 years I learned 2 things. 1. They are COMPLEX tools. 2. They offer an incredible amount of flexibility. But this is a double edged sword. Also its really easy to lose all your money due their leverage potential.
It's not gambling, it's running an aggressive portfolio to generate alpha by consolidating large amounts of capital into short term investment vehicles based on market sentiment. In other words Im yoloing on CLOV FDs for massive tendies.
Basically guys, with shares you can buy and sell anytime you want. With options you're locked into the price and if it goes south, you can't sell it and you'll lose your money
I'm considering the idea of using options to deal with meme stocks that have no real growth predictors. The short term expiration dates basically destroy an option strategy but what if you buy options a little at a time at the points when the previous options expire? This would imply speculation on a huge price increase and still amplify your returns if the premiums are appropriately priced (since the underlying stocks are usually seen as hot garbage)
you gotta' explain why they have the right to take bets for later dates like how is it allowed what's the premise behind it - that's what's confusing us beginners
Hey Richard, I've always been a bit curious on the nuance differences between options and futures... they seem like more or less the same thing (minus the obligation of a futures contract) but how are the Greeks different, etc.
@@alexanderdorscheid7649 Not really. If you don't sell the underlying contract, you take possession of the actual goods in most cases. And I traded at the Merc, CBOE and CBOT for a decade, so I'll pass on Investopedia, thanks.
Great video. But none of this applies to me. I am on autopilot and an defensive investor. Market goes up ok,Market goes down ok,Market goes sideways ok.
Completely off topic but is your thyroid okay? Maybe you’re just lean or built that way but it looks enlarged. Thank you for the great explanations of investing for a layperson like myself!!
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Investing Guru: "Well you see, you put a small amount of money down based on your theory as to the way things are gonna go. You make a large amount of money if you guess right and lose it all if you guess wrong."
Me: "Oh so it's gambling"
It's like playing poker, you can be very good at it and profit most of the time, but it takes just a bad streak to blow you off
@The plain Bagel bot alert
Let’s not forget that if the investing gurus is a young kid with a Mohawk that’s a red flag.
@Luís Andrade It's exactly like gambling. But, if you know what you're doing, it's like owning the casino.
@Luís Andrade That's not how gambling works at all... gambling is never random. There's always an edge and the casinos always ensure that they have the edge. Look at any casino game, they have well known and documented odds of any event happening. Then the casino sets up breakevens and strategies in their favor...
When it comes to options contracts, its exactly the same way. The fundamental price of an options contract is based on the likelihood of a stock price movement in either direction in a particular amount of time, and the premium is based on that math. If you educate yourself and set up proper strategies, you play the casino hand. If you don't educate yourself and yolo naked calls and puts well out of the money, you play the poor sap that walked in the door because of the flashing lights and cute waitresses.
What I am hearing is I should remortgage my home and pile it half into SPY call options, and half as an offering to the Holy Powell and his QE superpowers.
Literally can't go wrong.
This is why you're in the field - you really know how to read between the lines to extract the true teachings, well done!
Just in case anyone had not figured out why this does not work themselves: The people selling you the call option will charge you a large enough fee that you won’t actualy make larger expected return than just buying SPY.
No free lunch!
@@georgesmith4768 Why you gotta ruin my dreams? I had already picked out my new Ferrari!
@@georgesmith4768 This isn't true what so ever, options give you more leverage. He said this in the video and it's correct.
Looking at SPY, which is currently $409.40, a $412 strike call which expires on 5/3/21 is $398. If SPY goes up to $420 on expiry, the call will DOUBLE in value and a share would be worth only 3.1% more.
The reason people lose so much money on OTM calls is that if SPY went up only to $411, the call would be WORHTLESS while the share would be worth 0.5% more. People on wall street bets buy a bunch of OTM options, hope for some massive move in the underlying, it doesn't happen, and they lose everything. Of course if it does they are rich since again you get more leverage.
BTC fanbois (etc) would disagree with what you should do with at least half of it.
I rarely comment on videos; however, I had to given that one of the comments he showed was "Why does this guy look so much like Conan O'brien." Props to you for giving me a laugh
Yeah I know right?
Hey is this the scammer?👆 his p is lower case
@@rodrigoizaguirre9578 yes
He looks more like Steve Merchant to me.
I think Plain Bagel is the best channel I found about investing. Richard actually educates me rather than telling me to invest blindly. Or flooded with a masked ad. 😑
The first option I ever seriously considered buying was a put on GME earlier this year. It would have made me a lot of money, but I eventually decided against it. Totally unprecedented market conditions aren't a great time to get started in options trading. Nothing wrong with being very cautious with options.
I like to think of options as lottery tickets (calls) or insurance policies (puts)... in either case the ones who make money are the lottery operators (call sellers) or insurance underwrites (put sellers).
I just have to say, your first video about options was actually extremely helpful to me
Stock options are powerful: they can help you fly or destroy you. Respect!
@The plain Bagel fake
If you're going to trade options, BE CAREFUL! I'm new to them in general, and I made sure to load up on as much information as I can before I started trading them for real. Believe me: they are NOT for the faint of heart. It can wreck you when you see your option losing money, because the loss can come just as rapidly as the gain. I'm fortunate that I haven't lost money on them yet, but I've come close, and if not for setting limits to sell them and strokes of luck when the price brushed those limits, I'd be down by a lot already.
Options are an especially useful tool as a smaller part of a broader portfolio. But many people seem to have a portfolio of exclusively out of the money YOLO options lol
To be fair, my deep ITMs became way OTMs lol
@The Plain Bagel bot alert
@The Plain Bagel fuck you, bot.
@@Eduardobarthwe lmao, thats like saying fuck you wall! Get out of the way!
@@devin19222 Yeah, but it still felt good.
Hey where did the plate with the bagel go? Thats like the icon of your channel you can't ditch it!
I found my biggest problem with options (as an amateur) is that the more successful I become, the more I "bet" on a company. Then I lose all progress I gained. When I trade options, what has helped me is to just trade 1 or 2 contracts at a time (since I'm not working with a ton of buying power). Options have become a really nice source of income though. It helps a student like myself make a few hundred a month.
position sizing is the number one reason people blow up accounts by yolo-all in bets
Actual option traders risk 2% at a time and have max 30% exposure, and are mostly net sellers not buyers (outside some controlled trades like debit spreads)
The gambling mind focuses more on the good more than the bad. Great video.
@The plain Bagel fake
@The plain Bagel Eww stop impersonating RUclipsrs
Hi scammer bot.
that's the mind of someone desperate, not of a gambler
@@armenstaubach9276 Wait what? Are you saying it's not gambling because it's legal?? Because gambling is legal...
Great video,
I only sell 'covered call' 15%+ strike price options on my consumer staples stocks to boost my returns.
If a such a 'slow' sector stock tanks, I get to keep my stock (as I would for the long term)
If a such a slow sector stock hits 15%+, then, I will be forced to sell my position. This is fine as selling would have been intentional anyways to re-balance my holdings away from a such a crazy increase)
Only if all consequence is intentional.. I would recommend options.
*Good Explination*
I am a complete beginner who is studying hard to understand as much as I can, have not yet traded but $20. Though I do agree the terminology was a bit advanced in the last video -especially towards the end- but that doesn't take the fact that it's filthy rich in information. I go back to that video a few times a week as I keep learning more. Thank you for this one also
This was a MUCH better and more understandable explanation than your previous video on options! Thanks!
Good overview of options, and definitely one I'll point people to in the future. One thing I will add for anyone that is new is that there is a ton of nuance with options, and you really shouldn't dip your toe in until you have spent a substantial amount of time learning and understanding options. You need to know your fundamentals down cold.
All this video did was confirm my decision to not do stock options. Long term investing is the way to go for me.
well as you become more experience with investing you'll learn a great use for options can be to buy "insurance" for your stocks. For example, if you owned 100 shares of SPY and it is trading at say 300$ right now which puts its total value at and you thought there is a chance a large downturn in the market will happen in the next month like what happened with covid. you could buy options put which might cost you 600-1200$ and what that does it is Caps your potential downside like if the market were to tank 30% like it did last year. so instead of losing 10,000 in one month, you would have only lost your premium and the difference between 300$ and your strike, and even better now that you have sold your shares at above market value you can buy even more. And if the market doesn't crash your only out your premium, so its a great way to hedge risk in the event of large market turmoil
Actually, buying options except to close a position is a tough road. As 4 out 5 options expire worthless. I sell short term calls and puts and let the time decay work in my favor. My average is 9 out of 10 expire worthless so I collect the premiums every week.
@@vitsadelhole Its just that 30 % market downturns happen like once every 10 years. Paying large premium over and over again would incur more loss to you in the long run.
Yup. I'd say if you're gonna do stocks, buy the darn stock.
@@Interestingenough4 so sell puts.
This video is so much better than your previous on the topic ("Stock Options Explained," posted on August 31st, 2018).
Thank you.
You have now convinced me twice (once per video) that I does not (yet) know enough to invest in options. I wish to learn though.
I think you did a good job here explaining it to beginner investors! 👍
Thanks for sharing your thoughts! Leveraging money can be great but it’s possible to lever yourself off the face of the earth
Thank you for this video. I saw the first one, but I really appreciate this more in-depth return to the topic of stock options. Especially the part about the downsides!
Pro using a Buying Put to hedge and sometime if they feel Market too bad they just Buying Put , normal peoples using for quick money, in short time without knowing the direction , in a large group I asked few very important questions about Options and only one person answered. I can say 80% peoples don't know about options but they doing it
I think options can be very helpful when used appropriately.
Writing covered calls and cash secured puts is a nice way to make money waiting to sell the underlying, or waiting to buy the underlying.
And buying puts can help lock in potential profits or create a type of stop loss on a long trade.
Buying calls... I haven't found a risk off use for those yet... other than if you find yourself holding too many puts for security and not in many or any long positions... they can hedge an unbalanced put portfolio. Create a type of strangle trade.
Calls can be paired with a short position to reduce your downside. Open a short position, buy out-of-the-money calls, and if the price goes up you use the calls to cover your short position and put a cap on your potential losses.
Of course, that's a short-term trading strategy, not long-term investment. But it is one way calls can hedge risk.
Also you can sell covered calls, it’s my favorite options trade. It only limits upside potential for owning a stock, but in every other case besides a lot of growth in your stock, you will make more money than someone simply holding it without selling covered calls. Even if someone makes a bunch of money off of the call you sold, you will still make money.
Perfect video, as usual 👍
Options are like jet fuel. If you know what you're doing, they can be a very powerful tool. If you don't know what you're doing, they can blow up in your face.
U cant know what ur doing tho
@The Plain Bagel fake
@The Plain Bagel how’s the weather in Lagos Nigeria this morning??
Jet fuel isn't flammable in most conditions though.
@@levnikitin7432 If you own 100 shares of a stock and are worried about it going down, you can buy a put that guarantees you the ability to sell at that strike, even if the underlying plummets. You can then sell a call against your 100 shares to offset the cost, which also limits your upside. This is called a "collar" position and is actually far LESS risky than simply owning the shares, because you trade unlimited upside for far more limited downside.
I just finished your other options video nice.
I find your channel very insightful and funny too, keep up the good work 👍😂👍👍👍😂
I'm surprised there wasn't much discussion of option strategies - these are some of the key reasons options are so popular.
Individual options are pure risk, but option strategies are AMAZINGLY USEFUL and can be fairly safe (i.e. zero cost collar)
On an unrelated, is there a reason this channel doesn't talk about asset classes other than equity, such as bonds? I imagine some basic education on bonds would be quite useful for the average boomer investor
Not gonna lie, I miss the actual sliding bagel. Can we get that back please? 😔
As a value investor I started considering to sell put options. I felt that in your video you touched only upon buying options. Have you considered to make one about selling put and call options?
Thanks! Very clear explanation. I'm just confused about your example at 9:50. Why would buying the call option make you more money than buying the stock and holding when it moves up? In your example you mention 20% return on a $1000 investment (100 shares at $10) when the stock goes to $12; so far makes sense. Then you say with the call option you make $1000 which is a 100% return. But your example then moves to show buying 1000 shares for $10000, then paying $1000 in premium, and profiting $1000, which is just a 10% return, compared to 20% if you bought the stock.
Yeah, this part isn't right. "Doubling your investment" assumes that you sell the option, rather than exercise it. If you're buying the call option with the expectation of exercising it, you're effectively saying you want protection just in case the price per share drops to less than $9. In that case, you've limited your loss to $1. The leverage in the example is how much you risk versus how much you make.
Conan's son is the best financial guru, with the wits of his comedic father.
Very good work with this! Lots of people on RUclips gloss over these financial instruments without making it clear that things like options can be rather risky. Thanks for an excellent video!
thanks for your videos bro, you explaint it very clear...
ill keep with stocks instead all the other, seems less risky
great video, well explained the risks and potential benefits of options. well done really
Thank you so much. I've been starting at it for days months even. I want to use it
Great explanation
Great video! Thank you TPB.
Thank you for this 🙌🏽
This is the best video on options ever. Thank you so much!
@Plain Bagel what?
All you need to know about options is: "Never invest in any idea you can't illustrate with a crayon" -Peter Lynch
I did this recently with Astra. They had their first launch being broadcast and I am holding a long position on it, but to hedge losses I opened some short term puts to protect against the possibility of a failed launch driving the price lower. Launch did fail and the price dipped 20%.
thank you very much. this is very useful :)
Great timing! I have been terrified of buying options and I felt temptation today. Good thing I hate losing money, you just talked me out of it.
@The Plain Bagel Can I ask you something?
Are people still falling in this cheap trick??
🤷🏾♂️🤷🏾♂️
@@joputhiyaparambil07 I hope not. But I think most ppl aren't dumb enough to fall for it.
Can you go over RSU vs stock options
Any chance you could do a video on value averaging Vs dollar cost averaging?
Vs lump sum investing.
I've seen many pros and cons of value averaging, some saying studies are pretty much unanimous on my being a better method of investment and other people claiming it doesn't account for liquid cash deposits on the side that can't be invested.
I'd love to hear your thoughts on it. Thanks
All these gurus showing off their option wins while conveniently hiding their losses
Great explanation! Can you do a video on how this works with companies that offer share options as a benefit?
It can vary by employer. Typically your agreement with them (your contract or incentive program documents) will specify how you earn the options (the “vesting” period or requirements), what the strike price and expiration date are, and how to execute the options (for example: Do you buy the shares directly from the company or on the open market? Do you have to come up with enough cash to cover the strike price, or do you just give the order and they’ll exercise the options for you?)
And of course they’ll always be call options because the point is to align incentives. If you help them be profitable and increase their share price, you get paid more.
Hey man can you do a video explaining swaps? Better yet, one that explains how total return swaps killed archegos management. Credit default swaps, total return swaps, interest rate swaps…
Credit Default Swaps are used as an insurance if underlying bond defaults. It is usually issued by the bank and, in case that the company, whose bond you own, defaults on that bond, you get to exercise the CDS, which means the issuer bank will take that bond away from you in exchange for its original value. Of course, as with any other insurance, you also need to pay some premiums to the CDS issuer on pre-determined time period basis and in case the bond doesn't default and you manage to sell it back to the issuer company, you will not get back your CDS premiums that you payed along the way.
Unless you trade swaps for an institution this is way above anything you ever need to know. Its also very complicated. I took a college course in international finance and calculating costs/profits on swaps was no picnic.
Please, make a video in this similar style explaining Shorting
@The plain Bagel Fuck you Imposter 🖕🏻
I've had about five years of profitable trading and I use options. I wish more people could do so responsibly. I'm up 40% this year and those gains are virtually entirely options based. Iron condors, call credit spreads and now slowly transitioning to more and more LEAPS positions with the anticipation we'll pivot. Also running the wheel on stocks I want now. Might not do the upside part of the wheel on all of them though, but I'm potentially buying stocks that are dirt cheap even cheaper thanks to receiving a premium.
I avoided options for so long as I just saw unnecessary risk but I'm glad I've embraced them. All my stock holdings are still down this year, I believe. Maybe CROX is up? I don't even know.
Very interesting video - thank you for it :-)
I know u have discussed Bitcoin before, but is it possible to re discuss the topic specially with so many changes happening
Bermuda option: Am I a joke to you?
Thank you for the good video! I heard that some people buy LEAPS (1-2 years) deep in-the-money (0,7 delta or more).
Looks like you buy 2x stocks for the same price with fixed downside. But as soon as not all people do this I think there is something that I miss in it.
What's the downside of this strategy?
70 deltas suggest that you have 70% chance of getting at least your money back. That's 30% chance that you will lose everything every 1-2 years. In a decade, then, you can count on losing everything. 70% * 70% * 70% * 70% * 70% = 16.8% chance that you get your money back or better if you choose 2-year intervals and 2.8% for one-year intervals.
@@UmTheMuse assuming there is no change in fundamentals*
I like to think of delta how many shares you control a .7 delta would mean you control the equivalent of about 70 shares. Thinking of delta as a percent chance of making money isn't the best way to conceptualize delta in my opinion.
@@alexlu9564 .70 does not imply 70% of the value of the underlying; it's 70% of the change in the underlying. This is huge because the effect is nonlinear. In other words, if you own a call option and the underlying goes up a small amount, it is true that your call option will scale proportionately, but your delta will also increase (by an amount known as gamma).
This is fantastic when the stock price goes up. My point, though, is that there is a chance that the stock price will drop past your strike price. If this happens, you will almost certainly lose most if not all of everything you gambled (and yes, options are speculative gambles on the underlying when not used for hedging). Furthermore, if you try this strategy enough times, you're bound to have this happen to you at some point, even if the expected value is positive. Please keep your position sizes small
@UmTheMuse yes I agree with your point but the same can be applied to % of getting money back. However my point was that thinking of delta and using it to calculate that you have a 16.8% of profiting in the long run isn't exactly how it actually turns out when buying leaps. Because even 1 leaps trade can net you 2x or more in return which can offset the price of many years of losing money on leaps. Furthermore buy assuming that delta is percent itm neglects the fact that fundamentals can change dramatically in a few years in which most fundamentals do.
@@alexlu9564 If I roll 2 dice what are the odds that I roll 2 sixes? It's always 1/6², no matter how many dice you rolled before. This isn't quite true for options or stock trading because there's no guarantee that each event is independent, but since you can't predict how one event affects another, you might as well treat them as independent events I think.
So, even though your outlook will shift the closer you get to the expiration, you can't use that information when you buy the option
>10:35
But LEAPs are a thing. Why wasn't this mentioned?
Good point - I avoided LEAPs just because they have a few different quirks around them that I think warrant their own discussion. That being said, you pay a higher premium up front for the longer time period, and three years may still not be long enough for SOME positions to play out, so there is still a little bit of risk around their expiration date.
i knw im late to the party but with the part about selling naked call options. For my information retail investors mostly wouldn't be able to do that due to high margin requirements from brokers and so many sell covered calls, so that their risk isn't infinite but what they paid for the shares. I think that is a big diff in doing a naked call and a covered call and anyone that does option trading should look into the risks for them. Also i try to keep option trades less than 20% of my portfolio so that "all my eggs are not in one basket"
Great video, really educational. You talked about put options can be a way to protect capital but can it be a good way with small risk to make money from the premium with a stock that doesnt move. For example, if i own 100 share of a stock wich give for the moment 40%, it reached its all time high and due to its vocation i dont see it going up or down. Could it be a strategy to be a writer for a call and in the wort case you keep that 40% and best case you earn the prenium? Correct me if i am wrong
How much research did you do for your SPAC video?As in how many hours ?
Best way I had it explained to me - writing options is like selling insurance policies for an earthquake.
1:45 That should be a sign right there. If an introductory video is over your head, maybe you’re not ready to jump in yet.
Up until now I’ve only heard of stock options in the form of alternate compensation offered by employers. For example, my previous employer (a start-up tech company) gave its employees stock options in that company from time to time before it went public that would vest after the employee remained with the company for four years. I assume in this case that the “premium” you mentioned is the years of employee service?
What Richard was talking about are standard options traded on public exchanges. Options you get as compensation from an employer are a different class of security, so somewhat different interpretation is required. "Premium" doesn't really apply for equity compensation, although I suppose the "fair market value" that is used for tax purposes by both your employer and yourself has similarities to premium.
Would be interesting to hear about exotic options
I just sell covered calls on stocks I own, with strike price of what I would've wanted to sell them for. I also sell put options on stocks I want to own, with the strike price I'm already willing to pay for the stock.
Same. Like why not get a guaranteed 1-2% premium of cash with a 10%+ gain sale price locked in. Like, oh no my contract got exercised and now I have 12% more cash on hand to reinvest whatever will I do.
Have you tried covered calls?
Although I would agree that options are neither for the risk intolerant or those entirely unaware of the mechanics of options. It can be a good way to have a meaningful position without a large capital requirement (due to the leverage). For example, for the last few years I've had ITM call leaps (1yr+ expiration) for QQQ and SPY (nasdaq and S&P ETF) and hedged against the Theta (time decay) with monthly short calls that lower my cost basis. Even during a volatile period like March 2020 I wasn't completely blown out of the water because of it. Anecdote aside, while its important to warn investors about the risks of any decision, I think its ultimately a disservice to suggest that these decisions should be left to professionals. I always appreciate your content, looking forward to the next one.
I'm still trying to wrap my ahead about trading stock options without owning the underlying security. What happens when you want to exercise a call option ITM and you don't have the money to buy the lot of shares. Do you have get a loan or go on margin to exercise the option??
Also, I don't understand how you can offset the cost of options by buying more options.
@@MrSupernova111 In essence you never want to exercise your options for the sake of the trade alone. Because of time value (extrinsic) you will always get at least as much by selling it back to the market as you would from exercising. I.e. $90 Call option on a $100 dollar has an exercise profit of $10 but could be resold for $10.15 lets say. If you were going to use options for long term you'd probably have the capital for it, but if you didn't your broker automatically liquidates your position to cash because it's ultimately a profitable position. as far as offsetting cost I don't offset one option by buying another I sell a similar option with different characteristics. In that example I'm long a call that expires in over a year but I'm short monthly calls. I still get exposure to the long call but the premium from the short calls offsets my basis every month that I roll it. Hope that helps.
@@mrcosmojones880 . If I understand correctly, "exercising the option" is not the only option. Someone who owns a "call option" ITM could also sell the option in the open market and liquidate the position without ever owning the underlying lot of shares. Does that sound correct?
Does that sound right? The other part makes sense.
Hey Richard. May I ask how you animate your animations? Do you do that in your video editing software?
Great video! Each time I come I leave wiser. Thanks ;)
Thank you for always teaching us the the world of Investing and one day Henry is going to thank you for posting all of these videos that he will be able to learn from in the future.
@The Plain Bagel LOL. I'm not sure what this means.
It is a scam.bot
@@hyakushiki23 the scammer's phone number
Why you don't create a discord group?
Do you think I cannot spot scam?
Thanks for posting this! Loving learning with you @theplainbagel Wondering if you're still following GME etc. Glad to have some great CanCo & I have questions about being a Canadian on youtube, if you don't mind.
Based on your tax bracket, since exercising an option gets taxed as income, you are usually better off selling the option versus exercising it.
I only trade options in IRA/Roth accounts. I took several years to ensure I really understood them. I traded small and infrequently at first which showed me where my knowledge was lacking (haha) without risking much loss. I still mostly trade small but much more frequently.
Zero commissions have enhanced my net profitability (though there are still per contract fees). Not having to consider taxes helps too. I use my taxable accounts exclusively for long term buy and hold positions, particularly no/low dividend stocks.
Me, not planning to ever buy options: "Hmm, interesting."
Anytime this channel does an exclamation point on a video a sound plays, this happens at 6:17 in this video, does anyone know where this sound was popularized? I recognize it but I can't remember what it's from.
metal gear solid
i want to sell put option close at the resistance, so its like market order, but with extra cash
If you’re new, you’re gonna want to start out buying puts or calls, doesn’t matter, as long as make sure you’re buying out of the money options so you can later get *in* the money, which is where you want to be and please don’t do any of this.
After trading options for 2 years I learned 2 things.
1. They are COMPLEX tools.
2. They offer an incredible amount of flexibility. But this is a double edged sword.
Also its really easy to lose all your money due their leverage potential.
the only money that I would lose is the premium that I have paid
@@blast2686 you say that
@blast2686 sounds like you only long options, try to put on a short naked call on GME, all your money can turn into dust overnight.
So putting is just shorting with extra steps?
no its just shorting for common investors who don't have access or knowledge about other shorting instruments
It's not gambling, it's running an aggressive portfolio to generate alpha by consolidating large amounts of capital into short term investment vehicles based on market sentiment.
In other words Im yoloing on CLOV FDs for massive tendies.
Basically guys, with shares you can buy and sell anytime you want. With options you're locked into the price and if it goes south, you can't sell it and you'll lose your money
Ty
if the call option is ITM, isn't it better to sell the options than to exercise it-then-sell? since the ITM option also has extrinsic value?
Yes it is almost always better to sell the option vs exercise them.
Can you link the og video?
I'm considering the idea of using options to deal with meme stocks that have no real growth predictors. The short term expiration dates basically destroy an option strategy but what if you buy options a little at a time at the points when the previous options expire? This would imply speculation on a huge price increase and still amplify your returns if the premiums are appropriately priced (since the underlying stocks are usually seen as hot garbage)
no no nonono nonono no no no no no nono nonono no no no no nonono nonono
Just testing
Yes ( ͡⚆ل͜ ͡⚆)
@@Coolsomeone234 nooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo
I don't understand why options would be more around 9:50
You should talk about options spreads in another video
you gotta' explain why they have the right to take bets for later dates like how is it allowed what's the premise behind it - that's what's confusing us beginners
I did not understand. Why i am so dumb 🤣🤣 good one Sir, thanks for great content
Hey Richard, I've always been a bit curious on the nuance differences between options and futures... they seem like more or less the same thing (minus the obligation of a futures contract) but how are the Greeks different, etc.
Futures are not derivatives, they don't have greeks. They are more like stocks that have expirations.
@@alhollywood6486 futures are a derivative, I would suggest you Google “futures” and read up on investopedia
@@alexanderdorscheid7649 Not really. If you don't sell the underlying contract, you take possession of the actual goods in most cases. And I traded at the Merc, CBOE and CBOT for a decade, so I'll pass on Investopedia, thanks.
If it's all the same then why are the K, L, M, Q, etc. Priced differently? Is it just a wider spread?
@@CasualProfundity not sure, you mean the length of the contracts?
Great video. But none of this applies to me. I am on autopilot and an defensive investor. Market goes up ok,Market goes down ok,Market goes sideways ok.
@@K3end0 Read The Intelligent Investor by Benjamin Graham. You will know what I am referring too.
This vid should be how to... eToro.
they use Put and Call for their buy and shorting, to sell? a little harder to reach.
can we please get the sliding bagel back in the intro? i kinda like that more
Completely off topic but is your thyroid okay? Maybe you’re just lean or built that way but it looks enlarged. Thank you for the great explanations of investing for a layperson like myself!!
Now all this make sense 😃