 X traders and today we're going to review options because I believe that after spending so much time so many weeks learning about what they are how they work how they go up in value how they go down in value and all the theory and the Greeks and stuff you kind of lose track of you know how to use it as an instrument to make money and that's what this is about basically throwing in some of the more important concepts in a visual way and let's get started so options you know the bottom what are options well basically they're a piece of paper a contract and you buy it and you sell it okay you can either buy or sell it it basically turns into a sort of hot potato which is different from stocks because stocks you can hold and if they don't go up to tomorrow if they don't go up next week if they don't go up enough next month you can hold them for another year a couple years five or ten years pass them on to you know your sons or whatever and daughters and they'll still be valuable but options are a hot potato they have a time limit and that is what makes them so explosive and basically that is what makes them so valuable up to a certain point but after a certain point they are completely worthless so basically you know there's a buyer of an option and this is where we get basically we focus so much on being the buyer of the option because that is usually what we do and when we join X trades you want to buy calls and that is probably the most traded options contract as along are the calls because the sex appeal of options is basically you know buying a call and having this you know the ticker skyrocket and you make tons of money you know how they say oh you infinite profit potential yeah but stocks rarely go up so high that you make an infinite amount of money or even you know 10,000% whatever so we we tend to focus around the buyer of an option okay whereby we pay a premium and we get the right okay and what we do with that right well there's basically three things you can do once you have it you can either sell it to somebody else in which case you become the seller and that is one of the things we're gonna focus on you could hold on to it and let it expire which you don't want especially if you're the holder or the buyer of an option or number three you can exercise it you know if the stock does go to 100 and your option your call option gives you the right to buy it 50 then you can exercise the option which allows you gives you the right to buy it 50 from whoever sold you the contract and you can turn around and because the stock is now at 100 you can sell it at market price of 100 and you pocket 50 dollars per share okay but there is the other side of options contracts and we should not lose sight of this because it affects what happens to us as the buyer it affects the price and it also gives us other alternatives other means of making money with options that we probably haven't seen as well as giving ourselves a way to protect our investments in the case that we do have common stock okay so the seller of the option is the one who receives that premium that you paid for when you bought the call right and he gets to keep it okay but he has an obligation if the strike price is below the market price at any moment and you the buyer or holder of that option decides to exercise it then the seller has the obligation to give you those shares at 50 knowing that you are going to turn around and selling and sell them at 100 actually the seller if he does not have the stock then he has to go to the market buy it at 100 and sell it to you at 50 that's his obligation all right so what's in it for him well he gets a premium and if the option expires worthless then he keeps the premium and he has no obligation to you that is what is in it for him but it is a two-person person transaction so let's try to keep that in mind okay so let's one of the things that obviously makes options so different from stock piece of paper is that the option contract piece of paper has two parameters date and price basically and that is what makes it different we talked about how the date is kind of like you know expiration date on your milk carton and after that expiration date you get burned and that is why we compared it to a hot potato now you can also get burned before the expiration date well how does that work okay so remember that it has a strike price that is a second parameter that strike price has to be met and in this case this is a June 25th 131 call on apple so if this strike price of 131 is met and exceeded then it is that option that call option is said to be in the money it is profitable to whoever is holding it because it is at or above 131 the holder can buy it 131 and sell it 132.5 135 150 2000 whatever okay now this graph illustrates one of the most important factors giving value to this options contract right here when this options contract was created or written over here it was worth about 250 you know so if you were the buyer you paid 250 for this thing as the stock moves down up down up you know and it keeps wiggling around it needs to reach that strike price the closer you get to expiration the faster the value of this contract decays and that is again why we call it a hot potato because if this thing does not reach its strike price of 131 and surpasses it then the value of this contract diminishes quite strongly and the closer you get to expiration the faster it decays and here is an example look at actually we can even look at this here on on this little run as you can see the price of the ticker closed above then it closed down here which is probably around 121 but then the next day the third day it actually rose and closed above but look at what happened to the value of the contract because the value of the ticker didn't go up high enough and two days had transpired from the the original moment that this options contract was written then the value of the contract itself actually diminished because it only went up so much but this is probably the best example when the contract is even above 131 its strike price here okay all three of these candles on the last three days are higher than the previous one will accept this one but they are all above 131 but look at what happens to the value of the options contract on this day look at how much the ticker dropped and it's still above 131 but look at how much the value of the contract drops and not to mention the the third day or the last day here the contract drops probably to 133 it's still $2 above the 131 but look at how much the value of the contract dropped from 350 to 250 all right that's more that's around 30 so percent of value so what is this telling us it's telling us that the closer we get to expiration that ticker needs to be way above its strike price otherwise it's going to lose value really really fast all right now let's review this transaction we said it's a two-person transaction if you are the buyer that means you have money and the seller is giving you the product which in this case is the options contract all right the buyer has one theory his theory is that whatever the strike price of this contract is right now which is represented the price of the ticker is this line here the horizontal line here this is the strike price X he believes or she believes in this case that the price of this ticker is going to go higher and higher and higher which is going to make the value of the call contract very very valuable because think about it you hold she holds a contract that leds her leds her buy at X but she can turn around and sell it to market at X plus 50 all right her strike is 50 she can turn around and sell it for a hundred so whoever holds this contract is valuable right up until the very last few days where the value and actually up to the very last date where the value of this contract goes absolutely to zero because once expiry date is here then the contract is completely worthless so as a buyer you expect this to go up and you expect it to go up quickly otherwise what's going to happen is that the seller of that contract is going to profit because he sells for a fixed price which is whatever you pay him and he expects the value of this contract this to stay below the value of the ticker sorry to stay below the strike below the strike of X because if it's above X then the buyer wins the holder of the option if it's below X the contract expires worthless the buyer or holder of that call will not exercise it because it doesn't make sense to exercise it and that means that the seller keeps the premium all right so as with everything you want to buy low and sell high of course so if you buy if you're the buyer okay you buy low you want to go up if you're the seller then you want it to go down in the case of the call so let's review some of these concepts the seller collects the credit that is paid by the buyer as a debit the seller then has the obligation if that contract goes in the money and the buyer if he wants he has the right to acquire those shares before expiry at expiry and afterwards that contract is obviously worthless so what is the max loss for the seller well he takes the loss of whatever the delivery of the goods are in the example of the 5100 the 50 being the strike and the 100 being the market price the seller has to buy at 100 and then give up those goods at 50 because that is what the contract says the buyer on the other hand his max loss is just his debit whatever he paid for all right and you've seen these terms probably on the discord or on the x-rays app the seller sells obviously to open a contract and the buyer buys to open that position so if you're the seller it's a lot more risky because you could your maximum loss is going to be the delivery of the goods if that thing goes to a thousand dollars a share and you have a strike which means you have the obligation to deliver at 50 then you're going to lose a lot of money because you're gonna have to buy at a thousand at the mark in the market and deliver at 50 the buyer is probably the safest place to be because he know in he knows his maximum loss is just what he paid so this is where you control and what risk management comes in and you get to decide what is the maximum debit that you are willing to lose or risk on this position and of course you have to put that up against what you are expecting to be the potential reward okay and that is how you get your risk reward but this is what gives you the control and this is probably why options are so appealing specifically call options because there there is a defined a maximum loss from the get-go and you can define what that is and based on that you can define I want to lose only $100 a week or $200 a week I want it to spread up spread out my investment this week in one $100 contract or $250 contracts or you know $520 contracts whatever you get to decide and that that makes it a lot easier to process and digest and that's probably why you know the big appeal to going long calls but if you're gonna go long calls that's because there is somebody willing to sell and you have to take into account that this is probably very viable you know why is he selling he's taking a huge risk so why is he doing it hmm so why am I buying it you know is this really worth it and of course that's where in the money and out of the money comes from so in the money means that either call this is the options chain and thinkorswim has a strike price right here this stock is currently trading at 115 in 15 is right here anything above 115 120s 130s is down this way anything below 115 110s 100s is on this way now calls are on the left and puts are on the right and that's pretty standard so any calls that are here in purple think about it you have a strike a contract that allows you to buy at 100 when the current market price is 115 that's very positive you can buy at 100 and sell at 115 sure so that means that whoever holds these contracts is in the money or those contracts themselves are in the money anything above 115 is considered out of the money because if the current market price is 115 and you're holding a contract that gives you the right to buy at 130 why would you want to buy at 130 if you can buy the same thing at 115 in the market it doesn't make sense so these calls are out of the money these are cheaper but they also have a smaller delta and you have to make sure that you look at that because anything below a 30 delta is considered very risky okay and the same goes for puts so basically in the money means that that contract whether it's a call or a put is valuable to the holder whoever's holding it the seller on the other hand of that contract the in the money contract is worthless to the seller okay because the seller is going to have to give you those shares at the strike price now on the other side of the coin out of the money means that it is valuable to the seller okay let's look at the example with the puts with the 115 market price if you are holding a put that allows you to put to whoever you sold this contract at 130 well that's great because you can buy it 115 and then put to them at 130 so that's in the money but if you have a contract that allows you to put to somebody at 100 but the market is 115 well then you'd be crazy to put to you know to whoever to your options contract at 100 if you can get 115 from the market so in the case of out of the money puts as well as with calls it is valuable to the seller if the contract is out of the money okay and it is worthless to whoever's holding it you don't want an out-of-the-money call same in the by the same by the same token you don't want an out-of-the-money put okay so in the money out the money basically in the money is whenever the ticker is above that strike okay in the case of calls because it has a resale value and that means that the potato holder of this call can actually sell it to somebody else because it has a resale value it is worthy to the holder out the money means that that ticker is below the strike it has no resale value and therefore the potato holder got burned all right and it is completely worthless to the holder all right so going over a very quick P&L chart okay for the call holder as we've been looking at anything above the strike is profit anything below is a loss and and remember this is a call a long call so the loss is is whatever you paid which in this case the net debit is 1,128 so your maximum loss is down here okay for the put holder again this is these are for people who bought either calls or puts the put holder all right this is your profit area you profit if the stock goes down because if it goes down then you can still put at whatever price you contracted at all right and again the max loss is whatever you paid for that put which in this case is $1090 which you can see here on the chart all right so holders calls and put holders want in the money contracts call and put sellers want out of the money contract all right now a very quick explanation theta and vega when you have when a contract an options contract is born the moment it is born which let's say or written just say it right here 45 days till expiry nobody knows what the end price is going to be okay a lot of things will move the stock price down a lot of them will move the stock price up okay and there is a lot of uncertainty a lot of events can cause this stock price to move up and down which would cause the option price to move up and down and that is that is represented by volatility theta on the other hand is basically it's related but it's the fact that the more time there is between now and expiration the more of those events can actually drive the stock up or down make creating variations or waves on the option price itself okay so when you start an options value has an intrinsic value and an extrinsic value the intrinsic value the value within if you want to look at it that way if this is a $195 call it will be valuable up to 200 okay if it is trading at 200 then the intrinsic value is going to be about $5 because that is how much it is actually worth regardless of theta and volatility regardless of theta and volatility but as that stock moves below the strike then that intrinsic value flows out completely goes to zero as you can see right here the green line intrinsic value but look at what happens to the extrinsic value it reduces but it's still there what is extrinsic value whatever is going to move this stock price up or down whether it be theta or volatility that is extrinsic value and that is what goes down with time or what diminishes with time as you can see here extrinsic value falls as time moves by and when you're when you're at the end of the life of the contract it's pretty much all gone all right and like I said there are a few things that can move stock price up and a few things that can move stock price down you can think about it in terms of GDP and upgrades of a particular ticker or inflation and recession risks which affect earnings of that particular ticker and all of those create volatility and the amount of time to expiration combines to give a options contract it's extrinsic value whatever the value above the strike above 50 let's say if we're still talking about that 50 strike contract anything above 50 gives it intrinsic value anything that has to do with uncertainty by theta and volatility gives it extrinsic value all right so basically to wrap this up theta as expiry arrives theta flows out okay like air out of a balloon of a options contract price uncertainty drops and therefore value drops Vega as expiry arrives fewer things are going to change the value of the ticker drastically and therefore pick the value of the underlying stock or the overlying in this case stock price options price sorry about that and Vega drops all right so that is the quick recap I wanted to go over and in the next video we're going to be looking at spread so don't forget to subscribe so you can get notifications and I will see you in the next one have a good one