 Hello everybody. Lee Lowell here from smartoptionseller.com. Today is Saturday, July 10, 2021. Welcome to another edition of our Saturday YouTube option educational videos. Today we are going to talk about how to execute an option trade. One of the simplest and easiest lessons we're going to show you. I get lots of questions from people. They tell me, okay, Lee, I understand I want to get long the market so I buy a call or I want to get short the market, I buy a put, but how do I actually execute the trade? You know, there's different brokers, there's different platforms. I need to understand how to use the, you know, the software. So can you give me a lesson on how to actually just enter an option trade mechanically and physically enter an option trade? So that's what we're going to talk about today. Very simple, a little bit shorter educational video today. So get ready, sit back, relax, let's go right to it. So when you want to execute an option trade, you obviously have to go into your brokers trading platform and set up the trade and execute it. So obviously there's different platforms. There's lots of different brokers and a little later on the video I'll show you on our website. We have a list of brokers that we feel are some of the, you know, the ones that are available for most mainstream investors and we'll show you our list. But when you're going to execute an option trade, you're either going to buy it or you're going to sell that option. Okay. And so there's a few different ways that you can actually engage or initiate the actual trade. So the first thing you need to know is, is this an opening or closing transaction? Now, I guess since most people need to understand how to do it, it's going to be an opening transaction. What do I mean by that? Well, when you first execute your option trade, it's called an opening transaction, you're opening the position. And some brokers want to know if it's an opening or closing position. Now, obviously, if you don't have a position yet, it's going to be an opening position. And here are the four abbreviations for what you can do. A BTO is a buy to open order, and an STO is a sell to open order. So some people will actually buy an option as their opening transaction. Whereas here at the smart option seller, we always sell an option to open the position. So we're always doing an STO, we're selling put options here, that's what we do with the smart option seller. So we do an STO sell to open position. But for those of you that are just, you know, buying an individual call option or buying an individual put option, you're going to initiate a buy to open order. Now, some brokers, and I'm only going to show you, and I'm going to show examples using interactive brokers, interactive brokers, one of the more popular brokers out there. And I'll also show a quick one on Charles Schwab, because some people use Charles Schwab as well. Now, interactive brokers doesn't require you to tell them whether it's a buy to open or a buy to close. They just know that it's a buy order or a sell order. Whereas Charles Schwab makes you put in, is it a buy to open or a buy to close order? Now, most people will put in a buy to open order. Okay. And then when you close that order, you're going to do a sell to close. So this is an STO sell to close. So if you already have a position open and you're ready to get rid of that position, you're going to sell that position to close out the trade. That's what it means sell to close, meaning you're closing out the position. So I'll show you that in a second. And the other thing is now, once you have your buy or sell order set up, what you can do is you have to engage the order, actually get the order ready to go. You can click on the option bitter ask price right here, number two in the screen here. And I'll run through an example and I'll show you what that means. And once you have the order engaged, then you can tweak the parameters, you can tweak the number of contracts that you want to buy or sell, you can tweak the price, you can tweak the time and force, meaning is it a good till canceled order, or is it a day only order? And then if it doesn't get filled for whatever reason, because maybe your price isn't right, then you can adjust the order right on the fly. And I'll show you how to do that. And lastly, to close the position, let's say you bought a call option, the stock moved in your favor, everything's looking good, you want to lock in your profits. That's now you want to close the position and lock in the game. Now you just reverse the tree. So let's take a quick look at interactive brokers, we're going to open up our interactive brokers platform here. And I'll show you how to actually physically go through the process of initiating. Now we're only going to talk about individual trades here, we're not doing spread trades. I have another video I'll put in the links in the description in this YouTube video. You can watch my other video on how to execute credit spreads at interactive brokers. But anyway, so when you open up your interactive brokers platform, it defaults to the TDS you can see down here in my mouse, this is called the classic TWS that stands for trader workstation. I always use the classic because that's the original version that interactive brokers had way back 20 some odd years ago. That's what I use. You can also use the mosaic or the options trading type of setup. This is a little bit more advanced options trading or mosaic, I just stick to the classic, that's just easy for me. So when you have your setup, you can put in a number of different quotes, you can put in a quote for a stock or you can put in a quote for an option itself. So here I have, you can see we have Apple stock here yesterday, Friday, July 9th, Apple went out in the aftermarket around $145 a share. You can see the bid nests. Here's my comms, the bid nests. Those are the only comms that you really need to know when you're ready to do a trade. And here I pulled up, I want to get a quote on an Apple October 2021 $150 call option. And here's where it went out yesterday, $5.70 bid at $5.85 ask. Now when you're going to do a trade using interactive brokers in their classic version here, you have to decide, am I a buyer or a seller? Most people are buyers. If you're going to buy a call option, that means you're bullish. And I never, never, recommend selling naked call options. Extremely risky. You don't want to do that. Okay, it's unlimited risk. So we're going to engage a buy order for this $150 call option. Now, how do we actually do that? You decide, okay, I'm bullish on Apple. I want to buy a call option. What's the method? Well, the first thing you do is you click on the ask price because you're going to buy it. So people are offering it at $5.85 per contract. So we're going to click on the ask price. I'm just clicking it. And it's going to invoke a new trade ticket here. Now this is where you can set up all the parameters. Now that we clicked on the offer, it automatically defaults to a buy ticket. So that means they know we want to buy it. When you click the offer, that means you're looking to buy something. So it defaults to the buy here. And it tells you here's the here's the contract you want to buy the Apple 150 call, it's called the order ticket. So we're going to buy one contract. Now you can change the number of contracts, you can use the up and down arrows, or you can just click on it, and it'll bring up this ladder here. You can put in five, you can change it to four, whatever you want to do with three. And you're going to use a limit price. Okay, you're going to a limit price tells you you're specifying the exact price that you want to buy this option. You don't want to do a market order, because market order will buy whatever the current price is at that time. And sometimes the prices can be very wide, especially on the open at 9 30 am Eastern time. So you don't want to use a market order, you want to use a limit order. And so you have to put in your price. When you click in the price box, it will also bring up a ladder here. And you can choose whatever the price you want now, we had clicked on the $5.85 offer price, you can change it, you can scroll through the ladder, or you can actually type in a price. We're going to put in a price of $5.50 per contract. That's our limit price. Okay. And this should go away. Alright, let's just scroll down here and put in click on 550. Okay, so now the ladder goes away. Keep everything else default. Here's destination is smart. That means it's just routing to the best option exchange that has the best price at that time. There's a number of different option exchanges. I think there's 12 different options exchanges that have most of the prices should be the same, but the order will be routed to the best exchange at that moment in time. Time and force. Is it a day order or good till cancel? You have to decide good till cancel order will will stay in the queue. It'll it'll be there for you until your order is filled no matter how many days it takes. Now, if you just want to have a day order meaning it's only good for today only, you put in day order. And then if it doesn't get filled, if you're not, if you're not, if it's not executed by the end of the day, the order will disappear from your account. It will expire. So if you tomorrow, you come back and you want to do the same trade, you have to do this all over again. If you put in a good till cancel order, it will stay in effect until it's actually filled for you. Okay, so we're just going to keep this as a day order. Now the this down here, it has compact or comprehensive. If you hit comprehensive, it'll bring up another little area where you can put in some other instructions. I don't even use that. I just leave it as the default compact. So now we have our order to buy three contracts at $5.50 a contract. You want to hit the preview button always hit the preview button to see what the order is going to look like before you actually send it. Okay, hit preview, and it'll bring up another box. It tells you what you're actually about ready to do. Okay, you're looking to buy three contracts right here, buy three of this Apple 150 call for October, and it tells you how much it's going to cost you. Now if your limit price is $5.50, that's $550 per contract. So every contract you buy will be $550 cost to you. So three of them will be $1,650. And here's the estimated commission total for the three contracts anywhere from $0.83 to $3.62. It's a wide range because it all depends on what price you put in and where the market is, where the bid ask market is at that time. And here's on this side, it'll tell you if you're filled how your account value is going to change. Now here's where you start with before the trade. And now this is a fake trading account. It's not a real account, fake money. So you're starting with $1,000,000 and $32,000. If you're filled, it's going to subtract $1,654 from your account because when you buy an option you have to pay for it right up front. So your account value will decrease by $1,650. And it shows you see it says post-trade, how much your account value will be worth. Now, the broker is going to take out $1,654 from your account to pay for it. But if this Apple moves up in price and your call option contract goes up in value, you're gaining money as well. You've got a a paper profit built up. So your account value will start to go up over time if that call option value goes up. So you don't really have to worry about this right now. Let's just tell you what's going to happen immediately when you execute the trade. Your available cash balance or your account value will go down by whatever the option costs you. So we're not going to transmit, we're just going to close this. So we're going to dismiss this. Actually, let's put in the order. So let's hit transmit and I'll show you what will happen. So it's telling you're going to transmit the order. Let's hit transmit and what it'll show you is that. Okay, so it's telling me it's going to buy these call options and it won't be executed until this coming money market is closed today, Saturday. So we hit OK. So now what you'll see is you'll see the order here sitting. Sorry about that. We'll see the order sitting here. And tell me I have a buy order of the three contracts of this Apple 150 call option. Obviously it won't try to get executed until Monday. And here's the price that I'm trying to execute it at $5.50 a contract. And you can always do this during the active trading. Hit cancel. You can hit click cancel here or you right click on the line and you can do cancel as well. But it's just easier to click here. So the order gets canceled. So that's how you invoke a buy order for this option contract. Now let's just say we wanted to sell this contract. Let's just say we're currently long. Let's just say it's a few months from now. We bought this call option. Now we want to sell it. We want to sell it for a profit or loss, whatever it is at that time. And so in order to invoke a sell order we're going to click on the bid now because we want to sell it. So we click on the bid price and you can see it defaulted to a sell ticket. Now we want to sell once again if we had bought three contracts before we can move it up to three contracts. And now we're going to sell it at let's say we're going to try to sell it for $6 a contract. So we move the ladder, click on six. It's there. Day order. And now if we hit preview it's going to tell us what's going to happen. If we sell it for $6 a contract that's $1,800 we'll get. And here's what will happen to our account due to some commissions. The change is not a full $1,800 for some reason. Since this is going to be a naked, seeing it as a naked sell order you're going to have a margin requirement. Now if this was a position you already had on and you're just trying to sell it to close the position you wouldn't have any margin requirements. But since Interactive Brokers is seeing this as a potentially naked sell order you're going to have a margin requirement meaning you're going to have to keep over $13,000 of your cash balance held aside while the trade is active. So we're not going to transmit this we're just going to close this and dismiss it. So depending on what you're going to do whether buy or sell you invoke the trade ticket by clicking on either the bid or ask. And just once again if we click on a buy and you're like oh wait I didn't want to buy I want to sell it. So all you have to do is click in the box here and turn it into a sell order. So you can toggle back and forth. You can obviously switch any of the numbers here. You put in any different price that you want and then you click on the preview button and you send it through. So we're going to dismiss this. So let's go back to our document here. So what's going to happen is that you always have to know okay obviously are you buying or selling. And in Interactive Brokers case they don't need to know if it's a buy to open or a buy to close. They just know you're buying or selling. And if you're closing a position you already have Interactive Brokers knows it's a buy to close order. It means you're closing your position. But let me show you quickly Charles Schwab's platform and I'll show you how you can see the buy to close buy to open whatever different instructions. Okay so here I've opened up a Charles Schwab order screen. This is just their basic basic order entry screen. And I pulled up that same Apple call option. We have Apple in here and here's let's see where it says. Yeah the 150 call. So you go through the option symbol you can change the the drop downs here. You can change the strike prices obviously. But here's what I want her to show you. The action is what they call it in Charles Schwab. You got the drop down. You can choose buy to open buy to close sell to open or sell to close. So depending on if you have a position or not. Now this in this case we don't have a position yet. So we're buying this call option to open initiate the position. If we were if we had previously sold this call option let's just say we sold a covered call. We were short or we had sold this call option prior. Now we're going to buy to close this option contract to completely close out the position. Okay so depending on who your broker is you'll have to either choose one of these. If you're using interactive brokers like I just showed you before you can they don't ask you to choose a buy to open or buy to close. It's just either just a buy or sell order. Now within interactive brokers you can also initiate trades from the the option trader window. This is what I use a lot. This is their option trader window. And you can choose as many tabs. You can open up as many tabs as you want and click on many different stocks that you want to see. Now I've defaulted to the Apple. These are the Apple options and this is the October same October expiration. And here's the strike prices down the middle. Here's the 150 calls. Same thing. Let me move myself over here. Here's the 150 calls. Same bid ask price $570, $585. Now if we want to invoke the order let's click on the the ask price again. It'll bring up the the order ticket and let's see it's refreshed. Let's cancel the close this out so we can do the same thing. Okay let's just say we want to buy for $570 and we will hit once we hit transmit it's going to pull up. It's telling me it won't execute till Monday again. It's going to pull up the order and let it sit up here in the in the trading tab. Here's your orders. Okay so this thing is sitting open till next till Monday. All right and it won't it won't execute until at least Monday and it'll only execute if the price comes down to $5.70. So let's just cancel this get rid of it and it will disappear once you cancel it. And the red means that it's being canceled taken away. Let's just make sure it goes away. See they're disappeared so that order is not active anymore. All right so there's your different methods on how to execute just a simple option trade individual call option with an interactive brokers. It's pretty easy just click on the bidder ask to invoke the trade and then then tweak your parameters if necessary. So let's bring up the document one more time. Okay so if your broker requires you to specify here's the the the abbreviations depending on your broker. After you engage by clicking on the bidder ask then you just you can tweak your tweak your parameters and then you know once you're filled and you want to close the position down the road sometime you just reverse it. You just reverse the position now you're going to close it and you know if you use interactive brokers you don't have to specify it's a sell to close order. You're just selling it at Charles Schwab they want you know they want to know if it's a sell to close you know whatever it depends on who your broker is and I'll so let's let me let me quickly go to our our website the smart options seller website and show you some of the brokers that you can choose. We have in our frequently asked questions section so if you go over to the more tab here and click on FAQs for frequently asked questions scroll down to the bottom move myself over here the bottom of our FAQs has a number of brokers that we have in here all the links just click on the links and I'll bring you to their website and you can you can choose which broker you want okay so that's a good way if you don't have a broker yet go through this list these are very popular brand name brokers that are that are out there today all right so that's it for the simple little lesson today on how to execute a single option order at interactive brokers mostly and also at Charles Schwab here at our site smart options seller obviously you know we sell put options that's our that's our bread and butter so if you haven't downloaded our puts our put selling basics guide please do click on it right up here it's free you know all it is is that you have to put in your name and email address and scroll down to the bottom fill out the contents here and we'll send you a free copy also a few things that we have on our website our services tab we have our newsletters that you can read about and our one-on-one coaching that we help new students get a leg up in the options market okay so I think that's it for me today I hope this video has been helpful so you give me a thumbs up if it's been helpful for you don't forget to subscribe to my channel hit that red subscribe button and then like I said in the in the description below the video I will add in a link for the video on how to do option spreads at interactive brokers and I think I'll also put a I'll get a video going up here at the end and you can just click on that as well all right that's it for me today hope everyone has a great weekend and a great week ahead this is Lee Lowell signing off