 Hey everyone in today's video I'm gonna show you why buying short-term out of the money put options is a horrible way To try to make money on a consistent basis in the options market It's got a horrible track record of being profitable And I'm going to show you a few reasons why that is and by the end of the video I'm also gonna show you why or I'm gonna show you a couple ways that you can help that Profitability in the long run So if you've been buying put options in the past and having no luck whatsoever and losing your money buying these things Then you're gonna want to stick around and watch this video. So let's go Okay, everyone i'm lee lull founder of smart options seller dot com a website To help you try to up your options trading game So as I said, we're going to be talking about why buying out of the money put options is has such a horrible track record And and it's by the end of this video. You're gonna understand why that is but let's let's take a step back here and you know talk about what Buying put options is all about and what out of the money specifically means So if you're a bearish on a stock one way that you can capitalize on that is by buying put options And a put option is a contract that will increase in value if the stock falls in value Okay, so as stocks fall put option values go up So one way that you can capitalize is to buy a put option and hope that the stock falls Far enough fast enough to a point where you can actually sell that put option contract for a higher price than what you've purchased Purchased it for okay, so I put up these cheat sheets here To show us, you know, you know what we're going to talk about and and some of the reasons why so buying out of the money Put options. What does out of the money mean? Well, if the stocks at 100 and you buy a 70 dollar put option That means the stock has to fall from 100 to 70 in the time allotted if you hold that option all the way to expiration So the 70s strike is what's called out of the money It means the stock has to move really far in order for the value of that put option contract to go up Where you can sell it for a profit and at the money put option would be a strike price If the stocks at 100 the strike price of that option would be close to 100 as well That's called at the money But we're talking about out of the money put options with very short term expiration dates So if stocks at 100 you're looking to buy the 70 put because you think the stock is going to fall from 100 to 70 In a very short period of time Well, you know A lot of people think that they know where the stock's going to go in a very short period of time And the reason why most people fail is because the stock doesn't make that move in the time allotted And another reason why people will buy the out of the money put options is because they're very cheap on a dollar basis It's like buying a lottery ticket. You know, you're really speculating here You're really taking a shot in the dark saying, you know I think the stock's going to fall really far in a short period of time And in most cases the stock doesn't fall that far and the option Expires worthless meaning the option buyer loses their whole investment And there's As I said, there's a couple reasons why number one when you buy an out of the money put option The stock has to fall pretty far So that means the odds are really low that that outcome is going to occur And there's something called the delta which tells you which also gives you a probability Of you being profitable on that trade and we're going to show I'm going to show you a couple options screens here with the delta Another number two the second reason right right here is because people are playing against the trend if a stock is moving up And you're buying put options There's going to be a really low chance that you're going to make money on that trade Why buy something that is is going against the trend? You want a stock that's moving lower If you're going to buy put options You know physics works in the in the stock market as well. I'll tell you what that means If you if you ever heard the expression an object in motion continues to stay in that motion until something comes along and pushes it in another direction Same thing with the stock market stocks that are in a trend Are going to stay in that trend until something comes along and knocks it in the other direction So the only way for you to make money by buying put options if the stock Falls so if a stock is trending higher And it's going to continue trending higher Why try to buy put options on that stock? It's just going to make the the the trade harder for you to make a profit if the stock keeps going up The value of that put option is going to go down and you're just going to lose money The third reason why most people fail with buying put options because they don't give themselves enough time to be correct Okay, so if the stock's going up and you think the stock's going to drop hard in one week It's probably not going to happen. But if you give yourself Three months, maybe six months, you know, maybe as the stock's going up Something will come along and knock it down in those three to six months. So you have to give yourself more time Most people think that they know where the stock's going in a very short period of time and most of those Um, those contracts fail those put option contracts expire without any value So these three things right here are very important and the reasons why Most people fail when they buy out of the money short term put options and I want to show you an interesting study That the chicago mercantile exchange did the cme between 1997 to 1999 they They did a study on how many put options actually expired worthless Meaning if you bought the put option, you're going to lose your whole investment So between the three years 97 and 99 we concentrate right here the s and p 500 and the nasdaq 100 Those are the two stock markets That that we typically play and that we're talking about here. So if you look in this column right here Number percentage of expired put options. Okay. We're not talking about call option. We're talking about put options And the s and p 500 these out of the money put options expired 93.9 of the time and the nasdaq Put options expired over 95 percent of the time So if you're a put option buyer, you have the odds are really stacked against you. Look at these numbers right here Okay, why would you want to buy? You know an investment that that can expire without any value 95 percent of the time It's just not worth it. So what happened between 1997 and 1999? Well, let's go look at a chart of the S and p 500. This is a chart of the sp y which mimics the the s and p 500 and we'll go back to Let's go back to those years of 1997 to 1999. Let's see if the weekly chart could out No, okay. Let's go back to the monthly chart. So the monthly chart Right here. So we'll zoom in a little bit So 1997 to 1999 is this period right here? Okay, these couple years right here Where did the market go? It went up just straight up between 97 and 99 You had this little blip right here in 1998, but overall the market was going up So if you were trying to buy put options and make money on those put options in those three years Most likely you were going to fail because the market was going up And when the market goes up put option values go down So it wasn't worth trying to make money by buying put options The the probability of you making money is very very low And and look at the timeline of the s and p 500 The market's just been going up up up. No, we over here since 2008. Look at it. Look at the market We had the blip for covet here and we've had this down move right here But in the long run over the long history Buying put options is going to fail because the market consistently goes up over time All right, so let's go back to our cheat sheet here So number one playing against the trend if you're if you're hoping that the stock market's going to go down You're playing against the trend. All right, you really have to make sure that you're buying put options as something's going down Now, what would that mean? Well, let's go back to the charts here. Let's talk. Let's look at let's look at another chart Let's look at something like Pepsi Pepsi, okay? PepsiCo Look at this nice long-term chart of Pepsi. This one's going up up up up up up So if you're thinking that you want to try to make money on Pepsi in the long run By buying put options, you're gonna you're gonna fail because the stock keeps going up Yes, we have these dips and if you don't sell that put option on the dip here and take your profits and run You're just going to eventually hold on to that put option contract. That's going to expire worthless. Okay now on the other hand We look at a stock like disney. Okay. Look at disney just going down down down down down So this is what this is what we're talking about Using the trend the current trend of the stock or the market the you know the s and p 500 Whatever look at the way the stock is moving now. Disney would have been a better choice if you were could If you were to buy put options and and have a chance an opportunity to actually make money Because the stock's going down pepsi is going up So you don't want to choose pepsi now if we look at the nasdaq the same thing the nasdaq Is over time. I'm sorry. Let me just go to the monthly chart here Same thing market just goes up up up up. Why would you want to buy something that's going against the trend? Okay? so that's the you know one of the main reasons And you know, I also want to bring up the probability calculator here to show you Why and where is my probability calculator? Give me a second here Here we are probability calculator now want to show you That you know, um, we're talking about options put options that have a very low chance of being profitable So here's the stock at 100 and if we think that the stocks are going to go down to Let's just say 70 and we put in 70 for our values Our levels and days ahead. Let's just put 100 days ahead and typical stock Volatility is 25% the probability calculator will help you understand What are the chances of a stock moving from point a to point b in time in the time allotted? So the stock's at 100 and you want to know what the chances of it going down to 70 In the next 100 days you can use something called the probability calculator now when click on go You're going to see here The probability of finishing below 70 is 0.32 percent That's like No percent at all on the other side. It's going to finish above 70 99.68 percent of the time Meaning that you have no chance as a put option buyer for the stock to go from 100 Down to 70 in the next 100 days Now who's the the the ones that are winning on these trades? Well, it's it's the put option sellers that are having almost a hundred percent chance of winning on this trade Okay, now for those of you that know us at smart option seller.com We are big proponents of option selling specifically put option selling. All right So before we move on I just want to make sure that everyone gets a copy of our free put selling basics e-book This is an e-book all about what selling put options is why it's a great strategy and why we focus on that Exclusively here at the smart option seller.com. So go to our website smart option seller.com go to the put selling basics link right here And you can scroll down read some of the testimonials and then put your name and email address In this box here and we'll send you an email with a link for the free e-book So we're going back to our cheat sheet here Once again the reasons why the odds are so low Because people are picking the wrong strikes. So if we look at our Let's let's go to our option chain here. Okay, we're going to look at an option chain for the s&p 500 Which is the spy right here finished at 408 76 on friday Or thursday, I should say at a short week now. Here's an option chain puts over here calls on the left now. We're looking at Option 69 days out the june 16th expiration Now a lot of people think that they can guess where the stock's going to go in a very short period of time And they will fail miserably. Okay now people like to spend a little bit of money They don't want to spend a lot of money So what they'll do is they'll they'll concentrate on buying really cheap Out of the money shorter term options as I said, so let's look at, you know, the strike price of $250 the spy is at 408 Someone thinks, okay, I think the spy is going to fall all the way down to 250 in the next 69 days And it would cost them 19 cents per contract right here You can buy at the ask which is actually 19 actual dollars So for one contract you you can pay 19 dollars in the hopes that the spy is going to fall from 408 all the way down to 250 And these things are trading people are buying these things. Okay, they think the spy is going to fall from 408 to 250 now let's go back to the spy chart And see what that looks like so right here 409 And on the on the option chain it says 408 doesn't really matter same thing Now You're thinking it's going to fall down to 250 well Where's 250 I got a I got to even move my chart here 250 is all the way down here in the next 69 days you think the spy is going to fall all the way down here Now the chances of that happening are extremely low if we go back to the option chain One thing you can do is look at the delta if you have delta on your Platform wherever, you know, whoever you use for your broker platform The delta of those 250 put options is less than 1 1% you have less than 1 chance of the spy falling that far We can even go back to the let's go back to the The calculator And figure out see what happens so if the spy is at you can change the numbers here 409 and in the next 69 days And it'll show you that's the expiration date june 16 and the Volatility is around 17 and we want to know if it goes down to 250 we put 250 in both boxes here hit go The the calculator is giving us a zero percent chance of the spy falling that far And and conversely a hundred percent chance that it won't fall that far Here's the option buyers the put option buyers chance of winning Here's the put option sellers chance of winning 100 chance of winning now Obviously, this is not a guarantee because another covet could come along or you know Some disaster could come along and knock the market down But in normal times over the long run normal conditions This is what's going to happen 100 of the time the put option buyer is going to lose the put option seller Like we are are going to win At a very high rate, okay So these are the reasons why i'm showing you that If you're been if you've been losing on a consistent basis by buying shorter term out of the money put options You're going you have the odds stacked against you. You're going to lose more often than not All right, so if we go back to our cheat sheet here Let me move myself over once again Again the reasons why you're choosing the wrong strike You're playing against the trend and you're not giving yourself enough time So how do you remedy that how can you become a better put option buyer if you continue to want to buy put options? Well, number one give yourself some more time Don't think that you know where the stock's going to be in the time allotted give yourself some extra buffer Give yourself an extra two months or three months. Whatever Yes, the option will cost more Okay, the more time that you give the more expensive the option will be But do you want to have a better opportunity to make a profit? Then you have to pay up a little bit more you you get what you pay for okay So if you're going to buy these short term out of the monies that are cheap It's not going to work that well for you. So give yourself some more time will that work It'll give you it'll it'll help you. I'm not saying that that it will be profitable But at least you're giving yourself some more time to be right Also, make sure you know which way the stock is trending or the market is trending Don't buy put options if the stock's going up. You're just going to be fighting against the trend It's like trying to swim upstream. It's too hard to do number one choose a different strike price Choose a more at the money strike price if you want something that's closer to the current price of the stock Yes, it will also cost more But you're giving yourself a better opportunity because once the stock starts to drop This at the money put option strike will move faster than those out of the money put options And the third is what we like to do You can sell put options instead you can become the put option seller and have that higher win rate That's what we do At the smart option seller. We choose quality stocks Hopefully that are you know on the upswing so we get the trend for us And then we sell those out of the money put options and collect the cash. That's how we make our money So those are the reasons why buying out of the money put options Shorter term out of the money put options has such a low probability of winning. So if you go back to that If you go back to the the chart here Just remember up to 95% of the time These out of the money put options will expire worthless As the market's going up in the long run. You don't want to be a part of that Okay, so there you go The reasons why buying out of the money put options is a really hard thing to do and hard to win on a long term Consistent basis. All right. I hope this this video has been helpful for you What i'm going to do is i'm going to put another video up on the screen here More about put options selling so if you want to get more information on why we love selling put options You can watch the next video. Give me a thumbs up. Leave me a comment Don't forget to subscribe to this channel. Hit that red subscribe button in the bottom right hand corner of the video It helps me to get youtube to show these videos to more people. All right, that's all for me And lastly we can go back to our website if you want to learn a little bit more about what we do Our services tab right here. We have two newsletters and our one-on-one coaching sessions to Try to help you become a better trader if you need that help. All right, that's all for me today I hope everyone has a great weekend and a great trading week ahead. Hope to see you back here next Saturday This is lee lull signing off