 Before you start trading options, there are four things you need to know that are crucial for you to be successful. If you have been subscribed to this channel, you already know that I love options trading. And if you're not subscribed, now is a really good time to do that. Like right now. And you know what? The best thing about the sub button? So what is an option? An option contract is a trading instrument that gives you the right or obligation to buy or sell a security on a specific date at a specific price. What? Okay, let's start from the beginning. The first important thing that you need to know is that you are not buying any shares of a company. You're actually buying a contract that allows you to buy or sell shares in the future. I know that sounds similar to what I said previously, but I really wanna nail this one down that you understand if you trade options, you don't really have shares of a company. You're really just buying the right or the obligation to buy or sell those shares. But let's dive into specifics. What options do I have? See what I did there? There are a lot of different alternatives and combinations of how you can combine buy and selling, call options, put options. But today I'm gonna focus on the four basic ones which are buying or selling a call option and buying or selling a put option. Let's start with call options. Buy a call. If you buy a call, the contract gives you the right to purchase the underlying stock at a certain price at a specific time in the future. This could be one week, two weeks, a month, a year from now. And for this right, you have to pay a fee. Let's look at an example to make things easier. By the way, the next couple of scenarios are all hypothetically and it's not me saying that Apple will increase or decrease in value because of certain things that will happen in the near future. I will just use Apple as an example to make things easier to describe when you would use a call option or a put option. All right, so now that this is out of the way, let's get started. If I believed that Apple will increase in value over the next two weeks because of whatever, because they bring out a new phone, earnings call, whatever I think is gonna happen, I just believe that Apple will increase in value. Then I would buy a call option. Here's what I would do. I'd go to trade options, pick the date which is two weeks out. I'd make sure that I have buy and call selected. And if I believed that Apple's share price will go above $150 by October 1st, I could pick the option with the strike price of $150. Select one contract which always handles 100 shares. And I'd have to pay $133 for this contract. Now that I purchased this contract, let's look at the two outcomes. Outcome number one, Apple's share price goes up to $160 by October 1st. When we look at the chart, this option will be worth $1,000 on expiration date. Subtract your entry cost of $133, which was the fee to get the right to purchase Apple at $150. You're at a gain of $867 if you sold the option, which I recommend. An alternative, you also have the right to purchase 100 shares at the price of $150. So you could also exercise your right and just pay $15,000 and get your 100 shares of Apple. Either way, you will see it's the same math, you will make the same amount of money, but if you buy the shares, you are at the risk that the stock decreases in value and then you lose money again on paper. So this is something you have to decide for yourself, either if you just wanna take the profit from the option contract or you actually wanna purchase the shares of a company because you wanna hold them long-term and you wanted it at a discount. Outcome number two, Apple's share price loses in value and goes down to $140 on October 1st. When you look at the chart, this option lost 100% in value and is worth nothing, which means you lost the $133 you paid for the contract. Let's look at the maximum gain and loss for this option. With a call option like this, your maximum loss is basically just the fee that you paid to obtain the contract, which in our case was $133. Your maximum gain for this contract theoretically is infinite because Apple could go up endlessly and your contract will just increase in value. The chances of that happening are very small, but it's still possible. When would you buy a call option? The only reason why you would wanna buy a call option is if you believed that the share price of this company will increase in value because that's the only way you would make money with this option trade. So if you're bullish on a company, buy a call. Let's sell a call. Now that we understand what buying a call means and how it works, let's look at selling calls. There are different ways on how to sell a call, but I'm gonna cover the covered call. I didn't wanna say that. So we are going to focus on selling a covered call. If you hold 100 shares of a company, you can use those 100 shares to sell a so-called covered call. When you sell a covered call, you are obligated to sell your 100 shares at a specific price, at a specific date. If the share price surpasses your strike price and for that obligation, you get paid a premium. As the word implies, we are selling a call and every time you sell something, you should get paid and that's also in this case. Every time you sell an option, you get paid what's called a premium. I know it was very complicated again with the future price, future date, blah, blah, blah. Let's look at the Apple example one more time. Let's stick to our hypothetical Apple trade. Let's say we hold 100 shares of Apple. Now I can go trade options, select sell call, select the expiration date of October 1st, go to the $150 option, select one contract which handles 100 shares and submit the trade. For this covered call, I'd receive $127 in my account immediately after the option gets filled. Now let's look at the two outcomes. Outcome number one, Apple's share price increases in value and hits $160 on expiration date. I now have to sell my 100 shares at the strike price of 150. I still keep my $127 in premium but that means I missed out on $873. Important differentiation here is you didn't lose money, you just missed out on that money. And outcome number two, Apple's share price does not surpass $150 on expiration date. At this point, I don't have to do anything. I keep my 100 shares of Apple plus I keep my $127 in premium. When we look at the chart, no matter how low Apple's price drops, my maximum gain is always $127. The maximum gain for this contract is the premium that you receive for selling the covered call plus the stock appreciation. What do I mean by stock appreciation? Let's assume you purchased 100 shares of Apple at $120 and now you sell a covered call at $150. So now you have a $3,000 difference between when you bought it and when you sold it. So your maximum gain is the difference from where you bought to where you sold plus the premium. In this case, your maximum gain would be 3,127. The maximum loss on this trade is infinite because Apple could go up endlessly again and you have to sell your shares at $150. So technically it's not a loss but you would miss out on a lot of money because you sold the contract saying you are willing to sell at $150. So even if it goes up to $15,000, you have to sell at $150. When would you use that? I personally sell covered calls on a weekly and monthly basis just to increase my income. Obviously I can only do that with companies where I hold more than 100 shares. More so I focus on selling covered calls on companies that do not pay me dividends. So instead of waiting for stock appreciation, I make money while holding the shares. But that's kind of risky, no? So it could be risky if I go really close to the actual current price but if I wanna hold on to the shares, I go far out of the money. Let's go back to the Apple example. Let's just say we are currently at $140. I would go up to $170 for like two weeks and sell a covered call for two weeks and go up to $170 strike price. In that case the chances of me getting a sign is very low but at the same time my premium will get smaller. So you have to look at it and be like, okay, how much risk do I wanna take and how much premium do I want? The lower the risk, the smaller the premium, the higher the risk, the higher the premium. And when is a good time to sell covered calls? Usually when the market goes sideways or even a little bearish, it's a good time to sell covered calls because you can just make money while the stock is not moving up too fast. All right guys, we know how to buy and sell calls now. We have way there, we have two more. Now let's move on to the puts. Buy, put contracts. A put option gives you the right but not the obligation to sell 100 shares of the underlying stock at a specific time at set price. You would use this contract if you believe that the share price is overvalued and will decrease in value. Let's go back to our Apple example. So we go to Apple, trade options, select buy, put, select October 1st as our expiration day and select the $150 put contract. For this contract, we have to pay $450 to purchase the right to sell 100 shares on October 1st for $150. So what are the outcomes? Outcome number one, Apple increases in value and hits $160. Our contract is now worth zero, which means we lost $450 and the contract expires worthless. At this point, we can't do anything else. Outcome number two, Apple loses in value and drops to $130. Our contract is now worth $2,000, which leaves us with a profit of $1,550. How do I get to that number? $2,000 is our contract worth right now. We paid $450 for it, leaves us with $1,550. Let's look at our maximum gain and maximum loss. Our maximum loss for this trade is capped at $450, which we paid for the contract and our maximum gain is $14,549. If Apple goes bankrupt and drops to zero, I think it's clear now when you wanna buy a put option. It's when you believe that the company will decrease in value. And now we're gonna sell a cash secured put. When you sell a cash secured put, you are obligated to purchase 100 shares at a set price at a specific date if the price of the underlying stock drops below your strike price. Let's hop right into Apple again. If I had $13,000 in my account, I could go to Apple, trade options, select sell put, choose the expiration date of October 1st and scroll to the $130 mark. For this contract, I would get paid $24 in premium, which will get credited to my account the moment the option contract sells. So similar to selling a call, if I sell a cash secured put, I get paid to sell this contract. To put myself into a situation where I'm obligated to purchase 100 shares of Apple if it drops below 130. Let's look at the two outcomes. Number one, Apple's share price increases in value and goes up to $160. So now our contract expires worthless. We still keep the $24 in premium and our collateral of $13,000. When you look at the chart, you can see that our maximum gain is capped at $24, which is the premium that we receive as long as Apple is above $130. Outcome number two, Apple's share price drops to $125 and we get assigned. This means we have to purchase 100 shares at the strike price of $130, which costs us $13,000. If you subtract the premium of $24, we actually paid $12,976 for 100 shares of Apple. If you don't want to purchase 100 shares of Apple at $130, you could technically buy back the contract, which is now worth $500. So you would lose $476 on this trade. Maximum gain, maximum loss, let's go. Our maximum gain for this contract is capped at $24 and our maximum loss is $12,976. The maximum loss is basically the 100 shares that you're willing to purchase at $130 minus the $24 that you received in premium. This happens when Apple drops to zero. But possible, when would you sell a cash secured put? I personally use a cash secured put whenever I want to purchase 100 shares of a company at a discount or if I believe we're trading sideways or we are in an upward trend so I can just receive premiums on my cash that I'm holding within my account. I highly recommend that you only trade these four options on companies that you actually like and understand. Great example is Apple. Even if you get assigned and you have to purchase 100 shares of Apple at the strike price of 130 and it drops to 110, would you sell immediately because you believe the company is done? No. If you use these strategies with companies that you believe will be around for another 10, 15, 20 years, you're golden. Don't try to do any of this on like an AMC GME where you don't know what's gonna happen because this can drop and increase very fast. It's like at this point that's just gambling. So on top of that, if you get assigned and you have to purchase 100 shares of Apple at 130 we just learned that you can sell a covered call and get premium if you say I'm willing to sell my 100 shares at 135. So you can get paid premium until it reaches that point again and on top of that you have a stock appreciation as well. We're done. I know this was a long video. If you need to refine, just like go back, listen to it again, look at it again. Make sure you understand these four basic trades before starting doing something crazy like an iron condor can't even speak anymore. Just focus on these four, master them, understand them, test them like just on paper, don't place trades. Just look at it and be like, okay, I would do this. How much would that pay me? And then let's see what happens next week. And after you feel comfortable, then let's get started. If you want to see my personal option trades I post them on my Patreon every Monday and Saturday. So there's a link in the description below. As always guys, I appreciate your time. Have a great day.