 There's a reason why Xtrades is currently the fastest growing application on the market for sharing financial ideas. With over $2.5 million paid in the last two years to contributors, users are flocking to see what trades the top traders on the leaderboard are sharing in real time. If you're looking to grow your reputation as a trader on the internet or discuss your trading ideas with other reputable investors, click the link below and get connected with a trading mentor today completely free of charge. Alright, what's up everybody? This is Alex from Xtrades and welcome back to another educational video. We really needed to do this video because a lot of people get into options trading but they don't really know what they're trading, they don't really know the actual reasoning behind why they exist, and they don't know how much leverage is actually in these contracts. So these are some things you should know before trading options. Or maybe you're already experienced, you just want to up your knowledge in options. This video is for you. So what is an option exactly? So each contract is made up of 100 shares of underlying stock. So that's your total leverage per contract. You're getting exposure to 100 shares each contract. And then each options contract is made up of a strike price and expiration date and cost a premium. So this is the options chain. Pretty much your standard options chain on really any platform, thinkorswim, Webull, really anything. It's going to look like this. You're going to have strike prices, calls are usually going to be on your left, are usually going to be on your right. Obviously you can adjust that. You can really adjust any settings in most platforms to whatever you want to see. You can see here it's got the bid, the ask, just your pricing or cost of premium. Your expiration dates are over here. This is when the contract expires. And basically each options chain on any platform kind of looks like this. So when buying an option, you are buying the right to purchase 100 shares of the underlying stock at the specific strike price you chose and buy the expiration date if your contract goes in the money. So that was the original purpose for options was to be able to pretty much get it leveraged to 100 shares and not have to buy it yet until the expiration date assuming you were right on your bet. And if the contract expired in the money, you would then have the right to purchase 100 shares if it expired in the money at whatever strike price you chose. So let's give an example. If you bought a 395 call, let's say on spy, and it ran all the way to 400 by November 18th, that means your contract would be in the money at that point. And then you could then purchase 100 shares at 395 a share as long as it's over 395 by November 18th. So when a contract goes in the money, that means the underlying stock price is above or below the strike price. And that depends if it's for calls or puts. When the underlying stock price is above the strike price, that means it's in the money for calls. When the underlying stock price is below the strike price, that's in the money for puts. And I can give you another example here on optionsstrat.com. So you can see a spy is trading at 454.22. Let's move it back to 453 call. You can see it gets more expensive because you are going deeper in the money. The strike price is at 453, price is at 454. It means it's the dollar in the money. And the further you go back, you go to a 452 call, gets more expensive. And that's just one part of how options are priced. So the further out of the money they go, the cheaper they get. The further in the money you go, the more expensive they get. And honestly, in the money, contracts are the safest way to trade if you're going to trade options. And that's why you're paying more for that quality. And as well, you're paying more for more deltas. And we'll get into deltas later. But the higher the delta, the better. And here's an example on puts. See, as we go further away from where it's trading, they get cheaper. And as we go deeper in the money for puts, they get more expensive. So if your strike price is at 457 and it's trading at 454, that means you're almost $3 in the money on the put already. And that's why the value is higher because you're already in the money. If you go to exactly at the money, which is going to be like 454, you can see this put is really cheap because it's right at the money. If you go almost $1 out of the money, you can see very cheap. And this is why they're cheap because they're trash. And it takes more of a move to get in the money, which is why they cost less. So as you move further out of the money on anything, everything is going to get cheaper as you go further in the money on any contract, call or put, they're going to be more expensive because they're more quality. And there's less risk of it being out of the money if it's already in the money. And when a contract expires out of the money, it expires at zero. So options always have a time limit and they are decaying assets. So they're very risky. As you can see, these expire in one hour. Even though it's relatively close to 454 on this 453 put, you would still need $1.39 to the downside to even get at the money on this, which is why it's so cheap because it's a trash contract. It's risky. It's going to take way more to get paid on this. So these are kind of like a lot of tickets. But if you were to buy a 456 put right now, it's about $1.70 in the money. Pay 164 bucks. You're already in the money. So if you got this put at 164 and it went down to 153.10, you'd make 125 bucks. And I really recommend using this website because options are a little confusing. If you've never traded before and you have no idea how they're priced, how they move, obviously paper trading is a good outlet to go with, as well as use this option strat website so you can see how everything is priced. So now that you've seen kind of what in the money, what out of the money and what at the money kind of mean, hope it makes sense of why out of the monies are cheaper and why in the monies are more expensive. It's all based on risk. And this is just one way of how options are priced. Another thing that people get confused about is the 5.6 number, right? Premium cost showing on the options chain is multiplied by 100 shares. So the spy 395 call for 1118 is showing 5.68, which means you multiply 5.68 times 100 shares. Like I showed you, each contract is made up of 100 shares and your total cost to be 568. Looks like I had a typo here. It says 558, but your cost would be 568. Assuming you bought this at the ask. So even though it says $5 and 68 cents, that's just for one share. Your contract is made up of 100 shares. So you do 5.68 times 100. So you pay $568 total for one contract in this specific example. So another thing we'll get into here is reading open interest and volume. This is another piece of the options chain. So your volume is the total amount of contracts traded. Simple as that. Volume is your total amount of contracts traded on all exchanges. Open interest is the total amount of current open contracts that are not yet settled. So these are open contracts that nobody has closed yet. So in this example, you have 73,000 open 395 calls on spy here. While you have 54,000 contracts traded just on the day for this 395 call. So this is your total amount still open, total traded on the day. Paying attention to these on the options chain can give great insight to activity and how many other traders are opening and closing positions. Higher volume than open interest can also be viewed as unusual option activity, since it implies a sudden interest despite lacking open contracts. And if you want to see a cool unusual options activity website, go to barchart.com and just look up their unusual option activity. I'll show you a lot of different types of contracts on different tickers. Usually they have higher volume than open interest and that's what kind of implies the unusual activity when it has higher volume than open interest. And now we'll get into Greeks and implied volatility. So options are quite complex derivatives and pricing is made up of multiple factors. One of these are called Greeks. So you can see is theta, gamma, delta. So delta is showing how much the options pay per $1 move on the underlying stock. So if you have a 0.52 delta, that means you're making about $52 per $1 move on the underlying stock. So if you bought this 395 call at a 0.52 delta and it went up to 396, you're gonna make about 52 bucks on the contract. Theta, this is everybody's worst nightmare. Options are decaying assets that lose value slowly up into its expiration date. This is showing how much value the option loses per day. So you have a 0.37 theta. You have a $37 loss per day and this just keeps going. And as you get closer to expiration, theta gets a lot worse, which is why the short-term contracts are so risky. It's usually why you just want to day trade them. You don't want to swing these lotto tickets. You don't want to swing something with only eight days expiring. At least don't open anything fresh. That's expiring in eight days and hold it overnight. It's just risky because you have theta working against you. If it doesn't go in your favor, you're gonna get punished. You also have gamma. So that represents the rate in which the delta changes per $1 move on the underlying stock. So if you have a 0.02 gamma, that equals a 0.02 increase in delta per $1 move. So if you have a 0.02 here at the 395, if the stock price goes up $1 to 396, that means your delta is also changing. So that delta would then turn into a 0.54 in $1. Hope that makes sense. And like I said, your delta is showing how much the option is paying per $1 move. So that 52 delta equals a $52 game per $1 move. As the gamma moves, a $1 move would then change it 0.02. So then you'd probably be making about $54 per contract because your delta would change with the gamma. And then you have Vega. I don't really pay attention to this one too much. Mostly just paying attention to deltas and theta. But Vega is measuring the amount of increase or decrease in an options premium based on a 1% change in implied volatility. What is implied volatility? It is defined as the market's forecast of a likely movement in the underlying security. So low implied volatility, it's gonna be anywhere from probably like 20 to 30%. You can see implied vol right here. You got spy in the 24% range, relatively cheap. It's not too expensive. And most ETFs are gonna have lower implied volatility. Individual stocks like Tesla or Roku, stuff like that, they're gonna have higher implied volatility because they move more and they have a higher implied move. High implied volatility is probably gonna be like 70% or above and they're gonna have way more expensive premiums. So implied volatility is just another way options are priced. Options also get priced from the Black-Scholes model, which is just a super complex mathematical equation I have no idea about, but that is another way they get priced. So there's a lot of different factors that price it. I just wanted to show you the options Greeks and also a little bit about implied volatility. Kind of just give you the basics. Low implied volatility is gonna have cheaper premiums, high implied volatility is gonna have more expensive premiums, simple as that. And then like I said, your deltas pay attention to those. The higher the delta, the more in the money you are. The lower the delta, the more out of the money you are. So if you have a higher delta, usually above 0.5, that's gonna be like at the money. Anything higher than 0.5 is gonna be in the money. So you can use delta as another way to how to figure out how deep in the money or deep out of the money an options contract is. Like I said, the higher the delta, the better. So choosing an options contract, this is another thing people struggle with. For day trades, you probably wanna go with three to seven days till expiration at least. And this is only if you're day trading. Like I said earlier, should you pick anything less, you should cut down your position size. Go with at the money contracts at least, which should have a 50 delta minimum. Just like I showed you in the last example. So look for that delta, keep it at 50 or higher if you can. Swing trades, you wanna do 30 days till expiration at least, that's a good minimum threshold to go with. That gives you about a month till expiration unless theta burn or time decay. And I showed you the closer you get to expiration, the worse that the theta can get. You can go slight out of the money on these, but your delta should have a minimum of 0.30 if you're gonna open the position. Like I said, further out of the money, your deltas get lower. So 30 is a good minimum to go by, I would say. At least if you have 30 days of expiration, that gives it more time to work towards your strike price. Cause if you go with that 30 delta, you are buying something out of the money. So it's gonna take a bigger move to get closer to your strike price that you chose. An at the money contract and an in the money contract can also work for this if you need more safety. So if you wanna be safer, if you wanna pay more money for more quality, the at the money or the in the monies also work. I would recommend those. Those are gonna have higher deltas, you're not gonna have to worry about draw down risk as much, obviously there's always draw down risk if you trade in the markets. But to go at the money or in the money, it's not nearly as bad as if you bought an out of the money contract. Now we'll get into some basics for spreads. You really only wanna watch this part if you already know what a call and put is, but you've never traded spreads. So vertical spreads are defined risk to reward strategies. This means when you open them, your profit and loss is already limited and set in stone. This makes them more appealing to people who like safety and less risk. So a lot of platforms these days, they already have kind of like a spread helper. Like if you have Robin Hood, they'll have like a little section in the options chain that has debit spreads or credit spreads for you to kind of pick your strikes for you and help you out. I really recommend utilizing those if you're new, as well as utilize that option strat website. And we'll go over some examples on optionsstrat.com so you can get an idea of how the vertical spreads are priced, how to pick the strike prices, et cetera. So there are four different kinds of vertical spreads. There's two debits and two credits. Which one you choose depends on what direction you're trying to bet on and what kind of conditions you're trading in. So a call debit spread, that's gonna be a bullish position where you buy one call at your preferred strike price and then you sell another call above it simultaneously and you pay a debit for opening those. So I'll show you exactly how they work here. Like I said, when you're opening a call debit spread, it's a bull call spread. As you can see, it's highlighted here and you can literally build these. You can go up to build, you can hit bull put spread, bear call spread, bull call spread, or bear put spread. Right now we're going over the bull call spread and these cost way less money because they have way less risk. They're defined risk to reward strategies. As you can see, your total cost and your max profit is already laid out here. So if we did a December 15th, 454 to 459 bull call spread, you're paying $245 with a max profit of 254. So you're getting about a one-to-one on this and as you move the strike prices, you can see it increases or decreases. Usually for a spy, I would say $5 wide is pretty good. So $5 wide is gonna be, you know, 450 and a 455. And you can see how the more deep in the money it is, it's a little bit more costly and you get a little bit less profit out of it. But like I said, it's defined risk to reward. If you were to do an out of the money bull put spread, say we do a 455 to 460, you're paying about $223 to make about 277. And then your max loss for debits are always just what you pay. Simple as that. Same thing if you were to buy a call or buy a put, your max loss is just whatever you spend. Credit spreads are a little bit different and we'll go over that next. But I just wanted to show you that if you were to bet on spy here and you thought it could get to 460 at least by 1215, you could do this as well. You're not gonna be spending as much but you're also not gonna be making as much. This is why it's more appealing to newer people, even people just like less risk. And it's just a great way to have a long exposure without just having to buy a single call. If you were to just buy a single 455 call here on spy without it being a spread, you're paying $426. But the fact that you added that 460 by buying one and selling one, you're kind of knocking down that cost as well as knocking down your reward. So I hope that makes sense. So you can see that this is the one you buy, you're buying the 455 and then you're selling the 460. You can see the quantity is negative. That means you sold it and you do this at the same time. So you buy one at 427, you sell one at 208. Your total cost is 427 minus 208, that's 219. Then your max profit, 281, max loss, whatever you paid. Hope that makes sense. Definitely go play with this. Do some more research on spreads if you have to. Go to optionalstrat.com, play with it. Maybe even paper trade these if you want. If you can find a platform that does it so you can see how they move, how you get filled, et cetera. It's pretty important. So I hope that made a little bit of sense. Call debit spreads are a bullish position where you're buying one call at your preferred strike price and then selling another strike price just above it simultaneously. And I showed you on spy, you probably want to go about $5 wide. So if you wanted to do a 455 call, you would then sell a 460 call to lessen the cost as well as lessen your reward. That's what makes them a little bit safer. And then your total risk is just whatever you pay for it. So that's paying a debit. Now onto the next, this is a put debit spread. This is a bearish position. Same thing if you were to buy a put, but it's just less risk, defined reward. So they put debit spread, you're buying one put at your preferred strike price and then selling another put with a strike price below it simultaneously. So let's say we wanted to do the same expiration we were just looking at on spy for the bull call spread. This is now a bear put spread. So this is a bearish position. You can see the 455 put and the 450 put together. It's going to give you a total cost of about $200 with a max profit of 300, assuming you can get down to 450. So you can see on the graph here, as it gets further down, as price gets further down away from 454, it is increasing in value. That's why it's a bearish position. Once it gets closer to expiration, that's when it starts getting deeper into profit. As long as it's staying in this range, if it's staying at 451 by expiration, this is going to be worth four. So you'll have about a $200 profit there. If it goes down below 450 by expiration, you can see it changes to five. That'd be a $300 profit, max profit. So it needs to get under that 450 strike by 1215 to have max profit. A lot of people they'll just take profit about 50% on any debit spread, 75%. You don't have to hold to expiration if you don't want to. I just wanted to show you an example of what it would be worth under 450 by expiration. Because you have that 450 strike, it needs to get under that by expiration on 1215 to get that full value at five. And there's your total profit, it'd be at about $301. So I mean, it's under 450 by then. And like I said, use optionstrat.com, play around with it. You can even play around with it before you enter a position. This is gonna kind of help you choose strike prices, see what looks most discounted to you, see what looks best. And then you can see, let's say I moved it down to a 445 to 450, it's further out of the money. So it's gonna cost less because it's gonna take more to get there. But you have a higher max profit and then it's still $5 wide. So you can see it would need to get under 445 by 1215 to get that max value. And another way to figure out your max profit is you take the width of the spread and you subtract the debit, that's your max profit. So you have $5 wide, you just subtract the debit. So it's 500 minus 117.50, it's gonna give you 382.50 max profit. Hope that makes sense. So the width of your strikes minus the debit paid is your max profit potential. That's gonna, your max profit's gonna change as you change your strikes. It's gonna change as you go wide. If you go tighter, you can see if I did a 454 to 450. Max profit's 246, you get that from 400 minus 153.50 to get 246.50 max profit. Hope that makes sense. So that was two debit spreads. Those are two spreads where you're gonna pay a debit and your max loss is also just whatever you pay similar to if you bought a call or if you bought a regular pull it, your max loss is just whatever you pay. That's a debit. Now we're gonna go on to credit spreads. So this is pretty much the opposite of debit spreads but they are similar. They're both vertical spreads. You're just getting a credit upfront instead of paying a debit like these two. So this is a put credit spread. This is a bullish position. This is inverse to the bare put debit spread. On this put credit spread, you're gonna buy one put and sell a strike price above it simultaneously. This will result in receiving a credit straight to your account rather than paying for it upfront. But we'll go over some examples of a bull put spread. On spy, we'll do the same expiration date. Let's say you're a bullish on spy and you thought it could get over 460 by 1215. One way you could do this, you could do a 455 to 460 bull put spread. For this, you would take in $300 of credit. You'd probably need about 500 in margin with a max loss of 200. And another thing with credit spreads is you are capitalizing on theta or time decay. Since you're taking in a credit, you want these to lose value. That's why you are taking a bullish put position because you were hoping the price will get over these puts, these put strike prices and expire worthless. As you can see, they're worth zero. Once you can get to above 460 by 1215, that means you would keep the full $300 credit you took in and you'd also get your collateral back, et cetera. But that's your max profit. So max profit for credit spreads is always whatever you took in for credit. I showed you max profit for debits is the width of the strikes minus the debit paid. And then you can see the max loss for a credit spread for this one specifically. It's just the width of the strikes minus the credit. So you got 500 between the strikes minus 300 that equals your max loss. And I know this is a lot to take in but hopefully it's making sense. You can always go back as well as I'm gonna put this PDF inside the description so you can go back and look this all up. But it's really recommended you go to optionsstrat.com play around with this and move your strike prices around see how things are costing, see what you would need to get in profit by expiration, et cetera. That's how you're gonna learn as well as real time examples. Of course, you wanna take real time trades, start small of course, taking real trades is always gonna give you the best experience and screen time is always gonna give you the most knowledge and also give you the best examples. So hope that makes sense. This is a bull put spread. 460 by expiration to expire worthless which then you would keep the credit you took in. So with debits, you're paying a debit with credit you're taking in a credit. Simple as that. And as well as credit spreads are just great because you can capitalize on theta because options do naturally lose value as time goes on. This is a great way to capitalize on that. And like I said, 80% of options expire worthless. So credit spreads are great and selling options is also great but this is definitely where you wanna start. Start with credit spreads before you get into selling options too heavily. Start with credit spreads. They're great for beginners and they're fairly easy once you kinda get the gist of it. So hope that made sense guys. Put credit spreads is gonna be a bullish position. Like I said, it's inverse to the bearish put debit spread and you are buying one put and selling a strike price above it, another put simultaneously. Then you will get a credit straight to your account for that. The next one is a bearish position it's called a call credit spread. So this is inverse to the bullish call debit spread that we just went over. It's literally the opposite. You're gonna buy one call and sell a strike price below it simultaneously. This will also result in receiving your credit straight to your account. Same thing as the put credit spread. You're getting credits for taking these. So we'll go ahead and open one of these. Let's go to bear call spread under build on optionstrat.com. And let's say we thought spy could get under, let's say it could get under 450 by 1215. You would buy the 455 call 1215 for 457 and then you would sell or go short the 450 call 1215 for 789. So that 457 minus the 789 then gives you your $331.50 credit. And like I said, your max loss for a credit spread is the width minus the credit equals your max loss. So 500 minus 331.50 gives you a 168.50 max loss. So you would need spy under 450 buy 1215 for this to expire worthless and you would keep that credit. It's the same thing as the other credit spread that you were looking at. You wanted to expire worthless or you wanted to lose value. As it loses value, you gain. So you always wanted to expire below your short strike or your furthest strike, which in this case would be your 450 call. If it gets under that buy 1215, you will keep that full credit. Like I said, sorry if this sounds repetitive but repetitiveness is the best thing to get it nailed into your brain. This is all very confusing to me when I first started trading. So I wish I had somebody kind of drill in my brain more. Obviously it took screen time and experience and actually opening these spreads to kind of get it and get how they move and how they work. But once you do, they're really easy. I mean, these are, these are for beginners. So I hope it makes sense to you going forward. So as a bear call spread, if you were bearish on spy and you thought it could get under 450 buy 1215, you would keep that full credit. Like I said, minus 331.50 is your max loss. So your max profits 331.50 just your credit max loss 168. Both of these combined is the width of your strikes. It's another way to look at it. And like I said, credit spreads are going to require collateral and that's gonna depend on what you're opening and your brokerage. So I can't exactly tell you what your collateral will be. So I hope that made sense guys. That was your last vertical spread. So they call credit spread a bearish position. I will put this PDF inside of the description. So you can go back and read this. But your call debit spread is a bullish position. Your put debit spread is a bearish position. Put credit spread is bullish. Call credit spread is bearish and credits and debits are just pretty much opposite to each other. So you can see the call debit spread is bullish but the call credit spread is bearish. Likewise, the put credit spread is bullish but the put debit spread is bearish. But vertical spreads are great. They're just more defined risk to reward and you're pretty much already setting in stone what you're gonna make and what you're gonna lose. And that's why they're more appealing to beginners and people who are trying to take less risk. Some extra notes. Call debit spreads if you're bullish on a stock and think it will stay above or get above a certain price. Bull call spreads might be the strategy for you. You're also paying less than a regular long call option. Put debit spreads. Use these when you're bearish on a stock and think it will stay below or get below a certain price. Put credit spreads. Use these when you're bullish on a stock and think it can stay above or get above a certain price. It's smart to use these when implied volatility is higher since premiums cost more with higher IV you will receive a nice credit. Since you're shorting these and taking in a credit you benefit from theta and time decay and are also aiming for these to lose value. Credit spreads you want to lose value. Debit spreads you want to gain value. A call credit spread. Use when you're bearish on a stock and think it can stay below or get below a certain price. Same as the put credit. You will look to open these when implied volatility or IV percent is higher. So you are compensated a nice credit to your account. So I hope everything made sense guys. Hope you guys enjoyed this video. These are just some things you might want to know before getting into options. And also know that spreads are a really good way for beginners to get exposure to the stock market. Spend less than if you were to buy a regular call or put. We'll also kind of limiting your risk to reward. Spreads are great for that. And like I said, go to optionsstrat.com. It's a great website and go to build all your verticals are going to be right here. Bull call spread, bear put spread, bull put spread, bear call spread. Play around with your strike prices. Go in the money, go out of the money. See what they're worth. See what your max risk and your max profit is. All that good stuff. As you move your strike prices around for whatever you're going to open, could be any position. As you move your strike prices, your expiration dates, really anything, it's going to change the price. It's going to change the risk, et cetera. So it's important you play around with this and to kind of get a feel for it as well as get some real time experience and get some screen time. Maybe paper trade. If you got think or swim, I'm guessing they have paper trading still. You can play around and open these spreads, see how they move, see what they cost, see how easy or not easy it is to get filled. Sometimes spreads are tough to get filled on. But if you trade something like spy or QQQ and ETF, the options generally have tighter spreads. So it makes it easier to get filled and it'll make your life easier. So that's the video guys. Make sure you like, comment and subscribe to your extra YouTube channel. I love you guys. I'm gonna go ahead and get this chopped up, sent out, all that good stuff, got a lot of editing to do. So enjoy the rest of your trading day. I love you guys and I'm out.