 Hey, what's up everyone Lilo here from smartopsincell.com. How's everyone doing today? We're back for another edition of our free YouTube option strategy videos here today is Saturday February 25th 2023 as you can see on the screen right here the smart option seller guide to buy and call options We're going back to basics here We're going back to the beginning to the very most basic of all options trading strategies, which is buying call options I still get many emails from readers wanting to know Lee. I need to start from the beginning How do I how do I start with options? I need to know what they are Can you tell me about call options what they are how to use them? So today's lesson is really Basically call option buying 101. We're starting from the beginning So if you've never bought call options before or you're interested in learning about call options How to use them why people use them how they're priced Probabilities and all that then we've got a good one for you today. So I'm gonna I'm gonna break it down for you I'm gonna show you what call option buying is all about and how to go about picking picking strike prices Looking at expiration dates. We'll look at an option chain. So we're gonna figure it all out today So let's get this. Let's just jump right in get started So before we we actually get into the technical items about how to you know How to buy call options and and what they are and what they're made of and their pricing I just want to give a few caveats here You know, a lot of people will will approach call option buying as a very speculative type of Trading or investment. Okay. It's they use it as more of a hey, I'm just gonna take a shot I'm just gonna buy some call options. I'm gonna, you know, just see see what could happen You know, that's really just speculated and that's gambling or on the other hand, are you an investor? Do you want to buy call options to invest many you want to be in for the long haul? You want to give the stock an opportunity to make the move that it can make and you're you're gonna be there for You know months, maybe a year longer with these call options or you just there saying, you know I'm just putting some money down like I'm in Vegas and you know, if the stock moves in the right direction That then then I'm happy. Otherwise, I don't really care, you know So a lot of people will come to the table with that type of mentality where they're just gonna gamble on on a play They don't really know much about the stock. They they they heard it from somewhere say, hey, you know They're in a chat room. Hey, this stock's going up. You got to buy some call options So they figure all right. Well, you know, I just I heard it on the internet Maybe I'll just put down some money and and buy some call options Well, you know, if you're gonna do that then then you really have no business and being in the options trading game because in the long run You're gonna lose money if you're trading like that. Okay, so, you know I'm I'm here to try to help you understand, you know What call option buying is all about and how you you can become successful in the long run Now if you want to take a high flyer's speculative trade every once in a while, you know, that's fine That's fun for all of us But if you're here to make money and and you want to have longevity in the game You have to understand how these things work and you really have to know that You know trading on very short-term basis like that It's a crapshoot. Okay, so I just want to you know lay some groundwork here And then the other thing is that you know with all options contracts, they have an expiration date So if the stock doesn't make the move by the by the expiration date, you're gonna lose your money So you have to understand, you know, how much time am I willing to give this stock a Chance to move, you know options Exploration dates you can trade one day options zero day options meaning they expire the same day You can trade weekly options monthly options three month options one year out in time three years out in time So there's a lot of decisions to make when there's when you're trading options I think that's one thing that that turns a lot of people up is there's too many decisions to make So they're just gonna go with buying the cheapest option on the board and by cheapest I mean how much it costs you in dollars actual dollars. They add this thing only cost me 50 bucks I'm gonna give it a shot, you know with those cheaper options Sometimes they're the probability of winning is very very low. Okay, so we're gonna we're gonna look at some of that We're gonna look at some probabilities. Okay, so Get those those, you know caveats out of the way, let's start talking about You know what call options actually are and and how they work So we're gonna look at call options from the from the buyer's perspective from the option buyer the call option buyers perspective Now one thing I want to say is that you never want to sell call options naked just selling a call option It's extremely risky. You have unlimited upside risk involved. You don't want to do that So I never want to tell anyone to sell naked call options now if you're selling covered calls That's different. We talked about covered calls last week That means you already have some shares in your account to offset any any loss you may take on the call options But selling naked call options we don't do so we're gonna talk about call options from the buyers perspective here You're you're going to be the call option buyer So so what do why do people actually want to buy call options in the first place? Well number one Mostly because the the actual dollars that you'll spend Compared to buying the stock is going to be a lot cheaper. It's going to save you a lot of money Which means your your your downside risk is going to be a lot less Now all option contracts are comprised of 100 shares of stocks So we always have to compare the cost of buying an option versus how much it would cost to buy a hundred shares of stock and And stocks are expensive and a lot of people just don't have all that cash to buy a hundred shares of stock So buying call options is a way to reduce your capital outlay You put up a lot less money than it would cost to buying a hundred shares of stock So that's the real appeal to buying options whether you're going to buy a put option or a call option We're talking about call options here But but any option that you buy is going to be a lot less than what it would cost to buy a hundred shares of stock So that's how we always have to compare the you know, the actual dollar costs the return on investment and all that so For most call option buyers the main reason that they'll they'll buy a call option is because it cost a lot less Okay, so we're up here. We're looking at the reasons why people buy call options and and also Very important is that you have to be bullish on The stock that you're taking Otherwise, you're gonna lose money, you know, why buy something if you're not bullish on the stock So if you're gonna be a call option buyer, you have to be bullish on the stock. All right and Call options are investments just like stocks are call option prices will fluctuate. They can go higher and lower It's not like when you buy a call option It stays at that same price the whole time Throughout the expiration cycle that call option value is going to move up and down and that call option values The price or the value is called the premium. So when people say I'm gonna buy a call option Well, they have to pay a price for that call option. That's the premium. So whatever that option costs that's what you pay for it and Where are we right about here a call options value or its premium is this is determined by a number of factors But the three most important are, you know, what the stock price is How many days until the expiration date and the volatility of that stock? So you got three main factors there that help determine an options price and it goes through the black souls formula I talked about that in an earlier video and then once that option value was is calculated Then it just trades on supply and demand, you know, how many Option buyers are there out there? How many options sellers are there out there? So the supply and demand in the market will help move that that option price But but but the option price itself is calculated Mostly by the stock price the days expiration and the volatility. Okay, we're gonna look at some we're gonna look at some option Prices in a minute, but we want to just talk about, you know, what these things are Okay, and all call options are designated designated by their strike price the strike price is the Value or the the the price of the stock that you're willing to potentially buy the shares at So, you know if the stock said a hundred you don't want to buy the stock at a hundred You're gonna buy let's say a hundred and twenty dollar call option that 120 call option That's the strike price 120 is the strike price That means you're setting yourself up to potentially buy the stock at a hundred and twenty dollars a share sometime in the future Now there's two ways to look at it number one You're buying the option to trade the option itself like if you buy the option at one price You're looking to sell that option at a higher price, you know, buy and sell just like stocks You want to buy it at one price sell it another you can do the same thing with options You could buy it at one price and sell it at another price But you a call option also allows you to take hold of the The stock at a certain price if you decide to exercise the option at expiration So if you bought a 120 call option and all of a sudden the stock rises up to two hundred dollars That allows you to buy that that stock for a hundred twenty dollars while it's currently at 200 So you would exercise that call option But but most people I'd say majority people don't aren't really they don't really want to ex exercise the option And pay all that money to buy the stock they just want to buy the option price and Then sell that same option at another price sometime in the future and try to make a profit in between So there's lots of option buying and selling and there's not a lot of exercising of the options Okay, so what we're gonna look at today is more about you know How much money you can make by buying and selling the option itself? We're not gonna talk about exercising the the the option into actual shares of stock. Okay, so Let me move myself over here a little bit so you can see the words a little bit better, okay, so As we said the options are designated by their strike price right here This is a $50 call or the $100 call, you know, those that's the strike price That's the the actual option you're gonna buy and you're gonna pay money for that option Okay, so right here is where we are on our cheat sheet here Call option premiums are quoted in dollars and cents per contract. Okay that contract one contract is the equivalent of 100 shares of stock so whatever you see that option price In the option chain or if someone says hey that option cost me five bucks You have to multiply that option price by 100 100 shares of stock in each option contract. So let's just say right here the $50 call costs $2,050 cents per contract That's an actual cost of $250. Okay, so you're multiplying the 250 $2,050 cents by 100. There's your cost 250 bucks Okay, just so we're all on the same page there and That's basically the the essence of you know what call options are they have a strike price They have their own price, which is called the premium. You have to multiply that price by a hundred to get the actual cost now You may be saying okay Well, what you know, what's the whole point of buying the the option number one I said because it cost a lot less than buying a hundred shares of stock But at the same time you have other decisions you have to make do you want to buy an in the money strike and at the money Strike or an out of the money strike Okay, these are more decisions you have to make and which expiration are you going to choose? Do you want a a one-day option a one-week option a one month option? So we're gonna look at a couple different couple different scenarios here to help you figure out You know, how do I choose? You know, what's the best option strike to choose? Okay, because there's lots of different lots of different choices and lots of different options That's why they're called options. So we're gonna look at an actual trade here We're gonna look at a some options on Apple and and and try to figure out, you know What, you know, which one would be better to buy and we're gonna look at the return on investment and the probabilities of that option Being profitable for you. Okay. I'll help you decide once you if if and when you ever want to buy call options in the future Here's a process that you'll have to go through to figure out, you know, which which option contract which call option should I buy and You know being in the business for 30 years now What I found is that, you know, successful long-term successful options trading comes down to probability right here where my mouse is Since there's always an expiration date and The stock always has to move by a certain to a certain level in order for you to be profitable It all comes down to probability. What is the likelihood of stock X? Reaching stock price X By X date. Okay. So there's a lot of things involved to be a successful long-term option buyer I'm not talking about option sound. We're talking about option buying. So you have to be able to figure out, you know where that stock is going to go by a certain date and Will the stock be able to make that move by that date and that's where the probabilities come in We're gonna look at the probability calculator and figure and see, you know What are the chances of this strike price performing the way we want? Okay The other thing you need to know is before you ever buy a call option is you have to know what the the break-even price will be You have to know where the stock needs to go to for you at least to break even on the trade Okay, that's very important. So You always know the need to know your break-even and you need to know your probabilities of that stock getting to the break-even All right, so we're gonna look at a some, you know fictional examples of Call options we can buy on Apple and figure out, you know What which one would be the best option to buy? Okay, so we're scrolling down here. We're looking we're looking at the the We're gonna use Apple as our our stock today. So Let's go to the chart. We're gonna we're gonna start flipping back and forth here. Okay, we're gonna look at We're gonna open up Apple here. So here's a here's a daily chart of Apple Let's just say you're bullish on Apple. You want to buy some Apple You don't want to buy the stock because with Apple's price at a hundred and forty six dollars a share a hundred shares would cost you Over fourteen thousand dollars Okay, so you figure you know it I want to buy some call options because the call options will cost me a lot less in dollars and But I need to figure out, you know, which call option I should buy now Obviously if you're gonna buy call options on Apple that means you're bullish So you think Apple's gonna go up sometime in the future as we know. Here's a chart of Apple You know back in January of 2022 back here, you know Apple went down started trading sideways so Apple's been not really doing anything but your hope is that Apple is gonna go up in 2023 so you want to get bulls you want to buy some call ups So that's looking at the chart first, you know, whenever you decide to be bullish on the stock It's good to look at the charts to see where the stock's been. We're you know, where it may be headed Okay, so we've decided we're bullish on Apple. We want to buy some call options. So let's go back to our cheat sheet here So we're gonna look at a we're gonna look at three different call option contracts and figure out, you know, what it would cost what are the probabilities and What kind of returns we can make at different prices of Apple at expiration? Okay, so we're gonna use the the assumption Apple closed yesterday Friday February 24 2023 at 146 thousand 40 cents The question is which call options should we buy? Okay, we're gonna use the May expiration. Let's go to our Option chain here. This is at interactive brokers. This is the option chain that I use Here's Apple. I've got my Apple options up here. So we're gonna look at the May options That expire in 83 days and here's this, you know, some of the strike prices here. We're gonna look at Here's the the last Prices yesterday We look at the bid and ask that that'll give us the the most current Accurate prices for Apple. Okay, and these are some of the strike prices And so we're gonna go back to our cheat sheet here So we're gonna look at the $120 in the money call a 145 at the money call and $175 out of the money call option Okay, if we if we go back to the option chain here, there's the 120 call here We got the at the money 145 call and an out of the money 175 call These are the three strike prices. We're gonna look at to help us figure out which one we should buy Okay so And in the money call option just if you're unfamiliar with the terms in the money at the money and out of money in The money means the strike price the strike of the option is situated Below the current price of the stock Apple's at 146 the 120 call strike is below the price of Apple Okay, the 145 at the money call at the money means the strike price is very similar to the current price of the stock And an out of the money call right here the 175 calls situated well above the current price of the stock Okay, those are in the money at the money and out of the money now the out of the money calls are the ones that most people Focus on the most because they're the cheapest in dollar terms So they figured out well I'm just gonna buy a really cheap option and only cost me a few dollars whatever and if if I win I win And like I said, that's not really the right way to go about long-term profitability in the options market So let's go back to our option chain here So number one the 120 call is worth about $29.25 per contract. We're gonna we split the bid ask right here somewhere in the middle So the 120 calls is worth $29 and 25 cents The 145 at the money calls are worth $10 and 20 cents per contract And the 175 calls are worth 85 cents a contract Okay, we got three different options three different prices And then we're going to look at the probabilities and profits and returns on all these three things at different prices of apple at expiration Okay So follow me with the math here and we got some math involved, but these are the things you have to do To you know pick your best option strike Okay, so with apple at $146 and 40 cents the 120 in the money call costs $2,925 Now remember 100 shares of apple is going to cost you $14,640 So you always want to compare the cost of the option to the cost of buying 100 shares of stock 100 shares of apple is $14,460 The 120 in the money call costs $2,925. It's a lot less than the 14,000 Okay, now here's the really important part. What is the break even on that call option? Now in order to figure out what the break even is you have to take the strike price The the strike itself and add the option cost to it So the break even which is you got the 120 so you take 120 and you add $29 and 25 cents to it $29 and 25 cents is the actual cost of that contract before we multiply by 100 Put those two together So apple needs to get up to $149 and 25 cents just to break even Apple only needs to move another $2 and 85 cents In order to break even on the trade So apples at $14640 Do you think it can move up $2 and 85 cents in the next 83 days? That's the thing that you have to ask yourself and we're going to check the probability calculator in a second Now the $145 at the money calls cost $10 and 20 cents per contract So that's $1,000 and 20 cents Okay costs less than this one But it's still less than the four a lot less than the 14,000 it cost to buy the shares of stock So uh the 145 calls has a break even price of $155.20 at apple So apple stock needs to move $8 and 80 cents just to break even By may expiration. So do you think apple can go from $146.40 all the way up to $155.20? In the next 83 days We check the probability calculator. Okay Now i've already have the probabilities listed here and i'm going to show you How to use that in the in the calculator So the probability of apple moving $2 and 85 cents in the next 83 days is 44 Percent you have a 44 chance of that happening with the at the money calls. There's a 32 and a half percent chance of that happening Now we're looking at these 175 calls also, which only costs 85 bucks It's a lot less than a thousand 20 and a lot less than 2,925 dollars Most people will opt for these cheapies because they're cheap And they don't want to spend a lot of money But the break even of apple is $175 and 85 cents. So apple's at $146.40. It's got to travel almost $30 To just break even in the next 83 days. Do you want to Are you willing to Have to wait for the stock to move almost $30 just to break even on a trade? Well, that's the thing that's the that's the the balancing that the trade off you have to make here Yeah, I know it only costs $85 for that option. But now you have to wait for apple to move up $30 At expiration that's if you're going to hold all the way to expiration There's another key point here is that When you buy an option, are you willing to are you going to hold all the way through expiration just to see if You know, you're going to give it as much time as possible You want to give apple as much time as possible to make that move Because what if apple makes that whole $30 move on that very last day of expiration? So that's what people like to do. They like to hold the option all the way to expiration hoping that The stock's going to make that move by them But what if apple jumps $30 on the first day after you bought the option? Are you going to cash out then? Or, you know, what if apple drops back down $30 on day two? So there's always that there's always that that That thing in people's heads thinking how long should I give the trade to work? Should I hold it all the way to the end? Well, what if apple makes the move in the first five days and if I don't take my profit apple turns back down And then I then I give up all my gains. So this is something that you have to worry about or think about when you're trading options So you have to decide, you know, am I going to have a stop loss? Am I going to have a a profit point? If I make 50% on the option, do I do I scale out? Do I sell out? What do I do? So these are things that you have to think about. All right, so let's look at let's look at the Our probabilities here. Let's go to our Our probability calculator Okay, and figure out, you know, how we come up with some of these numbers. All right The probability calculator is a great tool that that helps us understand, you know, what are the chances of stock a moving to point b In x amount of time Now up here I've put in the input numbers. We got apples current price We've got 83 days in the future and the volatility future volatility is 27% Okay, that's where apple's current volatility is. So our first break-even price was let's go back here 149 and a quarter. So we want to see what are the chances of it hitting 149 and a quarter So in the we're going to put the same target in both boxes 149 and a quarter hit go Okay, so finishing above the highest target. That's what we want We want to know apples chances of finishing above 149 and a quarter. That's to at least get us to break even 44% Okay, so that's where I got the 44% here Now remember when you buy a stock, you're never going to have more than a 50 50 chance 50 chance of being right If you buy a stock at 100 the very next tick of that stock could be 101 cent or 99.99 cents you never have more than a 50 chance of winning When you buy stock so when you buy an option you want that probability to be You know Kind of close to the the same stock probability and when you buy an in the money And in the money call option contract your probability is going to be almost The closest to the stock's probability at 50 percent. So we got 44 percent here now our next target was the 145 calls has to get to 155 20 155 20 so we change it's here 155 20 and this is 155 20 we hit go so here's your probability 32 and a half percent of just breaking even And then the 175 calls is 175 85 so we change the price here Do it in both boxes Hit go and there's your 7.7 percent. Okay So once again, it's a balancing act. Do you want a higher probability of winning? But that's going to cost more money for the option contract Do you want to do you want a cheaper option? If you do then your probability of winning is going to be very low. Okay right here So, which do you choose? Well, we're going to look at let's go and now see what happens When apple moves to a certain price. Okay Here's what we're going to do what happens if apple moves to $150 at expiration in may So here's here's what the numbers are going to tell us The stock purchase will make $360 If you bought the bought the stock at 146 40 and now it's at 150 You've made $360 with a return on investment of 2.4 pot 2.45 percent The 120 call is now worth $30 per contract You have to take the the stock price at expiration and you minus out the strike price 150 minus 120 equals 30. That's what the the 120 calls worth at expiration But remember you paid $29 and 25 cents for it to begin with So your profit is 75 bucks Your dollar profit is 75 dollars, which is less than the the stock purchase profit But your return on investment is two and a half percent, which is better than the stock return on investment Okay, so you've got a little doll less dollars in profit, but your return on investment is better The 145 call is now worth $5 at expiration Okay, 150 stock price minus the strike strike price of 145 That option is worth $5 a contract now, but you paid $10 and 20 cents for it So you actually have a loss of $520 and a return on investment of minus 100 percent You're losing your whole investment I'm sorry. This is this is not it's not 100 you you lost about 50 that that is a typo on my mistake there So you've lost about half of your investment. So you lost about 50 of your investment Scratch that out make it about a negative 50 loss still you're losing Okay, even though the stock went up it went up from 146 40 up to 150 stock moved in your direction But you ended up losing on the option purchase You lost $520 and you lost about 50 percent return on investment Now the 175 call Is worthless the stock didn't get up to 175. So you lost your 85 dollars Now this one is a is a total loss of 100 percent. You lost the whole investment Okay, so it all depends on where the stock how far the stock gets to okay, so now let's look at another scenario here When apple's at 175 at expiration The stock purchase makes $2,860 with a return on investment of nine and a half percent 19 and a half percent. I'm sorry Okay, but remember you had a shell out 40 over $14,000 for the stock purchase The 120 in the money call is now worth $55 per contract That's a profit of $2,575. It's a couple hundred dollars less than the stock purchase, but look at the return on investment 88 88 versus 19 and a half percent And the reason why it's so much higher is because you only have to put out you put out a lot less money to buy that call option Okay Now the 145 call is now worth $30 per contract and it only cost it cost you $10 and 20 cents to buy it. So your profit is $1,980 It's less than the stock purchase Less than the 120 calls profit the actual dollar profit, but the return on investment is 194 You take your your profit and you divide it by your initial investment. That's how you figure out return on investment Now the 175 calls They're going to expire worthless as well because apple only got up to 175. It didn't get above to the break even So once again, if you bought that 175 call, you're going to lose a hundred percent of your investment So apple moved, you know the the $29.30 that you were hoping but if you bought those 175 calls You're losing your whole investment. Well, it wasn't even worth you by spending $85 to buy those things So Bottom line here's what's the best option to choose? It's all going to depend on your your stock predicting skills and how much and how far the stock goes It's all a crap. You don't know how far the stock's going to go. You don't know When it's going to get there, you know, what if apple? um Makes the move finally in june After all your may options expired And you'd be kicking yourself say, oh, if I only bought, you know, an extra month of time I would have made the money. So there's still that which strike and which expiration date do I choose? Okay The bottom line is that you know to get the the best Possible chance of making money or being as close to the break even as the stock is buying these in the money calls Okay, they're always going to cost more than the at the money or out of the money calls But your your chance of profiting profiting is higher your probability of profiting is higher Now Most people a lot I should say a lot of people will argue with me saying, you know The at the money calls are probably the best the best ones to buy Yeah, they're going to be cheaper than the in the money calls and your return on investment could be better But that's all dependent on if the stock moves in the right direction So you as an investor has to decide, you know, which strike price is best Which expiration date is best how far how much do I think the stock's going to move? And that's why the probability calculator can help. All right So there's a lot involved with, you know, buying single individual call options There's a lot of decisions that you have to make and that's why probably why a lot of people either they give up Or they get frustrated because they can't figure it out or they they they take their chances on these out of money calls And they lose a couple rounds and they just give up completely So, you know You're going to hear a lot in the news. You're going to hear from these other websites that you know Watch us, you know, we'll make you so much money. All you got to do is buy call options It's harder than that. I've been in this business for 30 years. It's not as easy as as people make it out to see So there's your initial lesson on, you know, how to buy call options what they are how they're priced How they move probabilities and all that. So I hope I hope this is giving you an idea of, you know, the basics of call option buying You know reread through the the the pdf here the Let me close that a little bit Read through the pdf, you know, go through it again understand how these things move move myself over here a little bit See trying to figure out what's the best placement here so you can see everything. Anyway, hope it's been helpful You know, give me a thumbs up in this video It really helps the youtube algorithm, you know, if I get the thumbs up and and and you subscribe here And, you know, you know, leave comments. I want to help as many people as possible. So, you know By by you helping me this thing could could reach a lot of different people. All right, so, um Leave me a comment send me an email. I'll always answer and before we leave. Don't forget to go to our website and we want to Although we're talking about call option buying today This is our free put selling basics ebook if you have not downloaded if you've not signed up for this thing yet Please do go to our website smartopsinseller.com Go to the put selling basics header here Put your name and email address in it. We'll send you an email with a link to download the free copy. All right That's all for me today. Hope it's been helpful And I hope everyone has a great weekend and a great trading week ahead. This is lee lull signing off