When it comes to option education, I’ve been dealing with options for quite a long time. I typically see beginners make the same mistakes over and over again.
They get attracted to the options by buying single calls or buying single puts.
You buy a call when you think the stock is going to go up. You buy a put when you think the stock is going down.
That’s the typical approach that most people start out with. That’s the typical education. You’ll see a lot of that education out there.
Unfortunately, it’s not the right approach.
Many people teach this because it’s the easiest you can suck in the most amount of people. Most people are just getting started, so it’s easy for them to understand.
They come from a stock mentality where if you buy a stock, when it appreciates, you make money.
You sell a stock, it depreciates, you make money.
If you’re short selling that is. So that’s the typical concept and a lot of options education out there teaches it in this way.
It’s completely incorrect. I used to go that route as well from just me trading in this way, until I knew more and better.
In options, when you break it down, it has a way deeper construct than just that simple concept of buying and selling like you do a stock.
Let’s look at Boeing for example.
Most options education, when you buy a stock, it’s geared around just this simple movement of a stock. A stock goes up, you make money.
So this is that concept right here.
Here’s the stock price (x-axis), profit and loss (y-axis), and the zero line.
So if I buy the stock at this point and Ii just line it up at 270. I would make that amount of profit.
If I reduce the share number, let’s say 100, obviously the curve is less steep. Basically as it goes up I make money. In this case it makes 863 dollars and so on.
If it goes down, I lose money. Basic concept. So options education is taught the same ways most people teach it.
If you want the stock to go up, you go ahead and buy the single call. So here it is, here’s your single call.
So if it goes up, you make money.
If it goes down, you lose money.
But you do have an additional curve here, which is this time decay curve.
So this is kind of your line at expiration. The time is a problem. You’re actually losing 14 a day, as you hold on to that.
If you’re dealing with just the stock, you don’t have that. You don’t have this gamma, theta and vega.
In options, you do.
What people don’t recognize is you’re losing time.
So if this thing does not move every day, so you’d be losing money.
Even if it does not move, I’m down 211 dollars. That sucks. So basically if the stock stands still, you lose.
If it goes down, you lose. If it goes up only a little, you still lose. You have to have it explode quite quickly to offset the time difference or the time problem that you’re going to have.
When we trade options as far as people who are more knowledgeable as you get deeper into the education. You’ll do spreads and I’ll show you that here in a second.
But just to show you the example of the put side. This is the other way that people show how to trade options.
So what people do is they’ll buy a single call or a single put if they think the stock’s going down.
But that’s a losing proposition because as I showed you stock stands still, you lose. Stock goes against you, you lose.
The only way you make money is if it goes up and it has to go up enough to offset the difference.
How do you make money when you’re trading options?
You could do this but with a smaller part of your account. The better approach is doing things like spreads. I have a handful of different spreads where the time decay here
It’s not negative but it’s actually positive. I’ll show you a couple of example.
Here is Apple.
What I’ve done here is I’ve sold a few spreads on this left side.
So what this is, is selling one and buying one. Here I’ve bought six calls. That’s fine, right? That’s the basic concept. But I’ve also sold six calls against it
So I’ve really sold first and bought some protection for the calls. That’s the way you do it because you’re protecting what you’re selling.
That’s the approach.
It’s a whole different mind shift here, okay? The real way money is made in options is through selling.
So what we do here is, we sell first right here. But the problem with selling is, you have unlimited losses to the upside.
So how do you offset that? Well, that’s where you buy the options. Then it creates kind of this vertical spread. Now I’ve done this twice with these other contracts here. You can see this one I’ve made paper money trading. But just to give you an example, this is what I use for mentoring and coaching when I deal with people.
If I stack the puts, it’s no different. Here I’ve got the left side and then combining it, you create kind of this iron condor strategy.
Which basically, you’re making about 26 dollars every single day as that white line gets closer to that green line. I really don’t care if that stock kind of stands still, moves up a bit or moves down a bit. As long as it’s kind of in this range.
Think of it like a goal post, as long as I keep that goal post there or like pong game, as long as I keep it in that range, that’s all that matters to me.
So anyways in this case, with time you’ll see that white line continue to get closer and closer and then eventually expire.
Now do you have to take it to expiration? No.
You can hold it for a day, a minute or 2-5 days. It’s up to you but this is the smarter approach. Because you have time working in your favor.
You could create all kinds of different constructs or spreads.
Here’s Amazon. Also, a little bit more bullish because you could see I’ve lifted one side over here.
Let’s see diamonds over here. This is more of a calendar spread. So you can see this one works a little bit different but still I have time working in my favor.
That’s the key here, right?
DKNG — this one’s a losing position.
I’ll still show you that so you can see this one is a little bit more of a butterfly spread. That white line is going a little lower due to a volatility problem. But you can see the spread is still making me 40 dollars a day in the theta.
Let’s go to Facebook here.
This is similar to iron condor. Spread a little bit more bearish in this case compared to some of the other ones. Nevertheless, it’s a spread.
Here’s gold, let’s see what we got.
I think I’ve got two things — one of them is a diagonal. So you can see it’s a bullish one and then the other one is a butterfly right here . Which is not working out as well.
So if we continue to move in that direction, that should pan out because it’s a little bit more bullish.
Let’s see Microsoft over here.
This is just a standard vertical. I just have a vertical on its own that I just sold, which is the put side.
You can see there’s a lot of things here. It’s all centered around spreads.
Here’s Nvidia on the butterfly.
So a lot of things are centered around spreads. Very few things are about buying singles calls and buying single puts.
Unfortunately, that’s kind of the education that you typically see in most YouTube videos or just basic option education.
It could be for a few reasons you might be wondering why.
- It could be that they don’t know better.
- It is more complicated.
So sometimes if you don’t know the basics, then you can’t move forward.
Typically what you want to do is you want to get to the spread.
Part learn about spreads because that’s where you can have money and time working in your favor.
That will help you definitely.
Use those spreads to your advantage.
So that’s ultimately the the goal and the key.
