25:49
Options Trading Course Day 1: How to Trade Options As A Beginner!
Aristotle Investments & HONEYDRIPNETWORK
Overview
This video introduces the fundamentals of options trading for beginners, presented by a successful trader. It breaks down the process into six key steps, covering what options are, how to enter and exit trades, and how to select strike prices and expiration dates. The course emphasizes practical application using a trading platform, explaining concepts like calls, puts, option chains, and the bid-ask spread. It also touches on different trading strategies like day trading and swing trading, and the importance of risk management and understanding market psychology.
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Chapters
- Options are financial instruments that allow traders to bet on the direction of a stock's price movement (up or down).
- Buying 'calls' is a bet that the stock price will increase.
- Buying 'puts' is a bet that the stock price will decrease.
- Options offer leverage, meaning a small price movement can result in a larger profit or loss compared to trading the stock directly.
- LEAP options are long-term options that expire a year or more in the future.
Understanding the basic definition and purpose of options is crucial before diving into trading strategies and mechanics.
Calls are used when you believe a stock will go up, and puts are used when you believe it will go down.
- The option chain is a tool that displays available option contracts for a specific stock, organized by expiration date and strike price.
- Expiration dates are typically Fridays, but some options (like SPY) offer 'zero days to expiration' (0DTE).
- LEAP options are found at the bottom of the option chain and are typically more expensive due to their longer time horizon.
- The strike price is the price at which the option can be exercised.
- The option chain shows calls on the left and puts on the right.
The option chain is the primary interface for selecting and analyzing potential option trades, so understanding its layout is essential.
When looking at Google (GOOG) with a current price of $284.12, the 285 strike price is considered 'at the money' for calls, while the 282.5 strike price would be 'in the money'.
- The strike price is the predetermined price at which the underlying asset can be bought or sold.
- 'At the money' (ATM) refers to the strike price closest to the current market price of the underlying asset.
- 'In the money' (ITM) options are already profitable based on the current market price (e.g., a call strike below the current price).
- 'Out of the money' (OTM) options are not yet profitable (e.g., a call strike above the current price).
- Traders often prefer to buy ATM or OTM options for day trading, while ITM options can be more expensive but offer a higher probability of profit.
Choosing the correct strike price relative to the current market price significantly impacts the option's cost and potential for profit or loss.
For a stock trading at $284.12, a 285 strike call is 'at the money', a 282.5 strike call is 'in the money', and a 290 strike call is 'out of the money'.
- The 'bid' is the highest price a buyer is willing to pay, and the 'ask' is the lowest price a seller is willing to accept.
- To buy an option, you must pay the 'ask' price; to sell an option, you receive the 'bid' price.
- The 'spread' is the difference between the bid and the ask, representing a transaction cost.
- A tighter spread (smaller difference) is generally more favorable for traders.
- You can place a 'limit' order to buy or sell at a specific price, or a 'market' order for immediate execution at the current best available price (usually the ask for buyers).
Understanding the bid-ask spread and how to place orders is critical for executing trades efficiently and minimizing costs.
If the bid for an option is $3.55 and the ask is $3.70, you must pay $3.70 (the ask) to buy it, and you would receive $3.55 (the bid) if you sold it. The spread is $0.15.
- Expiration dates determine the timeframe for the option's validity.
- Day trading involves entering and exiting options trades within the same day.
- Swing trading involves holding options for longer periods, from a few days to a few months.
- For day trading, shorter-term expirations (e.g., weekly or 0DTE) are often used to capture quick price movements.
- For swing trading, longer-term expirations (e.g., 1-3 months out) are chosen to allow more time for the trade to develop.
Selecting the appropriate expiration date aligns with your trading strategy and the expected timeframe for a price move.
If you expect a stock to move within minutes, you might choose a 0DTE contract; if you expect a move over a few weeks, you might choose a contract expiring in one or two months.
- When selling (closing) an option position, you sell at the 'bid' price.
- Traders can 'trim' positions by selling a portion of their contracts while holding the rest ('runners').
- Risk management involves determining how much capital you are willing to lose on a trade.
- A common risk management strategy is to set a stop-loss, such as accepting a 50% loss on the premium paid.
- It's important to cancel orders if the market is closed or if the trade is no longer desired.
Understanding how to exit trades and manage risk is as important as knowing how to enter them to protect capital and ensure profitability.
If you buy an option for $1000 and set a 50% stop-loss, you would aim to sell it if the price drops to $500 to limit your loss.
Key takeaways
- Options trading involves betting on the direction of a stock's price movement using calls (betting up) or puts (betting down).
- The option chain is your map to available contracts, showing strike prices and expiration dates.
- Understanding 'at the money,' 'in the money,' and 'out of the money' helps in selecting strike prices that align with your trading strategy.
- Always buy at the ask and sell at the bid, and be mindful of the bid-ask spread as a cost of trading.
- Choose expiration dates that match your trading timeframe, whether it's day trading (short-term) or swing trading (longer-term).
- Effective risk management, including setting stop-losses and understanding your maximum acceptable loss, is crucial for survival in options trading.
- Selling an option position means closing it by selling at the bid price.
Key terms
OptionsCallsPutsLeverageLEAP OptionsOption ChainStrike PriceExpiration DateAt the Money (ATM)In the Money (ITM)Out of the Money (OTM)BidAskSpreadDay TradingSwing Trading0DTE (Zero Days to Expiration)
Test your understanding
- What is the fundamental difference between buying a call option and buying a put option?
- How does the concept of 'at the money' differ from 'in the money' when selecting a strike price for a call option?
- Why is it important to buy at the ask price and sell at the bid price in options trading?
- What factors should a trader consider when choosing an expiration date for an option trade?
- How can understanding the bid-ask spread contribute to better risk management in options trading?