First, I want to show you in terms of stocks. When we look at stocks, here we’ll use DKNG as an example.
If I go and trade this DKNG and I buy some shares. There’s really only one way to make money from buying a stock or just from stocks in general.
So when you look at this risk profile picture.
So here is my price of the stock (x-axis) and then my profit and loss (y-axis). So anything above the zero line is profit anything below it will be lost.
You just kind of line it up. You can move your mouse and you can see.
As it continues to go up, I’ll make money.
As it continues to go down, I’ll lose money.
So this is kind of directional betting. Here is the profit and loss.
So you can either do this which is buying it or selling it.
You could short sell it if you want. The other approach of course is through dividends. That’s kind of a passive way that you can also make money from stocks.
But really you’re just either buying it or selling it. Then that’s it.
W hen it comes to trading options, you can make money in three ways price, time and volatility.
Here’s a trade example for you. In this case, I have a delta, a gamma, a theta and a vega.
Now, gamma is actually related to a price.
So let’s just forget about this one for a minute. Let’s say you make money from price.
Theta is related to time
Vega is related to volatility
Those are the three ways that you can make money from it.
Price
Now when it comes to a stock, let’s just go back and take a look.
You’ll see that there’s only a delta, everything else is zeroed out. So all this is just doesn’t work.
You can only make money from price and that is 500 shares, that is the delta. So in our case, when we’re dealing with options, we can make money in many more ways.
That’s why if if price goes up let’s say, a dollar so, watch what’s going to happen.
You’ll see I’ll be up about that 80.
Now delta keeps changing with time but you can see I’m making money from price. So as I keep moving this
You can see that curve, the white line (today) and the green lines (expiration), continues to go higher and higher This delta’s positive, I continue to make money from just the price movement.
So that’s kind of the first thing you’re making money from price.
How can I tweak this?
Can I make the price more strong and less strong? Sure
Can I put more emphasis on it? Yeah
For example, let’s make a bigger delta right here.
Well all of a sudden, I’m a lot more bullish.
So now, I need that price to continue heading higher. I’m much much more impacted by the price. I’ve got a delta 507 similar to 500 shares of stock.
If it keeps heading higher by about a dollar right here, I’ll make 504 or so. If you go negative a dollar you’ll be down about 500.
Time
Second way to make money is by the theta, which is time.
Most people that trade options do silly little things like buying a call and a put.
You have a negative theta. So let’s say 20 contracts, you’re losing 150 dollars every single day. Let’s just say you’re starting at a negative, every day you’re losing 150.
That white line keeps getting closer and closer towards expiration. So here as you can see, the theta is negative 162.
If I keep moving that date forward, that white line keeps shrinking. So if you’re buying a single put or call, it’s got to move enough to offset that problem.
That’s kind of the problem with buying a single put or call. Here if we’re doing spreads or trading the right way, we have a positive theta.
This is much better.
So with time, watch that white line continues to get closer and closer to the green line, as I move this date forward. You’re making money because the theta continues to grow.
That’s a lot better of a situation.
Volatility
Now volatility is a little more complex subject if you’re a beginner. But ultimately, it’s the value of an option.
It’s kind of the time premium of an option in theory. It’s how much kind of duration you have or selling.
If volatility or if stocks become more calm in this position, you’re looking for it to go down because you’re selling more.
Let’s just pretend volatility goes down five points, that line will pop.
On the other hand, if volatility goes up five that line will drop.
So I don’t want to dwell too much into volatility because it is a little more advanced. A lot of the videos I make on YouTube are more for beginners.
We cover this more in the intermediate courses. We get specific more in calendars, butterflies and iron condors.
But here what I’ll share with you is that when you look at setting up a strategy that’s something like this or a little bit of different or variation
You could set up strategies where you want to profit a little bit from price and then from time.
Time will continue going and if volatility also drops.
Let’s say down five points, you’re going to make money from all three ways.
You could create strategies where all of this is kind of negated. So let’s say for example, things like Amazon.
You can see in this scenario, delta here is almost not worth it.
But it’s neutral.
I’m not worried about price too much.
So I’m kind of right in the middle. I actually just want price to kind of hang around here.
This trade makes money more from time and volatility. It doesn’t make a lot from the delta.
Other trades here that I have, let’s see SPY right here. This one is a uh one that makes money from more of a delta and a vega.
It does have some theta but really the negative delta, I need it to go down.
Then I have let’s say P&G.
This is an old one but there’s a losing position. But just to show you, this one is heavily focused on the delta position.
I make sum on theta which is a 1.28 dollars but it’s not it’s not really anything. I’m really doing this one more on the price factor. So there’s a lot of different trade setups that you could do.
You could do,
- some that are based on more volatility
- some based more on time premiums
- some based more on directional movements, a bit like the delta.
But just to show you that you can make money in all kinds of different ways, rather than just looking at do I buy or sell a stock.
