A lot of people want to get into options because they don’t have to put up a lot of money to trade or invest in the stock.
That’s one big thing that you could do.
For example, Disney. If I want to get an exposure of about a hundred shares in Disney — I’ve got a delta of about a 101, here which is almost a hundred shares equivalent to the two the stock right here. This costs me one thousand and twenty dollars
How much would I have to put up in order to buy the stock?
Let’s buy a hundred shares. Let’s analyze. There’s a hundred shares, there is my delta also 100 — which basically means, if it goes up a dollar, how much are you gonna make? You make about a hundred dollars.
That’s what the Delta is causing. That’s why I’m saying it’s very close and similar as far as a price equivalent goes.
With three option contracts, I’ve got a Delta of about a hundred. So again, you can see right now profit and loss negative thirty at about a hundred. So I’d be profitable about seventy.
That’s what I’m saying, this one costs you $1020. If I did the stock for a hundred shares, it costs me $11,702.
That’s a big, big difference.
Do I want to pay $11,700 or do I want to pay $1,000? Almost 10 times more.
Most people would want to pay less.
A lot of people get into trading options like this and they start out buying a single thing.
But what they don’t understand, there’s no gimmies in the market. Is there a lot of gimmies in the real world? No.
There is not a lot of freebies in the real world. Same thing here there’s not gonna be a freebie.
What happens here? Is there a trade off?
What does that mean? That means that you’ve got to give something up to get something, you’re paying less.
But why are you paying less?
The problem with this is the Theta and the Time value.
When you’re a buyer of a single call, we’re losing $14 a day.
Think of it like bananas. What happens to them over time? They rot. Think of it like your insurance premium, after 30 days you got to buy more.
The same thing here. We bought an option contract 30 days, 50 days, 80 days. Eventually, after that expires I got to buy another one.
If I want the option for higher prices.
With a stock, you don’t have that time value problem. There is no Theta there, no time value problem. I could hold this for years and I don’t have to deal with that. It’s a straight line.
With an option contract, I’ve got two lines. I’ve got one line today, which is this white line and I’ve got one line at expiration.
As time moves forward, that white line gets closer to the green line.
You’ve paid for that time — the choice of having this to pay less money.
That’s not the smartest approach to do things because you’re buying. You’re taking money out of your wallet to pay for this choice.
I think that just like with anything the minute you buy something there’s always that slippage cost. You got to pay for it.
The minute you buy it, there’s a that time value associated to it.
If you’re buying option contracts, you pay less but you have the time value problem. If you have the stock, you pay more but you don’t have the time value problem.
How do you trade options the smarter way?
I definitely recommend you check out the getting started page — Options Trading 101.
On our website at www.tradersfly.com there’s a lot of things you can find.
Membership. Coaching. Courses.
If you really want to get into detailed options, I would recommend a course because you really just get it in all one setting. It’s just a lot faster.
How does this work?
This isn’t magic. It’s the same way as insurance companies work.
They sell you insurance. They sell you premium. When they sell you this insurance and premium, it basically gives you time.
As an option trader, you’re selling time premium for someone else to have this option contract to have this choice.
You could get out of this any time you want. You can get out of it early, you don’t have to hold it all the way to the end.
The smarter way to trade options is when you’re a seller
Think about it in the real world — do you make money when you’re a buyer or a seller?
When you’re a seller, are you making money when you buy stock? No. Money comes out of your wallet. You have to purchase something then you make money once you’ve sold it.
You can see we’ve got a vertical spread on the left and a vertical on the right — this creates an Iron Condor spread.
What an Iron Condor does is it limits your risk on the downside. You’ve got a spread and you’ve got time premium working in your favor.
A stock stand still, you make money. Stock goes up, you can still make money. Stock goes down, you can make money up until of course your breakeven.
What’s the downside to doing a spread versus a single contract?
You don’t have unlimited amount that you can make here. The most I can make is that 495 dollars — that’s the most that I can make from this because I’ve already sold it.
Can you sell an item on eBay first without having it? Absolutely, as long as you got pictures. You list it. You post it. You’re fine.
But what’s your obligation? Your obligation is you got to deliver that item. You’ve got to ship it. It’s got to be delivered.
In the Option Contract world, you’ve got to fulfill your contract obligation.
If you buy a contract here, you’re fine because you’ve already bought it. You’re a buyer. It’s a lot easier.
But if you’re a seller, as long as that time passes, you’re good. You fulfilled your duties because then you collect that premium, that time value as it just sits there, wiggles around and doesn’t do anything.
If it does go against you, let’s say the stock explodes to the upside, then you’ve got a problem. You want to sell that with protection. That’s why we create things like spreads like this.
That’s the smarter approach.
