Buying Call Options Tutorial and Close For Profit

Summary

This video tutorial guides beginners on purchasing call options via Robinhood, emphasizing strategies like choosing between short-term and leap options. It showcases实操 on Apple's stock, explaining strike prices and the option chain. The presenter advocates for careful selection based on momentum and RSI, and discusses managing risk by cutting losses at 25%. The video also touches on the volatility around earnings events, suggesting it as an opportune time for call option buying, while warning of potential risks.

Takeaways

• 📈 The video provides a tutorial on buying call options, specifically using the Robin Hood app, but the strategy can be applied on other platforms like Charles Schwab, Fidelity, and Interactive Brokers.
• 🍎 The example used in the video is buying call options for Apple Inc. (AAPL), but the principles can be applied to other stocks.
• ⏰ The decision between short-term and long-term expiration dates for the options is discussed, with 'leap options' defined as those over one year.
• 📊 The video explains how the option chain works, allowing for the selection of different strike prices, each giving control of 100 shares.
• 💲 It details the cost of purchasing a call option, in this case, approximately $715 for the right to buy Apple at $235 per share, expiring on October 18th.
• 🔄 The video emphasizes that the goal of buying call options is to sell them at a higher price for profit, rather than exercising the right to buy the shares.
• 📉 The concept of bid and ask prices in options trading is introduced, which reflects the market dynamics of buyers and sellers.
• 📈 The strategy of buying call options when bullish on a stock's upward movement is highlighted, with an explanation of break-even points and profit potential.
• 📊 Technical analysis, such as momentum and RSI, is discussed as a tool for selecting stocks to buy call options on, with Apple's recent performance used as an example.
• 🚫 The video warns of the risks associated with buying call options, including the potential for complete loss if the option expires out of the money.
• ⏰ The impact of time decay (theta) on option value is explained, noting that options lose value as they approach expiration, which can be accelerated if the stock price doesn't move favorably.

Q & A

What is the main topic of the video?

The main topic of the video is teaching beginners how to buy call options in Robinhood, including strategies and considerations.

Why does the presenter choose Apple as an example in the video?

Apple is used as an example because it's a well-known stock, and the presenter wants to demonstrate the process of buying call options using a familiar company.

What are the two types of expiration dates mentioned for call options?

The two types of expiration dates mentioned are short-term, exemplified by October 18th, and long-term, which can extend to dates like 2025 or 2026 for leap options.

What is the significance of the 'strike price' in call options?

The strike price is the price at which the holder of the call option can buy the underlying stock. It's significant because it determines the break-even point for the option.

How does the presenter suggest determining the number of contracts to buy?

The presenter suggests determining the number of contracts based on the bid and ask price, and considering the amount one is willing to invest or risk.

What is the difference between a market order and a limit order when buying options?

A market order executes immediately at the best available price, while a limit order allows the buyer to set a specific price at which they are willing to buy, potentially getting a better deal.

Why does the presenter mention the importance of the 'Delta' in call options?

Delta measures the sensitivity of the option's price to changes in the price of the underlying asset. It's important for understanding how much the option's value will increase with a $1 increase in the stock price.

What is the 'theta' mentioned in the video, and why is it important for call option buyers?

Theta represents the rate of decline in the value of an option due to the passage of time. It's important for call option buyers because it affects the option's value as it gets closer to expiration.

What is the strategy the presenter uses for managing risk when buying call options?

The presenter uses a strategy of limiting call option exposure to 2% per position to manage risk, and suggests cutting losses if the option value drops by about 25%.

Why does the presenter recommend buying call options before earnings events?

Earnings events can cause significant stock price movements, which can lead to higher option premiums. If the earnings are positive and the stock rises, call options can become more valuable.

What is the 'iron condor' strategy mentioned by the presenter, and how does it relate to call options?

An iron condor is an options strategy that involves selling both call and put options at different strike prices, aiming to profit from limited price movement. It's a strategy opposite to buying call options, which is more speculative and involves higher risk.

Outlines

00:00

📈 How to Buy Call Options on Robinhood and Charles Schwab

The video provides a beginner's guide to purchasing call options on trading platforms like Robinhood and Charles Schwab. It starts by explaining how to select a stock, in this case, Apple, and then choose between short-term and long-term expiration dates for the options. The presenter discusses the option chain, which lists various strike prices for call options, each giving the buyer the right to purchase 100 shares of the stock at a set price before expiration. The tutorial continues with a walkthrough of the buying process, including setting limit prices and understanding bid-ask dynamics. It concludes with a brief on strategies for buying call options, such as considering long-term or 'leap' options and the benefits of doing so.

05:00

📊 Understanding the Break-Even Point and Strategy for Call Options

This section delves into the concept of break-even price for call options, using Apple's stock as an example. It explains that the break-even point is calculated by adding the cost of the option to the strike price. The video then explores the impact of time decay, or theta, on options as they approach expiration, which can erode the option's value. The presenter shares a personal strategy of buying call options when bullish on a stock's upward movement and discusses the importance of momentum and technical analysis, such as using Yahoo Finance to assess a stock's momentum and RSI (Relative Strength Index). The advice is to limit exposure to each call option position to 2% of one's portfolio to manage risk effectively.

10:01

💡 Strategies for Buying Call Options During Earnings Events

The final paragraph focuses on a specific strategy for buying call options, particularly around earnings events. It discusses how earnings reports can significantly impact a stock's price, creating opportunities for call option buyers. The presenter uses Nvidia as an example, explaining that although the stock fell after earnings, those who were bullish on the earnings and bought call options ahead of time could have made a profit if the stock had risen. The video also touches on the volatility of options around earnings and the high premiums associated with them, which can be a double-edged sword. It concludes with a cautionary note about the risks involved in buying call options and the importance of being right about the direction of the stock's movement post-earnings.

Keywords

💡Call Options

Call options are a type of financial contract that give the buyer the right, but not the obligation, to buy an underlying asset, such as a stock, at a specified price (the strike price) within a certain period. In the video, the speaker demonstrates how to buy call options on platforms like Robinhood and Charles Schwab, emphasizing their potential for profit when the underlying stock's price rises. The speaker uses Apple as an example, showing how to select a call option with a specific strike price and expiration date.

💡Robinhood

Robinhood is a stock trading platform that allows users to buy and sell stocks, including options. The video uses Robinhood as one of the examples to illustrate the process of buying call options. The speaker navigates through the app to show viewers how to access and purchase call options, highlighting its user-friendly interface for beginners.

💡Strike Price

The strike price is the predetermined price at which the holder of an option can buy the underlying asset. In the context of the video, the strike price is crucial for determining whether buying a call option is profitable. The speaker explains that if the stock price goes above the strike price before the option expires, the call option holder can exercise the option to buy the stock at the lower strike price, potentially making a profit.

💡Expiration Date

The expiration date is the date by which an option must be exercised or it becomes worthless. The video discusses the importance of choosing the right expiration date when buying call options. The speaker contrasts short-term expirations with longer-term 'leap' options, explaining the strategic considerations behind each choice.

💡Option Chain

An option chain is a list of all the available options contracts for a particular security. The video references the option chain when the speaker is selecting a call option for Apple, showing how it displays various strike prices and expiration dates. Understanding the option chain is essential for investors to make informed decisions about which options to buy.

💡Delta

Delta measures how much an option's price is expected to move for every $1 change in the price of the underlying asset. In the video, the speaker uses Delta to explain the potential profit from a call option if the stock price increases. The speaker calculates the potential increase in the option's value by multiplying the Delta by the stock's price movement.

💡Bid and Ask Price

The bid price is the highest price a buyer is willing to pay for an option, while the ask price is the lowest price a seller is willing to accept. The video mentions bid and ask prices when the speaker is ready to purchase call options, highlighting the importance of these prices in executing a trade. Understanding bid and ask prices is crucial for knowing the cost of entering and exiting an options position.

💡Break-even Point

The break-even point is the price at which the option's profit equals the initial cost of the option. In the video, the speaker calculates the break-even point for a call option by adding the option's premium to the strike price. This concept is important for investors to understand when they expect to start making a profit from their options.

💡Theta

Theta measures the rate at which an option's price decreases as the expiration date approaches. The video touches on Theta to explain the time decay of options, which can significantly impact the value of an option as it gets closer to expiration. The speaker uses Theta to caution viewers about the risks of holding options for too long.

💡Earnings Event

An earnings event refers to the scheduled release of a company's financial results. The video discusses how earnings events can create volatility in the stock price and thus affect the value of options. The speaker suggests that earnings events can be a strategic time to buy call options, as positive earnings reports can lead to a significant increase in the stock price, potentially profiting call option holders.

💡Risk Management

Risk management in options trading involves strategies to minimize potential losses. The video emphasizes the importance of risk management when buying call options, as they can lead to significant losses if the stock price does not rise as expected. The speaker shares personal strategies, such as limiting the investment in a single option to 2% of the portfolio, to manage risk effectively.

Highlights

Tutorial on buying call options in Robinhood for beginners

Strategy for buying call options and how to think about it

Example of buying Apple call options with different expiration terms

Benefits of long-term expiration and leap options

Understanding the option chain and choosing the right strike price

Cost of buying a call option and the leverage it provides

The goal of buying call options is to sell them at a higher price

How to enter the amount of contracts and understand bid/ask prices

Using Charles Schwab as an alternative platform for buying call options

Importance of choosing the right expiration date for call options

Explanation of the break-even point when buying call options

How stock price movement affects the value of call options

Calculating the potential increase in option value using Delta

Risks associated with buying call options and managing them

Strategies for buying call options during earnings events

Impact of earnings reports on option prices and volatility

Personal experience and advice from working at Goldman Sachs

Risk management tips for call option buyers

How to take profit from call options at any time

Availability of a comprehensive course on options trading

Transcripts

hey in this video I'm going to quickly

show you how to buy call options in

Robin Hood for beginners I'm going to

show you how to actually do it a

tutorial but also the best strategy and

ways to think about buying a call option

I'm using Robin Hood and I'm going to

show you an example on Charles Schwab as

well but this strategy Works anywhere

that you can buy call options like

Fidelity interactive brokers Etc first

thing that you want to do is pick a

stock so I'm going to be using apple

right now but I'm also going to show you

some different examples so using Apple

the first thing I'm going to do is Click

trade Apple options now you want to

decide if you want to go for a

short-term expiration or a long-term

expiration so here I'm going to use a

shorter term expiration and go for

October 18th now if you scroll down

further you can pick an expiration that

goes out until 2025 and even out until

2026 I'm going to cover the benefits of

going longer term and going for a leap

option so anything that's over one year

is going to be considered a leap option

I'll go over that in just a second using

October 18 you can see how the option

chain here provides us many different

strikes all of these strikes regardless

of which option that you pick gives you

control or leverage of 100 shares buying

a call option gives you 100 shares of

exposure let's go for the 235 call

option right here you can see that I can

purchase this call option it'll cost me

around

$715 now this gives me the right to buy

Apple at

$235 per share and this option expires

October 18th so basically if Apple goes

above 235 I'm going to be controlling

100 shares and I can exercise my right

to buy 100 shares at any time however

you don't actually want to exercise what

you want to do is you want to make a

profit on the option itself the whole

goal of buying call options is you can

buy them cheap and sell them more

expensive you can see right here that if

I click continue I'm going to have like

a confirmation page right here so I can

enter the amount of contracts that I

want let's say five or 10 and right now

you will see that there's a bid and ask

price say that you want to buy 10

contracts of Apple call option typically

there will be a bid and ask well because

the stock market is full of buyers and

sellers a person selling this option

should want

$710 a person buying this option wants

to pay

$6.90 if you want to get executed on

this option you can either put a market

order in your brokerage or if you're

using really any brokerage Robin Hood

then you want to put a limit price you

want to put a limit price that you will

get filled you can also see in my other

portfolio I'm going to show you an

example of Apple in the same way so if I

click apple right now if you're using

another brokerage is going to be

basically the same exact thing so if I

go to trade and then I go to open a

position and then I go to option I can

now enter a symbol so I can enter AAPL

call and then you'll see I have all the

data here very similar to Robin Hood

every brokerage is very very similar so

if I go to action I can buy to open you

always want to buy to open if you want

long exposure into a call option you're

betting on it rising and if you don't

have the position you buy to open now if

you already have the position open then

you can also sell it to close however I

want to buy to open again you can pick

the amount of contracts that you want so

1 2 3 and Etc here you can pick

expiration date so I'm going to go for

the 1018 expiration again now I'm going

to pick the expiration so I'm also going

to pick 235 and now you will see that

the bid and the ask is basically the

same thing as I just showed you on Robin

Hood there would be no way that one

brokerage would have better options than

another brokerage because then there

would be a potential for Arbitrage

Arbitrage basically means that there's

two different prices for the same option

or the same good in general now let's

talk a little bit more about strategy I

like buying call options when I'm

bullish I'm buying call options because

I want exposure to upside you can see

here on the profit loss chart right here

that essentially if you're going to be

buying this call option at 235 then you

start making money at

24210 well why is that well it's because

you're paying $710 in this example and

that is going to be added to the strike

price so 235 is a strike price you're

paying about $7 so your break even is

going to be

$242 and that means that you're not

going to make money unless it goes above

242 but wait you can actually make money

at any time and you can take a profit on

the option before expiration this right

here is actually what happens at

expiration so if the option goes until

the last day of expiration if it's at

24210 you've broken even if it's

anything above you've made a profit but

actually call options are very

interesting because you can make money

in say a day or even an hour or even a

minute that happens when the stock Rises

so as you can see right here the option

isn't moving that much but if Apple

stock moves up by $1 then the call

option right here would actually move up

by about 50 that's because when the

stock moves up by a dollar you can

calculate how much the option will move

up by simply adding the Delta multiplied

by the call options by multiplying the

Delta times how much the stock has gone

up so if it has gone up $1 it's going to

go up by 50 Cents on the option if it

has gone up by $2 it's going to go up by

$1 on the option you can always do that

by multiplying Delta and the move higher

so say that I think apple is going to be

a $240 stock would I buy this call

option well it depends if I think 240

will happen at expiration I would

actually not buy this option because the

break even price is $242 per share that

means that I would actually lose $2 if I

were to buy this call option and it were

to go to $240 per share at expiration

mind you Apple's currently at $232 as

I'm making this video now if it actually

went to $240 and that happened in the

next one or two days then I would

actually make a lot of money it would go

to $240 the current price is $232 that

means I would have a rise of $8 and the

Delta right here would basically mean

that the option would go up in value by

$4 now why the difference why is it that

at expiration things are so different

than just a couple of days well that's

because of theta okay every single day

the option is expiring so in a short

amount of time if the stock goes up the

option will make a lot of money because

Theta hasn't really kicked in but as the

option approaches expiration then Theta

is really kicking in it's going to take

a big chunk out of your option so in

this sense options can be very difficult

and this is hard to calculate but the

whole point of buying a call option that

you make money as the stock Rises and

you hope that the stock Rises very

quickly let me show you a trick using

Yahoo finance I'm going to show you some

technical analysis if you're buying call

options you want to pick a stock that

has really good momentum right now if I

go to Apple and I go to the three-month

chart Apple actually has very amazing

momentum it has gone from $27 per share

all the way to $232 per share in a very

short amount of time in fact if you look

right here this stock was actually $27

in early August and now in basically

late August that's at $232 so that has

been a really big move and in fact

that's part of the reason why I've

actually been able to catch Apple very

early and I currently have a lot of my

portfolio in Apple stock and I'm Up 3

$558,000 now I'm not personally buying

call options because this channel is

mainly about selling options however if

you were to buy some call options in

apple you would be absolutely printing

money the trick is you want to find a

stock that has low RSI so for Apple the

RSI was actually around

35ish back when Apple really dipped here

in early August this was a really bad

day where a lot of people were panicking

this is also a fantastic day for someone

that is willing to take some risk to buy

a call option see call option buying is

pretty risky however at the same time

the rewards that you can reap from

buying a call option are absolutely huge

you can double triple and much more

extra money by buying call options right

here from 207 to 232 this was a really

big move on Apple what I typically like

to look for is not just low RSI I also

like to see really good momentum so I

personally was not able to catch Apple

at this low I'd be lying if I did

however I did buy Apple at 216 and I

actually got a really good pop still on

the upward action because once I saw

that this momentum had a really big

recovery I jumped in on the action

that's a really good thing that you want

to look for in a Stock's chart because

as a stock moves up and you buy a call

option your call option is going to go

up in value the option rules that I go

for when I'm buying call options is I

limit my call option exposure to just 2%

per position so say that you have

$50,000 that means 2% of $50,000 would

be $1,000 you wouldn't want to put more

than $1,000 in a single position because

when you're buying a call option and if

it doesn't go in your favor you can lose

part of the option's income you can lose

part of what you paid for the option or

even the entire amount if the option

expires and it's out of the money so it

becomes really interesting on how to

actually manage a call option when you

buy call options you have to be ready

for significant risk however you don't

have to lose the entire amount if the

option isn't going in your favor and

half of the time has gone by and the

option is not up in value and let's say

that it's down about about 25% here's

what I mean if the option is down 25% of

what you paid so for example if I go

back and go for let's actually go for a

longer term option let's go for January

17 2025 so if I were to buy this option

right here for $14 or

$1,400 this is what I would do let's say

that Apple goes sideways and it's not

going in my favor and this option is now

worth

$11.50 I'm actually taking

$3.50 off of this option premium because

1/ half the option premium is 7even and

half of seven is 3 and A2 so I know that

half of a half is 25% so I just did the

mental math and I know internally that

at around

$11.50 that would be a 25% loss now for

me that would be a really good time to

cut this option position because if

you've lost 25% on the option it could

be a very good time to cut your losses

and manage your risk now for me in my

experience from working at Goldman Sachs

I've seen handson that some of the best

times to buy a call option is when there

is an earnings event or there's an other

event that might impact the stock

significantly so let's take earnings for

example when a company reports earnings

that is a big shock in the market

because there's a lot of investors that

are expecting either a big rise or a big

fall in their earnings and let's say

that the management is very bullish and

they come out with really good numbers

well in that scenario the earnings are

going to be positive and that's going to

be a positive shock to the market which

means that the stock will react

positively in most scenarios that's

exactly what I'm looking for when I'm

buying a call option I'm looking for the

call option to be worth more than what I

purchased it for it's going to be worth

more if the Stock's value Rises so the

best strategy is picking a rising stock

and preferably a stock that goes up a

lot in a short amount of time that can

happen very often during an earnings

event so if you're bullish on an

earnings event and we can take something

like Nvidia for example Nvidia has

recently had earnings many people have

bought call options because they wanted

to bet on the stock Rising inid reported

some good numbers however the stock did

not rise the stock is actually down 4%

now luckily I'm making money on the

stock and I did not buy call options I

actually have an iron Condor here and I

also have some putur spreads I made

$11,000 just today and this is a

position that I've recently opened up in

my Discord community so I made over

$1,000 in a short amount of time here

and you can see here that this is more

of an option selling strategy however

buying call options can work but you

have to be right on Direction so had you

done buy a call option on Nvidia you

would have lost pretty much all of the

money in even a single day because when

a stock has earnings the earnings

actually make the stock more volatile so

option prices actually Implement more

volatility because there's earnings

everyone knows there's earnings the

option premium will be very high so it's

actually a double-edged sword it's very

profitable to buy a call option 3 days

before earnings on a stock especially a

positive blue chip stock that has good

momentum and key fun fundamental

analysis that I look for however if it

reports earnings they don't go well then

you end up losing quite a lot of money

so you want to be very careful with how

you buy call options it's hard to manage

this strategy but you can also reap a

lot of rewards and don't forget that you

can take profit at any time let's say

that you opened up a call option only a

couple days has gone by if the option is

up 10 to 20% honestly in most cases I

will just take profit if you want a full

tutorial on buying options and selling

options creating income I've actually

created a for hour course that you can

check out on the screen right now