Buying Call Options Tutorial and Close For Profit
Summary
TLDRThis 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
📈 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.
📊 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.
💡 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.
Mindmap
Keywords
💡Call Options
💡Robinhood
💡Strike Price
💡Expiration Date
💡Option Chain
💡Delta
💡Bid and Ask Price
💡Break-even Point
💡Theta
💡Earnings Event
💡Risk Management
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
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