Are you looking for a side hustle or to create a little extra income on the side? Well, learning about stock options and then using them is a great way to do just that!
If you are already investing in stocks, there is really no reason why you shouldn’t be using them to add some extra income onto what you are already doing.
In this post, we cover PUTS and CALLS 101. It’s basically a very basic explanation of what they are and how they work plus am going to show you some real examples.
By the end of this video you should have a solid understanding of what to do with options. Fair warning, it does take a bit of effort to wrap your head around the concept in the beginning. However, it’s worth it and you can generate a nice side income once you understand them while trading just a few minutes a week.
We talk about action steps you can take today to increase profits and reduce risks in your portfolios by trading options.
Real quick: Please check out and download the FREE options Workshop. It talks about the two main reasons why options can be less risky and more profitable than just buying stocks alone. It also details how to profit in both directions and pick your win percentage which you can’t do just buying stocks alone.
DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
Alright, to make it simple, let’s compare options to something that you already know. Buying and selling stocks.
Here is a price chart of APPL. It’s currently trading at 150. You think it is going to go up so you buy it at 150. Then it goes up to 190. So you sell it at 190. You keep the $40 profit.
Let’s say you are wrong and APPL instead drops to 100. Then your loss would be your purchase price $150 – the current $100 or $50. So you can see that your profit and loss is linked dollar for dollar with the stock price.
If Apple goes up $50 bucks you make $50 and if Apple goes down $50 bucks you lose $50 bucks.
So that is how it works when you buy a stock. Now let’s take a look at how it works when you buy an option. When you buy a stock option, you are buying the right to transact on a stock at a specific price before some pre-determined expiration date.
So what if instead of buying APPL stock for 150, you bought the option to buy APPL stock at $150. So it’s kind of the same thing but slightly different. Now this type of option where you are buying the right to buy a stock is called a CALL option.
So let’s say this CALL option costs you $10 and gives you the right to buy APPLE for $150 at any time prior to the expiration date. Isn’t this the same as actually buying the stock for $150?
So let’s say APPL goes to $190. As the CALL option Buyer that is great news! Because this gives you the right to buy the stock at $150 which is also known as the strike price.
So you exercise your right to BUY APPL at $150 and then turn right around and SELL it for the current price of $190. Again you make $40 just as if you owned the stock at $150. However, keep in mind you paid $10 for the option so your profit is actually $30 since you need to take into account the $10 option cost.
However, you only paid or put up $10 to do this! Think about it. You put up $10 and made $30. That is a 300% return on your money!
So that is how it works if APPL goes up. How about if APPL goes down? Let’s say APPL went down to $100. Well that is not great news for you. You paid $10 to buy the stock at $150. But who wants to buy something at $150 if it is only worth $100? That would be a loss, right?
So instead of exercising the option it just becomes worthless. So in other words it’s a $10 loss for you from the amount that you paid for the option.
However, here is what is interesting. What if you bought the stock outright at $150 and it went down to $100. You would lose $50, right? Well having bought the CALL option you only lost $10 so you reduced your risk!
Even if the APPL or the company you are trading went bankrupt and down to zero you would only lose $10!
So let’s take a look at a graph of buying stock versus a graph of buying a CALL option.
As you can see the graph of buying stock outright is 1:1 a straight line.
As the stock price moves up you make dollar for dollar with the stock price and same if it moves down.
And the graph of buying the CALL option is more like a hockey stick since the downside is limited or capped off at the price you paid for the option. But you still have the same upside benefit!
This is a key difference between trading stocks versus options. However, it’s not always just good times! There is a tradeoff.
Because options are not free and there is an expiration date. This means that you have to be right on the direction and you have to be right quick within a certain time frame. This is more difficult than it may seem.
Most people that buy options pay a lot of money for options that end up expiring worthless. Buying options overall long term is a losing strategy. Statistically it is much better to sell options versus buying them. Especially if your goal is to create consistent cash flow.
So now let’s really break down in detail how a call option works with a real example on the Tastyworks trade platform. I’ll put a link below. It’s the best option trading platform.
Here is a CALL option in APPL.
The Strike Price is 150. The expiration date is March 17th 23 days from now. The cost to buy this option is $395. Yes, they are a little more costly than $10 in reality. 1 option contract = 100 shares of stock so it is the $3.95 x 100 shares or $395.
Now when this trade is placed there needs to be a buyer and a seller on the other end of it. So let’s say Jim is buying this option. And Sally is selling it. So Sally agrees to SELL it for the $395 and Jim is willing to buy it for that price. Once the trade is placed Jim has the option or the right to buy or exercise the stock at the 150 strike price anytime before the March 17th expiration date in 23 days.
The stock is currently trading at 148.48. Now let’s see what happens to both Sally and Jim when the stock moves up.
If the stock moves up to 170 then that is good for Jim since he bought the CALL option. Now Jim has the right to exercise the option and SELL the underlying stock since he bought the option and owns it. At the same time Sally Sold the option so she has the obligation to BUY the underlying stock should Jim choose to exercise.
In this case if Jim exercises, then he will BUY the Stock at 150 and Sell at 170 for a $20 profit. This is really $2000 since 1 contract is equal to 100 shares of stock. However Jim paid $395 for this option or right to buy AAPL at $150. So his profit is $2000 – $395 or $1605.
On another note, since the underlying stock price moved up past the Call Strike it is said to be ITM In-The-Money.
Now Sally lost on this deal because the stock price rose and broke through the 150 strike price. Sally loses $2000 on the move. However she collected $395 upfront so she really lost $1605.
As you can see one side won and one side lost. And Jim paid the $395 in premium for the right or option to buy the underlying. In turn, Sally collected the $395 in option premium since she took on the obligation to SELL the underlying stock at the $150 Strike price.
Let’s now take a look at what happens when the stock price moves down below the Strike Price. Let’s say the stock price drops to $100. So Jim who is the CALL Buyer has the right to BUY the underlying at $150. However, would he really want to buy it at $150 when the stock is actually priced at $100? Of course not. So this option he will just leave alone and let it expire worthless. This option is also known as being OTM Out-Of-The-Money.
Jim is out the $395 that he bought the option for upfront.
Now Sally collected $395 when she sold the option. Since the stock price moved down and it is worthless she doesn’t need to be concerned with Jim exercising it since he would lose money if he did. So the option just expires worthless and Sally keeps her $395 that she collected in premium when she placed the trade.
So when a stock price ends up OTM or below the strike price it is good for the CALL Seller and Bad for the Call Buyer.
Buying a CALL is a Bullish trade meaning that it benefits when the underlying stock price moves up. Selling a CALL option is a Bearish trade that benefits when the stock price moves down.
Make a comment below if this makes sense!
Like I said it takes a little time and thought to wrap your head around when first learning but it starts to make sense pretty quickly and especially after you have done a couple of trades.
Also, if you like having something hands on to study, download the FREE Option Strategies Trading Guide. I’ll put a link below. It breaks down the different option strategies and is something you can keep by your side when learning options and starting to trade.
Okay now let’s talk about PUT Options.
A PUT Option gives the buyer of the option the right to SELL the underlying stock at the strike price on or before the expiration date.
Here is an example of BUYING a 145 PUT Option in AAPL.
Let’s say that Jim again is the Option Buyer and Sally is the option Seller. The cost to Buy the 145 PUT is $295. So Jim pays Sally $295 for the right to SELL the underlying stock at $145 anytime prior to the expiration date of March 17th.
If he does exercise that right to SELL then Sally is obligated to BUY that underlying stock from him at the $145 strike price. For this obligation she collected $295 in option premium that Jim paid for the option.
As you can see from the profit zone shown in Green, Jim will benefit and make more and more money as the stock moves further down in price. His max profit would be capped if the stock went to zero.
On the other hand, let’s take a look at what Sally sees when she sells a $145 PUT Option in AAPL.
As long as the stock price of APPL stays above the $145 strike price, she keeps the $295 that Jim pays her in option premium when she sells the option.
Sally’s max profit is capped at that $295 premium collected up from when the trade is placed.
Buying a PUT is a Bearish trade meaning it benefits from the market going down. Whereas SELLING a PUT is the opposite. It’s a Bullish trade and it benefits from the stock price going up.
This was a lot, but trading options really just boils down to this. There are two types of options. CALLs and PUTs.
And there are only two things you can do with those options. You can buy them or sell them. If you buy an option rather a CALL or a PUT you pay a premium and you are buying a right. On the other hand, when you buy a CALL you are buying the right to buy a stock underlying. If you buy a PUT you are buying the right to sell it. If you sell an option you collect a premium or a credit. The option seller always has the obligation to take the other side of the trade. The seller is selling the obligation.
Now that you understand CALLS and PUTS, the real question is what do you do with them? How do you trade them?
We will cover that more in upcoming videos. You will see that it is much easier to make consistent monthly income by selling options rather than buying them.
Alright guys, I’ve put a link down below for the FREE Options Workshop. Be sure to grab that. It discusses exactly how to profit month after month utilizing option trades like this one.
Please hit the like and subscribe buttons and let me know your thoughts on the video and what you are trading today in the comments below.
Thanks for watching and see you in the next one!