Most traders start out buying options because it’s the simplest option strategy to understand. If you think a stock will go up, you’d buy a call. If you think the stock will go down, you’d buy a put.
Well this is NOT a very good trading strategy because you’ll lose money every single day due to time decay. No smart investor is going to buy a depreciating asset and call it an investment.
Watch this video to learn a better way to buy options to make a directional bet on a stock but WITHOUT time decay hurting you. We’re going to show you how to trade the Long Vertical Spread to accomplish this.
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you must specify that the calls were negotiated at 75, otherwise this vid is unnecessarily confusing for a simple concept. In fact you seemed to have bought the long call 5 dollars in the money. But it is my understanding that most pro traders buy calls and puts slightly out of the money for short term trades.
Thanks this really cleared this up for me! Subscribed.
I guess the bearish inverse of these examples would be buying a put at 80 (ITM) and selling a put at something like 65 (OTM) right?
Also, do you let the options expire in this case? Thanks!
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How does the $250 at the start count against the $750, did you own options previously? Presumably the guarantee would still be required by the exchange, would they really let someone make a larger trade for less capital this way?
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On the first call at 70 example, i dont understand why the breakeven is 77.50. Is this just the cost of stock + premium? Did he mention the premium anywhere, sorry a little confused. Thanks in advance. Great video.
Your examples do not take into account volatility movement, where IV is at the time you put on the trade or what scenarios are acceptable for placing a vertical spread. When "buying" a vertical spread (call or put). Theta does play a role in the profit of the spread. If the price moves too rapidly, it will have to travel much more than your examples to realize maximum profit. you should show how to calculate probability of profit as well as how to calculate the spread profit over time. here is a link you can share that shows this. http://www.optionsprofitcalculator.com/ . Also, explain how many times do you buy vertical spreads and realize maximum profit because it is less than 50% of the time. One last thing is you should explain "Liquidity" in the underlying being purchased and the importance of trading liquid products. Don't get me wrong. I like your examples and trading verticals is my bread and butter, but you need to explain the entire trade so people do not go out and use your examples without knowing the whole story because they will lose money. You NEED to do a follow up video and explain this strategy completely.
Really easy to understand vertical spreads laid out like this, thanks! I do have one question, I currently use E-trade Pro and when I place an order for a spread, I'm given 4 "price types" - Market, Even, Net Debit and Net Credit. What are the differences?
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Jesus this video just flipped my world upside down lol been buying single options but after watching this is just doesn't make sense not to buy the vertical. I usually buy LEAPS but when looking at the delta of a LEAPS vertical for like two years the delta is extremely low compared to shorter expirations times. Should I change my strategy to shorter time frames like a couple months to gain profits faster if my direction is right or keep the long term LEAPS for the time benefit, not really sure..
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As someone who has done both, I would definitely recommend using vertical spreads as opposed to simply buying naked (single) options. The limited profitability is much worth the trade off for the amount of risk you incur. Spreads are more affordable, offer more flexible break-even points, and your P/L is much less volatile. If you continue to only buy single options, even if you are right in the long-term, you most likely will be stopped out and/or find it very difficult (and most of the time unwise) to hold a position that could easily lose 50% value overnight. Buy Spreads!
For example if I buy put strike price of 70 in your vedio and it is available at 30 rs means I have to pay 3000 rs and the put option of 65 is 15 rs but current price of Stoke goes to 75 to 70 then the price of 65 increase from 15 to 20 and if I would have bought 65 strike price at the rate of 15 then when current price moves can I sell the 65 strike price to other buyer at 20 rs which I initially bought at 15 making profit of 5 rs ??
I use robinhood to do my trading as a beginner and i don't think they have the option to do vertical trading like you showed here, do have any recommendation on how to do this using platforms like robinhood?
So here is an example if WSM stocks today is at $68.19 and i want to do a vertical trade of $2.00 increase in the time of expiration if I’m right I make money? If it decreases by $2.00 I lost money? So with options I’m biding if the stock will increases or decrease? Sorry if I’m confusing at explaining my thought process trying to learn this.
Good video. I'm curious why almost no videos about long vertical spreads mention that the option can be closed any time before the expiration as well. Let's say, if I don't want to risk waiting till expiration or shoot for the max gain, and I am happy with a 20-30% gain, so I can close the option much earlier? Am I understanding this correctly?
these trade example profits seem rather unrealistic if theta (time) is slowly killing your long leg at the same time it's killing your short leg you sold. Are you going long farther out in time, say (68 days to exp) and shorting sooner (30 days or less to exp)?
It's because that is a call that is written and sold by him to someone else. If the price of the underlying goes above $80 per share he's responsible for buying 100 shares of and selling it to the person who the call was owns the call option. This is not in his favour if he has to buy the stock at say $81 each and then sell it to someone else at $80 dollars each. He wants the price of the underlying stock to remain under $80 to prevent this situation from occurring.
It sounds like you break even but you save $250.00 in the strike price because we are risking only 500. In which scenario do we make money on the short 80 call? On the vertical Put, do you short buy high and sell low on vertical spread?
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Because in that case, you're hit hard by time decay. Not only does the stock has to move, it has to move big for you to even break even... With this strategy, time decay does not hurt you and even if the stock stays flat, you will breakeven.
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If anyone can help me out here, I’m a young investor just stating out and have tasted making some money so I’m looking into deeper strategies for options trading, so great video but my question is that what happens when you sell a call option or when it expires? We make money from that? I thought we’d lose it because the price didn’t go above 80 so it expires worthless and we lose all that money. Any clarification would be great!
I have a put option that expires this Friday. The option is selling at 3 cents, and my account won't let me sell to close in less than 5 cent increments. I am worried about getting assigned. (I don't know what's going to happen.)
But if I do get assigned to buy the underlying shares, my strike price is $2, and the shares are selling at $2.40. Couldn't I turn around and sell the shares and make my money back?
I traded amzn spreads with call options using techniques detailed here. With expiration still almost 5 days away, the break even, profit etc calculated here in this video are no where near the actuality. After I made the debit trade, amzn shot up by 20 points blowing past my short call strike by 4 strikes still my position is just break even! May be $5 spread is not good enough for a 1400 a share stock like amzn.
Great video, thank you for the clear explanation. I have a question however, What if I buy a call option 6 months out, but three months go by and the stock is down. Can I still do this vertical bull strategy although there's 3 months left until expiration?
In this example he bought the $70 strike call and the price of the contract is $7.50. You add the price you paid for the contract to the strike price. $70+$7.50 = $77.50. So the stock needs to go to $77.50 just for you to break even. Anything higher is profit. 1 contract = 100 shares.
I’m a little confused when he says we’re going to buy a call option at 7.5 which costs $750 and then we’re going to sell an OTM put at 2.5 for -$250.
How is this -$250. The video makes it seem like it’s a free 250 dollars. Because wouldn’t the total cost he $1,000 initially?
To Christ, and others: first, there are no puts in this example. You are buying one call and selling one call. Only the strike prices are different. (Yes, it is also possible to do a vertical put spread, which involves buying one put and selling one put, but the example in the video deals with a vertical call spread.)
The price of the underlying will either  go up significantly, [2 ]go down significantly, or stay about the same. With a vertical call spread, you will make money in conditions 1 and 3, and your losses will be limited in condition 2.
Second, you get $250 for the call you sold like this: you sold the call for $2.50 *per share*, multiplied by the number of shares controlled by one contract, which is 100, so 2.50 times 100 equals $250. If the call you sold is not exercised (because it does not hit the strike price), then you would keep the 250 if you hold to expiration. However, you will normally close the spread position before expiration, in which case you will be buying back the call you sold at a lower price and pocketing the difference. The price at which you buy back the unexercised short call depends on what the price of the underlying (stock) does in the meantime. Your broker will caculate all that automatically at the same time as the value of the long call, since you buy and sell them together as a single order (that is, you buy and sell the spread as a unit, not one component at a time). The speaker was trying to keep the details simple so you can grasp the key ideas more easily. I didn't know this would take so much typing!
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