How to Make an Options Trade

Transcript

Hey, it’s Andy Snyder here. I’ve gotten some requests for a quick lesson on trading options. A lot of people want to know how to trade options so I put this video together to show you just how easy it is to actually trade an options contract.

Let me start with a basic explanation of what options are. That’s the best place to start. They’re essentially contracts to control 100 shares of a specific stock during a set time frame. That’s important. Overall, a stock option has no intrinsic value of its own, so an options price is contingent on the price of the underlying stock.

The cost of the trade is equal to the number of contracts … this is important. It’s equal to the number of contracts you want to purchase multiplied by the options price. I’ll go through an example, but you got to multiply that by a hundred since each contract controls 100 shares.

So here’s an example to help show you what you would mean or what you would need as far as your costs and entering a single position. So at the end of May I suggested options that investors take a look at Terraform Power, it’s play that did very well. Has a symbol, T-E-R-P. I recommended the November $15 calls and I told subscribers to pay no more than 50 cents per contract.

So to keep things as simple as possible, let’s say you bought one contract right at the 50 cent mark, that investment would cost $50 plus any brokerage fees. So if you bought two contracts, it would be $100. So essentially there you’re taking that 50 cents per contract, multiply it by 100 again, you have to multiply it by a hundred. But before we show exactly how to make that trade, it’s vital you know, there are just two types of options calls and puts very, very simple.

With our service we never do any complicated strategies with options. We simply buy a position to open it and then we sell it to close. We buy a call, open the position, and then when we sell that call, we close it. Same thing with puts. It’s very simple. But the easiest way to think of all this is to simply understand a call option is purchased when you think the price of a stock is going up and a put option is purchased when you think the price of a stock is going down.

All right, so let’s go to the example here. The Terraform contracts I suggested were the November $15 calls. Excuse me. At the time Terraform was trading at $13 and 68 cents per share, but my assumption and the system told us this price was going up and it did and because the option strike price of $15 was a good ways out of the money as we say. Meaning the price at which the option can be exercised or used was higher than the underlying stock was selling for. I knew investors would be able to get into this position at a discount.

Bear with me, it’s a little complicated, but you’ll see making that trade is easy. I do all the hard work for you. I tell you what to buy. You just had to go in and make the trade. Almost all of the positions I recommend in the service have a similar setup to this ones. That’s why we’re going to use it as an example. We buy an option with an expiration date that’s a few months out and we buy contracts that are just slightly out of the money.

All right, so let’s get to what you’re here for. I don’t want this to be an options how to tutorial. I want to show you how to specifically make a trade, so let’s do that. It’s easy. You’ve probably heard that options trading can be tricky. Many people try to make it as tricky as they can to sell you something. But it’s not that hard. Once you know what to look for, it’s pretty simple.

In order to place a trade, you’ll need to have access to some sort of online broker. There’s a bunch of them out there. They all work pretty much the same. In this example, to keep it easy, again, we’ll be using a virtual training platform thanks to Investopedia. While online brokerages very in design, they all generally share the same language and capabilities. So your broker’s website might look a little different from our virtual account here, but it should operate the same way.

To begin this options trade, we’ll start with our empty portfolio. We’ll go over here to the trade tab. Let’s see this here. Click trade option. Get this screen here. Next we’ll enter the symbol for the position we want to play. So that’s T-E-R-P, Terp for Terraform. You can see that pops up. Click that, hit get the options.

All right. From here we’ll go down and remember I recommended the $15 November calls. So we have different prices here, the different strike prices, you can see that we’re in calls, options and over here is the expiration date. So remember I said the November call, so will scrolled down to November and you can see that changed the options pricing, but we still have this $15 strike price.

So we’re going to check that. We’re going to click it and then you can see some key things here. So we see the last price trading right now was $3.10. We can see the bid price, so somebody’s bidding it at $2.65 and the seller is asking $3.20 cents that’s a pretty good spread between the bid and the ask. So we can ask for, hopefully something in between there. But let’s go over here and actually make the trades. So we’re going to click buy to open. We’ll do three contracts with the strike price at $15 because that’s the option we clicked. But we want to have a limit price. So we don’t want to pay the market price, we want to pay a smart price. And so the last trade was at $3.10. Let’s say that my recommendation said put a stop in at $3.20 cents or a limit price of $3.20. Just add that right here and you can see that it’s a contract through November.

So typically options expire, monthly options expire the third Friday of the month, so I think this might be, usually it’s around the 18th or so. That’s a key idea to keep in mind, is exactly when in the month they expire. And then we have the duration so you have good till canceled or a day order. So we’ll do this one good till canceled. The differences is pretty obvious with a day order, it’ll go through the trading day if it’s not exercise or if we don’t purchase the option by the end of the day, the order will get canceled, it will be pushed out of the system.

This one we’re going to do good till canceled and that just means that if we don’t get filled at that $3.20 price or below today, it’ll be open again tomorrow or the next day and on and on.

So we can review. We’re going to buy to open the three contracts it’s a call option with a strike price of $15 and we’re not going to pay any more than $3.20 and it’s good till canceled. So hit preview order here and it looks, everything is pretty good. You can see here a commissions, just a sample commission. So this is going to show us exactly what we’re going to pay for this contract. Again, we’re doing three contracts, 300 bucks times three plus the commission gives us this $972 total. So we’ll hit submit order and the trade will be made, here’s our trade confirmation.

Again, this is just a kind of online virtual systems. We didn’t actually make a trade and that’s how easy it is to buy an option, that’s it. We simply took five clicks there, five or six clicks, we got our confirmation here and that’s it.

So even if you’ve never traded stocks or options before, set up a virtual account like this. Go into Investopedia, set one up and start trying this, make the trades. And then you’ll see once you go into your broker’s actual platform, you’ll have a whole lot more confidence as you do that.

So I hope this made sense. Hope you see how easy it is to make an option straight and most important, I hope you go out and make these trades so you can start adding some serious wealth to your portfolio. So thanks for watching.