Welcome to the Stock Market Millionaire Podcast, episode number 21. Ladies and gentlemen, my name is Robert Roy. And today, we’re going to talk about what put option trading strategies are best for you to start trading with. I get questions all the time. “Rob, is buying calls and puts a great trading strategy for me to start with?” And the answer is absolutely yes. Today, we’ll talk about puts. We’ve got another episode that we talk about calls in there. Today, is all about puts. But absolutely, trading calls and puts are great strategies for you as a new or an experienced trader to use. There’s not a trading level that doesn’t benefit from utilizing options in their trading platform. But, “Rob, what is a put option?”
Let me explain it to you this way, and I’m going to use the example of a phone. And you may have seen this in my call video as well. If you take a phone, right? There was a girl that I wanted to date when I was in high school, her name was Mary. And my friends kept harassing me, “Call her, call her. Ask her out, ask her out.” Now, by the way, there was no cell phone, there was no text message, there was no email or DM or social media. There was none of that. It was a corded phone that you would pick up and call. And I would pick up the phone to place a call. So to place a call, you pick up your phone. And when I did, the phone was ringing, my hands are sweaty. And all of a sudden she said, “Hello.” And when she found out it was me, she hung up. So when I was done, I put the phone down.
So with a put, you want the stock to go down. With a call, you want the stock to go up. So, and we’re talking buyer now. As a buyer, if I buy a put, I think the stock is going down. “But wait, Rob, if the stock goes down, how do I make money?” The way put options are designed is just this. If you take a stock, let’s say Apple, and it’s trading at $150, right? And Apple drops down to $140. If I had a put option, the value of the stock drops and that’s what I want. But the value of the put increases because the stock dropped. So puts will increase in value when the stock goes down. So you think the market is dropping or your stock is dropping. The way to take advantage of that is to trade puts. Right? Now, trading long and naked puts are two totally different option strategies. Let me explain.
If I am a buyer and I think the stock is down, there are three animals in the market, right? The two primary ones are bulls and bears. The two primary ones are bulls and bears. What does that mean? Well, with a bull, think of how a bull attacks. They take their horns and they lift them up, right? So they’re attacking by lifting up. So a bull goes up. A bullish market or a bullish stock, the stock is going up. With a bear, how does a bear attack? They put their paw up with their claws and they swing down, right? So with the bear, they’re down, bearish. They’re coming down. We think the market’s going down.
When I buy a put option, I think my stock for the markets are going down so I buy a put option on that position. So I am bearish. But if I sell a put. And when I say, if I sell a put, I’m referring to, if I sell first, I’m selling something I don’t own. I know, I know we were taught as kids not to do that, right? You can’t go into Johnny’s garage, take his bicycle out and sell it without him knowing about it, right? That’s illegal. You go to jail for that stuff, or even worse. If it was the neighborhood that I came from you, they wouldn’t find you. Anyway, we won’t to talk about that.
So when you look at selling a put, you’re selling something you don’t own, you’re now taking on an obligation, which means you may have sold the stock or sold the put and the stock had made a movement. You may have to, at some point, come up with some cash or cover that side of the trade. Now, we’re going to go in depth on another training on what naked puts on how I use them. And we’ll talk about my wheel of fortune trade in there. So make sure you look for that series, okay? But we’re talking today primarily about buying puts. Most traders will be authorized, approved by their broker to buy puts. To sell a naked put, not as often are they going to give that access to people.
Smaller account, less experience, the way you answer the questions on your brokerage application. If you check the box that says, “Oh God, I can’t lose a penny.” They’re not going to allow you to do anything that has to do with a naked put or any other higher risk according to a broker trading strategy. They’re not, it’s just a matter of knowing how to manage that position. Right? Now, there are multiple put option trading strategies, such as put credit spreads. So you could have a bearish put credit spread, you could have a bullish put credit spread, right? You’ve got put debit spreads are another one, but the most common and most basic trading strategy is a long put options trading strategies.
And again, we buy the put option when we think the stock is going down. Let me give you a couple of rules of what we’re looking for. If I am a day trader, I’m going to buy the option as short of time as possible. How short? Today, if I can get it. If I can’t get it today, this week, for sure I’d like to sell it. If your option doesn’t have weekly options, whatever the next expiration date is, that’s what I want to see. Okay? So we’ve got timing down, our timeframe down. Now what? Well, the next piece of this puzzle is we’re looking for an item called Delta. Delta is rate of change. Rate of change?
Yes, it tells me for every dollar the stock moves, how much my option will move. Right? We’re looking for a Delta between 65 and 85 as a buyer. And we’re talking about a directional trading strategy that we’re going to be in that trade for a couple of minutes, a couple of hours, a couple of days or weeks at most comparative to being in for three, four, six months a year plus. We’re not talking that longer timeframe. In that traders timeframe, 30 to 60 days, you’re looking at finding a Delta between 65 and 85, but I really want it closest to 65 for me. If I’m going out as much as two months in time, 65 is where I want to be. Right? And if I’m trading for the day, I may make an adjustment and go a little higher, but you’re just paying a lot of money.
And when you look at an options bell curve, the sweet spot on that bell curve is right about that 65 to 85 Delta. But that 65 will just cost me a heck of a lot less for the options. Okay? And then the last thing you need is what’s called open interest. There needs to be at least 100 contracts open on that options price, or on that strike price. So if you’re trying to buy the $50 put on XYZ stock, right? And you look at that put and it says, “Open interest 123,” great. It says, “47,” no. What open interest says is how many people already had, before today, had an interest in this strike, this exact price that I am looking to purchase for myself. Well, a great way to look at it, it’s a popularity test.
How popular is it? And take it a step further, think of it as a party. You probably enjoy going to parties. I love going to parties. Do you think I might have some fun and parties with just who I am and my personality? Yes, without a doubt. Well, how many of you like to go to parties and be the only one there? Well, some maybe. I know some people that might like that, they call it a pity party, right? That’s not what this is all about. Right? I want a lot of people at that party. I want it to be lively, which means I want at least 100 people, 100 contracts of open interest there for me to take advantage of finding an option that fits a criteria that gives me the best possibility to be successful in that trade.
If you take an option with less than a hundred open interest, let’s say there is one contract of open interest. And before you placed the trade, there was none. You are the only one. The market maker gave you that option and he sold it to you, you bought it and he sold it to you. And now you want to get out of that trade. That was trade station telling me we’ve got a trade going off. Okay. I’ll check it in a minute. So you want to get out of that trade. And the market maker says, “It’s time to dance.” And you’re going to do the market maker dance. It’s the OMG shuffle, right? The market maker’s got you by the throat and you have no choice.
If they say, “We’re going to have a very big bid-ask spread” and you try negotiating and they go, “He’s the only guy or gal, why I got to negotiate? It’s not like you can go somewhere else and sell it. I’m it, you got to get it from me. You don’t have a choice.” All right? So be cautious going outside of the rules that I’ve just laid out for you. They will give you the best opportunity to be successful. With that ladies and gentlemen, make it a profitable day. Stay focused on the quest to becoming a great trader. Keep crushing it and remember, you’re just one trade away, take care and I’ll see you at the next podcast.