Welcome to The Stock Market Millionaire Podcast, episode number 20, Options Trading for Beginners: Why The Best Option Trading Strategies Start With Buying Calls. Ladies and gentlemen, my name is Robert Roy. Welcome to the podcast today. Let’s go ahead and jump right in. First off, what the heck is an option? You know, some of you may have been trading in the market for a while and you’re doing it with stocks and you’ve heard of options. And people have told you things like, “Ooh, taboo, no, no, stay away! I don’t want it! Stay away! Drive a stake through his heart!”… Options are not something to be afraid of. It’s no different than anything else you do in life. Driving a car can be dangerous if you don’t know what you’re doing, right. You’ve got to learn the rules. Options are no different.
An option is a derivative of the actual stock. An option on Apple is a derivative of Apple, of the stock itself. Okay? So an option controls the stock. It’s all about control, not ownership. I want you to think of something… Wealthy people. They don’t own anything. They control everything. Bill Gates. What does Bill Gates own? It’s not Microsoft. He owns shares in Microsoft. He controls the company. He doesn’t own it. Yeah, his word, his word counts. He controls all of it. My corporations, I own nothing but the shares in the company, but I control everything. That’s what an option is. It’s all about control, right.
Now, If you look at, let’s say, as an example, a phone. You want to make a call. To place a call, you pick your phone up. So when you want to make a call, you pick up your phone. So when you buy a call, you want the stock to go up, right? Hence the example, call up.
If you are done with your phone and with your conversation, now you put your phone down. If you buy a put, you want the stock to go down, right? We’re going to talk more on the call option side today. I’ve got another podcast that you can go to and listen on the put options it’s actually scheduled, uh, not long out in the future after this one, you’ll see that one coming out, right?
So when we look at call options, a call gives you the right, but not the obligation as a buyer… So let me back up. As a buyer of a call, you have the right, not the obligation to buy a stock at a set price on or before a set or also called a specific date. So if I buy the $150 call on Apple, let’s say the option on Apple. That gives me the right, but not the obligation to buy Apple stock at $150 per share on or before a set dat, 10 days, 30 days, two years from now, whatever date I choose that’s available. And for that, right, I had to pay for it. So maybe I paid $7 per share. Now, inside of that option, it controls 100 shares of stock. So if you bought an option and it’s quoted at $7, is the asking price, say it’s 6.90 by 7.00. 6.90 is the bid, 7.00 is the ask. Well, I’m going to pay for the $7 for it. And just like a stock. You know, I just, I sat yesterday with the pastor of our church and we were looking at a trade that he wanted me to help him to place. And he was trying to understand bid-ask, and I said, it’s very simple. Look at the two numbers. If the number is six 90 by seven, bid by ask, and you’re going to buy the stock, which one do you want? Think about it.
You want the 6.90. But when you’re going to sell the stock, it’s 6.90 by 7.00. Which one do you want? Well, I want the seven, right? So here’s how it really works. Look at the number and whichever one you want, you can’t have! Period.
It’s always the one and you don’t want when it comes to the option. So if I’m going to buy that call option at $7 per share, that’s multiplied by 100 shares. So I am spending $700 on that options contract, all option contracts control 100 shares of stock. Okay? So as far as what a call is, I buy a call option because I think the stock is going up. So I buy the call option for $7. The stock goes up, it goes up, it goes up. I sell it for $8, $9, $10. I never want to buy the stock. The stock may go up to 200. I don’t want to buy it at 150. I wanted the value of my option to appreciate, and then I saw the option.
We don’t buy options to exercise them. Exercise means we were exercising a contract just like in real estate, you have a contract, right? I want to buy that house. I have the right to buy it. We’re in-contract. Here’s my money, give me your house. I don’t want to do that here. I want to turn around and just sell the option. Don’t worry about who buys it; the market maker takes care of that. There’s always somebody on the other side to take your transaction. That’s never going to be an issue, right?
So is options trading for beginners safe and the answer is, is it safe? Yes. Can the trader or the driver of the car do something wrong to mess things up? Yes, yes. Do accidents happen? Yes they do. But if I buy a call option on a hundred-dollar stock and I pay $5 for it, times a hundred shares, that’s $500. What’s the most I could lose in that trade? $500. If I bought the stock for $100. And let’s say that stock went down to $50 and I had a hundred shares of
stock, that’s $10,000 I spent on that stock, and now it’s down at $5,000. You see, I could lose a lot more in the stock than I can in the option.
So our options trading strategies say for beginners? Absolutely. But do you need to learn some rules behind it? Yes, you do.
So as an example, when you look at buying a call option or a put, but we’ll use this for calls since that’s what we’re talking about here today, I need you to have three things in mind. First one is, how far out you want to buy that option? A maximum of 60 days.
You need to find a Delta between 65 and 85. That just tells us how much the stock moves for every dollar. I mean, how much the option moves for every dollar, the stock moves.
And then an open interest of 100 or greater. Those are the three components that you need, right?
In the put option podcast. I go more in depth on how to utilize each of those three. Right?
So then how does call option pricing work anyway? All right. When you’re looking at pricing of an option, there’s a formula calculation called the Black-Scholes. Two mathematicians, I’ll give you a moment to think of what their names are. Black and Scholes came up with a methodology, a formula to fairly calculate the pricing of options. They made millions in the first couple of years selling their picks, their information, to brokerage firms, trading firms, and the likes, right? That formula tells us whether or not the option is fairly valued. That doesn’t mean the market maker doesn’t jack the price up around earnings. The price of the options are going to get jacked up, right, without a doubt. News coming out, right when 9/11 hit, when Y2K came along, all of these things affected options, pricing. But on a day-to-day basis, if I look at an option and it’s trading at $6 and I look at what’s called the fair value and it’s trading at $11, or shows $11 that says the option should be trading at $11 and it’s only trading at $6. We are way undervalued or it’s trading at $6. And the fair value is two. We are way overvalued on that option, right? So options pricing, the price is the price is the price. You have a bid and an ask, right? That asking price is what you’re going to buy the option for. You spend $7 on the option and you’re done. You’re not buying the option to ever, ever take possession of the stock. That is not why we buy call or put options.
So what is the best option strategy? So what is the best options trading strategy to start with? In my opinion, it is buying call options. Buying puts is a great strategy, but you literally have to turn your hat backwards and you’ve got to start thinking in opposites, Wait, the stock goes down and I make money? Sí. It’s a little bit more thought intensive than call options, so I think call options is the better one for a trader to start with.
Now are buying call options, strategies, simple to understand? They are right. But when I say they are, the average person that just picks up a book and says, I’m learning it from the book, you can, but isn’t it so much easier with anything you learn in life if someone holds your hand and teaches it to you, right? And that’s what we do here at Wealth Builders. We train you with the how. The teaching motto is pretty, pretty simple, pretty straightforward. Tell, show, do. With books, they just tell you. That’s it. They might show you some things, but it’s not the same. For me, tell is me telling you, “we’re going to talk about this.” Show is me showing you how to do it. And then the do is when I put the test to you and say, you do it and give me your answer. What do you see happening at this level? Which option would you pick? That’s the do? And that’s what we do very well here.
All right, with that, make it a profitable day. Stay focused on the quest of becoming a great trader. Keep crushing it and remember folks you’re just one trade away. See it, the next update. Bye for now.