Sunday, June 26, 2022

$1 vs $3 OPTION TRADING STRATEGY FOR SMALL ACCOUNTS | TRADING OPTIONS

Hey what's going on youtube and welcome back to tech conversations i am host guillermo it is april 9th hope you're all having a great weekend so far before i get into today's video all i ask is do you guys hit the like button down below and subscribe guys it really helps out the channel and check out the discord link to it in the description below over.

74 000 members completely free to join you can also become a premium member on here for seven dollars a month you'll get access to a bunch of great resources one of them is our alerts here's an example of another from this week this is a call option on lly we paid 355 we sold for 13.50 so we made a 995 profit per contract on this alert to check out.

The discord the link to it in the description below now in today's video i want to talk about two small account strategies today and compare them now remember before you ever enter these options trade or any other options trades please make sure you know how to close them i'll pin a video in the comments section below.

Where i show you guys how to close out of any options trade so our goal here today with both of these strategies is going to be to benefit from neutral behavior in the underlying stock with limited risk and at a very cheap cost so again you'll know right from the start what's the most you can lose with these strategies and so the ideal.

Situation here with both of these strategies is you believe a stock will trade sideways in other words not move much up or down basically trade within a pretty defined range and you'd like to take advantage of this by entering some pretty cheap option place so before i get into these two strategies guys i'd like to introduce today's sponsor weeble.

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Them out guys so with that being said let's get into the first strategy here so i'm going to be using ticker symbol n k l a for today's video this is nikola keep in mind these are just examples so don't copy these exact same trades but let's say that we think nicolas not going to move much for the next couple of weeks it's going to basically trade.

Sideways so we could potentially use the stock for these strategies and so remember before you actually go into the options two things you should always check first thing is commission fees we are going to be opening and closing multiple contracts here today if you're on a broker with high commissions that might eat away at a lot of your profit.

Now robinhood doesn't have any commissions so we don't have to worry about it on here the other thing is we're also going to be selling options so anytime you sell an option there is risk of assignment you want to avoid being early assigned due to the x dividend of a stock so always check if the stock has a dividend if it does.

Check when the x dividend date is you want to avoid selling options on the week of the ex dividend if you do you want to close out two days before now nikola doesn't have a dividend so i wouldn't have to worry about that so let's actually go into the options here now and so right away guys first thing i'm going to mention here is you do not.

Need a hundred shares of nicola to use either of these strategies and so let's say that we believe nicola isn't going to move much for the next couple of weeks so what i'm going to do is i'm going to start by using calls here for this first strategy we're only going to be using calls and the way you set up this first strategy is you first pick a.

Proper expiration date so again if we think it's not going to move much for the next couple of weeks maybe i'll go out a couple of weeks to like may 6 maybe let's say we think from now until may 6 it's not going to move a whole lot so i'm going to choose may 6 for today's example so the first thing you would do here is you would try and determine.

What price you believe nicola will be on the expiration of may 6 and so since we think it's not going to move a whole lot let's just say we believe it'll be at around the same price that it's at right now so at 8.50 and so the way you would start this is you'd start by selling two.

Call options at that strike so 850 i'd sell two call options here and i'll show you guys how to change the quantity for each contract here so we'd start by selling two calls now we want to switch over to buy because now we want to buy some calls and so what you'd want to do is you want to buy a call with a higher strike than the strike of the call.

You're selling and buy a call with a lower strike than the strike of the call you're selling and what's very important is that these two calls you're buying are the same distance away from the call that you're selling so in other words if i buy my first call at the nine dollar strike here this is going to be 0.5 away from the.

Call that i'm selling meaning the call i buy down here should also be 0.5 away from the call that i'm selling so in other words i'd have to buy the call at the eight dollar strike so right here and then remember we actually want to sell two calls not just once we can go up here click on this drop down go to custom and then for the call that we're.

Selling we want to switch this to two so i'm going to click in here and we want to and so here's the strategy right it's going to tell you that you're entering for a debit here total cost and it's going to be three dollars so you're gonna pay three dollars to enter this strategy.

And basically you're going to be risking three to potentially make around 47 here very high reward to risk if you take a look here right you'll see that the stock can still go down and it can still go up and you'll still be able to make money but for the most part you're going to want the stock to trade sideways now again.

I would go ahead and use option strat to visually take a look at what this trade will look like depending on the price of the stock depending on the date depending on implied volatility so let's do that here very quickly let's go to option strat let's go to build and again we'll just go to long calls we'll start with a call here and so we chose ticker.

Symbol and kla for today's video so nicola we went to may 6 here because we think that it's not going to move much from now until then so we started by determining what price we believe this stock will be on the expiration we said well we don't think it's going to move a whole lot from now until then so let's just say we.

Think it's going to be at close to the same price that's at right now so 850 so we started by selling two calls at that strike and then we went ahead and we bought a call with a higher strike i went to the one right above it and we only want to do one here so let me on let me go one here and then we also bought a call with a.

Lower strike than the calls that were selling so i went to the eight dollar strike right here so this is what it looks like here right you're entering for a debit meaning you're paying to enter and that's also the most you can lose here as you can see max loss is three net debit is three max profit is forty seven dollars and so what you'd.

Want to happen ideally on the expiration is for the price of the stock to be at the strike of the calls that you're selling so in other words you'd want it to be at exactly 850 on the expiration that's where you make your max profit of 47 which would be a huge return right we're talking 1500 percent return all these.

Returns here are pretty huge 300 400 you know 200 returns now what i wanted to talk about here specifically in today's video is what if we set this up using put instead because we can do that right here we used calls but what if we had set this up using puts instead right.

When would we want to use puts when would we want to use calls so let's first go back here to robinhood to a new tab and let's take a look at what this looks like using puts and stats let's go into the options here and we're going to choose the exact same expiration which was may 6. so let's go to may 6 but now we.

Want to use put instead and let's take a look here so it's going to be the same process right you want to start by determining what price you believe this stock will be at on the expiration so again let's say we think it's not going to move much from now until then it'll be around the same price 8.50 so you start by selling two puts at that strike.

Then again we want to also buy a put with a higher strike and buy put with a lower strike than the the strike of the puts that we're selling so again i'm going to go to the exact same strikes i chose for calls so i'm going to go to the strike right above it nine and then again same thing here the distance between the call you're selling and the.

Call you're buying up here needs to be the same as the distance between the call yourself or the put you're selling and what you're buying down here so i'm gonna have to buy this put here and then finally i want to come back here go to custom because i want to sell two puts not just one and so this is what this one is going to.

Look like here now notice this tells me it's going to be around one dollar total cost right so here it's telling me that i'm going to risk one dollar to potentially make 49 okay now will you be able to get in for one dollar probably not but you could probably get in you know for a very.

Cheap price maybe three four dollars same thing with the other one will you be able to get in for three probably not but maybe four or five six bucks right but ultimately right this is showing me a better cost here so again let's take a look here at what this looks like so let's go over to option strat here let's go to build and again we'll start with.

Put here so again we are choosing ticker symbol n k l a here so n k l a we chose the expiration of may 6. we started by determining what price we think the stock will be at on that expiration so again let's say we think it's not going to move much we think.

It's going to be at around the same price that's at right now so 850 then we bought a put with a higher strike um and then we only want one here so we chose the nine dollar strike and then we bought a put with a lower strike and that has to have the same distance from the puts that we're selling as this put with the higher strike okay so they're.

Both 50 cents away here so this is what this one looks like here so again this one's telling me my net debit is one dollar that's also going to be your max loss right the most you can lose here is one dollar if you get in for one dollar max profit is 49. so very similar right to the last one here what we want to ideally happen is for on the expiration.

Date the price of the stock to be at the strike of the put that we're selling so in other words at 850 because that's where we're gonna make our max profit again huge returns here so for this one's even bigger right almost five thousand percent return here because this is only giving us that it is only telling us that you know we're only.

Risking one dollar here but anyways pretty big returns here right so what's the difference here well first of all they're very very similar right synthetically they're the same uh like i mentioned your max profit will be at the same you know for both right at the strike of the puts or the strike of the calls that you're selling they're both.

Neutral strategies uh they both have very similar reward to risk right but the difference here and what you want to look out for right when you're trying to pick one over the other is firstly you want to go for the one with better liquidity because if liquidity is better for one than the other you're going to be able to get in you know.

Easier and then close out of it easier as well and kind of related to that is you want to check and see if one has a better pricing right for example like here right this is telling me this is going to cost three dollars but with using puts it's telling me it's only going to cost me one dollar so.

Sometimes you can find these where one has better pricing one might cost you know one dollar less and with even it costing one dollar less you know that's a lot better uh your reward to risk will look a lot better so you want to go for the one with better liquidity because it'll be easier to enter and close out of you also want to check for better.

Pricing right sometimes like i said one might be a little bit cheaper now the other thing you need to think about here when trying to figure out which one you should choose right this one or this one is think of assignment okay because if let's say you enter this uh this.

Strategy right but let's say you believe that there's a possibility of the stock going higher if it doesn't trade sideways well in that situation if you think there's a possibility of it going higher you might want to go for using puts here and the reason why is let's say nikola does go higher and it goes to 950 by may.

6. what's going to happen to these puts that are in the money right now they're going to be out of the money by then that means you don't have to worry about being assigned because they're not going to be in the money anymore now if you were to use puts and the.

Stock drops right by may 6 these will all be in the money and so now you're at risk of assignment so if you believe that nicola has a chance of going higher if it doesn't move sideways you might want to use puts because if it does go higher then all of these puts will be out of the money you don't have to worry about assignment now if you believe the.

Stock might go lower instead in instead of trading sideways then you probably want to go for calls because what's going to happen if nicola goes to like 7.50 well now these calls will all be out of the money right right now we have this one that's in the money but if nikola goes under eight this will be out of the money and so now you don't have.

To worry about assignment because they're all out of the money so that's another thing that might not be obvious here but uh something you should watch out for right so when it comes to assignment if you think the stock's going to go higher here you might want to use puts that way they're all going to be out of the money and you won't.

Have to worry about assignment if you think the stock might drop lower you might want to use calls here because that way if it does drop lower all your calls will be out of the money you don't have to worry about assignment but beyond that these two are basically the same thing okay but again sometimes you may find one.

That has a little bit better pricing than the other one so always check both here and again always keep assignment in mind as well so anyways if you guys have any questions about anything i just talked about feel free to leave them in the comment section below check out the discord link to it in the description below hope you enjoyed the video let me.

Know what you guys think and i'll see you guys next time

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