Robinson, J. [Options Trading University]. (2019). Introduction to Options (Part I) [Video File]. Retrieved from https://followthemoney.com/options-trading-university/

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Summary

Learn Key Concepts For Trading Options, Including Calls, Puts, Premiums, And Much More.

Questions

In what way is trading Options smart?

Why is it so hard to grasp options in comparison to stocks?

What does wallstreet purposefully opaque? Jargon and big words?

Why is it better to learn stocks before learning options?

What does it mean to "understand" the stock market?

What is an optionable stock? How can you rent them out?

Is hedging just insurance?

How does the specualtion thing work? § Thales options, is antifragile example

In what ways have options become more regulated than originally?

In what way is time linked with options?

How are options easier if there are three dimensions?

How are sellers/writers better off than options buyers?

What is real language version of what a option is?

Why do they have a higher probability of success? Why isn't it equal?

Notes

Derivatives = the thing that the parent creates. Orange is derivative of orange tree. The value is from teh parent, not from the child. Options are derivatives of a stock, etf, commodity, interest rate, etc.

Stock = ownership in a company. Option = a choice to buy or sell stock at another time.

Stock = dividends, voting rights, etc. Option = none of those things (since you don't own it)

Stock = an asset that never expires (unless compnay goes out of business). Option = tied to exiration date, so once expired, you have no rights

Stock price = based on fundamentals, etc. Options price = based on price of stock, expiration time, etc.

Stock is an investment to trade in the future. Option is a short term trading device. Not really an investment.

Stock risks = lose everything if the company does poorly. Options risk = just the premium you pay.

Can only buy/sell calls/puts. 4 actions:

1. Buy call
2. buy put
3. sell call
4. sell put

The four options of options?

1. What is buying a call option?

An agreement that gives the buyer the right to BUY a stock/etf, etc at a predetermined price for a limited period of time.

You're buying a right.

Story analogy: You want to buy a boat, but they're all really expensive. You'd need to finance because you don't have $30k right now. Then you hear your neighbor has a boat they'll sell for $8,000. You don't have $8k, but you could scrape it up in 30 days, so you say to him "Hey, if I give you $500, will you take the boat off the market and give me the option to buy your boat for the full $8k in 30 days?"

Few scenarios:

• You give the $500, then scrounge up the $8k and buy the boat. Win/win: You got the boat for way cheaper than market value ($8k instead of $30k). He got paid $8.5k instead of just $8k. Only had to wait 30 days for a higher profit.
• Could also sell that right to someone else. You could go to your church friend and say "Hey, I've got a guy holding a boat for $8k that needs to be bought in 25 days. You want to have the right to buy that option from me for $550?" Still a win/win. Boat buyer still got (at minimum) the $500. I made a profit of $50, and the friend gets the option to buy an $8k boat.

2. What is buying a put option?

An agreement that gives the buyer the right to SELL a stock/etf, etc at a predetermined price for a limited period of time.

So a buyer has limited loss potential (only loses the premium) and has unlimited amount of gains. And the seller only ever gets the premium.

Why do all options expire on thrid friday of the month?

Each option is for 100 shares. You can't sell optionable stocks if you don't own more than 100 shares.

The option buyer has rights. And the option seller has obligations to honor that right for a fee.

3. What is selling a call option?

An obligation to deliver a security at a predetermined price from the option buyer

4. What is selling a put option?

An obligation to buy a security at a predetermined price from the option buyer

Options sellers are like the house at a casino. The buyers (gamblers) have unlimited gain potential and limited loss (I put a quarter in, but have the option of gaining so much more). The sellers (casino) has limited upside and unlimited loss potential (I only got a quarter, but I need to pay out a huge amount if they get the jackpot).

In reality, the probability is in the favor of the seller (the casino), even though it looks bad on paper.

TAKEAWAY: Options sellers have a higher probability of success than options buyers. You want to be the house.