SIMPLE OPTIONS STRATEGIES
The first 3 Options Strategies I learned, and one to avoid, at least in the beginning
The next 4 sections are going to outline a Call Option, a Put Option, Bull Call Debit Spreads, and Selling Calls. Calls and Puts require level 2 trading within Robinhood, and spreads require level 3, you have to apply for the ability to trade options in the settings.
Options are an incredible way to leverage your cash and start seeing measurable returns, even on relatively small amounts of beginning cash (A couple hundred is plenty to start getting a feel, never risk more than you can lose and please do not SELL ANY OPTIONS until you understand what they mean!).
CALLS, PUTS, AND SPREADS
There is an option strategy for every scenario (Stock surges, stock crashes, volatility, no movement, etc. we are going to start with the basics.
BUYING A CALL
When you are Buying a Call in a company, you are buying the option to purchase (or "call away") 100 shares of that company at a certain price (referred to as the Strike price) from whoever sold you the call (individual trader), on a certain date (expiration date).
I'm going to use General Electric (GE) as the example, which is currently trading for $10.79 per share, and you think it has room to grow in the future.
GE sells options, and once you have activated options in your brokerage, you should have a choice to "Trade Options."
Next, along the top of the page, are the expiration dates available for options in that company's stock, I primarily buy options that are at least 6 months or more out, the further, the better. You want to give the stock time to grow, and also give yourself protection if something happens and the stock drops in the short term.
After selecting an expiration date, you will select the "Strike Price," this is the price per share you are agreeing to pay for 100 shares. You are not obligated to buy them, you have the option. Let's say, for example, you think that GE will surpass $20 this year.
You will select the $0.34 next to the $20 strike price. You will be paying the $0.34 per share x 100 (Options are always in contracts of 100 shares on the NYSE), so each contract would cost you $0.34 x 100 = $34. That is your total risk on this trade, you cannot lose anymore, but you have the potential to capture the gains if GE stock was climb in price, as you expected. As the stock price gets closer to your call, the value of your call will increase. This is when you have to make a choice; do I sell the call and collect the profit, or do I continue to hold the call option because you feel the price will continue to climb? If you are buying multiple contracts, at times like these, you can sell some of them to protect your net gains, as well.
This is referred to as buying "Out of the Money (OTM)," meaning you are buying the option higher than the stocks current price. Now, throughout the year, as GE gains and loses stock price, your option will adjust with it. When buying a call, always try to buy when the stock is down (Red), you make money on volatility (Rapid ups and downs).
Here's the thing though, I never buy calls with the intention of exercising them (Holding them to expiration and buying the 100 shares from the seller), I just want the premium available from the buy and sell of the option. Basically, we are holding reasonably priced calls until volatility makes them more expensive, then we sell them, pocketing the profit.
These earnings are taxed as short-term capital gains (if held less than a year), so plan accordingly for 25-35% taxes on gains come tax season.
Please see the FCEL calls from My Story, if you want to see a visual example of a buy and sell and the associated growth from volatility.
Calls should be viewed as a heads up bet between you and another individual trader. You think the stock will be one price, they think another, that's all call options are.
BUYING A PUT
A Put Option works in a very similar way to a call option, except you are making a bet that a stock will go down in price. You are buying the option to PUT shares into the account of whoever sold that Put Option to you.
Also in step with buying calls, I do not ever intend to put shares into someone's account by exercising my options. I want to find and Buy Put Options that are 6 months or more out and I reasonably believe there will be a drop in the stock.
For example, you think General Electric is going to crash this year (Currently $10.79), so you want to buy Put Options. First select your expiration date (6 Months +), then make sure you have selected to Buy a Put at the top.
You can then choose how much you think it will drop, let's say under $5 a share, so you purchase the $5 Put for $0.13 in the image above. That would follow the same Options Contracting of 100 shares, so your total cost would be $0.13 x 100 = $13. That is your total risk on this trade.
Now, how does this translate into making you money, why would it? Think of it this way, you are providing insurance for someone who owns a lot of shares of GE. If, for some reason, GE decides to file bankruptcy and their stock goes to $0, that person holding lots of shares can buy your put which allows them to PUT their, now worthless shares, into the Put Sellers' account at $5 a share.
That is where our growth comes from, those contracts now represent 100 shares of GE at $5 a share, (worthless to selling for $5 each), or just about $100 for each $1 under the strike price. Your puts, you paid $13 total for, could now be valued at nearly $500 each, potentially 40x gains. Obviously this is an extreme example, because, more than likely, GE will not file bankruptcy, but that is the power than Options Hold.
BULL CALL DEBIT SPREAD
When you are buying a Bull Call Debit Spread, you are expecting the stock to increase over time. Spreads are usually referred to as being "more advanced," but they really are not that complicated once you understand what it all means.
An options spread is the combination of 2 or more options, in a single trade. This can be done by navigating to the expiration date of your choice (I try for 6+ months away) and hitting the "select" button, again, I use Robinhood so your broker may be different.
After tapping "select," you will see little bubbles pop up, and now you select the Call you are Buying. For example, you think on March 19, 2021, Apple will be higher than $140 a share. You start by selecting that option by clicking the dot.
Next, at the top, you switch it from Buy, to Sell, this step is important. You are now selling a call option, on the same expiration date as your buy call above. All you are changing is the Strike Price of the options. One buying, and one selling. You think Apple will be higher than $140, but lower than $145, so let's sell that call option by selecting the bubble, remember, make sure you have "Sell" selected.
Finally, at the bottom you'll see "2 options selected - Continue" button, click on that and it will show you the total price of your Bull Call Debit Spread. In this case, we are paying $6.08 (Remember that is $6.08 x 100 = $608) for the option to buy 100 shares of apple at $140 on March 19th, 2021, no matter what the price of Apple on the date of expiration.
We are also Selling a Call Option for this spread, at the strike price of $145, also on March 19th, 2021, for $4.55 ($4.55 x 100 = $455). This means you are responsible for 100 shares of Apple at $145 a share, no matter what the price of Apple is on the date of expiration.
Your total risk on this trade is $608 (The buy) - $455 (the sell) = $153. You can then advance onto the buying page, and buy multiple spreads if you choose, at $153 each spread.
You make money on these spreads by the stock increasing in price and getting closer to strike price of your Buy Option. This strategy will give you downside protection, because if the stock crashes, no one would call away your shares at $145, if they can buy them on the open market for less. However, it will also cap your potential gains. You will gain profit as Apple climbs, but once it crosses $145, you no longer have room for growth, since you are selling at that price.
Basically, you are creating a buy/sell loop, protecting yourself from drops, but putting a maximum gain on the trade. It is a more conservative option than buying calls alone. Similar to Buying Calls and Puts, I don't intend to hold these until expiration, but rather capture premium gains through stock growth, then selling the options back into the market, as a complete spread. There are times where a stock will crash and you can buy your sells back as a way of reducing your initial calls cost, then you take away the gains cap.
Please do not sell options until you understand them, you can go very broke.
SELLING A CALL
I want you to use this giant hook as your reminder that when you Sell a Call, you are "on the hook" for 100 shares of whatever company you sold that call for, at the strike price, and on the expiration date. Let's use Apple for this example, which is currently $132.71 a share:
If you sell a call, like I said above, you are responsible to provide 100 shares, per call, that you sell. When we look at it within Robinhood's Options menu, it will look like this. When you sell a call, your account is being credited the amount.
In the picture above, if you were you were to Sell a January 8th, 2021 - $135 Call Option - You would gain $1.50 x 100 = $150 into your account.
Now, here is where you can lose your house. When you Sell Call Options, you are responsible for 100 shares, per contract, that you sell. In the example above, the $135 is the strike price, the price you are agreeing to provide 100 shares of Apple at, if on January 8th, Apple is over $135 a share. If Apple is not over $135 per share on that date, the contract expires worthless, you keep the premium ($150) gained, and you are no longer responsible for 100 shares per contract.
However, if Apple runs up to $140 a share on some good news on January 8th, you are now responsible to provide 100 shares per contract of Apple to whoever bought your call at $135 per share. That is 100 shares x $135 = $13,500, and if you are not holding the shares to cover that, or have enough cash to buy the shares, you are in trouble.
There is an option strategy for every occasion, and if you google "option's strategies," they will bury you in charts and it was difficult to understand. If you start with these simple, and relatively safe (You know your max loss from the start), option strategies, you will begin to see how the rest fits together. I hope you stick around and ask a question on the board!
Buying Calls - You are buying the option to purchase 100 shares of a company from another individual at a certain price on a certain date. You buy Calls when you expect a stock to climb in value. This option is referred to as being Bullish.
Buying Puts - You are buying the option to PUT 100 shares of a company into another individual's account, at a certain price, and on a certain date. You buy Puts when you expect a stock to decrease in value over a certain period of time. Then you sell the option to someone who would exercise it, or if you have the shares, you can sell them for higher than market price. This option is referred to as being Bearish.
Buying Bull Call Debit Spreads - You are buying the option to purchase 100 shares of a stock at a certain price, and also sell the same stock for a higher price, on the same date, pocketing the difference. This option is also Bullish, since you are expecting the stock to rise, but in some cases where the stock decreases, you can buy your Sell Options back, and keep the difference. Then you would be holding Calls, at a cheaper overall price. Spreads give you some downside protection at the expense of capping your potential gains.
Selling Calls - You are Selling the option for another individual to Call-Away (take) 100 of your shares at a certain price, on a certain date. Do not sell calls unless you fully understand them.