Ep 3.2 - Buying Calls | Step Up to Options - YouTube

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Hey I’m Rachel, and this is Step Up to Options, where you learn the long and short of trading options

Every trade has assumptions on the prices involved

If you assume the stock price will go up, you’re bullish

If you assume the stock price will go down, then you’re bearish

With stocks, it’s easy; you buy when you think it’ll go up, and you short when you think it’ll go down

It’s a little trickier however with options because what you want the stock to do isn’t always what you want the option to do

Of the four basic options trades, the closest relationship between trading stocks and trading options is buying stocks to buying calls

That’s because 1, you’re buying to get in....when, 2, you expect the price of the stock to go up

Let’s start there

The call buyer is long the call because they expect to sell it later at a higher price

and they’re bullish the stock because they expect it to push that call price up

We’re going to take a big picture look at buying calls with Ryan to get a better idea of what’s happening

We’ll show you how this looks in dough soon enough

Hey, everyone. This first example will be about how buying a call can win

So let’s say the call buyer picks a strike just Out-Of-The-Money, and there are 45 days to expiration

The call buyer pays a debit to open their trade

Now the stock starts moving down, and the call is farther Out-Of-The-Money

But It still has time value even though thats always going down

Now, here, with 35 days left, the stock price turns up

And with 25 days left the stock is now above the strike, and the call is In-The-Money

The stock keeps climbing, and the strike gets deeper In-The-Money as the gap between them widens

By the time expiration is near, the stock has moved up much higher than the call’s strike, the call is well In-The-Money

and the trader could place a sell order to close the trade

This trade made this much…minus the cost of the option

And so that’s when buying calls wins: when the stock price goes up

Thank you Ryan

Obviously, if the stock had done the opposite and gone down, it would have been a loser

One good thing about buying, though, is that the buyer can’t lose more than their initial debit

So, what if it hadn’t moved at all?

Well, remember that options lose time value as expiration approaches

So the more time the buyer sits in the trade, the more they’ll feel the time decay pushing the option price back down

If the stock had stayed neutral, the trader would just spend the days to expiration watching time decay eat away at the call price

The call would expire worthless, and the buyer would be out the debit they first paid

That’s why neutral stock movements also lose when buying calls

that’s two out of three scenarios where buying calls didn’t win

Two out of three losers… that means buying calls generally has a lower probability of winning

You know, I think we’re good to review the fundamentals of buying calls now

First, buying calls opens the trade with a debit

That debit is the most the call buyer can lose

Buying calls can win when the stock price and the call price both go up

A call buyer wants the call to be In-The-Money at expiration

A call buyer closes the trade by placing a sell order

And lastly, when buying calls, the trade-off for limited risk and no profit limit is only seeing a 1 in 3 chance of actually getting that profit

So now we’ve taken care of buying calls. Remember, we’re really just talking about the mechanics of the options themselves

and not necessarily actual trades we should place yet

After we’ve covered all Four Basic Trades, then we’ll see how easily we can combine them in dough to create the strategies that help us win

Now, let’s jump over to the next video for our second basic trade, buying puts

And, of course, you can learn more at tastytrade and dough.com

Guys thank you so much for watching. You can click to check out all the resources we have for you

I know this is getting complicated and tough but you are doing so so good

You're getting it, I'm here for you. You got this, just keep going and watch the next video

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