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Options Trading Terminology & Definitions. Puts & Calls for Dummies - YouTube
Channel: BestStockStrategy
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Trading options for Beginners. In this
video you're gonna learn some basic
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terminology and definitions so that you
can understand how to trade options a
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lot of times in a lot of a lot of
different industries though use
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exclusionary jargon such as with doctors
and lawyers and even as an investment
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banker they will use definitions that
will make other people feel like fuel
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confused or feel as if they don't know
what's being talked about when you learn
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how to trade options you have to make
sure that you understand a few basic
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definitions about 80% of the money that
I make from trading is by selling put
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options
remember when you sell an option you are
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essentially the casino when you buy
options you are acting as a gambler
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now the casino doesn't make money if a
hundred people come in the casino
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doesn't make money from all 100 of those
gamblers maybe the casino will lose
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money on five of them but you make money
on ninety five percent of the people
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that enter your premises if you make
money as a stock or rather as an options
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trader on ninety five percent of your
trades those are incredible statistical
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odds so remember we sell options in
about nine about 80% of the money that I
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make is by selling put options so what's
a put a put option obligates me if I
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sell a put option and obligates me to
buy the underlying stock at a specific
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price if I sell a call option it
obligates me to sell the underlying
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stock at a certain price so for example
if facebook is training right now 175 I
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can sell a put on Facebook at a strike
price of 160 now what that means is if
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facebook trades below 160 dollars at the
X on the expiration date then I will be
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forced to buy Facebook at 160 dollars if
Facebook is trading on the expiration
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date at 140 then I will be forced to
purchase Facebook at 160 about eight out
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of ten times Facebook will not drop
below your strike price if you choose
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the correct strike price and also if you
choose the correct expiration that's why
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we always sell out of the money options
so again you sell a put option an
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example would be Facebook trade is
trading at 175 you sell it with a strike
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price now a strike price is your bottom
coat worry price you don't really have
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to worry at all if when you sell a put
the underlying stock stays above your
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strike pricing you don't really have to
worry that much if when you sell a call
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your underlying put state or your
underlying stock stays below the call
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strike price but really you have to pay
attention to making sure that when the
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underlying stock gets close to the put
side or close to the call side that's
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when you really have to start worrying
and looking at the position but for most
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of the trades I would say probably eight
out of ten of them I just choose the
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correct strike price and the correct
expiration date and then I never have to
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look at it again so again remember
you're going to choose your strike price
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which is the price that obligates you to
buy if you sell a put or the price that
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you're obligated to sell if you sell a
call and in exchange for agreeing to
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purchase when you sell a put or agreeing
to sell when you sell a call you receive
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money this money is called premium and
it's also called your taking in a credit
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so if you buy selling options you are
receiving money and as a result you are
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receiving the credit if you buy options
which I don't know why you would but
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some people do buy options then they are
going to pay a debit as I mentioned
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earlier the expiration date is the date
at which the seller of the option is no
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longer obligated to guarantee that the
underlying stock will not fall below
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that strike price so for example if you
look at it from an insurance perspective
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if you buy a car insurance policy for
six months and then you have an accident
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two weeks after your the expiration of
that
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policy that policy writer or rather the
insurance company is no longer liable
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for paying for that claim why because if
it happened within the six months then
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that person would be liable or that
company will be liable but because it
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happened beyond the expiration date and
the contract expired then that person or
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that company is no longer obligated to
make do on something that expired so a
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good example of this if we go back to
the Facebook example where Facebook's
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trading at once
175 if we sell a put with the strike
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price of 160 I can have the expiration
be three weeks and then I could receive
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let's say a dollar or if I choose an
expiration that is six weeks out which
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means that I'm obligated for an
incremental or an extra three weeks to
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buy Facebook at a hundred and sixty
dollars if it were to fall below that on
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the expiration date then I would receive
more money so instead of receiving one
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dollar like I would for the three week
option I probably receive around two
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dollars and 20 cents for the six week
expiration an underlying asset that's
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simply the that's simply the stock that
you sell the option on so this includes
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something like Facebook or Amazon or
Google or Netflix or Tesla or Nvidia so
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all of these very large companies they
have a lot they have a liquid options
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market which means that the there's a
very deep market is very easy for you to
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sell options on something like Facebook
because it's worth about five hundred
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billion dollars and you want to deal
with markets where there's a lot of
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activity and a lot of liquidity because
that means that the pricing is much more
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efficient so the underlying stock you
can sell contracts and that's how that's
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what you're going to sell you're going
to sell one contract let's say a
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one-foot contract on facebook one
contract is a hundred shares so going
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back to the Facebook example you can
sell one contract with a strike price of
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a hundred and sixty and an expiration
date
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of August 20th and you can receive
premium of $1 so as a result we are
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permitting ourselves or forcing
ourselves to buy Facebook if it drops
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from its current price of 175 if it
drops below that and it drops below 160
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we will force ourselves to buy Facebook
ad 160 as long as its trading below that
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price 160 dollars on August 20th if it
stays above 160 dollars on August 20th
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then we collect the full amount of
premium which we which we receive is one
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dollar per share so if you sell one
contract and you receive one dollar per
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share then you receive $100 for making
that trade if you sell five contracts
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that obligates you to buy Facebook in
the example that we use before to buy
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yourself five contracts you're obligated
to buy Facebook to buy 500 shares of
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Facebook at a price of a hundred and
sixty dollars and in return a $1 share
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you will receive 500 dollars from making
that trade and you will make that money
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with about a 90 to 95 percent
probability a few other definitions
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buying power really just means the
number of contracts that you can sell so
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if your account has 30 thousand dollars
in it then you can control 60,000
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dollars worth of stock and because
options the regulations are a little bit
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different you actually have greater
leverage so you can control sixty
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thousand dollars worth of stock and you
can probably control about a hundred and
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fifty thousand dollars worth of options
so yeah so options they they reduced
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buying power and twenty percent whereas
stock reduces your buying power at 50
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percent but for all intents and purposes
buying power is just the number of
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contracts that you can sell a vertical
credit spread means that
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using the Facebook example I would sell
the 160 and then I would buy the hundred
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and 50 put it would have the same
expiration the same underlined so
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Facebook and it would be the same type
of option remember there's only two
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types of options puts and calls so if
you wanted to do the trade that we spoke
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about before you would sell one contract
of Facebook with a strike price of 160
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and expiration of August 20th and you
would receive $1 if you wanted to turn
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that into a vertical credit spread you
can do that same trade where you choose
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the 160 strike that you're selling and
then you can buy the 150 and then the
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efficient usage of your buying power
because instead of Facebook having a
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maximum risk of a hundred and sixty
dollars a share if you sold if you were
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on the hook and had to buy facebook at
160 and then Facebook went bankrupt at
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$0 you would still have to buy facebook
at 160 but if you sold a vertical credit
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spread with a hundred and sixty you sold
and 150 that you bought then technically
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you would only have to you'd only your
maximum loss would only be ten dollars a
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few other things bid in the ask you're
going to buy at the bid and the ask is
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the maximum price that you can sell at
usually I would say 95% of the trades
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they get big they get filled at the
mid-price
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so it going back to that 160 dollar
Facebook put if you could if it gets
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filled at $1 the bid is probably going
to be like 95 cents and the ask is going
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to be $1 o five and then they're gonna
meet in the middle and that that trade
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is going to fill at one dollar a share
or $100 per contract a limit order when
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you enter your trades you should always
use limit orders a limit order is simply
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the minimum amount of money that you're
willing to receive in order to execute
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that tree so going back to the Facebook
example if you say
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limit order at one dollar that means
that the minimum amount that you are
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willing to accept is one dollar per
share or $100.00 per contract and the
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exchange cannot fill that order unless
you receive at least one dollar per
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share or $100 per contract and roll or
manage that's the last definition that I
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typically have to roll or manage a
position about five out of a hundred
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times and what that pretty much means is
that I would close out the trade that is
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problematic and then I would just extend
in time extended duration so instead of
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like using the example that we use
before let's say the August 20th put
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let's say it was August 10th and that
put option that I sold expires on August
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20th
I can then buy back the August 20th with
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a strike price of 160 push it forward
into September sell a hundred and
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fifty-five strike price put so I would
get $5 and I would still be able to
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bring in a small amount of credit or you
can roll it forward from August to
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September and keep the strike price the
same at a 160 and you would be able to
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collect even more credit so remember
that when you sell options the
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probabilities are in your favor and you
are acting as a casino because an asset
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just like an insurance policy is a
depreciating asset that with time
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eventually goes down in these worthless
so that's why we make money every single
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day that goes by where stock prices
don't move or if they move in my favor I
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profit from the time decay because an
option an option is an expiring asset
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and I also make money as the underlying
stock moves further away from my strike
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price and to be honest when you do
something where you sell the hundred and
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sixty dollar put you if Facebook is
trading at 175 you have a fifteen dollar
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cushion so I don't even care if Facebook
drops all the way down to a hundred and
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sixty two or a hundred and sixty as long
as our one hundred and
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161 as long as it stays above 160 on my
expiration date then I make money so a
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quick summary because I know that that
was a lot of information and to be
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honest I gave you about I'd say 10 or 12
definitions of them the most important
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things to learn is to take away or that
you always want to sell options you
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never want to buy about 80% of the money
is made by selling put options a put
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option obligates you to purchase the
underlying stock such as Facebook at a
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specific strike price as our options are
expiring assets that don't have any
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value in so for example if the
underlying stock trades above your your
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strike price on the expiration date then
you keep the entire amount of premium
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the only time that the option that you
sell has any value is if any intrinsic
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value rather at expiration D is if the
option that you sold is selling bull is
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trading below the the strike price so in
this example at the expiration date if
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facebook is trading at 165 then that
option that you sold that you collected
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$1 per share is worth nothing if
facebook is trading at 155 though that
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means they would have to have fallen $20
or around almost 15% then then in that
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instance it was trading at 155 then you
would that option would be worth $5 but
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you already received $1 so you would be
out $4 so remember you sell options it's
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the only way to make money you want to
be the casino you don't want to be the
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sucker you don't want to be the gambler
80% of the money is going to be
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generated by selling puts and for all
the other like technical information I
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would not focus on overwhelming yourself
because the most important aspect is
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just to get started if you want more
informational videos like this you can
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once again this is David Jaffe with best
stock strategy calm and if you have any
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