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What are options it is very important that every single investor out there understands options fully and what a call option is what a put option is so today what i’m going to do is i’m going to share with you guys what those are in the very simplest terms so you can understand it very easily i can’t wait to share this with you guys today good day subscribers thank
You so much for joining me today on the financial education channel so today we are talking about options and what i’m gonna try to do today is i’m going to try to explain what call options and put options are in the simplest simplest simplest way possible that way you guys cannot get information overload like a lot of the videos i’ve seen out there on youtube
Do they tell you about options but they go so far into detail into it there’s so many people just get scared away because they’re like it’s too much i can’t even remember all this information so i’m going to keep it simple today so let’s go ahead and get into this so what i want you guys to think about as far as an option is i want you to think that an option is
Basically placing a bet not a stock price will be above or below a certain level by a certain date and a call option is you’re basically placing a bet that a stock price will be higher than it is today and at a certain level by a certain date and a put option is you’re basically betting that a stock price is going to go down and it’s going to be at a certain level
By a certain date so let’s go ahead and do an example let’s say you believe apple’s stock price will be well above $100 by 2018 january 2018 those are the longest term options you can play right now usually the longest term options you can play usually about a year and a half in advance to two years and those are the ones i like to do some people like to do short
Term options which are basically like placing a bet that a stock price will be above a certain level next week or next month or things like that i think that’s more gambling i don’t like to do that so much so we’re doing the apple illustration so apple i believe they’re ticker symbols aapl and their stock price right now is about i think it’s ninety five dollars
I mean my eraser i believe their stock price of ninety five dollars all right so apple stock price ninety five dollars right now and you believe it’s gonna be well over a hundred dollars so you’re gonna look four hundred dollars is what you need it by jan 2018 so jan 2018 needed above 100 so someone out there is gonna sell you a contract but they’re gonna sell
It to you for a premium price you have to pay a premium on this that way and they want to sell it because they believe the stock price won’t go to that and they want that money right now so they’re gonna probably sell you it looking at this will probably sell you it for about ten bucks i’d say so they’re gonna sell it to you for ten dollars now you don’t just pay
Ten dollars because in each one contract it controls a hundred shares so if you just want to buy that one contract you’re gonna need to pay a hundred times ten dollars you’re gonna need to pay a thousand bucks one thousand dollars is what that gonna cost you for your one contract so you place that bet thousand bucks said it’s gonna go up to that price now so your
Break-even is a hundred and ten dollars you need by january 2018 you need apple stock price to be at least a hundred and ten dollars to break-even 110 de bie e stands for breakeven whoops 100 110 is your breakeven so let’s run through some scenarios let’s say this was at odyssey apple stock price was only at $100 2018 what happens you lose a hundred percent of your
Money you lose every penny you own so you lose all thousand bucks because it didn’t get back to your breakeven so if apple’s stock price only a hundred bucks into those 18 because you paid that premium you lose it all that’s the downside of options you lose a hundred percent if it’s not by that price but let’s say let’s say it’s just at one hundred and twenty
Dollars and this is the fun part let’s say apple stock price is one hundred and twenty dollars comes out 2018 you just made a hundred percent on your money that thousand dollars is now worth two thousand dollars you made a hundred percent in the stock price didn’t even go up that substantially if you would invest it in it and just bought the stock straight up at
Ninety five you would have made a decent return about twenty five percent or so but that’s a sneeze when you look at you couldn’t made a hundred percent here’s the real fun what if apple really exploded and it was at one hundred and fifty dollars come 2018 your breakeven was one hundred and ten you doubled your money doubled your money doubled your money doubled
Your money so now that thousand dollars is now worth let’s say 1,000 2,000 3,000 4,000 now that thousand dollars is worth four thousand dollars and you still wouldn’t even have doubled your money if you had just invested in the stock straight up you needed it to go to at least 180 just to double your money if you had invest in a stock straight up but at 150 already
Made four times your money so that is the beauty of options that’s why is kind of worth taking the risk sometimes if you feel super confident in company because you can make so much more money than if you just invest in stock straight up in a put option it’s the exact inverse of this so you’re basically placing a bet that the stock price will go down and it will
Be lower so you probably would have played like an $85 strike and you probably would have have paid you know five or $10 premium so you’re basically placing a bet when you do a put option that the stock price will go down to a certain level by a certain date i usually do call options because i feel more comfortable with those but some people that are more negative
And can see things like companies going down and going to bankruptcy and those kinds of things it’s really smart to play put options on those because you can make massive some money if you are correct so i hope that explained in the simplest way possible what options are there’s not a ton left – what options are other than that we could go into more in the detail
Like all subjects and talk forever and ever but i want you guys to just get the simplest imagination on what options are that way you don’t get this information overload that a lot of other videos do where you just get scared away because it’s too much so let me know if that video was simple enough for you guys especially you subscribers out there and i thank you
So much for watching if you haven’t subscribed you may want to talk ton about personal finance stock market related videos like this a little bit about business and entrepreneurship those kinds of things i think you guys have a great day
Transcribed from video
What are options By Financial Education