hi everyone mark lichtenfeld chief
income strategist with the oxford club
this is
your state of the market you know i've
gotten a lot of feedback from viewers
want to know
more about options so today we're going
to talk about options is going to be
kind of a primer
for you and then next week we'll get
into some more advanced strategies
options can be used to generate enormous
profits
or they can be used to hedge current
positions so they're a very versatile
tool
that every investor should at least know
how to use so let's get started
there are two types of options calls and
puts
a call gives the buyer the right but not
the obligation
to buy a stock to call it away
from the options seller and they can do
so at a certain price
by a certain date the seller of the call
has the obligation
to deliver that stock if the buyer
demands it
so for example let's look at qualcomm if
qualcomm
was trading at 123 a call buyer
could buy the november 130 calls for
seven dollars
and that means that the buyer of the
option has the right but again
not the obligation to buy qualcomm at
130
at any time before the third friday of
november
options usually expire on the third
friday of the month
130 dollars is what's known as the
strike price the
price at which the stock transaction
would take place
options contracts represent 100 shares
so if you buy one call you can buy 100
shares of stock
and for that right you're paying seven
dollars per share or
seven hundred dollars now wait a second
with qualcomm trading at 123
why would you pay seven dollars for the
right to buy it at 130 dollars
well if you bought 100 shares of
qualcomm at 123 dollars
you would have to pay 12 thousand three
hundred dollars
buying a call contract only cost seven
hundred dollars
if the stock goes higher as you expect
your calls will increase in value
or you could pay a hundred thirty
dollars for the stock even though
the stock might be trading at 140 or 150
or higher most options investors don't
exercise their options or
make that stock transaction rather
they're looking for the call to
appreciate and price and profit
from trading the call so if by november
qualcomm was trading at 150 the calls
would be worth at least 20 dollars and
likely more
so someone who bought the stock would
have made 27
or 22 percent but a call buyer would
have nearly tripled their money
the risk is that the stock does not go
up to 130 dollars by expiration
if the stock goes nowhere and still
sitting at 123 dollars someone who had
bought the stock
still owns it they're flat and there's
an opportunity that the stock could go
higher at some point in the future
a call buyer's option would expire
worthless
and they would lose their entire seven
hundred dollars now of course they could
sell
the option at any time before expiration
you don't have to hold it to expiration
so maybe if they sold it in october
they'd only lose
350 instead of the entire 700 that's up
to
you as the investor you can sell it at
any time
but it's important to understand that
even if the stock rose
to exactly 130 dollars at expiration
that call
would have no value only above 130
dollars would the call have value
meanwhile if you bought the stock at 123
you'd have a seven dollar
profit if it's trading at 130. so by
purchasing a call
you can participate in a stocks upside
with less upfront capital you can make
tremendous gains but the risk is higher
and you can lose
all of your capital so that's cause
let's now switch to puts
when you buy a call to bet that the
stock is going to go higher
a put is a bet that the stock is going
to go lower and it can also be used to
hedge
an existing stock position using
qualcomm as an example again
trading at 123 a put buyer
could buy a put let's say the november
110
puts that means that any time by the
third friday november
the put buyer can put the stock or sell
the stock
to the put seller for 110
now obviously if the stock is trading
above 110
you wouldn't do that but if the stock is
trading below 110
you could force the put seller to buy
your stock from you at 110
or the value of the put would increase
and you could simply take your profits
on the put itself
now this is important to understand you
don't have to own a stock
to buy a put you can buy a put
purely as a bet that stock is going to
go down if qualcomm
drops in price then the put becomes more
valuable let's say
qualcomm totally blows its third quarter
earnings
and it's a disaster and the stock drops
to 90
well if you bought the november 110
puts for five dollars if the stock is
trading at 90
that put becomes worth at least 20 or a
300
return on your money like with the call
you don't have to hold it the entire
time you can sell it
anytime you want to before it becomes
worthless so
you may still lose on the put but it
doesn't have to be a hundred percent
of the value of the put even if the
stock does not trade down to 110
investors that own the stock can use a
put as a hedge kind of like insurance
so for 500 they can ensure
themselves and protect themselves from
downside
worse than let's say about 10 percent if
you're buying the 110
puts they own the stock at 123 and can
sell the stock at 110 so in the case of
a disaster
like the stock falling to ninety dollars
the put becomes worth
twenty dollars so even though the stock
is down thirty three dollars because you
bought it at 123
when you add the profits from the put it
results in a loss of just 13
now you can buy puts at your cost basis
so that you're guaranteed not to lose
any money
but the puts will be more expensive it's
just like insurance the larger
deductible you have the larger
loss you're willing to take the cheaper
your premiums are
the less loss you're willing to take the
more expensive your insurance will be
so buying puts and calls is a great way
to make
big money without using a lot of capital
to invest
as long as you can handle the higher
risks that come with trading options
now next week we're going to kind of
flip the script a little bit
next week we're going to talk about how
to generate income
with low risk trades using puts and
calls
so i know you're going to want to see
that so be sure to check back next week
and for more income and wealth building
ideas
be sure to click the link below for my
free e-letter wealthy retirement i'll
see you next week thanks for watching