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hi everyone and welcome to today's tip
today I will quickly show you how to buy
a long foot option with a fidelity
account and will explain some of the
basic terminology associated with
options if you are unfamiliar with
options I encourage you to check out my
options tutorial video as a starting
point but as a brief summary options are
a type of derivative contract meaning
they derive their value from some other
underlying security and are most often
used for speculation increasing leverage
and reducing risk or as hedges there are
a few steps you need to go through
before buying an option first you will
need to set up an account with a
brokerage today's demonstration we'll
use fidelity you will then need to fund
your brokerage account with cash the
easiest way is to link your checking
account and transfer cash directly from
your checking account to your brokerage
account the final step is to apply for
options trading approval you can do this
by logging into your account and
selecting options under the investment
products drop-down you will then follow
the steps to get to the margin and
options screen and then select apply
next to your account my account might
look slightly different as I already
have approval but once you click apply
you will need to follow the steps and
fill out the requested information
approval usually takes a few days and
once received you are ready to trade
options to begin trading options you
will need to log in and select trade and
then options under the transaction type
you will see at the top here are cashed
currently available to trade within our
account which is 415 dollars next we
enter the symbol today I will
demonstrate a long put option on the s
py ETF by entering into a long put on
the s P Y we will have the right to buy
the S P Y once it reaches the strike
price of our option contract so
essentially we are making a bet the
price of the s P Y will go down the
process for buying a long call option
which you would do if you wanted to make
a bet on the price of the security going
up is very similar
after we enter in the symbol will leave
this strategy at calls input since we
are demonstrating input today and we can
also see that the current price of the
security is automatically populated
which is 270 for 0.03 next we are going
to select our action by to open just
means we're buying a new option contract
then we enter the quantity of contracts
note that each contract is typically 100
shares so if I buy one contract I'm
effectively buying options on 100 shares
of the underlying security next we enter
the expiration date if the underlying
security does not reach the strike price
by the expiration date then our option
will expire worthless the farther out
our expiration date the more expensive
the option is going to be the final step
is to enter the strike price for a put
option the higher the strike price the
more expensive the option will be
finally we select call or put and as I
mentioned I am buying a put today then
we select our order type market orders
will execute as quickly as possible at
the best available price and market
orders are by far the most common with a
market order on fidelity the only timing
option is day which means the order will
remain open for one full day and will be
closed if not executed on that day
remember the market is open Monday
through Friday from 9:30 a.m. to 4:00
p.m. Eastern and you will not be able to
place a trade outside of those hours
once we've filled into all the option
details we can click this Max gain loss
link and we can see that in this case
our max gain is substantial and the max
amount we can lose is $0 however bear in
mind that does not factor in the price
we are going to pay upfront to purchase
the option now we can preview our order
and we see that the estimated total
value or cost to buy the option will be
three hundred and fifty two dollars and
sixty five cents so for a long put or
call option that is the maximum amount
we can lose it's important to note in
this option we would have to make back
the premium we were paying to buy the
option in order to truly breakeven so in
this case the price of s py would have
to reach
236 dollars and 48 cents to truly break
even and I've shown the math behind that
at the bottom of the screen and a put
option the maximum amount we can gain
depends on how much the price of the
security goes down and in a call option
it would depend on how much the price of
the security goes up then you simply
review the order and place a trade and
note that if your option becomes in the
money you will need to execute the
option or close out the option prior to
the expiration date in order to avoid
expiring worthless lastly I just wanted
to quickly show you guys a few cool
tools on fidelity that you can use to
evaluate options so if you go to news
and research options and then type in
our security ticker we get this grid
that shows a bunch of different option
prices which are shown in the column on
the Left titled last as in last price
the price has shown per share and
remember each contract is typically for
100 shares this grid shows calls on the
left and puts on the right and we can
evaluate a bunch of different scenarios
depending on the strike price and
expiration date another cool tool is if
you click the profit and loss calculator
and play around with different scenarios
in there so I know this seems like a
complicated process but it's really not
bad once you get the terminology down
feel free to post any questions below
I'll do my best to answer them and don't
forget to subscribe for more tips see
you next time
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