Hi everyone! Today’s video is the fourth out of four videos about knowing your trading products. In episode 1, I spoke about stocks ( In episode 2, I went into detail on exchange traded products ( Episode three was on futures ( And today I will tell you about my favorite trading product, options.
In today’s video I want to answer three questions and provide you with my view on options.
What are options?
Why buy options?
Why sell options?
What are options?
Options are contracts between buyers and sellers. There are two different types of option contracts – puts and calls. Call options are purchased to profit from an outsized price move to the upside. Put options are purchased to profit from an outsized price move to the downside. Both put and call options provide buyers with rights and impose requirements on sellers.
Why buy options?
I would buy options if I was expecting something big to happen. If I expected prices to increase quickly, I would buy a call. If I expected prices to decrease rapidly, I would buy a put option. As a buyer, I plan to profit from the strategy of hitting a few home runs (baseball reference).
Why sell options?
I would sell options if I think the past is likely to repeat itself and, over time, the probabilities will continue to work out in my favor. This means, I would sell options if I don’t think something big is going to happen OR something big won’t happen soon enough. As a seller, I plan to profit from the strategy of hitting a lot of singles (baseball reference).
My opinion:
I plan to trade for a long time and expect the probabilities to work out in my favor over time. Therefore, I sell options and collect my small payments frequently.
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Leave your comments down below to let me know how I can improve and especially let me know what you would like me to cover next.
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