WHAT TO EXPECT IF YOU'RE NEW TO OPTIONS & TASTYTRADE...
Sept 8, 2013 5:11:04 GMT -8
tls, fulanito, and 1 more like this
Post by Mark @hawaiiantrader on Sept 8, 2013 5:11:04 GMT -8
When I first learned about options, I like most people thought of them as a risky way to play the market. There always seemed to be this auroa of mystery surrounding the option world... as if those who were in it wanted others to feel as though it was some elite club.
The beauty of tastytrade is they take all that mystery out of options and break it down into 'tasty bites' for the average mom and pop retail investor. More importantly, they give you strategies that are practical and that can be applied immediately in the real-world.
What I have taken away from tastytrade is the core philosophy of:
If you just blurted out loud..."What da *%#?!" Don't worry, I did the same thing. I'll try to explain it in an easier way. I'm sure there are others in #TastyNation that have a great way of expressing this, so please anyone reading this chime in and please post a reply.
In a nutshell, what if you could:
1) Pick a stock or underlying,
2) Actually choose your chance of being correct... say a probability of success rate of around 84%,
3) Get paid by someone else who buys that same stock from you and has only a 16% chance of being right, and finally...
4) Be a winner even if you were wrong about your assumption on the stock?
How many times would you take that deal? Heck I'd take that deal every day of the weak and twice on Sundays. Tom and Tony take that deal on average 20 times per day at least!
Now I may be over simplifying this a bit but when you really break it down, the concept really is that simple.
I personally comprehend things faster when they are put to me in the context of ‘real-world’ applied situations. For those of you who are the same way and perhaps enjoy sports, let me lay out a situation for you.
Let's say you have a child who plays pee-wee football in the local little-league. You know your boys team is good because you’re there supporting him at every practice.
Your next door neighbor though… he just happens to be a real putz. You know the type. He’s always bragging about his money or something else and his dog always takes a crap in your front yard.
One morning while you’re picking up the crap his dog made in your yard yet again, he comes over and starts talking all kinds of smack about how his kids team is going to crush your kids team in their football game later that day.
He says, “My kids team is going to slap your kids team all over the place like a redheaded stepchild. You guys have no chance in hell. In fact, I’ll bet you $1,000 that your kids team won’t even score 14 points!”
Now you’ve had enough of his B.S. You did your homework. Your kid’s entire team is on average 4 inches taller and 20 pounds heavier. In addition, your son the quarterback just finished going through a quarterback boot camp with Colin Kaepernick!
You’ve been talking to your old math professor and he inputs the stats into his software program. He tells you that the software math states that your probability of winning and scoring at least 14 points is 84%!
So you tell your neighbor: “Okay, and since you’re absolutely so confident that you’ll win, why don’t you buy 3 points from me? I’ll sell you 3 points for $300 now and you give us a head start ‘cushion’ of 3 points. So if we score at least an additional 11 points, I keep your $300.”
“I’ll give you a certificate that says if we don’t score the 11 points, I’ll pay you the $1,000. However, I have the option of buying back that certificate from you at any time before the game ends.”
Your neighbor quickly shouts “DEAL!” and he gleefully forks over the $300 acting totally confident that he has this bet in the bag as he mutters “sucker” and walks away.
The game starts. Your son is doing great and by the end of the 1st quarter, your kids team has already scored 10 points and winning 10-0. You look over at your Putz-of-a-neighbor, and he pretends to be defiant but you can tell he’s worried. After all, you only need to score 1 more point and the full $300 is yours to keep.
However, you notice it might start to rain and you over heard the coach saying that he might take your son out of the game to save him for next weekend. So you go to your neighbor and say:
“I’ll buy the certificate back from you right now for $50, or take the chance that we won’t score just one more point and you’re out the entire $300.”
He reluctantly admits defeat, decides to cut his losses and hands you back the certificate for $50. You walk away grinning having just made $250 from the Putz that is your neighbor.
Congratulations, you just sold premium/credit also called selling a "PUT" options contract. "What-What?"
1. You first picked your spot/strike price where you knew you had approximately an 84% chance of being right.
2. You then sold a contract "PUT" (bid) on that spot/strike price for $300.
3. You then increased your chances of winning even further by lowering your cost basis in the deal by getting that 3-point 'cushion' when you sold that PUT in that spot/strike price.
4. Finally, you purchased it back for $50 thus pocketing the difference of $250. That's a 25% return on capital!
($300 that you sold and collected from your neighbor minus the $50 that you paid to buy the contact back from your neighbor = $250 profit)
You realize that you won the $250 even though your team didn't actually make the required 14 points yet. Since you bought back the certificate early, even if the score never changes and your kids team never scores that additional point, you still pocket that $250. In fact, even if they did score that additional 1 point but eventually lost the game, you would have still made the total $300.
As Tom and Tony would say, “Good Job Out'ta you!” as Vonetta chimes in with a “Woot-Woot!”
While the above may be an oversimplification and not exactly the same thing, I found that this type of explanation greatly helped me wrap my head around the basic tastytrade concept of giving yourself the chance of a higher probability of success by selling premium/credit in options to lower your cost basis.
I just put videos in just for people that are totally new to options trading and want to know more. Just click on this link. Its totally free, just have to register: Golden Gecko Options Trading: What You Need To Know
Explore the forum and of course tastytrade.com to learn a whole lot more.
Peace,
Mark
The beauty of tastytrade is they take all that mystery out of options and break it down into 'tasty bites' for the average mom and pop retail investor. More importantly, they give you strategies that are practical and that can be applied immediately in the real-world.
What I have taken away from tastytrade is the core philosophy of:
'Give yourself the chance for a higher probability of success by selling premium/credit in options to lower your cost basis.'
If you just blurted out loud..."What da *%#?!" Don't worry, I did the same thing. I'll try to explain it in an easier way. I'm sure there are others in #TastyNation that have a great way of expressing this, so please anyone reading this chime in and please post a reply.
In a nutshell, what if you could:
1) Pick a stock or underlying,
2) Actually choose your chance of being correct... say a probability of success rate of around 84%,
3) Get paid by someone else who buys that same stock from you and has only a 16% chance of being right, and finally...
4) Be a winner even if you were wrong about your assumption on the stock?
How many times would you take that deal? Heck I'd take that deal every day of the weak and twice on Sundays. Tom and Tony take that deal on average 20 times per day at least!
Now I may be over simplifying this a bit but when you really break it down, the concept really is that simple.
I personally comprehend things faster when they are put to me in the context of ‘real-world’ applied situations. For those of you who are the same way and perhaps enjoy sports, let me lay out a situation for you.
"Your Neighbor the Putz"
Let's say you have a child who plays pee-wee football in the local little-league. You know your boys team is good because you’re there supporting him at every practice.
Your next door neighbor though… he just happens to be a real putz. You know the type. He’s always bragging about his money or something else and his dog always takes a crap in your front yard.
One morning while you’re picking up the crap his dog made in your yard yet again, he comes over and starts talking all kinds of smack about how his kids team is going to crush your kids team in their football game later that day.
He says, “My kids team is going to slap your kids team all over the place like a redheaded stepchild. You guys have no chance in hell. In fact, I’ll bet you $1,000 that your kids team won’t even score 14 points!”
Now you’ve had enough of his B.S. You did your homework. Your kid’s entire team is on average 4 inches taller and 20 pounds heavier. In addition, your son the quarterback just finished going through a quarterback boot camp with Colin Kaepernick!
You’ve been talking to your old math professor and he inputs the stats into his software program. He tells you that the software math states that your probability of winning and scoring at least 14 points is 84%!
So you tell your neighbor: “Okay, and since you’re absolutely so confident that you’ll win, why don’t you buy 3 points from me? I’ll sell you 3 points for $300 now and you give us a head start ‘cushion’ of 3 points. So if we score at least an additional 11 points, I keep your $300.”
“I’ll give you a certificate that says if we don’t score the 11 points, I’ll pay you the $1,000. However, I have the option of buying back that certificate from you at any time before the game ends.”
Your neighbor quickly shouts “DEAL!” and he gleefully forks over the $300 acting totally confident that he has this bet in the bag as he mutters “sucker” and walks away.
The game starts. Your son is doing great and by the end of the 1st quarter, your kids team has already scored 10 points and winning 10-0. You look over at your Putz-of-a-neighbor, and he pretends to be defiant but you can tell he’s worried. After all, you only need to score 1 more point and the full $300 is yours to keep.
However, you notice it might start to rain and you over heard the coach saying that he might take your son out of the game to save him for next weekend. So you go to your neighbor and say:
“I’ll buy the certificate back from you right now for $50, or take the chance that we won’t score just one more point and you’re out the entire $300.”
He reluctantly admits defeat, decides to cut his losses and hands you back the certificate for $50. You walk away grinning having just made $250 from the Putz that is your neighbor.
Congratulations, you just sold premium/credit also called selling a "PUT" options contract. "What-What?"
1. You first picked your spot/strike price where you knew you had approximately an 84% chance of being right.
2. You then sold a contract "PUT" (bid) on that spot/strike price for $300.
3. You then increased your chances of winning even further by lowering your cost basis in the deal by getting that 3-point 'cushion' when you sold that PUT in that spot/strike price.
4. Finally, you purchased it back for $50 thus pocketing the difference of $250. That's a 25% return on capital!
($300 that you sold and collected from your neighbor minus the $50 that you paid to buy the contact back from your neighbor = $250 profit)
You realize that you won the $250 even though your team didn't actually make the required 14 points yet. Since you bought back the certificate early, even if the score never changes and your kids team never scores that additional point, you still pocket that $250. In fact, even if they did score that additional 1 point but eventually lost the game, you would have still made the total $300.
As Tom and Tony would say, “Good Job Out'ta you!” as Vonetta chimes in with a “Woot-Woot!”
While the above may be an oversimplification and not exactly the same thing, I found that this type of explanation greatly helped me wrap my head around the basic tastytrade concept of giving yourself the chance of a higher probability of success by selling premium/credit in options to lower your cost basis.
I just put videos in just for people that are totally new to options trading and want to know more. Just click on this link. Its totally free, just have to register: Golden Gecko Options Trading: What You Need To Know
Explore the forum and of course tastytrade.com to learn a whole lot more.
Peace,
Mark