The Ultimate Beginner’s Options Crash Course To Be Consistently Profitable (PART 1)

Are you a beginner in the world of options trading, looking for a comprehensive crash course to help you consistently profit? Well, you’re in luck, because Options with Davis has created “The Ultimate Beginner’s Options Crash Course To Be Consistently Profitable (PART 1)” video just for you! In this video, Options with Davis promises to share their personal experience and insights that transformed them into a profitable trader. Plus, they’re offering viewers a free copy of “The Options Income Blueprint” for even more valuable resources. So grab your pen and paper, get ready to take notes, and let’s dive into the core fundamentals of options trading together!

In this captivating crash course, you’ll learn all about call and put options, how they work, and the ins and outs of exercising them. Options with Davis breaks down the key concepts, from strike prices to expiration dates, in a clear and easy-to-understand manner. They also delve into high-probability consistent income strategies, recurring profits with the wheel strategy, and mastering covered calls. Whether you’re brand new to options trading or looking to enhance your knowledge, this video will provide you with the foundation to become a consistently profitable trader. So sit back, relax, and get ready to take your options trading to the next level!

Table of Contents

High-Probability Consistent Income Strategies

In the world of options trading, consistency is key. Traders are always on the lookout for high-probability strategies that can generate recurring profits. These strategies form the foundation of a successful trading career and can help traders navigate the ups and downs of the market. By understanding and implementing high-probability consistent income strategies, traders can increase their chances of long-term profitability.

One such strategy is the Wheel Strategy. The Wheel Strategy is a popular options trading strategy that aims to generate consistent income from stocks. It involves selling puts on stocks that you wouldn’t mind owning at a lower price and then, if assigned, selling covered calls on those stocks to generate additional income. This strategy allows traders to take advantage of stock price movements while still generating income regardless of market conditions.

Recurring Profits With The Wheel Strategy

The Wheel Strategy, as mentioned earlier, involves a combination of selling puts and selling covered calls. Let’s break down how this strategy works:

Selling Puts: When selling puts, you are essentially selling someone the right to sell their stock to you at a specified price (the strike price) within a specified time period (until expiration). By selling puts, you are effectively taking on the obligation to buy the stock at the strike price if the option is exercised.
Covered Calls: If the put option that you sold is exercised, and you are assigned the stock, you can then proceed to sell covered calls. Selling covered calls involves selling someone the right to buy the stock from you at a specified price (the strike price) within a specified time period (until expiration). By selling covered calls, you are generating income from the stock you already own.

The Wheel Strategy allows for recurring profits because even if the stock is assigned to you, you can continue to sell covered calls on that stock, generating income until it is called away again. This strategy is especially effective in sideways or slightly bullish markets, where stock prices tend to remain stable or experience small fluctuations.

Mastering Covered Calls

Covered calls are a powerful tool in the options trader’s arsenal. They allow traders to generate income from stocks they already own while simultaneously benefiting from potential stock price appreciation. By selling covered calls, traders can enhance their returns and potentially reduce their cost basis in the stock.

A covered call is created by selling a call option against a stock that you already own or are willing to own. The call option acts as a contract that gives the buyer the right to purchase the stock at a specified price (the strike price) within a specified time period (until expiration). By selling this call option, you are effectively giving someone else the opportunity to buy the stock from you at the strike price if the option is exercised.

The key to mastering covered calls is selecting the right strike price and expiration date. The strike price should be set at a level that you are comfortable selling the stock at, while the expiration date should align with your trading objectives. By carefully selecting these parameters, you can maximize your income potential while still maintaining the potential for stock price appreciation.

It is important to note that selling covered calls does come with some risks. If the stock price rises sharply and surpasses the strike price of the call option, you may be obligated to sell the stock at a lower price than the current market value. Therefore, it is essential to choose your covered call positions wisely and be prepared to manage your trades actively.

The Ultimate Beginners Options Crash Course To Be Consistently Profitable (PART 1)

Options trading for beginners

Options trading can seem daunting for beginners, but with the right knowledge and strategies, it can be a rewarding endeavor. Options are derivative instruments that derive their value from an underlying asset, such as a stock or an index. They provide traders with the opportunity to profit from price movements without actually owning the underlying asset.

Before diving into options trading, it is crucial for beginners to understand the basics. This includes understanding the difference between call options and put options, as well as the intrinsic and extrinsic value of options. Call options give the buyer the right to buy the underlying asset at a specified price, while put options give the buyer the right to sell the underlying asset at a specified price. The intrinsic value of an option is the difference between the current price of the underlying asset and the strike price, while the extrinsic value represents the time value and volatility premium of the option.

Once the basics are understood, beginners can start exploring different option trading strategies. Some common strategies include buying call or put options for speculative purposes, selling covered calls to generate income, and utilizing advanced strategies like straddles and iron condors to take advantage of market volatility.

As a beginner, it is crucial to start with a solid foundation of knowledge and to practice with small positions before scaling up. Options trading involves risk, and it is essential to have a clear understanding of your risk tolerance and trading objectives. By arming yourself with the necessary knowledge and strategies, you can embark on your options trading journey with confidence.

Option trading strategies

Option trading strategies offer traders a variety of ways to profit from different market conditions and price movements. Whether you are bullish, bearish, or neutral, there is a strategy that can align with your outlook and objectives. Let’s explore some popular option trading strategies:

Long Call: A long call strategy involves buying a call option on a stock or index. This strategy is best suited for bullish traders who believe that the price of the underlying asset will rise. By buying the call option, you have the right to buy the underlying asset at a specified price for a certain period. If the price rises above the strike price, you can profit from the price difference.
Long Put: A long put strategy involves buying a put option on a stock or index. This strategy is best suited for bearish traders who believe that the price of the underlying asset will fall. By buying the put option, you have the right to sell the underlying asset at a specified price for a certain period. If the price falls below the strike price, you can profit from the price difference.
Covered Call: A covered call strategy involves selling a call option on a stock that you already own. This strategy is best suited for neutral to slightly bullish traders who want to generate income from their existing stock positions. By selling the call option, you give someone else the right to buy the stock from you at a specified price. If the option is exercised, you can profit from the premium received, while still potentially benefiting from any stock price appreciation.
Straddle: A straddle strategy involves buying both a call option and a put option on the same stock or index with the same strike price and expiration date. This strategy is best suited for traders who expect a significant price movement but are unsure about the direction. By buying both options, you are positioned to profit from the price movement in either direction.

These are just a few examples of option trading strategies. It is important to understand the strengths and weaknesses of each strategy and to align them with your trading objectives and risk tolerance. It is also worth noting that options trading requires active management and monitoring, as positions can change rapidly due to market conditions.

Option selling strategy

Option selling, also known as option writing, is a strategy that involves selling options to generate income. This strategy is best suited for traders who are looking to take advantage of time decay and market volatility. When you sell options, you take on an obligation to buy or sell the underlying asset at a specified price if the option is exercised.

One popular option selling strategy is the covered call strategy. This strategy involves selling call options on stocks that you already own. By selling the call options, you generate income in the form of the premium received. If the options are exercised, you are obligated to sell the stock at the specified price (the strike price). This strategy allows traders to generate income from their existing stock positions while still potentially benefiting from any stock price appreciation.

Another option selling strategy is the cash-secured put strategy. This strategy involves selling put options on stocks that you wouldn’t mind owning at a lower price. By selling the put options, you generate income in the form of the premium received. If the options are exercised, you are obligated to buy the stock at the specified price (the strike price). This strategy allows traders to potentially acquire stocks at a discount while still generating income in the process.

Option selling strategies can be effective in sideways or slightly bullish markets, where stock prices tend to remain stable or experience small fluctuations. However, it is important to manage risk when selling options, as large price swings or unexpected events can result in significant losses. Traders should carefully select their strike prices and expiration dates to align with their risk tolerance and trading objectives.

Understanding call options and put options

In options trading, there are two primary types of options: call options and put options. Understanding the differences between these two types of options is crucial for successful trading. Let’s take a closer look at call options and put options.

A call option gives the buyer the right, but not the obligation, to buy an underlying asset (such as a stock or an index) at a specified price (the strike price) within a specified time period (until expiration). The buyer of a call option pays a premium to the seller in exchange for this right. If the price of the underlying asset rises above the strike price, the buyer can exercise the call option and profit from the price difference.

On the other hand, a put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price (the strike price) within a specified time period (until expiration). Similar to call options, the buyer of a put option pays a premium to the seller in exchange for this right. If the price of the underlying asset falls below the strike price, the buyer can exercise the put option and profit from the price difference.

Call options and put options can be used in a variety of trading strategies, depending on the trader’s outlook and objectives. Call options are typically used by bullish traders who believe that the price of the underlying asset will rise. They allow traders to profit from price increases without actually owning the underlying asset. Put options, on the other hand, are typically used by bearish traders who believe that the price of the underlying asset will fall. They allow traders to profit from price decreases without actually owning the underlying asset.

Understanding call options and put options is essential for navigating the world of options trading. By mastering the concepts and strategies associated with these options, traders can unlock a wide range of trading opportunities and increase their chances of success.

Intrinsic and extrinsic value of options

When trading options, it is crucial to understand the intrinsic and extrinsic value of options, as these values affect the price and profitability of the options. Let’s explore these two values in more detail.

The intrinsic value of an option is the difference between the current price of the underlying asset and the strike price of the option. In other words, it is the value that an option would have if it were exercised immediately. For call options, the intrinsic value is the positive difference between the current price and the strike price. For put options, the intrinsic value is the positive difference between the strike price and the current price. If an option has no intrinsic value, it is said to be “out of the money.”

The extrinsic value of an option, also known as the time value, is the portion of the option premium that is not attributable to the intrinsic value. It represents the potential for the option to gain additional value before expiration. The extrinsic value is influenced by factors such as time until expiration, volatility, and interest rates. As the expiration date approaches, the extrinsic value tends to decrease, as there is less time for the option to potentially move in the desired direction.

The intrinsic and extrinsic values of options work together to determine the total value of an option. This total value is known as the option premium. The option premium is the price that traders pay to buy options or the price that they receive when selling options. Traders can profit from options by buying them at a lower premium and selling them at a higher premium, taking into account changes in intrinsic and extrinsic values.

Option Greeks: Delta, Theta, Gamma, Vega

Option Greeks are a set of risk measures that help traders assess the sensitivity of options to various factors. By understanding these Option Greeks, traders can make more informed decisions and manage their portfolios more effectively. Let’s take a closer look at some of the key Option Greeks: Delta, Theta, Gamma, and Vega.

Delta: Delta measures the sensitivity of an option’s price to changes in the price of the underlying asset. It represents the expected change in the option price for a one-point change in the underlying asset’s price. For example, if an option has a Delta of 0.50, it means that for every one-point increase in the underlying asset’s price, the option price is expected to increase by $0.50.

Theta: Theta measures the sensitivity of an option’s price to the passage of time. It represents the expected change in the option price for a one-day decrease in the time to expiration. Theta is often referred to as the time decay of an option. As the expiration date approaches, the Theta value tends to increase, reflecting the diminishing time value of the option.

Gamma: Gamma measures the rate of change of an option’s Delta in relation to changes in the price of the underlying asset. It represents the expected change in the option’s Delta for a one-point change in the underlying asset’s price. Gamma is important for traders who engage in dynamic hedging strategies, as it indicates how much the Delta of an option will change as the underlying price changes.

Vega: Vega measures the sensitivity of an option’s price to changes in the implied volatility of the underlying asset. It represents the expected change in the option price for a one-percentage-point change in the implied volatility. Vega is important for traders who want to take a position on volatility or adjust their positions based on changing market conditions.

Understanding the Option Greeks allows traders to evaluate the potential risks and rewards of their options positions. By analyzing these measures, traders can determine their exposure to changes in the underlying asset’s price, time decay, volatility, and other market factors. This knowledge empowers traders to make more informed decisions and adjust their strategies accordingly.

Trading the expected move allows premium sellers to take advantage of the overstatement of volatility

The concept of the expected move in options trading provides an opportunity for premium sellers to take advantage of the overstatement of volatility. The expected move refers to the range within which a stock is likely to trade in the next 24 days, as predicted by the options market.

Historical statistics show that implied volatility (IV) tends to overstate actual volatility, meaning that prices often stay within the expected move range. This overstatement of volatility provides potential profits for premium sellers, who can benefit from the decay of option premiums as time passes and from the fact that prices tend to stay within the expected move range.

Neutral trading strategies, such as the Strangle or Iron Condor, can be profitable if the market stays within a certain range at expiration. These strategies involve selling both call and put options with strike prices outside the expected move range, taking advantage of the overstatement of volatility.

The theoretical probability suggests that the stock should stay within the expected move range 68% of the time. However, actual occurrences within the range are often higher, ranging from 71% to 85%. This creates an edge for traders, as they can profit more often than the theoretical probability suggests.

Tastytrade’s study shows that the expected move consistently overstates the average realized move. The difference between the expected move and the realized move is more pronounced in higher volatility environments. This means that premium sellers have even more opportunities to profit from the overstatement of volatility during periods of high market volatility.

By trading the expected move and implementing neutral trading strategies, premium sellers can take advantage of the overstatement of volatility and increase their chances of consistent profits. This approach requires careful analysis, risk management, and an understanding of market dynamics.