Most traders start out buying options because it’s the simplest option strategy to understand. If you think a stock will go up, you’d buy a call. If you think the stock will go down, you’d buy a put.
Well this is NOT a very good trading strategy because you’ll lose money every single day due to time decay. No smart investor is going to buy a depreciating asset and call it an investment.
Watch this video to learn a better way to buy options to make a directional bet on a stock but WITHOUT time decay hurting you. We’re going to show you how to trade the Long Vertical Spread to accomplish this.
Also, make sure to sign up for our FREE 3 Video Lesson Series at www.skyviewtrading.com!
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what are options
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Vertical Spread Option Strategy
Bull Call Spread
How To Trade a Vertical Spread
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option time decay
these trade example profits seem rather unrealistic if theta (time) is slowly killing your long leg at the same time it's killing your short leg you sold. Are you going long farther out in time, say (68 days to exp) and shorting sooner (30 days or less to exp)?
It sounds like you break even but you save $250.00 in the strike price because we are risking only 500. In which scenario do we make money on the short 80 call? On the vertical Put, do you short buy high and sell low on vertical spread?
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Because in that case, you're hit hard by time decay. Not only does the stock has to move, it has to move big for you to even break even... With this strategy, time decay does not hurt you and even if the stock stays flat, you will breakeven.
Hello, regarding doing puts perhaps i purchase at X then on bracket i do profit taker 10% down so if i win appears negatives numbers on monitor so i dont understand please help ☺ if the software is that way or i am makimg mistake, thanks.
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If anyone can help me out here, I’m a young investor just stating out and have tasted making some money so I’m looking into deeper strategies for options trading, so great video but my question is that what happens when you sell a call option or when it expires? We make money from that? I thought we’d lose it because the price didn’t go above 80 so it expires worthless and we lose all that money. Any clarification would be great!
I have a put option that expires this Friday. The option is selling at 3 cents, and my account won't let me sell to close in less than 5 cent increments. I am worried about getting assigned. (I don't know what's going to happen.)
But if I do get assigned to buy the underlying shares, my strike price is $2, and the shares are selling at $2.40. Couldn't I turn around and sell the shares and make my money back?
I traded amzn spreads with call options using techniques detailed here. With expiration still almost 5 days away, the break even, profit etc calculated here in this video are no where near the actuality. After I made the debit trade, amzn shot up by 20 points blowing past my short call strike by 4 strikes still my position is just break even! May be $5 spread is not good enough for a 1400 a share stock like amzn.
Great video, thank you for the clear explanation. I have a question however, What if I buy a call option 6 months out, but three months go by and the stock is down. Can I still do this vertical bull strategy although there's 3 months left until expiration?
In this example he bought the $70 strike call and the price of the contract is $7.50. You add the price you paid for the contract to the strike price. $70+$7.50 = $77.50. So the stock needs to go to $77.50 just for you to break even. Anything higher is profit. 1 contract = 100 shares.
I’m a little confused when he says we’re going to buy a call option at 7.5 which costs $750 and then we’re going to sell an OTM put at 2.5 for -$250.
How is this -$250. The video makes it seem like it’s a free 250 dollars. Because wouldn’t the total cost he $1,000 initially?
To Christ, and others: first, there are no puts in this example. You are buying one call and selling one call. Only the strike prices are different. (Yes, it is also possible to do a vertical put spread, which involves buying one put and selling one put, but the example in the video deals with a vertical call spread.)
The price of the underlying will either  go up significantly, [2 ]go down significantly, or stay about the same. With a vertical call spread, you will make money in conditions 1 and 3, and your losses will be limited in condition 2.
Second, you get $250 for the call you sold like this: you sold the call for $2.50 *per share*, multiplied by the number of shares controlled by one contract, which is 100, so 2.50 times 100 equals $250. If the call you sold is not exercised (because it does not hit the strike price), then you would keep the 250 if you hold to expiration. However, you will normally close the spread position before expiration, in which case you will be buying back the call you sold at a lower price and pocketing the difference. The price at which you buy back the unexercised short call depends on what the price of the underlying (stock) does in the meantime. Your broker will caculate all that automatically at the same time as the value of the long call, since you buy and sell them together as a single order (that is, you buy and sell the spread as a unit, not one component at a time). The speaker was trying to keep the details simple so you can grasp the key ideas more easily. I didn't know this would take so much typing!
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There's no error in the video, profit of 90% is correct. Another way to understand it is: you're 1 day from option expiry, the stock price at is $79.5, now you want to close your position, so you need to buy the $80 call which costs you $0, and you have to sell the $70 call, which gives you +$950.
in scenario 2 when spot is 75 , why does long call have -250....its still in the money so shudnt it be +ve-profit , also the short 80 y zero as spot is below 80 so shudnt tht too be in profit...plz explain
At expiration, the option will only be worth it's intrinsic value. So the 70 call will only be worth 5.00 if the stock price is at 75.00. And since we paid 7.50, and it's now at 5.00, we will be -2.50 (-$250) on that leg of the trade.
Great advice 4 "pick a stock, any stock." The fact that your profits are capped, as well as your losses, is the issue. I suggest placing more emphasis on the Underlying. This means you have to do your homework so that the probability of success is nicely in your favor. One winner can cover ten losers. I use verticals when I'm less certain, straight buys when I'm convinced of direction & time.
There is no benefit to trading options over, say, spread betting. And if the market is random you're just as likely to lose. You're still betting that the price of the stock will go up or down. If you keep picking the wrong direction (scenario 3 in the video) then you'll lose money...again and again and again. That's what happens when you spread bet or do any other form of trading. So, what's the point.
This is just one option strategy of many... and yes, it is a directional strategy. However, most strategies we teach are not directional like this. (Watch our Iron Condor video and/or our other Vertical Spread video where we talk about selling vertical spreads)
I use E-Trade, and IBD the rest is watching videos I've been trading since 92, be careful trade small $ I only trade very liquid etf's & the spyders, if your platform has a practice platform use it, although you'll see the difference when you have real skin in the game.
Great Video but there was small mistake on the videos. On scenario # 1, the profit is not 90% bcoz the original cost was $500 but you don't get the premium of $250 as you have already deducted that amount from $750. :)
The net profit also depends on what the underlying stock is at. If it blows past the $80 call you sold you make MAX return which is $1000 or $10 in contract terms, $80call-$70call=$10 profit. so if capital is $500 for the trade you made %100. Also for the downside if it goes BELOW your $70 call you will only get back $250 from the $80call you sold because the $70call would be worthless resulting in a %50 loss.
At 2:55 does the long 70 call have to drop below 70 in order to exercise the option? The chart doesn't show it dropping below 75 roughly and there's a 9.50 profit? If not, what's stopping a person buying the call option for 70 and selling it right away and making a 5 difference (75-70)?
Hi, I enjoyed your video but I just have a few quick questions. In scenario 1 you say that 'at the expiry date' the long 70 call is worth 9.50. My question is how exactly do you manifest that theoretical value into real value? I understand that the call option is worth 9.50 but that is only if someone is willing to buy that call option right? Do people really buy a call option 'at the expiry date'? And if no one is willing to buy it then is that option essentially worthless (that is unless you exercise your right to buy the share at $70 and subsequently sell it at $79.50 meaning that you would in fact own the share for a brief period of time)?
Sorry I don't know if that makes sense but hopefully you can clear that up for me. I am from Australia btw.
Hey Scott, the call will be worth 9.50 because if the call were less than 9.50, you better beliee there would be people willing to buy it at the expiration date because it would be free money (which doesn't exist of course).
If the stock is at 79.50, and you could somehow buy the 70 strike call for less than 9.50, then you could acheive a risk free profit immediately... You'd buy the call, let the call turn into long stock, then sell the stock at 79.50.
Hope that makes sense. Basically, there WILL be bid on that call option even at the expiration date if it is in-the-money (meaning the stock price is higher than the call option's strike price).
For Scenario 1 on the Vertical Spread when it says:
Long 70 Call @7.50 -> 9.50 = +200
Short 80 Call @2.50 -> 0.00 = +250
I understand the first part with the Long Call but how would you make +250 on your short call? If the stock changed only .50 from the strike price of 80.00 wouldn't it +50 on your -250 investment, resulting in -200 for that Short 80 Call?
I am probably wrong, just curious! Thank you for the great video though !
I feel in the same exact boat when I was first learning this. The trap people fall into is thinking of shorts in the same way as longs. Remember, with a short, you receive a premium (credit) at whatever the cost (in this scenario it is $250 ($2.50 * 100).) Now... the only way you can lose that money is if the price of the underlying stock is above $80. As long as it stays at or below $80 (rendering the call worthless, $0.00), you keep (or make) the premium (in this case $250) REGARDLESS of how far below the $80 it goes. The call itself has no value whatsoever once it hits $80, which means the person who sold it/shorted it gets to keep the premium. Hope this helps.
Your videos are awesome and super helpful for a rookie like me trying to learn. My question is what are the exit choices? Specifically for a bull put and bear call credit spreads. I know that if taking max profit you can let them expire and keep the credit. BUT if the market goes the other way, can you let them simply expire and take a max loss OR do you have sell/but to cover your positions??? Many many thanks!
WIth Verticals, you can let them expire OR you can close them as long as BOTH legs are either ITM or OTM. (you can't have one ITM and one OTM). However, we highly recommend just closing all positions prior to expiration if any option is ITM. It keeps things simpler and will also save you money on exercise fees.
I understand a Call and a Put option and now am learning Vertical spreads. That's a bit harder to grasp if I don't get the basics right. That's why explaining the concept slower would help my brain register these concepts. Or I have to watch this video about 5 times or so to understand every layer of information. Thx.
Thanks. We do explain these concepts much slower and in more detail in our Options Trading Course on our website. The course is over 4 hours so we are able to go into much more detail. Have to keep the videos somewhat short for YouTube, unfortunately! We will do our best in future YouTube videos to slow it down though!
Awesome, Jason. In the meantime, start with our 3 free video series on our site! Just enter your email at the homepage of the site and you'll be sent 3 free videos. Link to the site in the description!
You need to upgrade your account to Tier 2. The process should take just a couple days max. You don't have to have a successful track record but they do look for some other things. Email us via the homepage of our website and we'll give you some tips (link in description).
If you short a call option wouldn't your stock lose value due to the price of the stock going down, because you would have to buy 100 shares to short? That would mean your max loss is $75*100 - 500 per long vertical spread option. Maybe I'm missing something.
As others seem to be confused about this too.. are you ever at any time actually "owning" the underlying stock? My understanding is, buying options gives me the "right", but not the "obligation" to actually buy the underlying stock. Example: I've purchased "call" options simply by trading the premiums. Is this the same? Thanks.
Nope, we are never actually owning or trading the underlying stock... We are just trading the option contracts. Also, you are correct in your understanding that it gives you the right but not the obligation to buy the underlying stock... SELLING an option, however, means you are SELLING this right to someone else!
For this strategy, we are buying 1 option and selling another option (at a different strike). The reason we do this is to eliminate the time decay that will hurt you if you were to simply purchase an option.
You'd really benefit from our training course we just launched on our website. The course includes over 4 hours of video content (just like our YouTube vids) teaching options and all the strategies from A-Z.. Check it out!
It doesn't make sense on slice 3:13. You cannot count the profit of short 80 call twice. The profit should be 0. Because you already counted the $250 profit in your initial cost of $500 ($750-$250). So, the return should be 200/500 = 40%.
No, the slide is correct, I promise. We were breaking up the trade into each leg to demonstrate how the trade works. We did not count the profit of the 80 Call twice.
The $250 was not factored into the initial cost on this slide because we showed that the cost of the 70 strike call was 7.50... (If we were to factor that into the initial cost, then the cost would have been 5.00, not 7.50).
Hi ScorpXM, do you mean that you only use the vertical spread strategy? (vs. long call/put) Or are you referring to something specific in the comments like exp. dates or something? just wondering i'm a noob
i don't see an answer to the following question . . . . . >>>>>> kingmike40 (2 months ago) . . . . If you sell a call option what happens if the option is exercised?>>>>> Gman Dotcom: hey skyview where is the answer to this question???<<<<<<
Selling the call is as simple as buying one. Whenever you sell the call, you are telling the person who buys it from you "I am contractually obligated to sell you 100 shares of stock at a certain price." And people who think the stock is going up and buy the call you sold are saying "I want to buy the right to buy 100 shares of stock at a certain price." So, you see, the value is in the RIGHT to buy/sell. Think of it like car insurance. You buy a put from your car insurance company every month. If the value of your vehicle goes down (you get in a wreck), then the insurance company will have to pay you the value you agreed upon originally (the strike price). Do you understand?
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