How To Trade Options Safely and Consistently

All right, ladies and gentlemen. I hope you're having a wonderful weekend. We are not going to have a watch list tonight. It's going to be tomorrow because of the holiday. So I figure we would take this time to elaborate on a strategy, especially a good strategy when it comes to how to trade options and doing so safely and consistently. I brought this up in the small account videos. We brought this up in many tutorials and I have a lot of other videos explaining this, but I want to go in depth now with credit spreads and selling premium, but I'm going to take it a step further here. So I am going to assume, you know, a little bit about spreads. If not, don't worry. You could still get something from this video. Just make sure you follow up with the other spread video. Because again, some questions we're not going to discuss of really the intricacies in the pure basics of a spread. But what more so what I want to talk about is going to be how to find the best ones. And really I want to clarify the difference of selling spreads that are high collateral and low collateral and how you can literally go about selecting the most safe consistent ones. Literally that the big boys on Wall Street and I've said this many times and I'm so confident about saying it because it's very very hard to dispute. This is literally throughout Wall Street. One of the safest strategies people with a lot of money do this Warren Buffett does it we are even doing this and you could utilize this the better you understand selling premium how this works. You could even utilize this in a long-term portfolio, but if you go about this in a certain manner, this is the most safest way to trade option. So that's what I want to discuss is how you could go about this in the most safest manner as well as the not safest manner and I'm really going to explain it. I got some keys for you and I'm even going to go over some tricks and I want to even keep it simple and we'll even show up for the Robin Hood account. And again, this may seem like it's confusing. It's a lot of stuff. This is something for the small accounts again. That is the whole key here selling premium is what people with a ton and ton of cash do but by utilizing credit spreads and options you could get into the game even with a very very small amount of money. So don't let spreads and say a lot of people say, oh, it's just too complex for me. Now, if you could buy an option and this will even further option trading you will be able to do these spreads. So let's get into it. But before we do that, you guys know what you need to do. Make sure to drop your thumbs up on the video. Make sure you subscribe. And if you don't know we are live Monday through Friday 30 minutes before open. It's the first link in the description and it is pinned in the comments. Hopefully we see you there in the morning, but it's free 99 too. So you could even come there and ask questions if none of this makes sense, but all we ask be positive and respectful not too big of a requirement. But nowadays, I guess it kind of is 2020 but let us get into it. So right off the bat the way to trade these options safely and consistently is going to be spread. So this is the quick recap. This is shorting an option. Everybody will tell you options are risky. Most of them expire worthless. So by selling a spread you are playing that to your advantage and this is the key you really need to understand. So again, I'm trying to get this in a simple way to just really make this click for you guys instead of trading options hoping that they're going to increase in value instead of buying a call hoping it goes up buying a put hoping it goes up you are trading them. That's why they say selling but to make it simple you just say trading you're trading these options in the hopes of them expiring worthless. So instead of buying an option in hopes that would go up you are selling or you are shorting this option hoping that by expiration day it loses all of its value. So if you want to be trading safely and consistently credit spreads are what you want to be doing especially if you want them to now expire worthless and profit the way to do this is through specifically a credit spread. So by doing a credit spread you are saying you want both of these options to expire worthless. If that was the case you would receive the profit as opposed to now doing a debit spread because when you do a debit spread you are actually hoping that it would expire with value. So that's the biggest difference here. We're focusing on credit spreads and selling contracts hoping that they expire worthless. But now why is there the difference between debit spreads and credit spreads and why do we even use credit spreads is because it limits buying power as opposed to just shorting a contract without doing a spread. So this is what I'm assuming you guys know if not check out the other videos, but essentially when you do any sort of debit spread or credit spread you're utilizing two options. You short one option and you buy another one in a credit spread you short one by another one in hopes that it gives you more credit or you collect more money than the trade cost the debit spread you would pay money. And again, you're hoping the debit spread expires worth with value, but essentially when you sell this strategy because again, you are essentially acting as the bank. So you it requires you to pledge money. This is why people with a lot of money and this is why anybody with a ton of money or even again any decent amount. This is the safest way to get a yield on your money by selling insurance and you're saying that's what they call it or you're essentially being this bank. It requires a lot of money by buying that other contract by using a spread. It limits the amount of buying power necessary, which makes it pretty much available to any size account. If you know what to do. So moving forward now the keywords we're going to talk about here is going to be credit. That's the first thing you're going to hear and ask a lot about it's pretty much how much you receive for the trade you want to collect a credit by receiving credit. You collect the money up front and then you hope the contract expires worthless so that you keep that credit or what people will also call premium. So when you open a credit spread or when you open the trade, you will receive a credit. If you are not receiving a credit, if you're not collecting any money up front that is not a credit spread and that is not selling premium. The next word you're going to come across that that you really need to know to understand this is going to be collateral and that's how much you're pledging to take on that trade. You're agreeing to a defined situation that will have a specific amount of risk. So by selling and shorting one contract and then buying another contract that limits the amount of buying power you need. However, the difference between those two strike prices creates a dollar amount that since you're collecting money up front you have to have that money available in the event that this trade works out against you. So that is your collateral. That's how much you have to put up to take on the trade. So you don't have to spend any money, but you're saying if and if this goes wrong, if and only if this goes wrong, I will pay this amount at the worst case scenario. In the meantime, you collect the credit. So essentially the collateral is the total risk or the difference between the strike prices the difference between the contracts you sell again. We're going to go over a credit spread and you'll see that but now one thing you will also see with these trades when you collect credit, even though they'll be the difference between strike prices. It could be let's say a dollar if you collect $50 in credit your real collateral or your real max risk is $50. So that's the basics. You're going to need to understand anything. Now again, go refresh on the other video. Make sure you paper trade these also first to begin with, you know, option trading and selling risk. You can't lose all the money, but this is now how I would go about finding the best credit spreads. So I'm going to show you guys even on Robin Hood. I have the tricks at the end. I'll show you guys how you can put them on so you can see what I'm talking about. But essentially now here are some just easy tips to in rules of thumb to follow if you want to find the best credit spreads and understand mostly what you're doing, but right off the bat stocks and ETFs that don't move a lot. Those are traditionally what a lot of premium sellers sell spread spreads on and just premium in general because indexes have less volatility. So if you remember some of the talks from the long-term portfolio, I tell you guys I don't buy ETFs for my long-term because I don't you know, I want the bulk of the move. I like it when the individual moves happen. Same thing even if we're trading options and earnings you want big dollar moves when you're buying the option. But now the diversification helps you if you're selling premium because ETFs that don't move a lot especially ETFs and the indexes. That's what a lot of premium sellers go to because they're only going to move a dollar or two in a day or in a week. You know, the indexes are not designed to move a lot. It's a little different here in 2020, but for the most part, you know, even selling indexes on oil and all that they're not designed to move a lot. And even if they do you'll win a bunch more times week after week of it not moving than the times that it does move, but those are going to be the safest credit spreads on any stock, especially ETFs that don't move a lot and are not designed to move a lot. The next thing you have to understand here is the credit to collateral ratio. This is the main key. This is where I'm saying this why I want to keep it simple. You don't need to know anything about like you don't need a special platform. You don't need to know anything but understand how this ratio operates you take the credit and I take it off full screen mode, but essentially you just got to take the credit. So let's say now you receive $1 on the trade and the max difference between strike prices is 250. That's the collateral divide that by 250. You are left with this number 4.4. That's 40% but now here's the end to it. It's the probability after you inverse it. So flip this around instead of 40% it's 60 that whatever's remaining is pretty much your probability of the trade. So if that was the credit credit to collateral ratio, you have a 60% Chance of that trade working in your favor and you winning by X meaning by expiration. You collect you collect and receive all of the collateral and win. So let me show you guys this because this is how you could just keep it simple again. And this how you would even do it on Robin Hood and we're going to go over the tricks but enter in the stock. You want to go you go to trade options and this is actually one of the tricks I'm going to talk about. It's very simple with the credit spread. If you want to make sure you're doing a credit spread, it's very simple. You go to sell you sell the expensive contract first and then you buy the cheaper one. That's it. That's why I don't say the total credit call credit spread and again now the difference in strike prices is that max risk. So here you see here now, it's a $1.39 total credit. So do that ratio again, take a $1.39 divide that by $2.50. You're left with 0.556. So do the inverse of that that's a 45% probability of profit meaning this trade has a 45% chance of actually working in your favor. So this is what you have to understand. This is really why I'm making this video because now there's two different ways to analyze the best type of credit spread in the ones you want to find again, you can make trades that pay a very high credit. You could walk away again. You can see right here. We could go to 25 and again the stocks at 231. So you're selling a 225 call then you're buying a 227 call you see you're getting a credit of $2.23. But the stocks at 231 you're saying by the end of this week, you're hoping both of these contracts expire worthless. That means the stock essentially for this contract to expire worthless and lose this value. It would have to go below 225 on a stock. That's not too big of a mover like HD. It's it's again. It's a lower probability. But then again, if you're beginning or you're starting out, that's why you could practice in paper trade and do this to understand. How do you know this is a good trade or bad trade? Let the credit verse collateral ratio tell you everything. So you see here in this case, you're collecting $2.23 credit. Now divide that by $2.50. You're left with 0.89. So the credits literally receiving 89% credit to collateral do the inverse. That's an 11% probability of you being successful. So you see how by doing this now, you're knowing. Okay. Well, I'm going to make that's an 11% chance of being successful, even though it's a credit spread and it's easy to make money doing credit spreads. Those are going to be the way to consistently build up a portfolio. Think about it. Doesn't make sense saying you're going to consistently trade options doing a strategy that statistically has a 1 in 10 chance. This is what all the big players do. They don't do all of those. This is a specific way to go about a credit spread. These are what I like. I personally like doing those, but it doesn't mean those are the best credit spreads. So now let's do the reverse here where you sell now this 237 and remember use the little tricks. If you want it to be a credit spread, you're selling the expensive contract and then you're buying back the cheaper one right below it or again. You could space out the credit or the difference between strikes, but I don't really recommend that you again, you have to understand what that implies with the max risk reward. So watch that other video. But here now you see the total credit is $16, but your max collateral is 250. You have to so that's what you could pretty much lose again. Well, I guess I'm telling you the max risk. Now you subtract the credit minus the collateral. So $16 of credit minus the $2 and 1550 cents. That's the most you could lose. But now in this case point 16 divided by $2 and 50 cents, you're left with 0.06. So inverse that if it's if that's a 6% credit to collateral ratio, the probability of that trade then is around 94% so you have a night. So even though you're only getting paid $16, if both contracts expire, it's pretty much saying the chances now of both contracts expiring worthless, meaning the stock doesn't get above 237, which would mean this one expires worthless to your odds. 94% chance. So now this is what people are doing because you could take a trade where 9 out of 10 times even slightly more than that. You're going to always win. You're getting a little bit amount of money, but again, it's safer and consistent. Now, if you wanted to put up more money, take more risk, you could be my guest. But that is essentially now as we move forward finding the best credit spreads, you have to find the difference and now quite simply the best credit spreads that are going to give you the easiest money and that are going to win the most are going to be far out the money and they're going to have 80% or even 70% is a little bit, you know, your borderline there, but 80% or higher you do those you're going to win. Now the other ones though, when you're selling the ones that are 10% those are good for finding the best credit spreads that pay high amounts of money, good risk to reward ratios, but you still have less probability of winning now. So moving forward, you will understand here credit spreads are inherently more advantageous than a normal contract. So selling that credit spread that's offering a high credit in a low collateral, but has a 10% probability, it's inherently better than buying a normal option three standard deviations out the money with a 10% probability because you still have a better chance and a better risk to reward strategy involved in it. But and again, you know with the contracts expiring, it's easier for a contract to expire than to end in the money and make, you know, a worthwhile breakeven, but you have to understand by selling high credit plays with lower probability, you're running that same risk though of just buying out the money contracts. It's not going to be how you build consistent income, but it will get you good risk to reward. You're more likely to get a signed or straight lose on those bigger trades because they're offering such high credit to again, you know, you're getting such a high payment. It's such a low risk to reward, you know, you can make $2.20 or risk 20 bucks, you know, it's coming with something. So don't forget that. But moving forward now with picking the right companies, you want to look for slow movers. And these are the two's I like. I like slow movers with small differences between the contracts AKA the strike prices and then going for low premium. So this is now the ones that could work like HD. Now, this is a slow mover, but it does kind of move big, but it has a big difference between the strike prices, a company that I like and this is what I'm talking about. And again, you could see here, you could do your analysis. One part is understanding how the underlying stock is going to move that will give you an, you know, advantageous approach to this. But at the end of the day, the risk to reward here, this is just looking at it from a strategical money management point. The price of the option chain is telling you the specifics and the statistics and you can just manage your risk and go from there and you can really treat this like a robot, but understanding the actual underlying company will give you a little bit more of an advantage. But Intel is an example of one of these companies that I like because you see here, it's a slow mover into Intel does not move a lot or use the Robin Hood chart to see. You can see pretty much over the last month. It was a pretty big month for them, you know, considering the whole melt up, but they went from from $57 to 60 bucks in one month. They move $3, you know, in three months, you know, they had a good earnings, but even then they move 52 to $68, you know, that's a little bit more than 10% and then let's see in the year, though, if you kind of even look at it at the year from top to bottom, they pretty much barely ended up a little higher there. But again, it was a crazy year. But what I'm trying to show you here, it's a slow moving stock and that's something I know through experience. But again, go see how a stock moves on a day to day. So being a slow mover, that's good because that means if the stock doesn't move high or low a lot, there's a lot of contracts. They're going to expire. So so finding a company that's a slow mover and then it has a small difference between the prices and they offer a small premium. These ones are usually going to be great. So again, even for this week and it might be different premium with earnings, but again, sell the expensive one, buy the cheaper one. You're getting a 14 cent credit and the difference between strike prices is 50 cents. So let's take a look here. 0.14 divided by 0.5. We're left with 30. So reverse that. That's a 70%. So remember I said those are kind of borderline there. So you could do that one if you wanted, but if you really again, if you wanted to be safe and consistent, just go for these types of companies here where now you just get them even cheaper. So you'll collect less money. So in this case now we get 12 bucks. So would that be 0.12 divided by 0.50? Now we're at 24. That's 75. So again, if that's not good enough, we could keep moving up. So you'll see here will make 12 bucks, maybe six bucks. That'll be what we want. Whatever is up to you. But again, the less credit you're receiving the more likely you are going to win. So this is a way to find again. The best credit spread is finding the ones you if again, you know, the stock has no chance of getting and you could you know that 70% credit to collateral is good or that probability then take it. But this is a way to find good plays is finding the ones that are slow movers small differences and that are really really far out Low probability of hitting but still providing, you know, a 12 buck play on that. That's actually pretty decent considering how low of a probability is the next company you could be looking for are the companies that make big moves with big differences between strikes and that way you go for higher premium, but don't forget now the more credit the more risk. So essentially if you're going to take more risk with the big difference in strike prices try to get a little bit more premium. That's what I try to do. But now really what I'm saying is you want to diversify you're going to do the best taking the small credit high probabilities and that's literally because of stats, you know, but throw in a large credit here and there, you know after a couple wins just make sure you don't keep risking too much but diversified, you know play a bunch that are going to give you low collateral. That's the best way to build up account again. You could do it on a small account let that compound and compound and then maybe you could throw in some that have, you know, different risk to reward ratios, but don't get caught up only doing these high credit plays or only the low credit plays because again, you will eventually lose on one of those low credit plays and then again your risk to rewards pretty bad, but that's why that's the advantage of constantly playing them. But essentially if you are trying to pick out these companies understand the difference in how they move in difference in strike prices, but another thing I like to look for is I like to look for companies that just made big moves or companies that have done nothing, you know, I'm using the extremes to help limit the variables because if they just made a big move then those high credit plays that are low risk. They're the premiums are going to be up all over the place and the stock has a chance to bounce or make big moves then we could take advantage of the low probability because it's already making big moves. Anyways makes more sense to take the risk and I really wouldn't even want to play the low probability or low collateral plays in that instance then on the reverse of the company hasn't done nothing, you know that it's more likely not to move and then you could either justify taking the smaller risk or the bigger risk, but by having the stock on one end of the spectrum, it's easier to comprehend how the stock is going to move because all you want to do is say hey, I'm going to sell contracts that have a low probability of expiring with profit and I know how this stock will move and I know it's not going to do that. So keep all this in mind as far as you know, some of these companies here's guys you guys could look at paper trade these some of my top ones that I sell premium on and do the spreads on HD McDonald's AMD Facebook and Intel but Facebook's one because it kind of moves like a stable stock nowadays. But again, you'll notice the big movers when they really move big and the contracts go crazy like Amazon and stuff like that like Roku Shopify beyond in those instances. I prefer to even do a debit spread or play them a little differently because they can move so much but the ones that you know move but not too much but still have high contract prices and are still kind of brand names up there. These are the ones I like to sell credit spreads on so wrapping it up. Let me leave you off with some tricks to keep it simple. You know, if you're on Robin Hood here and you're trying to sell a contract these three dots or you'll see on mobile when you go to sell a contract you're always going to start by pressing sell to open the credit spread. So anytime you go to the option chain, make sure you're always on sell even if you're on mobile click the first option and then you'll be there select in the top right corner or the top three buttons here and then you click those and it'll let you select the other option then you switch to buy and do that. So remember it should always say total credit. It should always say credit spread but this is the easiest trick again to really start off it to even get a hang in practice with them. Just think sell the expensive contract by the cheaper one when you go to close it. So let's say you even want to go, you know, it'll show up as one option on the order when you make it but any other time even if you can't find it on your portfolio, you want to close all of these go to the option chain of the stock you have it on and it's very simple. Now go find the one you own and you sell the one you own and then buy back the one that says negative. So here's a debit spread. It's a little different but I'm going to show you just so you can see this is what I'm saying back anytime you want to close any sort of spread. It's very simple. You just do the opposite of what it says. So we're plus one here. We want to sell that and then it says that one's negative one. We want to buy that one and boom you see so I'm closing a debit spread. So it's saying a credit but now that leads to the next trick when you open the trade, it should always be credit. If you're doing a credit spread when you open the trade, it should always say credit this one. We're closing a debit spread. So again, now if you were to close a credit spread, it should say debit in this case. It's literally the inverse. It's saying credit. So hopefully that doesn't confuse you guys, but just understand this again when you open the trade, it should always be credit when you close it should always be debit again. You guys know how to do it when you're opening it. You sell the expensive one buy the cheaper one when you're closing you're buying the one that you owe and you're selling the one that that you own and now here's another trick the more time the easier to make money. This is what I talked about the other spread videos because we're talking how to let the credit to collateral speak to you and understanding how to find the best ones in low probability, but the best thing you could do if you get more time, it's more likely that either that has a lot of premium by having more time. It's more likely more things could happen. You have more wiggle room. You could be in that trade for a long time, but it takes up a lot of opportunity costs. You'll be tied up in the trade, but it's easier to make money or even go up 20 30% and take your profit versus the less time you sell on the premium the more unexpected that could happen where a low probability could suddenly become a high probability in it. You know, you don't have time to work in your favor and then you could instantly be out but less time makes it easier to walk away from a trade with profit and that's it. And then lastly when you guys sell you want the highest price. That's when you're opening the trade. So when you are going to the option trade, we've done a lot of these credit spreads. So again, I'll do one here. Let's say we're doing a credit spread you sell the expensive contract by the cheaper one. It says the total credit but this is also a problem. You're going to face here credit spreads are two options. This is a big spread. So on the credit you're going to put in one but the key is to get back the most money when you open the trade you want this to be a high price. Some people think if it's not it's reverse. It's just like buying a trade. If you spend a high price, you'll get filled but that's the problem. If you do a high price, you're less likely to get filled. So pretty much you start at a high price. If you don't get filled you could lower it as you want. But then again, this is determining how much money you receive. This is going to be your credit. So you're saying minimum credit at 40 bucks, but if you can't get filled at $10 that changes that whole play go run the credit to collateral ratio again, but essentially just keep this in mind when you sell you want to get the most money when you buy to close you want to pay the lowest. So it's reverse to opening a trade a normal options trade, but hopefully this helps. I want to leave it there. Watch the other spread videos. You guys could just search credit spreads or if you even go on the live channel, it's in the description on every single live stream or just comment below. I'm sure some people will post it on there or let me know what you guys want. We'll make a follow-up. But again, I hope you guys are able to make the best decisions here and understand the types of credit spreads and understand what the premium in the option chains are telling you to make the best trade to do this consistently so you guys could build up small accounts bigger accounts or just going to something that can make you income or living or whatever you really want baby, but I will see you guys in the morning. I'll see you on the watch list and let's go.