What's up, everybody? Welcome to financial heresy, where we talk about how money works so that you can make more, keep more, and give more. Today we are going to be talking about something called options. Some of you may be familiar with trading options up to this point. Some of you may have heard of them and thought, man, that sounds a little bit too dangerous. I don't want to ever get my hands dirty with something like that, because I'll probably just lose money. The reality is that options are a tool, and just like any tool, they are useful for a specific task. And so if you go into a job site with a tool belt that just has hammers in it, you're not going to be very effective if suddenly you need to cut something in half. So you need to have as many tools at your disposal as possible if you want to be as effective as possible at accomplishing a task. So if the task is let's say, increasing your total wealth maximizing your total return over time, then even if you decide never to use options, they are still a tool that it would be wise to have in your tool belt, so that if a situation comes up where that is the best tool to accomplish your goal, you at least know how to do it. The example that I always give for options is that they are like, it's like a sharp kitchen knife in the hands of a child who doesn't know how to use a knife that is very dangerous, like they're going to cut themselves or they're going to cut somebody else. That's not smart. But you put that same exact knife in the hand of a seasoned chef and it will be, you know, beautiful, It'll be elegant, They'll be able to use it extremely effectively, and it won't be dangerous at all. They'll be able to accomplish all of their tasks of cutting whatever they need to cut, and it will not be used incorrectly. It'll be used correctly, and they'll be able to accomplish their goal much better than if they were given a dull like a butter knife. And so that's exactly what options are. And throughout this episode, I'm going to explain some of the basic mechanics because I think that for most things in life, we fear only what we do not understand. And the more you understand something and comprehend how it works, then you understand how you can control that thing. And so my journey with options started when I became a stockbroker. I had never even heard of them before, and I became a stockbroker, and instantly it was just like number one, this sounds like the most confusing thing I've ever heard. But number two, this sounds like the most magical thing I've ever heard of. And I heard, Okay, So there's these things called calls, and there's these things called puts, and you can buy and sell them to make money on what the stock does. And so you're buying and selling the calls and the puts, not the stocks, but depending on what the stock does, you'll either make money or lose money with the call or the put. And so I instantly was extremely curious and spent a really decent amount of time learning about them and trying to understand how they worked, and then spent the next few months after that learning or I should say, paying down the stupid attacks and instead of you know, a lot of some people, if they want to learn about something, they'll pay for a course, they'll pay for somebody to teach them, they'll do someone on one coaching something like that. Other people like myself, will pay a lot more money to learn it but how money will go towards just paying for all of the stupid mistakes that you make along the way when you're learning about how to do something, you know, like using offs. And so that was my journey, journey with options and UM eventually got to the point where you know, I was I was training other stockbrokers on how to use options for both themselves and for clients accounts, trading options for clients and UM and so I have a long history with these things. I love. I actually really enjoy options because they are so uh what's what's what's the right word? Um? You can you can do so many different things with them if you really understand how they work. You can combine them in ways to achieve uh, you know, any outcome. So, whether you want to make money on the stock market overall or individual stocks, whether you want to uh produce income on a position that doesn't have dividends, whether you want to head your portfolio, or whether you think if the market's going to go sideways you want to make money on that, or if it's going to go down you want to profit off them going down, Or if it's going to go up, or if it's going to go down, and then up, or up and then down, or you think that it's got a good chance of going up, but it might go sideways and it probably won't go down. It's like, no matter what you think the market is going to do, there's a strategy you can use that we'll be able to profit on that. Not only that, but there are so many different ways to structure each one of those. So like, if you think the market's going to be, you know, be going up, there's going to be you know, ten different strategies you could use to make money on that, and they each have their own risk and reward payoffs, and so it's it's vital to understand how these things work because you'll most likely, i mean, with the market the way it is today. The market is, you know, most people are losing money in their positions. They're they're buying down and they're just averaging in and then once they've lost a little bit, then you're going to sell and move on to the next stock. And by the time you've heard about that, all the insiders have already started getting out. So it's like you're gonna realize there are lots of situations where you could have the same profit potential and minimize your total risk by using options instead. So they're extremely powerful for any type of situation that you want to go into. So let's get into this. I'm going to kind of break down the mechanics and how they work and some of the very basic strategies and what you can do with them, and if you're interested afterwards, I do have a new options course that is coming out soon. It's available for pre order. There's a bundle bonus if you use the link in the show notes, or you can go to my website as well to find these courses. In any case, though, we're going to break down the mechanics and how they work in some of the basic strategies so that you can kind of get a handle on this. So options, there are two types of options. There are calls and there are puts. These are the names for them, and so that's more of just a memorization thing. There's calls and there are puts. Options are contracts. So just like any other contract in life, if if you sign you know, a marriage contract or an insurance contract, any contract, that's what options are. As with any contract, there's one party that has rights and there's one party that has obligations, and so for instance, you've got you've got car insurance. When you sign that contract and you and you and the insurance company open up that contract with each other, you are the buyer of that contract and they are the seller of that contract, because you know, it's not something that they bought beforehand that they're just passing along and selling to you. Like you know, a grocery store buys a banana from the distributor and then sells it to you. Contracts are different. The contract is created at the time of the sale, so they're selling this contract to you as it's created, and you're buying it from them as it's created, and that gives you certain rights. One of those rights would be, you know, if your car gets totaled in an accident, then you have the right to have the insurance company pay for a new car for you. And then the insurance company likewise has obligations that they're taking on, which is, you know, there they will be obligated to buy you a new car if your current car gets totaled, and you're paying for those rights because you're paying them that monthly premium and that insurance company is receiving income in compensation for their obligations. And so I want you to think about options in that way. It makes the terminology make a little bit more sense thinking about it that way. So we've got calls and we've got puts. Those are the two types of option contracts. So we're going to focus first on calls. A call gives the buyer of the call the right to buy a stock. Likewise, it gives the seller of that call the obligation to sell that same stock. So you're the buyer of this call. And let's say there's a stock that you think is going to do well over the coming months. It's a stock. Let's say it's Tesla. Let's say you're an Elon Musk fan and you think, hey, it's sold off a lot. I think it's going to do well over the coming months. It's training out around two hundred dollars right now, so you think in six months it's going to be back up to three hundred dollars. Now you're looking at this and you're thinking, Okay, I could buy a hundred shares of Tesla and throw twenty grand into Tesla, and then if it goes up to three hundred, then it'll be we're thirty grand, and I will make ten thousand dollars on my shares. You think that's a pretty good that's a pretty good profit. Turning twenty grand into thirty grand, you make you make ten grand a profit off of a twenty one thousand dollars position worst case scenario, because that is the proper way to analyze risk, not in probabilities, but in worst case scenario. Worst case scenario, it is in the future worth zero. Tesla goes bankrupt, something happens, they can't sell cars, Global lithium and cobalt get shut off, the subsidies, government comes after them. Whatever. Let's just say they go bankrupt, Tesla goes under. Share price goes to zero. So you're risking twenty grand for a potential maximum profit of ten grand if your price target is three hundred dollars per share for Tesla. Now, let's say instead you look at the choice of buying a call option on it. A call option will give you, as the buyer of the call, the right to buy Tesla. If you're going to buy a call on Tesla. Now, as with all other contracts, there's going to be an expert a date on this, so let's say it expires in six months. If you buy a call on Tesla that expires in six months, you're going to have to say, okay, well, it'll give me the right to buy Tesla. The question is at what price. So let's say you say, okay, well, i'll I'll buy a call that gives me the right to buy Tesla at two hundred and ninety dollars per share two hundred ninety dollars per share any time between now and six months from now. And this call option it's going to options are in one hundred share price multiples, So it'll give you the right to buy one hundred shares of Tesla at two hundred ninety dollars per share any time between now and the next six months. Now, this is a real option contract. This is not something that I'm making up. This is something that actually exists, and so I'm pulling it up right now. This would be for September fifteenth, so it would be a little bit longer than six months away. It's about two hundred two hundred days. But if we look at the two hundred ninety call, which means it gives you, the buyer of the call, the right to buy Tesla shares at two hundred and ninety right now, the cost of that option is about a little under fourteen dollars um. So it'll cost you one thousand, four hundred dollars to buy that option contractum. That gives you the right to buy Tesla at two ninety per share anytime between now in the next six months. Now, that's that's a that's a little bit of an expensive option. You know, that's not the that's not the cheapest contract out there. But Tesla's a pretty vaulatile I mean, it was just above three hundred back in what like September of twenty twenty two, so it's not really that far off to imagine that it could get that high. So now you own this, Let's say you buy that it costs you a fourteen dollars, but it's for one hundred shares, so it's times one hundred, so it's fourteen hundred dollars. You have the right to buy test the shares at two hundred and ninety dollars per share. You know what, instead, let's go to the Let's go to the two eighty because this example will work a little bit better. And I'm using real numbers here, so so that that help that that's the reason why this is sometimes what you have to do with options. You have to kind of mess with things a little bit to look at the not mess with things, just like look at the pricing and see which one fits your goal is better. So we're gonna look at the two seventy five call. You have the right to buy Tesla at two hundred and seventy five dollars per share anytime between now and September fifteenth, So in about six months now, that's one hundred shares at two hundred seventy five dollars per share, and that's going to cost you fifteen dollars. So let's fast forward and look at this through the lens of a couple different potential scenarios. Let's say Tesla goes up to three hundred dollars per share. Tesla goes up to three hundred dollars per share in six months, you now have a contract that gives you the right to buy Tesla at two seventy five. That is twenty five dollars under the current price. Now, because Tesla's at three hundred, you have the right to buy it at two seventy five, So that is twenty five dollars per share. Under what the current stock price is, that contract then would be worth twenty five dollars. How much did you pay for that contract? Fifteen dollars, So you made ten dollars on that contract. But remember that's ten dollars times one hundred shares, and so that contract is worth twenty five dollars because it gives you the right to make twenty five dollars per share. And so you buy shares at two seventy five, you sell them on the open market at three hundred dollars per share. You just made twenty five dollars per share times one hundred you made twenty five hundred dollars. Times you're in. When you subtract, you minus out. You subtract your initial cost of the contract, which is fifteen You made a thousand bucks. Now you made a thousand bucks profit. That's your net gain. How much did you spend on that You spent fifteen hundred dollars. So percentage wise, if you make a thousand dollars off of a fifteen hundred dollar investment, percentage wise, you're up what sixty percent? Your alternative was to put up twenty grand to make ten grand, which, yeah, ten grand would be a larger profit, but you're only going to make thirty percent off of that trade. If Tesla does the exact same thing. Not only that, but you are risking a much larger amount of capital. You're risking twenty grand instead of fifteen hundred. So let's say we still want the potential to make ten grand off of this move, Well, then all we have to do is increase the number of contracts that we buy. So instead of buying one contract at fifteen hundred dollars to make a thousand dollars, we buy ten contracts at fifteen hundred dollars to make ten thousand dollars. And so if we buy ten contracts at fifteen bucks apiece times one hundred times ten, we're going to spend fifteen grand. Fifteen grand to make ten grand is better than twenty grand to make ten grand. Now you might think, Okay, well that's actually not that good of a deal. Those options are pretty expensive, and sure, you might be right, and so in that case, you would say, I'm glad that I know how to use these options, because given the expense on how expensive those calls are, maybe I maybe I think that the market is already pricing in that movement and it would be safer for me to buy the shares, or maybe there's too much speculation that Tesla will go up. So I'm going to be a contrarian here, and now I want to see what the pricing is like for Tesla to fall. So let's now look at let's look at the opposite. There's a contract called to put and it put you can think of as crash insurance on your shares. So you let's say you still think Tesla's gonna go up, so instead of doing the call, you buy the shares. But you're not as sure as you were before. So now instead of using calls in place of your shares, you're just going to buy the shares like you were going to originally, but you're going to buy some protection on these shares as well. So that's what puts are puts our crash insurance. So let's take a look at what the pricing is for puts on Tesla. Let's say we think that you know, there's no way Tesla goes below one eighty in between now in the next month, and so we're okay if it bops around in between two hundred and one eighty. We just don't think it's going to go below there, and we want to cover our shares for the next month. You can buy a put, just like a call. When you buy a put, you get rights, but this time, instead of getting the right to buy the stock, you get the right to sell the stock. So if you buy this put and you think that Tesla won't go under one eighty, you're going to buy the right to sell Tesla at one eighty because you think, to yourself, Okay, if I'm wrong, it could go down to one hundred, it could go down to thirty whatever, it could go to zero, and so I want to make sure that no matter what happens, my worst case scenario is that I can sell shares of Tesla at one hundred eighty dollars per share. And you can do that. By buying this put. You can guarantee that you can sell your shares of Tesla anytime between now and the next month. You can sell your shares of Tesla at one hundred eighty dollars per share. Guess how much you're gonna pay for that right. You're gonna pay five dollars again times one hundred, because you've got one hundred shares, but that's still only five hundred bucks. You're spending twe any grand on the shares. Might as well spend another five hundred bucks to guarantee that you can't lose any money past one eighty in the next month. Let's say Tesla goes to zero. Well, guess what you get to sell your shares at one eighty. Let's say Tesla goes to one hundred, you get to sell your shares at one eighty. Let's say Tesla goes to one sixty, you can sell your shares at one eighty. What if Tesla goes to three hundred, Well, you just made a ton of money, so you don't care that you spent five hundred bucks to ensure your stocks against a loss pass one eighty. Now, since you have to, you have to keep in mind you're paying for this contract. You paid five hundred bucks for it, so you have to calculate that in mentally to what the Tesla shares have to do for you to start making money. Right, So it's Tesla has to go up five bucks from here for you to pay for the five bucks that you spent on that contract per share, because you're out five hundred dollars now by buying that insurance, so you need to make another five hundred dollars on the Tesla shares to compensate yourself for that loss. But as long as it goes up by five bucks, then now you're breaking even. And if it goes up past that, you're making more money all the way up. And if something crazy happens, you know that you have ensured your portfolio against a loss. So these are two very very simple examples of trading options. And we saw there that buying the call on Tesla did not have a good risk to reward payoff scenario there. But let's look at something that might have a really good risk to reward profile. Let's look at SPY. Most people they invest in the SMP five hundred. Basically, you might have a couple different mutual funds in your four one k, but for the most part the correlation to the SMP five hundred. You're basically investing in a bunch of different mutual funds that are all investing in the same stocks that are in the SMP five hundred anyway, and so that's what most people are investing in, so you've got you know, your let's say forty grand in a brokerage count or an IRA or a four O one K, and it's all invested in basically the SMP five hundred. An alternative would be to say, okay, well can I do this with a better risk profile by using call options? Because if you own one hundred shares of let's say Spy that's an ETF that tracks the SMP five hundred, then you have forty grand in the SMP five hundred, and that means that you're one hundred percent invested. So worst case scenario is that goes to zero. Now, what are the odds of that? What are the odds of the entire stock market every company going to zero? Probably probably pretty low? But it is it zero? No, it's not. I mean we've seen ETFs and investment vehicles go to zero even if the assets that they hold technically still will have some value, and so it's it's not. It's not something that is entirely impossible? Is it very very very improbable? Yeah? But okay, let's not even say go to zero. Let's say you're risking forty thousand going down to being worth thirty thousand or being worth twenty thousand, or being worth ten thousand. You've got all of your cash in that investment vehicle. Even if it's spread out between a number of funds, it's still invested in the same stocks at the end of the day, and so you've got all of your money at risk of systemic collapse of large stock market losses. So is there a way to do this with a better risk profile. Let's see, Let's look at spy calls for the next two months, and so these will go out to, uh, you know, the end of April, let's say, and we want to we want to make money if the stock market goes up, but we don't want to We don't want to risk forty thousand dollars if the stock market crashes. So if we look at the cost for an SMP five hundred a spy spy call, that gives us the right to buy the shares at four hundred ten dollars per share. Right now, spy is trading at three ninety six, so a little under four hundred. This gives us the right to buy shares at four ten any time between now and the end of April. Right now, that will cost us five bucks, so five times one hundred is five hundred dollars. Then we control one hundred shares, so that's forty grand worth. So we are getting exposure to forty grand worth of the SMP five hundred by only spending five hundred dollars. So let's play this out. Let's say the SMP five hundred goes up to four thirty in the next month and a half. If it goes up to four hundred thirty dollars, well we can buy the shares at four ten. And then if we can buy one hundred shares at four ten and immediately sell them at four hundred thirty, that's twenty dollars per share times one hundred shares is two thousand bucks. Instead, if we had invested our entire forty thousand dollars in the SMP five hundred in spy and it goes up to four thirty, we turned forty thousand into forty three thousand, So we can either make two thousand with one call, or we can make three thousand with investing our entire portfolio. So we can turn five thousand into into two thousand dollars, or I'm sorry, we can turn five hundred dollars into two thousand dollars, or we can turn forty thousand dollars into forty three thousand dollars. Now, let's say we want that profit potential to be similar, so we buy two calls instead of buying one call. So we spend a thousand dollars and we turn that thousand dollars into four thousand dollars. So our net profit is three grand. So what is better to risk losing a thousand dollars for the profit potential of three thousand total or to risk losing forty thousand dollars for the profit potential of three thousand dollars. The profit potential in either case is the same. If SMP five hundred goes from where it's at right now up to four hundred thirty dollars per share. In that case, if that movement happens, both of these trades profit the exact same. But the worst case scenario, if the SMP five hundred drops from here, you could lose up to forty grand by buying the shares, but with option you could lose only what you spend on it. You spent a thousand bucks, you could lose a thousand bucks. Now you do sometimes have to ask a question, Okay, what's the likelihood of this happening? Because if you spend forty grand and you buy the shares and then the SMP five hundred does nothing, then you still own the shares even after a month from now. Shares don't expire, contracts do, so you have to know that there's that risk there. If the SMP five hundred doesn't move, then your contract eventually becomes worthless and it becomes worth zero and then it expires. So you do have to be aware of that. And the nice thing about options is you can play both sides of the ticket here. You could be a seller of options as well, and that's where that's where the power really comes in. Here where you start pairing, buying calls and selling calls, and buying puts and selling puts so that you can say, Okay, if the market does nothing, then I'll make a little bit of money, but if the market does something crazy, then I'll make a lot of money. Like there are so many different ways to pair these options together so that each one of them it'll have a little bit of a you know, its own risk to reward profile. But when paired together, you structure a trade to say, Okay, if the market does nothing, then you know, I'm just gonna, you know, make a little bit of money, which is nice, like you don't have to have to worry about, you know, losing a lot. Or you can say, if the market does a lot, if it just goes crazy up or crazy down, then either my calls or my puts will will provide a ton of profit. But if it doesn't do anything, then I've only spent a very small amount total on this trade, so I'll lose a very tiny amount because you've paired it together with selling some options. Now, you never just has a big warning here. You never want to sell puts or calls just by themselves. That would open you up to significant loss. Because let's say you took the selling side of this call and you said, okay, I'm going to sell this call to you. That means that I have you know, if I sell this call to you, I have the obligation to sell you shares at this price during this timeframe. But if I don't already have those shares, then I'm going to have to go out to the open marketplace and get those shares at some point. So if the stock price skyrockets, and you want to buy and you want to exercise your right to buy shares for me at two hundred, but I have to go out and buy them at a thousand. I'm gonna I'm gonna take a bath. That's just there's unlimited loss potential by selling options by themselves, just by doing like you know, selling a call or selling. It's called naked selling, naked options, and it's a strategy that is extremely dangerous. It's playing with fire. It's called picking up pennies in front of a steamroller. You make a little bit of money and you expose yourself to massive blow up risk. So I do not recommend doing any of those types of strategies where you are risking more than what you stand to gain, because at the end of the day, you can never know the probability of something happening. Yes, the odds might say, oh, well, the odds of that happening are you know, a billion to one. But people still win the lottery all the time. And so if the lottery company was not able to structure the odds in their benefit, and that lottery payout could be way more than they ever made on selling tickets, that'd be a bad business to be in because yes, the odds are super low that something like that happens, but it still always happens. People still always win the lottery, and so they're gonna have to make that payout. So with options, you never want to take a trade that your maximum loss could be you know, a large amount, especially an undefined large amount, because that could wipe you out. So that's a little primer on options. You can use them in place of buying the shares. So if you think, oh, yeah, this this stock, I think it's going to go up, but I don't want to spend a couple thousand dollars on buying a few shares, so I'll spend you know, twenty dollars, you know, fifty dollars. We looked at some expensive options, but for most stocks you can, you know, even when you have to multiply it buy one hundred, you could buy a call or buy a put for twenty bucks or for you know, fifty bucks, significantly less than you have to spend on the shares. And then if the move happens that you think was going to happen, you can still make the same in some cases, far more than you would have made on the shares, but your worst case scenario is that you lose a lot less. And so for portfolios where you want to preserve your purchasing power or your total net worth of your portfolio, you throw the whole thing into stocks, and then the market crashes. Everything crashes. Diversification doesn't protect you against a market crash. It only protects you against one stock crashing. And so if you have the ability to then take eighty percent of your portfolio and put it in something very stable like cash or even if you like treasuries or bonds, so you're in a little bit of interest, and you put the majority of your money in something very safe that doesn't really move and just kind of stays the same. Then you take a little bit of your money and do these little speculations, so I think this one's gonna drop. I think this one's gonna pop, And you only need one to hit every once in a blue moon, and you make way more than you ever lost on all those little trades put together. And then you get a little bit more sophisticated and you're like, Okay, well I own these shares and I want to protect them against a drop. So I'm going to protect them by buying a put, but I also want some income on it because I own Amazon and it doesn't pay a dividend. So I'm going to sell a call on this, and if it goes up and I have to sell my shares while I already own the shares, But if it doesn't go up, then I keep the income that I got from selling the call, So it's a win win. And so there are tons of little strategies that you can employ with options that even if you never use them, it is such a powerful tool to have in your tool belt just in case you recognize the situation that would call for that, because if you don't know how to use them, then you might run into a situation where it's like, oh, that'd be a good idea to do the strategy right now, but I'm just not educated enough on how to do them or how to use them, and so the opportunity slips by and you're not able to take advantage of it. And so I'm a huge proponent of education of not just options, just like you know, in general, most skills in life, because there might be an opportunity that comes up that you would be able to profit off of by taking advantage of it, only if you're prepared. That's why they say luck is where opportunity and preparedness meet, because you build the skills beforehand and then if, by luck you happen to run into that situation, well then now you're able to take advantage of it. So, like I said, I do have an options course that is coming out that goes into a lot more of the advanced strategies, the mechanics, the pricing there is you know, as you might imagine a lot that goes that goes into this. There are plenty of free resources out there as well that you can piece together yourself kind of that. My goal with this course is to provide a one stop shop that gives you literally everything you'd ever need in order to trade options successfully. And so if you're not looking for that, you know, convenient one stop shop, then obviously there's tons of other places where you can get all that information for free. And that's what I did in the beginning when I was learning about this, I did mostly free stuff, and then I paid for paid for my education in losses on bad trades, and so really you pay for your education no matter what. But it's down there, and like I said, if you are interested in pre ordering it right now, because it's available for pre order, I'm finishing it up soon. During this pre order period. It has a bundle attached to it so that you can ad access to my Portfolio Allocation course as well, which talks about other portfolio allocation strategies, so they pair really nicely with each other actually, so you have your your portfolio allocations, so you know, okay, this is how much I put in stocks, it's how much I put in gold and bitcoin and real estate and things like that. And there's a whole section in my Portfolio Allocation course about using options, and so then this options course goes deeper into using using options more effectively and more the advanced strategies. So those are bundled together just for the price of the options course, just during pre order, and then once I've published the course and once it's live, then that bundle goes away and it's just the options course by itself with the same link there, so you can you can go check it out if you are interested. If not, again, I just highly recommend at least getting familiar with how to use them and how they work. From any source possible. That's all for today, really a pre shte you guys, Thank you so much for listening, and we'll see you next week on another episode.

What's up, everybody? Welcome to financial heresy, where we talk about how money works so that you can make more, keep more, and give more. Today we are going to be talking about something called options. Some of you may be familiar with trading options up to this point. Some of you may have heard of them and thought, man, that sounds a little bit too dangerous. I don't want to ever get my hands dirty with something like that, because I'll probably just lose money. The reality is that options are a tool, and just like any tool, they are useful for a specific task. And so if you go into a job site with a tool belt that just has hammers in it, you're not going to be very effective if suddenly you need to cut something in half. So you need to have as many tools at your disposal as possible if you want to be as effective as possible at accomplishing a task. So if the task is let's say, increasing your total wealth maximizing your total return over time, then even if you decide never to use options, they are still a tool that it would be wise to have in your tool belt, so that if a situation comes up where that is the best tool to accomplish your goal, you at least know how to do it. The example that I always give for options is that they are like, it's like a sharp kitchen knife in the hands of a child who doesn't know how to use a knife that is very dangerous, like they're going to cut themselves or they're going to cut somebody else. That's not smart. But you put that same exact knife in the hand of a seasoned chef and it will be, you know, beautiful, It'll be elegant, They'll be able to use it extremely effectively, and it won't be dangerous at all. They'll be able to accomplish all of their tasks of cutting whatever they need to cut, and it will not be used incorrectly. It'll be used correctly, and they'll be able to accomplish their goal much better than if they were given a dull like a butter knife. And so that's exactly what options are. And throughout this episode, I'm going to explain some of the basic mechanics because I think that for most things in life, we fear only what we do not understand. And the more you understand something and comprehend how it works, then you understand how you can control that thing. And so my journey with options started when I became a stockbroker. I had never even heard of them before, and I became a stockbroker, and instantly it was just like number one, this sounds like the most confusing thing I've ever heard. But number two, this sounds like the most magical thing I've ever heard of. And I heard, Okay, So there's these things called calls, and there's these things called puts, and you can buy and sell them to make money on what the stock does. And so you're buying and selling the calls and the puts, not the stocks, but depending on what the stock does, you'll either make money or lose money with the call or the put. And so I instantly was extremely curious and spent a really decent amount of time learning about them and trying to understand how they worked, and then spent the next few months after that learning or I should say, paying down the stupid attacks and instead of you know, a lot of some people, if they want to learn about something, they'll pay for a course, they'll pay for somebody to teach them, they'll do someone on one coaching something like that. Other people like myself, will pay a lot more money to learn it but how money will go towards just paying for all of the stupid mistakes that you make along the way when you're learning about how to do something, you know, like using offs. And so that was my journey, journey with options and UM eventually got to the point where you know, I was I was training other stockbrokers on how to use options for both themselves and for clients accounts, trading options for clients and UM and so I have a long history with these things. I love. I actually really enjoy options because they are so uh what's what's what's the right word? Um? You can you can do so many different things with them if you really understand how they work. You can combine them in ways to achieve uh, you know, any outcome. So, whether you want to make money on the stock market overall or individual stocks, whether you want to uh produce income on a position that doesn't have dividends, whether you want to head your portfolio, or whether you think if the market's going to go sideways you want to make money on that, or if it's going to go down you want to profit off them going down, Or if it's going to go up, or if it's going to go down, and then up, or up and then down, or you think that it's got a good chance of going up, but it might go sideways and it probably won't go down. It's like, no matter what you think the market is going to do, there's a strategy you can use that we'll be able to profit on that. Not only that, but there are so many different ways to structure each one of those. So like, if you think the market's going to be, you know, be going up, there's going to be you know, ten different strategies you could use to make money on that, and they each have their own risk and reward payoffs, and so it's it's vital to understand how these things work because you'll most likely, i mean, with the market the way it is today. The market is, you know, most people are losing money in their positions. They're they're buying down and they're just averaging in and then once they've lost a little bit, then you're going to sell and move on to the next stock. And by the time you've heard about that, all the insiders have already started getting out. So it's like you're gonna realize there are lots of situations where you could have the same profit potential and minimize your total risk by using options instead. So they're extremely powerful for any type of situation that you want to go into. So let's get into this. I'm going to kind of break down the mechanics and how they work and some of the very basic strategies and what you can do with them, and if you're interested afterwards, I do have a new options course that is coming out soon. It's available for pre order. There's a bundle bonus if you use the link in the show notes, or you can go to my website as well to find these courses. In any case, though, we're going to break down the mechanics and how they work in some of the basic strategies so that you can kind of get a handle on this. So options, there are two types of options. There are calls and there are puts. These are the names for them, and so that's more of just a memorization thing. There's calls and there are puts. Options are contracts. So just like any other contract in life, if if you sign you know, a marriage contract or an insurance contract, any contract, that's what options are. As with any contract, there's one party that has rights and there's one party that has obligations, and so for instance, you've got you've got car insurance. When you sign that contract and you and you and the insurance company open up that contract with each other, you are the buyer of that contract and they are the seller of that contract, because you know, it's not something that they bought beforehand that they're just passing along and selling to you. Like you know, a grocery store buys a banana from the distributor and then sells it to you. Contracts are different. The contract is created at the time of the sale, so they're selling this contract to you as it's created, and you're buying it from them as it's created, and that gives you certain rights. One of those rights would be, you know, if your car gets totaled in an accident, then you have the right to have the insurance company pay for a new car for you. And then the insurance company likewise has obligations that they're taking on, which is, you know, there they will be obligated to buy you a new car if your current car gets totaled, and you're paying for those rights because you're paying them that monthly premium and that insurance company is receiving income in compensation for their obligations. And so I want you to think about options in that way. It makes the terminology make a little bit more sense thinking about it that way. So we've got calls and we've got puts. Those are the two types of option contracts. So we're going to focus first on calls. A call gives the buyer of the call the right to buy a stock. Likewise, it gives the seller of that call the obligation to sell that same stock. So you're the buyer of this call. And let's say there's a stock that you think is going to do well over the coming months. It's a stock. Let's say it's Tesla. Let's say you're an Elon Musk fan and you think, hey, it's sold off a lot. I think it's going to do well over the coming months. It's training out around two hundred dollars right now, so you think in six months it's going to be back up to three hundred dollars. Now you're looking at this and you're thinking, Okay, I could buy a hundred shares of Tesla and throw twenty grand into Tesla, and then if it goes up to three hundred, then it'll be we're thirty grand, and I will make ten thousand dollars on my shares. You think that's a pretty good that's a pretty good profit. Turning twenty grand into thirty grand, you make you make ten grand a profit off of a twenty one thousand dollars position worst case scenario, because that is the proper way to analyze risk, not in probabilities, but in worst case scenario. Worst case scenario, it is in the future worth zero. Tesla goes bankrupt, something happens, they can't sell cars, Global lithium and cobalt get shut off, the subsidies, government comes after them. Whatever. Let's just say they go bankrupt, Tesla goes under. Share price goes to zero. So you're risking twenty grand for a potential maximum profit of ten grand if your price target is three hundred dollars per share for Tesla. Now, let's say instead you look at the choice of buying a call option on it. A call option will give you, as the buyer of the call, the right to buy Tesla. If you're going to buy a call on Tesla. Now, as with all other contracts, there's going to be an expert a date on this, so let's say it expires in six months. If you buy a call on Tesla that expires in six months, you're going to have to say, okay, well, it'll give me the right to buy Tesla. The question is at what price. So let's say you say, okay, well, i'll I'll buy a call that gives me the right to buy Tesla at two hundred and ninety dollars per share two hundred ninety dollars per share any time between now and six months from now. And this call option it's going to options are in one hundred share price multiples, So it'll give you the right to buy one hundred shares of Tesla at two hundred ninety dollars per share any time between now and the next six months. Now, this is a real option contract. This is not something that I'm making up. This is something that actually exists, and so I'm pulling it up right now. This would be for September fifteenth, so it would be a little bit longer than six months away. It's about two hundred two hundred days. But if we look at the two hundred ninety call, which means it gives you, the buyer of the call, the right to buy Tesla shares at two hundred and ninety right now, the cost of that option is about a little under fourteen dollars um. So it'll cost you one thousand, four hundred dollars to buy that option contractum. That gives you the right to buy Tesla at two ninety per share anytime between now in the next six months. Now, that's that's a that's a little bit of an expensive option. You know, that's not the that's not the cheapest contract out there. But Tesla's a pretty vaulatile I mean, it was just above three hundred back in what like September of twenty twenty two, so it's not really that far off to imagine that it could get that high. So now you own this, Let's say you buy that it costs you a fourteen dollars, but it's for one hundred shares, so it's times one hundred, so it's fourteen hundred dollars. You have the right to buy test the shares at two hundred and ninety dollars per share. You know what, instead, let's go to the Let's go to the two eighty because this example will work a little bit better. And I'm using real numbers here, so so that that help that that's the reason why this is sometimes what you have to do with options. You have to kind of mess with things a little bit to look at the not mess with things, just like look at the pricing and see which one fits your goal is better. So we're gonna look at the two seventy five call. You have the right to buy Tesla at two hundred and seventy five dollars per share anytime between now and September fifteenth, So in about six months now, that's one hundred shares at two hundred seventy five dollars per share, and that's going to cost you fifteen dollars. So let's fast forward and look at this through the lens of a couple different potential scenarios. Let's say Tesla goes up to three hundred dollars per share. Tesla goes up to three hundred dollars per share in six months, you now have a contract that gives you the right to buy Tesla at two seventy five. That is twenty five dollars under the current price. Now, because Tesla's at three hundred, you have the right to buy it at two seventy five, So that is twenty five dollars per share. Under what the current stock price is, that contract then would be worth twenty five dollars. How much did you pay for that contract? Fifteen dollars, So you made ten dollars on that contract. But remember that's ten dollars times one hundred shares, and so that contract is worth twenty five dollars because it gives you the right to make twenty five dollars per share. And so you buy shares at two seventy five, you sell them on the open market at three hundred dollars per share. You just made twenty five dollars per share times one hundred you made twenty five hundred dollars. Times you're in. When you subtract, you minus out. You subtract your initial cost of the contract, which is fifteen You made a thousand bucks. Now you made a thousand bucks profit. That's your net gain. How much did you spend on that You spent fifteen hundred dollars. So percentage wise, if you make a thousand dollars off of a fifteen hundred dollar investment, percentage wise, you're up what sixty percent? Your alternative was to put up twenty grand to make ten grand, which, yeah, ten grand would be a larger profit, but you're only going to make thirty percent off of that trade. If Tesla does the exact same thing. Not only that, but you are risking a much larger amount of capital. You're risking twenty grand instead of fifteen hundred. So let's say we still want the potential to make ten grand off of this move, Well, then all we have to do is increase the number of contracts that we buy. So instead of buying one contract at fifteen hundred dollars to make a thousand dollars, we buy ten contracts at fifteen hundred dollars to make ten thousand dollars. And so if we buy ten contracts at fifteen bucks apiece times one hundred times ten, we're going to spend fifteen grand. Fifteen grand to make ten grand is better than twenty grand to make ten grand. Now you might think, Okay, well that's actually not that good of a deal. Those options are pretty expensive, and sure, you might be right, and so in that case, you would say, I'm glad that I know how to use these options, because given the expense on how expensive those calls are, maybe I maybe I think that the market is already pricing in that movement and it would be safer for me to buy the shares, or maybe there's too much speculation that Tesla will go up. So I'm going to be a contrarian here, and now I want to see what the pricing is like for Tesla to fall. So let's now look at let's look at the opposite. There's a contract called to put and it put you can think of as crash insurance on your shares. So you let's say you still think Tesla's gonna go up, so instead of doing the call, you buy the shares. But you're not as sure as you were before. So now instead of using calls in place of your shares, you're just going to buy the shares like you were going to originally, but you're going to buy some protection on these shares as well. So that's what puts are puts our crash insurance. So let's take a look at what the pricing is for puts on Tesla. Let's say we think that you know, there's no way Tesla goes below one eighty in between now in the next month, and so we're okay if it bops around in between two hundred and one eighty. We just don't think it's going to go below there, and we want to cover our shares for the next month. You can buy a put, just like a call. When you buy a put, you get rights, but this time, instead of getting the right to buy the stock, you get the right to sell the stock. So if you buy this put and you think that Tesla won't go under one eighty, you're going to buy the right to sell Tesla at one eighty because you think, to yourself, Okay, if I'm wrong, it could go down to one hundred, it could go down to thirty whatever, it could go to zero, and so I want to make sure that no matter what happens, my worst case scenario is that I can sell shares of Tesla at one hundred eighty dollars per share. And you can do that. By buying this put. You can guarantee that you can sell your shares of Tesla anytime between now and the next month. You can sell your shares of Tesla at one hundred eighty dollars per share. Guess how much you're gonna pay for that right. You're gonna pay five dollars again times one hundred, because you've got one hundred shares, but that's still only five hundred bucks. You're spending twe any grand on the shares. Might as well spend another five hundred bucks to guarantee that you can't lose any money past one eighty in the next month. Let's say Tesla goes to zero. Well, guess what you get to sell your shares at one eighty. Let's say Tesla goes to one hundred, you get to sell your shares at one eighty. Let's say Tesla goes to one sixty, you can sell your shares at one eighty. What if Tesla goes to three hundred, Well, you just made a ton of money, so you don't care that you spent five hundred bucks to ensure your stocks against a loss pass one eighty. Now, since you have to, you have to keep in mind you're paying for this contract. You paid five hundred bucks for it, so you have to calculate that in mentally to what the Tesla shares have to do for you to start making money. Right, So it's Tesla has to go up five bucks from here for you to pay for the five bucks that you spent on that contract per share, because you're out five hundred dollars now by buying that insurance, so you need to make another five hundred dollars on the Tesla shares to compensate yourself for that loss. But as long as it goes up by five bucks, then now you're breaking even. And if it goes up past that, you're making more money all the way up. And if something crazy happens, you know that you have ensured your portfolio against a loss. So these are two very very simple examples of trading options. And we saw there that buying the call on Tesla did not have a good risk to reward payoff scenario there. But let's look at something that might have a really good risk to reward profile. Let's look at SPY. Most people they invest in the SMP five hundred. Basically, you might have a couple different mutual funds in your four one k, but for the most part the correlation to the SMP five hundred. You're basically investing in a bunch of different mutual funds that are all investing in the same stocks that are in the SMP five hundred anyway, and so that's what most people are investing in, so you've got you know, your let's say forty grand in a brokerage count or an IRA or a four O one K, and it's all invested in basically the SMP five hundred. An alternative would be to say, okay, well can I do this with a better risk profile by using call options? Because if you own one hundred shares of let's say Spy that's an ETF that tracks the SMP five hundred, then you have forty grand in the SMP five hundred, and that means that you're one hundred percent invested. So worst case scenario is that goes to zero. Now, what are the odds of that? What are the odds of the entire stock market every company going to zero? Probably probably pretty low? But it is it zero? No, it's not. I mean we've seen ETFs and investment vehicles go to zero even if the assets that they hold technically still will have some value, and so it's it's not. It's not something that is entirely impossible? Is it very very very improbable? Yeah? But okay, let's not even say go to zero. Let's say you're risking forty thousand going down to being worth thirty thousand or being worth twenty thousand, or being worth ten thousand. You've got all of your cash in that investment vehicle. Even if it's spread out between a number of funds, it's still invested in the same stocks at the end of the day, and so you've got all of your money at risk of systemic collapse of large stock market losses. So is there a way to do this with a better risk profile. Let's see, Let's look at spy calls for the next two months, and so these will go out to, uh, you know, the end of April, let's say, and we want to we want to make money if the stock market goes up, but we don't want to We don't want to risk forty thousand dollars if the stock market crashes. So if we look at the cost for an SMP five hundred a spy spy call, that gives us the right to buy the shares at four hundred ten dollars per share. Right now, spy is trading at three ninety six, so a little under four hundred. This gives us the right to buy shares at four ten any time between now and the end of April. Right now, that will cost us five bucks, so five times one hundred is five hundred dollars. Then we control one hundred shares, so that's forty grand worth. So we are getting exposure to forty grand worth of the SMP five hundred by only spending five hundred dollars. So let's play this out. Let's say the SMP five hundred goes up to four thirty in the next month and a half. If it goes up to four hundred thirty dollars, well we can buy the shares at four ten. And then if we can buy one hundred shares at four ten and immediately sell them at four hundred thirty, that's twenty dollars per share times one hundred shares is two thousand bucks. Instead, if we had invested our entire forty thousand dollars in the SMP five hundred in spy and it goes up to four thirty, we turned forty thousand into forty three thousand, So we can either make two thousand with one call, or we can make three thousand with investing our entire portfolio. So we can turn five thousand into into two thousand dollars, or I'm sorry, we can turn five hundred dollars into two thousand dollars, or we can turn forty thousand dollars into forty three thousand dollars. Now, let's say we want that profit potential to be similar, so we buy two calls instead of buying one call. So we spend a thousand dollars and we turn that thousand dollars into four thousand dollars. So our net profit is three grand. So what is better to risk losing a thousand dollars for the profit potential of three thousand total or to risk losing forty thousand dollars for the profit potential of three thousand dollars. The profit potential in either case is the same. If SMP five hundred goes from where it's at right now up to four hundred thirty dollars per share. In that case, if that movement happens, both of these trades profit the exact same. But the worst case scenario, if the SMP five hundred drops from here, you could lose up to forty grand by buying the shares, but with option you could lose only what you spend on it. You spent a thousand bucks, you could lose a thousand bucks. Now you do sometimes have to ask a question, Okay, what's the likelihood of this happening? Because if you spend forty grand and you buy the shares and then the SMP five hundred does nothing, then you still own the shares even after a month from now. Shares don't expire, contracts do, so you have to know that there's that risk there. If the SMP five hundred doesn't move, then your contract eventually becomes worthless and it becomes worth zero and then it expires. So you do have to be aware of that. And the nice thing about options is you can play both sides of the ticket here. You could be a seller of options as well, and that's where that's where the power really comes in. Here where you start pairing, buying calls and selling calls, and buying puts and selling puts so that you can say, Okay, if the market does nothing, then I'll make a little bit of money, but if the market does something crazy, then I'll make a lot of money. Like there are so many different ways to pair these options together so that each one of them it'll have a little bit of a you know, its own risk to reward profile. But when paired together, you structure a trade to say, Okay, if the market does nothing, then you know, I'm just gonna, you know, make a little bit of money, which is nice, like you don't have to have to worry about, you know, losing a lot. Or you can say, if the market does a lot, if it just goes crazy up or crazy down, then either my calls or my puts will will provide a ton of profit. But if it doesn't do anything, then I've only spent a very small amount total on this trade, so I'll lose a very tiny amount because you've paired it together with selling some options. Now, you never just has a big warning here. You never want to sell puts or calls just by themselves. That would open you up to significant loss. Because let's say you took the selling side of this call and you said, okay, I'm going to sell this call to you. That means that I have you know, if I sell this call to you, I have the obligation to sell you shares at this price during this timeframe. But if I don't already have those shares, then I'm going to have to go out to the open marketplace and get those shares at some point. So if the stock price skyrockets, and you want to buy and you want to exercise your right to buy shares for me at two hundred, but I have to go out and buy them at a thousand. I'm gonna I'm gonna take a bath. That's just there's unlimited loss potential by selling options by themselves, just by doing like you know, selling a call or selling. It's called naked selling, naked options, and it's a strategy that is extremely dangerous. It's playing with fire. It's called picking up pennies in front of a steamroller. You make a little bit of money and you expose yourself to massive blow up risk. So I do not recommend doing any of those types of strategies where you are risking more than what you stand to gain, because at the end of the day, you can never know the probability of something happening. Yes, the odds might say, oh, well, the odds of that happening are you know, a billion to one. But people still win the lottery all the time. And so if the lottery company was not able to structure the odds in their benefit, and that lottery payout could be way more than they ever made on selling tickets, that'd be a bad business to be in because yes, the odds are super low that something like that happens, but it still always happens. People still always win the lottery, and so they're gonna have to make that payout. So with options, you never want to take a trade that your maximum loss could be you know, a large amount, especially an undefined large amount, because that could wipe you out. So that's a little primer on options. You can use them in place of buying the shares. So if you think, oh, yeah, this this stock, I think it's going to go up, but I don't want to spend a couple thousand dollars on buying a few shares, so I'll spend you know, twenty dollars, you know, fifty dollars. We looked at some expensive options, but for most stocks you can, you know, even when you have to multiply it buy one hundred, you could buy a call or buy a put for twenty bucks or for you know, fifty bucks, significantly less than you have to spend on the shares. And then if the move happens that you think was going to happen, you can still make the same in some cases, far more than you would have made on the shares, but your worst case scenario is that you lose a lot less. And so for portfolios where you want to preserve your purchasing power or your total net worth of your portfolio, you throw the whole thing into stocks, and then the market crashes. Everything crashes. Diversification doesn't protect you against a market crash. It only protects you against one stock crashing. And so if you have the ability to then take eighty percent of your portfolio and put it in something very stable like cash or even if you like treasuries or bonds, so you're in a little bit of interest, and you put the majority of your money in something very safe that doesn't really move and just kind of stays the same. Then you take a little bit of your money and do these little speculations, so I think this one's gonna drop. I think this one's gonna pop, And you only need one to hit every once in a blue moon, and you make way more than you ever lost on all those little trades put together. And then you get a little bit more sophisticated and you're like, Okay, well I own these shares and I want to protect them against a drop. So I'm going to protect them by buying a put, but I also want some income on it because I own Amazon and it doesn't pay a dividend. So I'm going to sell a call on this, and if it goes up and I have to sell my shares while I already own the shares, But if it doesn't go up, then I keep the income that I got from selling the call, So it's a win win. And so there are tons of little strategies that you can employ with options that even if you never use them, it is such a powerful tool to have in your tool belt just in case you recognize the situation that would call for that, because if you don't know how to use them, then you might run into a situation where it's like, oh, that'd be a good idea to do the strategy right now, but I'm just not educated enough on how to do them or how to use them, and so the opportunity slips by and you're not able to take advantage of it. And so I'm a huge proponent of education of not just options, just like you know, in general, most skills in life, because there might be an opportunity that comes up that you would be able to profit off of by taking advantage of it, only if you're prepared. That's why they say luck is where opportunity and preparedness meet, because you build the skills beforehand and then if, by luck you happen to run into that situation, well then now you're able to take advantage of it. So, like I said, I do have an options course that is coming out that goes into a lot more of the advanced strategies, the mechanics, the pricing there is you know, as you might imagine a lot that goes that goes into this. There are plenty of free resources out there as well that you can piece together yourself kind of that. My goal with this course is to provide a one stop shop that gives you literally everything you'd ever need in order to trade options successfully. And so if you're not looking for that, you know, convenient one stop shop, then obviously there's tons of other places where you can get all that information for free. And that's what I did in the beginning when I was learning about this, I did mostly free stuff, and then I paid for paid for my education in losses on bad trades, and so really you pay for your education no matter what. But it's down there, and like I said, if you are interested in pre ordering it right now, because it's available for pre order, I'm finishing it up soon. During this pre order period. It has a bundle attached to it so that you can ad access to my Portfolio Allocation course as well, which talks about other portfolio allocation strategies, so they pair really nicely with each other actually, so you have your your portfolio allocations, so you know, okay, this is how much I put in stocks, it's how much I put in gold and bitcoin and real estate and things like that. And there's a whole section in my Portfolio Allocation course about using options, and so then this options course goes deeper into using using options more effectively and more the advanced strategies. So those are bundled together just for the price of the options course, just during pre order, and then once I've published the course and once it's live, then that bundle goes away and it's just the options course by itself with the same link there, so you can you can go check it out if you are interested. If not, again, I just highly recommend at least getting familiar with how to use them and how they work. From any source possible. That's all for today, really a pre shte you guys, Thank you so much for listening, and we'll see you next week on another episode.