Options Trading: Getting Started with Options

Understanding Options Trading

Episode 01 – Getting Started with Options Trading

David McGann (00:17) Hello to all of our viewers. My name is David McGann. I'm a director here at BMO Investor Line, and I'm thrilled to be co-hosting today's webinar on getting started with options in partnership with options plan. With me, I have Tony Zhang. Tony is a chief strategist at OptionsPlay, where he leads development of options, trading products, education for investors, and oversees the firm's quantitative options research. He's a frequent contributor to CNBC for analysis on the markets with a specific lens using technical analysis fundamentals and options. So we truly have an industry expert here today to help us kick off a tremendous new education and content series geared specifically towards options. And with that, Tony, I'll hand it over to you to take us away as we dive into this topic of getting started with options.

Tony Zhang (01:07) Thank you so much Dave, and thank you so much to everyone here at BMO. Um, really excited to be launching this series on helping investors better understand options, option contracts, and how to, uh, think about how options fits into your portfolio. So thank you so much and let's go ahead and dive right into it.

(01:27)

So let's get started here today with our first webinar in our series, which is getting started with options. In this webinar, we're gonna explore and understand the basics of an options contracts. We'll talk about buying and selling calls and puts to better understand the different types of strategies that you could potentially deploy in your portfolio and how you should think about, uh, options fitting into your overall portfolio, whether it's for generating income, speculating on the overall direction of the overall market, or even potentially protecting your portfolio against some downside. So let's go ahead and get started. Now, before we do, what we are going to discuss here today is purely for education and demonstration purposes. It is not a solicitation or recommendation to buy or sell any of the specific securities that we'll be using as example purposes during today's session.

(02:20)

So let's kick off and take a look at what we are going to cover here today. First and foremost, we wanna make sure you understand what and option contract entails, the difference between a buyer and a seller of an options contract, and the difference between a call and a put options contract. Then we'll take a look at an example to give you a better understanding to compare in the co the exposure that you have with an options contract compared to the exposure that you have owning the underlying stock. And this giving you that comparison will give you a good understanding of the differences and when you might want to consider using an equity exposure or an options exposure. And then we'll take a look at why do investors typically utilize options. We'll be taking a look at a few different use cases to generate income, to speculate on the overall direction of the markets, as well as how to protect your portfolio against some downside correction in the overall markets utilizing options. And lastly, we will wrap this up with, uh, some best practices on utilizing these option strategies before I'll hand this back to Dave to show you how to utilize the InvestorLine platform to find and utilize some of these strategies.

(03:34)

So let's kick off with just a basic understanding of what is an option, because the first time you look at an option contract, it might seem, uh, a little overwhelming because it's actually some legal, uh, it's essentially a legal document. It is a contract between a buyer and a seller. And what we're gonna do is we're gonna break down this contract to help you better understand the terms of the contract and what you might be obligated to or have the rights to as a buyer or seller of an options contract. So first and foremost, the most simple thing to understand is that an option contract is simply an agreement between a buyer and a seller. And in this particular case, the buyer will always be the party that's going to pay a premium in order to have the rights to the contract. And the seller in this particular case will be the receiver of the premium that, uh, the buyer pays, which sometimes we refer to as the income that you receive as selling an options contract. And as a seller, what you have is the obligation to fulfill the terms of the contract, if and when the buyer chooses to exercise those rights. So sometimes to better understand this, we use a bit of a metaphor. Uh, we think of it as driving a car. The buyer is the person who's the driver of the car. They're going to maintain control, they pay for that, right? And the buyer gets to control whether we go left or right, and they choose whether they want to exercise the rights. And as the seller of an option, as the writer of an option that gets paid that premium from the buyer, you are effectively in the passenger seat. You are at the whims of what the driver, where the driver wants to go. So that's why as a seller, you have the obligations of the contract that if the buyer chooses to exercise those, his right, his or her rights, you have the obligation to have to fulfill that obligation.

David McGann (05:35) Thank you, Tony. Uh, really appreciate that walkthrough. And I love the, the use of metaphors. And I I think when it comes to retail investors, historically there's been more of a skewed towards being a buyer and a driver, to use your metaphor, uh, versus a seller. Have you seen this dynamic change over time, and if so, why?

Tony Zhang (05:55) Um, that's a fantastic question, Dave. And, you know, I've been doing this as an option strategist for 18 years, and over that timeframe, I certainly have seen a lot of changes with regards to how, uh, investors are utilizing options. Uh, you know, 18 years ago, uh, when we look at the retail landscape, predominantly retail traders were largely buyers of options.

And it was actually the professional community, the market makers, the, uh, institutional investors that were predominantly selling options, collecting premium, collecting, income on options, on selling options. But over the last few years, we've really seen a resurgence of the retail trader in terms of their, uh, education, access to education, access to understanding these strategies in a much deeper level, understanding the underlying Greeks. And what we have seen as a result of that is far more, uh, I would say a balanced approach for retail traders that have, you know, a pretty more, a pretty, a far more balanced approach to not only buying options, but also selling options.

And we're seeing a lot more retail traders actually selling options these days than we did looking back, you know, a decade ago.

00:07:04.445 --> 00:07:05.525

Tony Zhang (07:06)

So with that, let's dive into the anatomy of an option. This is really where we break down the legal terms of the agreement between the buyer and the seller. And once we go through this, you'll have a much better understanding of how to, uh, navigate and understand an options contract. So first, let's take a look at the terms at which we agreed to between the buyer and the seller. The first term we look at is the contract amount. How many underlying shares does each contract represent?

Now, with most stock ETF and index options, the contract amount is a 100 multiplier. So either 100 shares or 100 times the index level. Each contract is going to represent 100 shares, and you can trade multiple contracts. Uh, but the minimum contract you can trade is one contract. The second thing you're going to agree to is the underlying product or the underlying asset. This could be a stock, an ETF, an index, a currency, or a commodity. Most traditionally, you're going to see, uh, ETF stocks and indices that are traded on the US and Canadian exchanges.

(08:12)

So in this particular case, we're gonna use an example with Oracle stock traded on the New York Stock Exchange. The next thing you're gonna look at is a price at which you agreed to typically called a strike price. And this is priced in dollars per share. And what you're doing is you're agreeing to a price at which you can either buy or sell the underlying stock at sometime on or before the expiration. And that is the last term that we look at, which is the timeframe. At which point does the option contract expire, meaning the buyer has the rights to buy or sell this stock at the specific price up and, uh, to up and unto that expiration date. In this particular case, we're looking at April 19th at the time. So this gives us a better understanding of the terms that we agree to. And the only thing that we have to then specify at the end of this is whether it's the right to buy the stock at a specific price or the right to sell the stock at a specific price. And that will determine whether it's a call option or a put option. So this might start to sound a little overwhelming with the number of terms that you have to agree to the calls and puts whether it's a buy or sell. So let's take a look at a real example here of Oracle stock. Let's first take a look at the call option example. What this gives us is the right, as the buyer of the call option, the right to buy 100 shares of Oracle stock at $100 per share on or before the April 19th expiration. So the goal here is to make sure that when we look at the, um, the contract, you understand the terms at which you're, you're agreeing to. And in this particular scenario, if you were to buy this call option on Oracle stock expiring on April 19th for $100 strike price, let's take a look at the three different scenarios that you might come across as the buyer of this call option.

(10:14)

So first scenario that we'll take a look at is if ad expiration, the stock is above $100 per share. So what this means is that typically you will likely exercise your call option because you can effectively buy the stock at $100 per share for a stock that's actually worth more than $100 per share. And that is going to be beneficial to you as the buyer of a call option because you can effectively exercise your call option, buy the stock at $100, and immediately sell your stock on the open market for a price that's higher than that. And that would be, uh, the potential profits that you have on the contract. The second scenario that you might come across is if the stock stays at $100 or lower before expiration. And this is really when we say that your option is out of the money, because you, in this particular scenario, you would generally not exercise a call option for $100 per share if the stock was worth either $100 or lower because there's no economic benefit to doing so. You're better off just either buying the stock on the open market for the current price at either a hundred dollars or lower. In this particular scenario, the call option that you purchase will simply expire worthless.

And in this particular case, because as a buyer you paid a premium to enter the contract and the contract expire worthless, you effectively lost the premium that you've paid as the buyer if the option were to expire worthless. But what's actually more commonly done in this, in this scenario is that likely before expiration when you purchase an option, that option will fluctuate in value based on the underlying securities price, based on volatility, based on how much time is left before expiration. And what you can do is simply sell the option contracts that you had purchased. So if you had purchased the contract originally for $5, whether that contract is now worth $10 or worth $3 based on where the stock has moved over time, you can always just sell your contracts on the, your option contract at the current price and realize either a profit or gain by simply selling the option contract itself.

(12:32)

So those are generally the three scenarios that you'll find yourself in, either at expiration or prior to expiration. That will, um, typically determine, you know, whether you hold onto a contract or let it, uh, you know, whether you hold the contract to expiration. And if we look at a put contract, it is very similar, just the mirror image of that, because now instead of the right to buy the contract, uh, buy the stock at $100 a share, you now have the right to sell the stock at $100 a share on or before the expiration date. So let's go through the scenario here again. Let's say you bought a $100 put option on Oracle stock that expires on April 19th. If the stock in this particular case was trading below $100, just like the call option, this option is now what we call in the money because you can now sell the stock at $100 and effectively buy it on the open market for a lower price. Um, and, and this allows you to, uh, or rather buy the, the, the stock at the open market at a lower price and immediately sell it to the seller at $100, realizing the, the difference between the price you bought the stock at currently and the $100 a share that you can sell it for at the very moment. Now, this is really when if you hold the option contract expiration, you can exercise that right and realize the profits between the current price and the stripe price. Or if, let's say at expiration the stock is at $100 or higher. Now, in this particular case, it doesn't make economic sense to exercise your put option because if you sell the stock at $100, but you have to buy it back at a higher price than it currently trading for, then that doesn't make any economic sense. So in this particular case, we consider the option worthless at expiration. And just like the call option, if an option that you purchased expires worthless, you, you have effectively lost the premium that you have paid for the option contract, and you will have a loss on that specific trade. And in the third example, if, let's say the option contract that you purchase over time, as the stock fluctuates, as it goes higher or lower, and time passes by and volatility changes, these are all things that are going to affect the value of your option. If you purchase that option for let's say $5 per contract, that option contract will fluctuate in value and you can always sell that option contract sometime in the future for that price.

Whether that will gain, that will, uh, turn into a gain or loss in the underlying contract will determine what your profits or low profits or losses are for that contract.

(15:22)

So hopefully this gives you a better understanding of if you were to buy or sell, uh, buy or, uh, a call or put what the different outcomes that you might find yourself in and what that might mean for your underlying portfolio. So I've always found that because you have calls, you have puts, you can be the buyer of a call or put, you can be the seller of a call or put, this can be very confusing for a lot of first time users of options to try to remember all of these different scenarios and when you might use it. So one of the best ways, in my opinion to remember this is to use a simple t-chart.

What we have are calls and puts, uh, uh, calls and puts on the top, uh, calls and puts on the bottom, I'm sorry, we have bullish strategies on the top bear strategies on the bottom, you have calls on the left and you have puts on the right. So what you have is a long call and a short put are both going to be bullish strategies. Now, what we refer to a long call is simply the buyer of a call option. And when we refer to a short put, we're referring to the seller of a put option. So when you buy a call option, that is a bullish strategy, which gives you the right to buy the stock. And then when you short a put option, the this is also a bullish strategy that gives you the obligation to buy the stock. Now, whenever you're looking to buy the stock, you want the value of these e of the underlying to rise in value, which is why we say that that's a bullish strategy. And vice versa, we just refer to buying a put option as being a bearer strategy, which gives you the right to sell the stock at a specific price. But a short call, meaning if you were to sell a call option or you collect a premium and gives you the obligation to sell the stock, those are also bearer strategies because any strategy where you have the right or the obligation to sell the stock, you generally want the value of the underlying security to decline in value. So the T chart is a great way to help you remember what, which strategy is going to be bullish, which strategy is gonna be bearish. And always remember calls on the left, puts on the right, on the ones on the top are going to be the bullish strategies, and the bear strategies are the ones at the bottom of the chart. So in order to better understand these strategies, it's also, it's always best to just go back to something that we have a better understanding of. And I think most viewers here have a better understanding of buying and selling stocks than you might have on option strategies.

(18:01)

So let's do a comparison here of the exposure that you have in your portfolio when you own an underlying stock or ETF, and compare that to what it looks like relative to the option. And that will help you better understand when you might wanna utilize an equity exposure and when you might want to use an options exposure in your underlying portfolio. So let's first take a look at stocks. What do you get when you own a stock and what do you get when you own an option? So with stocks, you know, you, you own a stock because you believe it's going to appreciate in capital, that's the first and foremost of why you own a stock or ETF. You believe it's going to rise in value sometime in the future. And when you own that stock, it gives you an actual slice of ownership in the corporation or the ETF that you own in that portfolio. And this gives you the rights to only to the dividends as well as any voting rights that come with that underlying stock. And the benefit of, of a stock investment is that, is the fact that the time horizon you have on it is effectively infinite. You can have any time horizon, you can hold onto a stock for a few minutes or a few years, however long you'd like to hold onto that security. As long as you have the margin requirement to hold onto it, you can hold onto it for as long as you'd like.

(19:17)

Now let's compare that to an options contract. When you buy an options contract, it gives you the rights to buy or sell the stock at a specific price on or before the expiration date. Those are the terms of the option contract that we're referring to before. Now here, your goals are going to be quite different. It depends on whether you believe the stock is going to move materially higher or lower, when you buy a stock, you, you only own it But option contracts give you a lot more optionality versus when you buy a stock, you, you only own it because you believe it's gonna appreciate in value. With options, you can trade them in all different outlooks, whether you think it's gonna move higher or lower, or even if you think it's just gonna stay where it is. There are option strategies that can allow you to profit in all of these different scenarios. Now, there are going to be some trade-offs with options because you don't have any dividends that, that you're gonna be able to collect from the underlying security if you own the option and you won't have any voting rights in the underlying security as the owner of an option. And option contracts, unlike EE equity securities have a time horizon. They expire on a certain, on a certain date, and either the outlook that you have, uh, uh, achieve that objective within that timeframe or not, you only have until that timeframe in order to exercise your rights. So those are some of the things that are important to pay attention to as an options investor that is going to be different from an equity investor. Now the next thing I think it's important to understand is what influences the value of the stocks that you own or the value of the options that you might own your portfolio. So when we talk about stocks, we're really referring to the earnings, the revenue, and how the, the management or the executive team of a company is managing the, uh, the outlook of that underlying, uh, security. And many investors will typically look at technical factors looking at the underlying chart to help determine where they feel that the stock will be sometime in the future, as well as fundamental analysis, looking at valuations, looking at, uh, income statements. They understand how the business is doing. Um, but typically an, an equity investment does require a larger capital outlay. And the the benefit that I think for a lot of investors from a simplicity perspective is that stocks give you symmetrical exposure, meaning you know exactly how much money you would make if the stock were to rise by $10 and you know exactly how much money you'd lose if the stock declines by $10 and it's a symmetrical amount of risk if it goes up by $10, you make a certain amount, and if it goes down by $10, you lose the exact same amount. Uh, so it's a symmetrical risk profile, very easy to understand with options, you start to add some complexity because it's not just the earnings and revenues and where the stock is going that's going to impact your p and l. There's going to be multiple, uh, inputs that are going to affect the value of an option. The underlying security is going to be the primary driver of the value of the option. However, volatility time and even interest rates will have an effect on the underlying, uh, value of an options contract. So you are adding some complexity in terms of what factors are going to affect the options price, but it does require typically less capital to enter an options trade than an a securities trade. And we have what we call asymmetrical risk. This is what we as options traders refer to as convexity. Uh, something that if you've ever wondered what you're ever gonna do with the things that you've learned in calculus back in high school and college, well this is one of the places that you can actually apply those terms because an option contract and option option, the payoff diagram of an option contract is not linear. Uh, in certain instances you're going to accelerate in terms of potential profits and in other cases you're going to decelerate in potential risk. And these are all trade-offs that you can make. And by determining which option contracts you trade, that gives you a better sense for how asymmetrical your risk profile is going to look like. And those are some of the things we're gonna dive, uh, deeper into as we look at some examples. And as we progress into other parts of this webinar series, that's gonna give you a deeper dive into what the val what is going to affect the value of an option and how much it's going to do it by.

David McGann (23:47)  Tony. I'm gonna jump in for a quick minute here. And you know, I know you did introduce some, some new terms and, uh, of course, um, you mentioned that we'll have more content in the series that dives a lot deeper into some of the terminology with options. I think one term, um, for options traders  that's pretty common is, is Delta. And, and, and maybe for some of our newer options viewers here today, it would be great if, um, you could elaborate a little bit on what Delta is and why it's something option traders often reference when they're researching or evaluating your options positions.

Tony Zhang (24:28)

Um, David, that, that's a fantastic question. It's actually one of the most important, uh, I would say terms and technical aspects of options trading that traders should understand before they dive into actually trading an option. Um, when we refer to Delta, what we're actually trying to understand is that effect of the underlying securities value on the option contract, right? So we refer to before, when you buy a stock, when refer to a stock position as Delta one, what that means is that for every $1, the stock moves, your investment will either make or lose $1. So if you own one share of the stock and the stock moves up by a dollar, you'll make $1 in profits. And if it goes down by a dollar, you would lose $1 in, in losses on that security.  That's why we call it a delta of one. It's a one-to-one relationship between where the stock goes and what your p and l is. Now with option contracts, option contracts run a wide gamut of deltas between zero to one. Meaning if you buy an option contract with, with a delta of 0.5, that means for every $1 the stock moves up by your option contract will increase in value by half that amount or 50 cents. So, and vice versa, if the stock was were to decline by $1, that value of that option contract would decline by 50 cents. And you can choose different deltas for different option contracts. So some option contracts may have a delta of 0.9, some option contracts may have a delta of 0.1, and you have a choice as to how much exposure you want to the underlying security and the different, uh, exposure levels will cost a different amount in terms of the premium that you have to pay. So really fantastic question, but we're gonna, and we will dive that, we'll dive into that, uh, you know, Delta and the other Greeks in the webinar that we will be covering on option Greeks, but really good call out here, Dave, uh, to better understand kind of how the va, how the underlying security affects the value of your option, which is that term delta that you might hear, uh, as you learn more about options.

(26:36)

So let's take a look at, now that we've explored kind of some of the, uh, terminology, some of the terms that you're agreeing to as an option. I think it's really always more, uh, uh, it's always important that we understand why should I take the time to learn, uh, you know, all of these, uh, or add some complexity in my portfolio and learn how options, uh, can fit in my portfolio.

So I always like to, before we kind of dive more into options and some of the terminology to take a step back and look at, if you were to take the time to learn about options, what can it do for your portfolio? So what we're gonna explore here today are three primary use cases that an investor would generally utilize options for in their portfolio. First and foremost, what's probably most popular and what draws most investors in is the concept of speculation.  Trying to speculate on the directional view of either the overall market, a specific sector or an individual stock. And, and, and I would say the, the, the thing that probably draws most investors in is that asymmetrical risk profile that I was referring to. How can I take a view on the overall, uh, on a specific asset class  or a specific security with limited risk, but still get leverage to the upside or unlimited gains to the upside that asymmetrical risk profile is what usually draws a lot of investors in.  But you know, Dave, you were asking me before, um, you know, what is the balance between buyers versus sellers?  And this is really where I think, uh, you know,  while speculation and buying options is what draws a lot of investors in.  Once, uh, investors learn more about options and they kind of understand how they work, we tend to find that income generation tends to be, uh,  a more common use of options.  This is really where, uh, these are,  these option strategies honestly are not as sexy as buying options,  but they create yield on existing portfolios or positions that you might already own in your portfolio. And this is actually one of the most popular use cases of options, um, once investors learn more about how they can utilize call and put options to generate income.  And then lastly, uh, we see this is the one that you don't use very often, but sometimes you might feel that the markets are due for a large correction, whether it is a minor correction or a major correction, you might consider utilizing options to protect your portfolio while you can still remain fully invested in the markets. Maybe you want to remain invested for dividends or maybe you wanna remain invested for tax purposes, uh,  but you wanna protect yourself against some downside, uh,  risks that you see in the overall markets. Options can potentially provide a bit of a partial hedge on your overall portfolio.  So what we're gonna do here today is we're gonna explore these three, uh, scenarios and give you a better understanding as to how options will fit into your portfolio for these three outcomes.

(29:43)

So when we use, you know, the four different scenario, uh,  the t chart before that we're looking at, there are four different scenarios when we talk about speculative trading,  meaning effectively taking a view on an underlying security,  and whether you believe that stock is gonna move substantially higher, substantially lower, we're typically referring to either buying a call option or buying a put option.  This is really when you expect either a big move to the upside or big move to the downside. And you would look at buying a call option.  If you believe that the equity the underlying security has, uh, or you have a bullish outlook on the underlying security, then you would typically look at a put option if you believe that you have a bearish outlook on the underlying security because a call option gives you the right to buy the stock at a specific price.  And the goal here is that you believe that the stock will be worth more than that agreed upon price at, on, or at expiration is typically the motivation to buy a call option.  So for example, if let's say you buy a call option at a strike price of $100 when the stock is trading at $100 today because you believe that stock might be worth $120 at expiration,  then you would pay for that option so that hopefully by expiration you now have the option to buy the stock at $100 when the stock is actually worth $120.  The $120 and the $100 minus the premium or the, the pay, what you have to pay in order to get onto that option contract. And vice versa. If you were looking at selling, uh,  buying a put option, you're hoping that you'll be able to sell the stock at a specific strike price when it's going to be worth less than that price at expiration.  Um, and this really, you know, is think you can think of calls and puts when you're buying calls and puts of sort of mirror images of each other.  Um, and you know, and,  and keep in mind that as I said, that even though sometimes you might hold these contracts to expiration, what's more commonly done is that if you buy a call option and the value of the stock increases, then the value of your option contract typically will also increase as well. And a lot of traders will simply just sell the option contract based on the increase in value of the option contract itself and never actually hold these contracts to expiration.  So when we talk about speculative trading, we generally refer to just the buying and selling of the option. It's actually not as common as many traders might think to actually hold these contracts to expiration and actually exercise those rights.  Um, and keep in mind that, um, you can use, uh,  a combination of calls and puts and buying calls and buying puts, uh, that we will explore in further webinar series that can potentially give you some of the benefits of both worlds as we start to explore speculative trading and income trading, how you can actually combine them together into a single strategy to kind of achieve even, uh, far more outcomes than you were looking at as just simply saying, I'm bullish or I'm bearish on an underlying security.

(00:32)

Next, what we'll take a look at here is income trading. Like I said, I think a lot of investors get drawn into the concept of options trading because they hear about speculative trading, how you can turn a small amount of capital into a large amount of capital in a short amount of time if you were to get the directional view of a stock correct and buy the call and put at the right time.  But I tend to find that once investors learn more about options and understand the trade-offs with buying and selling calls and puts as you learn about selling calls and puts, this is really actually where a lot of investors spend more of their time utilizing options in their portfolio. And the, and it really just comes down to the fact that the amount of time where you feel that the a stock is going to make a big move higher or lower is always going to be relatively s small versus the amount of time that you might feel that the stock is going to be trading sideways or just not making a big move is probably gonna be more common.

(33:50)

And that's really where income trading will come into play.  We're gonna look at two examples.  We're gonna look at a cover call and a covered put. And from my perspective, cover calls is by far the most widely used option income strategy.  It's when you own an underlying security at least 100 shares of an underlying security because each option contract, uh, uh, is for 100 shares of the underlying stock.  So if you own 100 shares of the stock,  a cover call is when you sell a call option against the stock that you own.  Because a call, when you sell a call option,  you are obligated to sell a stock at a specific price.  So if you own the stock today,  what you're doing is you're obligating yourself to potentially sell the stock at a specific price sometime in the future.  Typically, you would choose a a strike price that's above the current price of the stock so that if in the future the stock were to rise in value, you would effectively be able to sell your stock at a potential profit, uh,  once the stock is to rise sometime in the future.  But even if it doesn't happen,  what you do is you collect premium, that's the income that you're gonna receive by selling that call option.  So this is, cover calls are by far the most, um, uh,  popular strategy.  And you typically would do this if you own the underlying  security and you're hoping that sometime in the future you'll be able to sell it at a higher price.  And in exchange for that, you're gonna collect some premium.  And if the stock doesn't rise to that strike price by expiration, uh, you can effectively keep selling cover calls and keep collecting income month after month, quarter after quarter, as long as the stock stays below that strike price at expiration. And when the stock does rise above that strike price at expiration, you've now effectively sold your stock at that specific price. And hopefully at that point you would've realized a profit on the underlying security while collecting income, uh, uh, when you wait for that security to rise in value. So a cover call gives you the obligation to sell the stock at a specific price.  Another popular strategy that in my opinion is actually not as, uh, utilized is actually what we call a covered put or sometimes called a cash secured put.  And a cash secured put gives you, uh, the OB  or as a, as the seller of a, of a short put, you have the obligation to not to buy the stock at a specific price.

(36:19)

So always think of calls and puts as mirror images of each other.  A cover call gives you the obligations  to sell the stock at a specific price. A covered put gives you the obligation to buy the stock at a specific price. And this is a popular strategy to acquire stocks at a price lower than where the current stock is trading. So similar to placing a limit order, when you, when you, uh, when you place a limit order, you are obligating yourself to buy the stock at a specific price. When you sell a put option, you are obligating yourself to buy 100 shares of the specific stock at a specific price on or before the expiration date. And basically what you're doing is you're saying if the market were to decline to that strike price, I would like the, I would, uh, I I would be okay with the obligation to buy the stock at that specific price. And in exchange for taking on that obligation, I'm gonna get a paid a premium for today. That premium that you collect is the income that you receive on a cash secured put or a covered put. And generally you're doing this on stocks that you are bullish on long term, but in the short term, you believe that the stock is going to be fairly neutral or even have a little bit of a dip before the stock takes off sometime in the future. And this gives you the opportunity to collect some income and buy the stock potentially at a lower price than what it's trading for today.

David McGann (37:40)

Tony, I'm gonna jump in. I, you know, I think it's great that we're talking about, you know, three ways to really think about using and trading, um, options, uh, to compliment your, your portfolio. You've talked already about speculation. Here we are on income trading, uh, and of course in a minute, I know you'll expand a bit on hedging, um, as it relates to these two strategies here for income covered calls and covered puts. I mean, I think you've touched on this a bit already, but which do you see as being more popular among investors and why?

Tony Zhang (38:16)

Yeah, great question. Um, definitely cover calls by far is more popular. Um, but from my perspective, you know, these, these two strategies arguably should be equally popular, right?

Because a cash secured put is, is a strategy that helps you acquire the stocks that you want for your portfolio. And a cover call, it potentially helps you sell the stocks that you own in your portfolio. So it's really the full lifecycle of buying a security and eventually selling that security. So in, in theory, they should be equally popular, but by far, cover calls are more popular. And I think it has to do with the risk profile of a cover call and also what strategies that you can trade in a, in a, in a tax deferred account. Um, but, you know, cover calls are by far the most popular strategy, but in my opinion, a covered put is the most underutilized strategy by a lot of investors because, you know, it's really a, it's really a strategy for anyone who's a long term investor. If you own stocks in your portfolio for the long term cash secured puts help you potentially acquire those stocks at a lower price, at actually less risk than simply buying the stock at outright because you're getting paid a premium in order to take on the obligations of buying the stock. And then once you own the stock, selling that cover call allows you to generate an additional income stream outside of the any potential dividends that you can generate from owning the stock in hopes that in the future you'll be able to sell the stock at a higher price.