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Intrinsic Value of an Option: Earn a Living Trading Options – Video 3 Part 2

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As we get closer to the third Friday of May,the chances of that stock moving above the strike price of $27.50 becomes less and less certain, and because of that the option has less value to it.

If you take a look at an optionlike this overtime, let’s say that the stock doesn’t really move.  Maybe in a week from now,this option will be selling for 20 cents bidand 35 cents ask; a week after that it’s 15 cents and 20 cents or 25 cents.  The week after that maybe it’s 5 cents and 10 cents.  So eventually the option that you purchased at 40 cents with great hope that the stock was going to move upis now only worth about 10 cents.  You’ve lost 30 cents on the trade.

Well that’s exactly what the person who sold it to you is hoping would happen.  That in fact, the stock did not go up in price.  That you purchased this option that they know is going to expire and will eventually erode in value over time.  That’s how they make their profit because they sold it to you at 40 cents; they can buy it back at 10 cents; and make 30 cents on that trade.

What about the guy who purchased the put option?  Theoption that gives him the right to sell the stock at $27.50 and hoping that it would go down so he could buy it back at $22.50.  If he could buy it at $22.50 and sell it at $27.50, he’s made a $5 profit.  And that’s what his hope is.

Now if the stock doesn’t do anything at all, the same exact thing is going to happen to his put option.  Eventually over time, because the actual probability that the stock is going to decline in price decreases as these options get closer to expiration.  Then this option will be worth less and less each week.  Let’s say next week at this time if the stock does not move then this option will only be worth maybe 45 cents to 65 cents.  Another week passes by and it’s only worth 35 cents to 45 cents.  Now another week passes by and it’s only 25 cents.  As long as the stock does not move, all of these options will continue to decline in price if they have extrinsic value.

Now the prices of theseoptions are called “in the money” options.  In the money options have some component of what they call extrinsic value and some component of intrinsic value.  The way that you can determine intrinsic and extrinsic value is simply by taking the strike price of the option, in this case we’re taking a look at the May 20 calls, and their price is $7.40.  On these 20 calls, if you add the strike price to the price of the call, you get $27.40.  At the mid-price you’re probably talking closer to $27.25, which is exactly the price of our current stock.  So you can say that this call option has no intrinsic value. In fact, if we look under the extrinsic value, you can see that it is actually zero.

The closer you get to “in the money” or the actual strike price of the stock, you can see that there is, in fact, some extrinsic value left.  There is some time value left in that option and that time value is basically saying that “hey you know what, we do have three or four weeks before expiration” so the price of the option may actually increase to the point where it might be actually further in the money.

What is our objective, though?

This is just a very brief.  You should already have a basic understanding of options.  I probably haven’t told you anything new.  Or maybe I have, I don’t know; but that depends on your experience.  The important thing to remember, though,is that when we trade for monthly income the stock cannot be in two places at one time.  At expiration we’re going to make money on one side or the other.  That’s an important distinction tomake because we make money whether the stock goes up or goes down.

Now the types of vehicles that we use in order to trade options on the exchanges are normally going to be,and I’ll go through all those with you in the next series herein portfolio building.  What we’re going to be using are(proprietary information edited out) adjustments.  Adjustments are everything because as I said, prices fluctuate.  That is oneinviolate rule of the market:  prices will fluctuate.  We don’t care if they go up or down but they do fluctuate.

There are a couple of rules to the option markets and that’s the two I’ve already told you.  The third one is don’t lose money.  So, the rules are:  prices fluctuate,options expire at a date in the future, and don’t lose money.

In order not to lose money, many times we have to do adjustments to our original positions.  This is where a lot of option players make a mistake.  They do not adjust their positions.  They put a position on and they believe that they can just keep it on there until expiration.  Well, they forgot about the other rule of the market and that is prices will fluctuate.  Options expire but they also fluctuate so if you get into a position, and a lot of option players do this, they just put positions on and they forget about them.  They don’t even look at them until they have a loss and then it’s too late to do anytype of adjustment to that position because they are already too far gone.

Our goal is to monitor your positions.  You put these positions on and then we will show you exactly what you need to do in order to adjust the positions.  That’s where the majority of the real profits come in this business.  What happens to a business when it’s not making money all of a sudden?

Well, just like this, if we’re not making money, then we have to take a look at the source of the problem and adjust our strategy in order to take advantage of new market conditions.  That’s exactly what any business has to do.  Any businessthatis not in a profitable position has to take a look at their business model and that’s exactly what we do in our business of trading.  That’s why it really is a business because we manage by numbers and that’s what all good big businesses do.  They manage by numbers.

This is an aggregate position ofour demonstration account for the purpose of these videos.  You will see this throughout all the videos that we’re creatingon this strategy.  We start out in a cash position,but I also want to show you what the profit potential of having more contracts is.  Eventually as you get experience in this type of trading as a business, you’re going to be able to have a great deal of confidence in your ability to adjust trades over time.

I suggest that you begin with paper trading.  Now the thinkorswim platform has a papertrading account that you can set up for free.  It looks identical to this.  The only thing that is differentis if you look up in this top left hand corner, this is a live trading account.  It has a red symbol here with the thinkorswim symbol and logo.

If you have a paper trading accountopen, this is a green symbol but the platform is absolutely identical.  Everything is exactly the same.  You can enter trades, you can adjust trades, you can look at charts, and you can monitor your account.  You can do everything that you can in the paper trading account with thinkorswim, as you can in this account.

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Index Option: Earn a Living Trading Options – Video 2

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Let’s go back to our trade position here and see what we’re doing. It’s still working and we haven’t gotten filled yet and it’s been about five minutes now so what I’m going to do is I’m going to raise this up to 16 cents and see if we can’t get out at 16 cents. We’ve got$305 of profit open on this and so we’ll capture that $305 as soon as we get out of this position. We made $40 just today on this position. Let’s try 17. So, youdon’t mind giving up a little bit of profit.

We started out at 15 cents. This is a good lesson. Like this morning I had no problem getting out at the price that I wanted which was really I think a penny off the mid-price. Here we had to go up two cents. We got out at17 cents. Westarted out at 15 cents as you can see down here. It went to 16 and then ended up gettingfilled at 17. When you have90 percent of your profit you can afford to give up a few pennies. It doesn’treally matter that much.

At this point what I wanted to do was I wanted to pair those positions down. You can see now on the April positions. I’ve got my SPY positions off. I’m not in the April position anymore and that’s the way I want it. I want out of that seven-day position because the closer you get to expiration there’s all kinds of weird things that can happen, especially gamma risk. If the market happened to get to one of our strike prices,then we get some weird stuff going on. I’m going to take my profit at 90 percent.

So we’re out of the SPY. If we take a look at our portfolio nowthe only thing we have left on there is the EEM’s and the EEM’s are looking pretty good. I’m not too worried about them. Because we do build portfolios we had a lot of different positions on here. Let me just refresh your memory.

We had a SPY positionand that’s gone. We had an IWM this morning and we took that off and we still have the EEM. And the DIA we took off this morning as well. So all those other positions are gone and the only one we have left isthis one. This one still shows some profit potential here. We can still move down on this quite a bitand still be in a profitable position. Our current profit on this is $138; with one contract.

Remember I’m talking small contracts. Imagine if we had 10 contracts. Now we’re up $1,300. If we had 20 contracts we’d be up $2,300 just on this one position. I mean how much money do you want to make? That is the only question. Once you learn how to build your portfolio and manage these positions, it’s only a matter of size.

Now this position, because the marketis falling, we’re now down 237 points. When we started out, we were down about 200 points. Now we’re down almost 240. This could go down a little bit more and we’d beeven in a better position. We made about $30 today. We have 136 open but let’s see where the expiration is. The expiration is $351 so we’ve got a couple hundred dollars of profit still in this position that we could take out of it if we hung in there just a little bit more.

Since I do not like to predict price, I only want to manage a portfolio based on numbers. Then you know what, I’ve got upside, I’ve got downside and it doesn’t matter if the market goes up or down from this point, I’m going to be in a profitable position. So I’ve got room to let this ride a little bit and I may do that just to grab a little bit more profit out of this position. So we’re going to leave this fornow but this is how you close out profitable positions. If we ever get into a losing position, I’ll do a video on that, too, so you may find one on your CD.

This is how you trade with confidence because it doesn’t matter if the market goes up or down. What you always want to take a look at is where your current profitable position is and that’s this white line here. Your expiration position is this greenline here. When you hover your mouse over your current position and live price, you can tell what the difference is between your current position and the profit potential that you have availableleft in this position, which is about $200. We’re going to hang in there I think a little bit more because we have room to breathe and this is the last position in our portfolio that we haven’t closed out yet.

 

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Option Trading: Earn a Living Trading Options – Preview Video

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Welcome to the art and science of trading as a business!

The objective of the program is to generate money every month. We really want to have a monthly income stream and, in order to generate a monthly income stream, we are going to be using options as our primary trading vehicle. What we want to do here is show you how it’s possible to make a monthly income and build wealth at the same time on very small positions.

As you take a look down here, you can see we only have one contract. But, just to show you what the profit potential is, on one or two contracts, we’ve only got $1,000 of margin up right now and we’re making $407. That’s a 40% return on investment, on margin, return on margin, in just the last two weeks.

When you’re trading with confidence, it doesn’t matter what the market does. As you can see from my position here, I’m right in the sweet spot and the market is down. If you take a look over here, the Dow is down 190 points and my position is beautiful. Right in the center here is where all the profit is made. The market could go down another 200 points and I would still be ok. It could go up 200 points and I would be okay.

You know, that’s why these kinds of positions are so powerful. Because you’ve got a wide range that the market can move in, it doesn’t matter if it moves up or down, and you’re going to be in a profitable position. I’ve got one contract here and I’m making $400 in two weeks. If I had ten contracts, I’d be making $4,000 in two weeks. If I had 20 contracts, I’d be making $8,000 in two weeks.

How much money do you want to make? That’s the only question. And the only way that you can make this kind of money in the market is by learning how to structure your positions, how to manage them on a portfolio basis, and how to adjust them when necessary. You never have to get hurt and if you want to make money, this is the only way I have found to make reliable monthly income from the markets and build wealth over the long term.

I mean this is the kind of stuff that you can hand down to your grandchildren and it will still work for them as well as it works for you. This is the kind of stuff you can hand down, it is something that is so secret that only market-makers who are extremely successful have ever learned about these markets.

This is the kind of stuff that would go into a vault; make personal copies for yourself and put them in a safety deposit box at your bank. Believe me, your children and your grandchildren and their grandchildren are going to profit from these strategies. The same strategies that you can profit from now, they are going to be able to profit from 20, 40, 100 years from now because these will never change. I would say less than 1% of all traders even know how to do this.

The market-makers have been doing this for years and now it’s possible for retail customers like us to be able to take advantage of this. But retail customers in general are not going to even understand these types of positions. They think price is the only way to profit from the markets. You know, prices going up, prices going down. I buy puts it it’s going down, I buy calls if it’s going up. I buy stock if it’s going up, I buy short-stock if it’s going down. But price is not the only way to profit from the markets. In fact, it is probably the least effective way to profit from the market.

The kind of positions that we are talking about here are the kind of positions that you can put on that don’t take all of your time. You can put them on, you can let them go, and you can adjust them as necessary and make a great monthly income from them and build wealth out of them. And there are very few people I would say, very very few people who understand this and can teach it. So that’s my goal.

My goal is to provide you with the very very best training; the very best tools; the very best understanding of building these type of portfolio positions, managing them and adjusting them as necessary so that you can draw that monthly income, build wealth, and trade with confidence.

 

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