Option Premium Explained: Options Trading for Beginners

[@TN-cl2eg]

Your explanations are always so amazing - very easy to understand

[@DanielRizza]

Hey Mike. This was a good video. You broke down ITM and OTM nicely as well as given me a good understanding of how premium is calculated. Your explanation on IV was not quite clear to me. As I understand it is just how volatile a stock is or better the stock price's propensity to change and by how much. High IV means the price can move farther from where it is while a low IV increases the likelihood of the price to stay closer to where it is. High IVs correlate to high premiums. I know this, I just do not really know why. Time is money. I get this. The more time an option has on it the more extrinsic value is tied to the price. So in summary, it seems like selling options with more extrinsic value is better than selling ones with less.

[@tastyliveshow]

That's correct! Selling an option in a high IV environment generally offers more premium than a low IV environment, which improves our max profit, breakeven point, and probability of success. Selling premium in low IV can still work, as it implies little movement, but if IV increases this will reflect an increase in the option's price, which is bad for us since we already sold it!

[@bluepine33]

High Vol is created by anticipation of higher prices - example; buyers anticipate knock out earnings report or anticipate a new product launch. The stock price is then bid upward in anticipation of higher market value. Hope this helps.

[@empoweredsupernova]

@@bluepine33 Great answer! Yes: IV, simply put, is the volatility due to future news. The more uncertainty, the higher the IV.

[@JaviAirForces]

best video on options. very simple presentation

[@loremipsum752]

2:53 - aren't calls ITM when the stock trades ABOVE strike price and aren't puts ITM when the stock trades BELOW strike price?

[@empoweredsupernova]

If shares are trading at 32 and you sell a 31 call, that 31 in ITM for $1. ITM for calls = strikes underneath the share price.

[@soho1080]

Any vid that starts w/ Zeppelin is bound to be good!!!

[@ashbyedwards]

Awesome video dude. Thanks.

[@fotospatinaje]

excellent video thanks

[@IamDoubleP]

Thanks, this was very informative.

[@FLOODOFSINS]

How did you come up with $6.50? How did you pull out a $1.50 cents out of the air? What exactly tells you that number? And where do I find the premium price when I go to places like Yahoo finance? Whenever I look at an options chart I never see any price for the premium. I don't get it. I see videos like this all the time and I still don't understand. For example I'll go to Yahoo finance mobile app and search something like AMD. The price right now is $86 and when I go to the options chart for February 5th the very first one it says $50 strike price. So I assume it'll cost $5,000 for that contract or right to buy but I don't see anywhere where it says premium price. Places like TD Ameritrade I think charge 65 cents per contract which would be $65 to trade that option I think. So I don't understand why I see all these different KZbinrs giving strange premium price numbers for various stocks. I can't find that information anywhere.

[@IFaresM]

Never thought I would understand options! Thank you so much that was a great explanation

[@ricardocanelon8830]

That was great! However I am still left with some doubts. The following situation is going to put my main concern into perspective. So, imagine that i sell and OTM call at 105$ (assuming the stock price at that moment is a 100$). If the stock moves up to 110$ before the expiration date, then i have the obligation to sell 100 shares of stock at 105$ which would mean that i would have to buy those shares at 110$ and and sell them at 105$ to fulfill the contract. However, the same case happens if the stock goes up to 108$. So my question is, if I sell an option to the market and that option becomes ITM with time, when will the market exercise their rights on me? if we use the example of the call, then when will the market exercise their right to buy from me 100 of stock at 105$ if the stock at any given moment if trading above 105$?

[@tastyliveshow]

It usually has to do with extrinsic value, since people that turn their option into stock give up all extrinsic value right then and there. The more extrinsic value there is in the option still, the less likely it is to be assigned for this reason. The only times I've been assigned have been in situations where extrinsic value is extremely low, even though it can happen at any time.

[@empoweredsupernova]

Selling nakes calls is extremelly risky, since the share price can go very high and the losses could be unlimited. We only sell covered calls.

[@tchovosky]

Hi, thanks for the explanation! I have a hard time picturing a scenario of comparing 2 different stocks. Could you help me walkthrough it? Assuming we have 2 stocks a b, the current prices of a and b are 10 and 1000 respectively. Assuming these 2 stocks are really identical, u can think them are the same company in the parallel universe. Let's say I predict them will increase pass 20%, and buy call options at 11 and 1100. Will the premium cost the same? As the stocks move to 120 and 1200 before the expiration date, and I decided to sell them to keep the profit. What will the premium be like? Will the profit be the same if I sell?

[@arun4846]

Thanks ❤️❤️❤️

[@claycodes6226]

Thanks mike... You rock!

[@valueinvestor3940]

What is difference between Premium and Options prices? When you say IV is reflection of option prices and if option price is decreasing then IV also decrease and hence Premium will decrease but my point is Option price = Premium so you can't really say Premium is decreasing because IV is decreasing?

[@tastyliveshow]

Good point - in this case, we're talking about extrinsic value. Options will have intrinsic value regardless of IV, but extrinsic premium will fluctuate based on changes in IV

[@mrnareshkumar12345]

NICE

[@abrahamgarcia3907]

let’s say you buy a call option out of the money, if you let it expire will you get your premium back? for example 55 strike price and share price is 43

[@sandeep0094]

Do Options premium consider future price ?

[@baggingbiggins2247]

When you say “stock price” do you actually mean strike?

[@tastyliveshow]

At what section of the video? I can check it out.

[@80sglint71]

Excellent!

[@Gabriel-mr5gf]

question do you get the premium back when you sell a call option ( not exercise)

[@tastyliveshow]

Yes - when you buy an option you pay a certain amount to own it. When you sell it, you get cash back for the value of the option. Just like buying and selling anything physical in real life.

[@Lifesituations8000]

If the stock goes up in value will my premium go up or does it stay the same?

[@chalemi]

Is there every a circumstance in options trading where you're actually buying or selling actual shares? Or is it only about trading the premium?

[@tastyliveshow]

Sure - covered calls, covered puts, covered strangles - all three use stock and options in conjunction. Also, if I want to become long 100 shares of stock, I can sell an OTM put, and if the put expires ITM, I'll own the shares at a lower basis than if I just bought shares outright at that same time, plus I'd collect premium for taking the risk of owning the shares at the strike I choose.

[@xiaolisun7675]

If I want to buy a currency option, how to convert the premium and face value to the other currency? By spot rate or strike price? Thank you.

[@harsh-bm4wx]

@tastytrade so if I am selling OTM option, I will get the premium up front, so can I close that trade right there immediately after selling OTM option as I am getting the premium upfront ??

[@tastyliveshow]

Sure you can close it if you want , but you pay premium to close it. If you collect $1.00 up front selling an option and want to close it and it's still trading for $1.00, you pay that $1.00 back.

[@harsh-bm4wx]

@@tastyliveshow I am a little confused.. please help me out here.. for example a stock is trading at 100 and sell a call of 105 and put of 95 (both OTM), then I will get the premium upfront so if I close that trade right there, will I not be in profit ?? Or if the stock moves say to 97 or 103, what will be my profit and loss look like ?? I am sorry for long query

[@samarthpandey8483]

@@harsh-bm4wx Whenever you sell an option obviously you get the premium upfront But you have to close the trade So when you close or exit the trade You again buy those options by paying the current market price of that option

[@Popinjay87]

hey mike, say this monday I buy a GDX call for may 2017 strike price is $24. if gdx keeps rising from here am I guaranteed to make money via a rising premium? since a rising stock price means less risk thus a higher premium? would it then make sense to sell the contact to someone else and pocket the difference in premium or hold til expiration and exercise? this is a hypothetical scenario that the option will expire ITM. If I don't have the money to pay for the shares if I were to exercise the call could I just sell the contract to someone else easily?

[@tastyliveshow]

Hey Eric sorry for the delay! If GDX stock price rose, the call price would likely increase, especially if it rose swiftly after you purchased the call. However, extrinsic value decay (theta) would be lowering the price of this option every single day, even if you are directionally correct. Looking at GDX right now at $24.34, a 24 call held this long is probably showing a loss, but I could be wrong. At any rate, anyone who buys an option has the right to sell it prior to expiration - there is no obligation to hold it to expiration. But if you did, and it was ITM as it is right now by 34 cents, you would be obligated to buy the shares if you let it expire through expiration. If you didn't have the funds to cover this, you would be put in a margin call and be forced to either add funds or just sell the shares to close the position.

[@ojnik]

how does a canadian do this? any suggestions? with TFSA details?

[@automobili2801]

Is it good strategy to sell covered call and buy put at breakeven price to decrease the risk?

[@tastyliveshow]

You certainly could - this is similar to a "costless collar" where an investor would buy 100 shares, and then sell a call that is the same price as an OTM put purchased.

[@magicmike1122]

How do I calculate the premium I have a contract add some specific price

[@tastyliveshow]

Premium is typically extrinsic value. Extrinsic value = option price - intrinsic value ( if it applies)

[@egoboy]

dumb question - is option premium a one time payout or is it reoccuring?

[@tastyliveshow]

It is a one time transaction - if you sell an option to open, you collect that premium up front. To close the position, you have to buy back the option. If you buy an option to open, you need to sell the option to close the trade. These are all binary transactions, but the value of the option itself will change by the second based on stock price and implied volatility, and extrinsic value will decay as you reach expiration via theta decay.

[@egoboy]

tastytrade thanks mike & tasty trade for your reply

[@harsh-bm4wx]

@@tastyliveshow so if I am selling OTM option, I will get the premium up front, so can I close that trade right there immediately after selling OTM option as I am getting the premium upfront ??

[@utsargwealfoundation]

amazing

[@promitbanerjee2623]

hey I have one doubt why it is said that otm options have "0" value at expiration. suppose stock price is 80 I but otm call option at 85.. stock is valued at 90 at expiration ..so I will still make 5 -option premium I paid as profit... right??

[@tastyliveshow]

If a stock is at 80 and you sell a call at 85, it is OTM at that time. If the stock price moves to 90, now that call is 5 points ITM, so it would no longer be OTM. If you bought that call, then yes you would make $500 - premium paid to buy the option.

[@hspnew]

Great

[@jeevankg1]

good

[@josepvaz8827]

THX

[@bensmith6987]

Hope numbers were written.

[@gssseveni3939]

What is difference between Premium and Options prices?

[@tastyliveshow]

Nothing - premium is just trader-speak for the option price.