Show Transcript
In the first of a two-part series, Greg Bonnell speaks with Bryan Rogers, Senior Client Education Instructor with TD Direct Investing, about the benefits and risks of buying a call option. TD Direct Investing is holding an Options Education Month in May. Register at www.td.com/oem
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* Bryan, You're a client education instructor for TD Direct Investing, where you teach people anything from how to place a trade on the Direct Investing platform, to topics like options trading. I've heard some options strategies can enable you to profit from a stock without actually buying the stock. Walk us through that.
* Well, yeah, that's the tricky part, Greg. I know those that are used to buying stocks, you're just buying the stock, you're buying the number of shares. And you're selling the stock, hopefully at a profit at some point. With options, It's completely different. So that's where learning options, it's hard to wrap your head around at first.
So as I said, when you're buying a stock, you own the shares. And they're going to fluctuate up and down. So buying an option can be like making a deposit. It's a fee to lock in a price to either buy or, potentially, to sell.
I don't know, I like an example we use oftentimes in our classes, Greg. We talk about, if I were driving down the road and I saw my dream car-- I don't know if you have a dream car in mind or not-- but mine is usually, like, a '60s Corvette or something like that. If you saw a sticker price of $20,000 on there, but you didn't have the money and you didn't have the time to go and go to the bank and get the cash. Or maybe you just need to wait a little while and you wanted to research it.
You could go to the seller and say, hey, can I give you a small deposit? Let me give you $1,000 right now. And if you guarantee me or you just promise that you're going to sell me the car at the $20,000 price in the next 30 days-- or it could be 60 days, whatever time frame you guys agree on-- that would be like an option. So you're locking in that price.
So you could either come back a little bit later on and buy the car, or you can decide not to. You're going to lose that deposit, or that $1,000. But if the car price all of a sudden goes way up because there's a bunch more demand, the price maybe goes up to $25,000. You are now guaranteed you can buy it at that $20,000 because you have that contract with the seller in place. So that's very similar to an option.
* OK, so we have an understanding now how options work. Why might an option be relevant in today's market conditions?
* Well, options can provide alternative approaches, too. You can either profit from up, down, or sometimes even sideways movements. Locking in that price is one thing I just mentioned. So if you don't really want to buy the stock yet, or you maybe don't want to sell a position quite yet. You want to hold on to your shares and see if it's going to be worthwhile to maybe sell something later on. But then you want to lock in that price now.
There are even strategies where you can lock in a price to sell. So you can protect a stock that you currently own or even speculate that the market's going down. So that's in the case of a stock dropping, options could be used to potentially lock in a price that way, as well. So there's a number of different ways that give you a lot of flexibility with options that you wouldn't have necessarily with a stock.
* OK, let's go a bit deeper now. For someone who's just starting to trade options, tell me about one of the most basic options strategies.
* Well, that example I gave you is similar to what's called buying a call option, the one with the car example. We can dig into that a little bit deeper here. But buying a call is a trade where you temporarily own the right to buy the stock at a certain price. And when I say temporarily, there is an expiration date. So that's a key difference between buying a stock and buying an option. You're only going to have it for a certain period of time.
So if the stock price increases, you can sell that right for a higher price, potentially. That's probably the most common thing that happens with most options. Or you can buy the stock at that lower price. Hopefully, if the stock did increase significantly, you can now buy it at that locked in price. So the faster the stock moves up and the higher it goes, the more money you're going to make.
So although the risk-- there is a big risk there, because there is that time component also-- if it doesn't move your way, it just kind of goes the opposite way, you could lose 100% of whatever you paid for that option contract.
* All right, so we're getting deeper now into options. I think it's time, Bryan, to see an example with some numbers attached to it.
* Well, Greg, yeah, we know we love our examples. And we're going to use WebBroker today. So I'm going to jump into WebBroker and show you the platform. I'll show an example of using real-time numbers in a tool to test the pricing of an option.
First, to start what we want to do is we want to select the underlying stock, which I've already done. So you can type in up here. You could type in, whatever, Home Depot app, or whatever stock you're interested in. Let's look at Home Depot. So this is the option chain. So as soon as I put in the stock symbol, you're going to go to the Options tab. And I'm going to scroll down. And I'm just going to show you really quickly, the Symbol, Bid, and the Ask, and these columns. They do disappear as you scroll down.
But as I go to the middle, I'm going to see this greenish, colored line. And this is what's called an "at the money" option. There's calls on the left-hand side. So I mentioned that call. We're going to look at a call example. Then there's puts on the right side. And I'm looking at the $300 strike price. So this is that price I want to lock in.
So I'm going to go up to the top a little bit further. And I'm going to go to a time frame. If I want to go to, maybe, roughly about 30 days or so, I could go to, say, June 2nd. I'm just kind of eyeballing this. It'll tell me in a moment. That's roughly about 39 days.
So if I scroll down again, and I want to buy a call that's going to lock in this $300 price, if I think Home Depot's going to go up to, say, $320 or $330 in those 30 days, it's going to cost me-- this is the ask right here. It's going to cost me roughly about a little over $1,000, roughly $1,060. These numbers here are in multiples. They're multiplied by 100. One contract represents 100 shares. So it's going to cost me about $1,060.
So now I can go up to the top and I can go into this Analytics tool. And I can test this. And I can see, well, what would happen to the price of that option if it did go up to, say, $330 or something in that nature? Whatever your target is, you can now put it in here at this top part. And now it shows me all the calls for that date I'm looking for. I'm going to type in, say, $330. I'm going to leave everything else the same for now. I'm going to click on Calculate.
And then you're going to see, in the Theoretical Value here, this is what we want to happen, if we go back down to that line. So roughly, we have about $33.88 is what that option price is going up to. So you're almost tripling your money if that stock goes up to where your target is.
* OK, what's the maximum risk here, though, Bryan, if you're playing an option this way?
* Great question as well, and something to be aware of, too. Because you want to know the risk and reward. The risk is that you could lose that full $1,060. The nice thing is that it's defined risk. You're going to lose roughly that full amount, potentially. You could lose 100% of that, if the stock doesn't move above your price by that expiration date.
* All right, Bryan. Quickly, before I let you go, you're going to be back next week on MoneyTalk. We're going to continue the discussion about options. I also wanted to mention that TD Direct Investing is holding an options month in May, where the audience can join in. Tell us a bit about that.
* Yeah, it's the Options Education Month. So it's going to be a full month long of classes. There's going to be master classes, webinars, so something for all kinds of different levels. We have getting started, up to choosing your right options path. There's all kinds of different strategies. So take a look. You could register at www.td.com/oem. And see if you can find something that interests you.
* That was Bryan Rogers, senior client education instructor with TD Direct Investing. I want to emphasize that while the goal of today's segment is to educate you on options, you need to decide for yourself whether trading options is right for you in terms of risk profile, amount of time you have, your resources, just to name a few considerations. Any information we provide does not constitute financial, legal, tax, or investment advice.
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* Bryan, You're a client education instructor for TD Direct Investing, where you teach people anything from how to place a trade on the Direct Investing platform, to topics like options trading. I've heard some options strategies can enable you to profit from a stock without actually buying the stock. Walk us through that.
* Well, yeah, that's the tricky part, Greg. I know those that are used to buying stocks, you're just buying the stock, you're buying the number of shares. And you're selling the stock, hopefully at a profit at some point. With options, It's completely different. So that's where learning options, it's hard to wrap your head around at first.
So as I said, when you're buying a stock, you own the shares. And they're going to fluctuate up and down. So buying an option can be like making a deposit. It's a fee to lock in a price to either buy or, potentially, to sell.
I don't know, I like an example we use oftentimes in our classes, Greg. We talk about, if I were driving down the road and I saw my dream car-- I don't know if you have a dream car in mind or not-- but mine is usually, like, a '60s Corvette or something like that. If you saw a sticker price of $20,000 on there, but you didn't have the money and you didn't have the time to go and go to the bank and get the cash. Or maybe you just need to wait a little while and you wanted to research it.
You could go to the seller and say, hey, can I give you a small deposit? Let me give you $1,000 right now. And if you guarantee me or you just promise that you're going to sell me the car at the $20,000 price in the next 30 days-- or it could be 60 days, whatever time frame you guys agree on-- that would be like an option. So you're locking in that price.
So you could either come back a little bit later on and buy the car, or you can decide not to. You're going to lose that deposit, or that $1,000. But if the car price all of a sudden goes way up because there's a bunch more demand, the price maybe goes up to $25,000. You are now guaranteed you can buy it at that $20,000 because you have that contract with the seller in place. So that's very similar to an option.
* OK, so we have an understanding now how options work. Why might an option be relevant in today's market conditions?
* Well, options can provide alternative approaches, too. You can either profit from up, down, or sometimes even sideways movements. Locking in that price is one thing I just mentioned. So if you don't really want to buy the stock yet, or you maybe don't want to sell a position quite yet. You want to hold on to your shares and see if it's going to be worthwhile to maybe sell something later on. But then you want to lock in that price now.
There are even strategies where you can lock in a price to sell. So you can protect a stock that you currently own or even speculate that the market's going down. So that's in the case of a stock dropping, options could be used to potentially lock in a price that way, as well. So there's a number of different ways that give you a lot of flexibility with options that you wouldn't have necessarily with a stock.
* OK, let's go a bit deeper now. For someone who's just starting to trade options, tell me about one of the most basic options strategies.
* Well, that example I gave you is similar to what's called buying a call option, the one with the car example. We can dig into that a little bit deeper here. But buying a call is a trade where you temporarily own the right to buy the stock at a certain price. And when I say temporarily, there is an expiration date. So that's a key difference between buying a stock and buying an option. You're only going to have it for a certain period of time.
So if the stock price increases, you can sell that right for a higher price, potentially. That's probably the most common thing that happens with most options. Or you can buy the stock at that lower price. Hopefully, if the stock did increase significantly, you can now buy it at that locked in price. So the faster the stock moves up and the higher it goes, the more money you're going to make.
So although the risk-- there is a big risk there, because there is that time component also-- if it doesn't move your way, it just kind of goes the opposite way, you could lose 100% of whatever you paid for that option contract.
* All right, so we're getting deeper now into options. I think it's time, Bryan, to see an example with some numbers attached to it.
* Well, Greg, yeah, we know we love our examples. And we're going to use WebBroker today. So I'm going to jump into WebBroker and show you the platform. I'll show an example of using real-time numbers in a tool to test the pricing of an option.
First, to start what we want to do is we want to select the underlying stock, which I've already done. So you can type in up here. You could type in, whatever, Home Depot app, or whatever stock you're interested in. Let's look at Home Depot. So this is the option chain. So as soon as I put in the stock symbol, you're going to go to the Options tab. And I'm going to scroll down. And I'm just going to show you really quickly, the Symbol, Bid, and the Ask, and these columns. They do disappear as you scroll down.
But as I go to the middle, I'm going to see this greenish, colored line. And this is what's called an "at the money" option. There's calls on the left-hand side. So I mentioned that call. We're going to look at a call example. Then there's puts on the right side. And I'm looking at the $300 strike price. So this is that price I want to lock in.
So I'm going to go up to the top a little bit further. And I'm going to go to a time frame. If I want to go to, maybe, roughly about 30 days or so, I could go to, say, June 2nd. I'm just kind of eyeballing this. It'll tell me in a moment. That's roughly about 39 days.
So if I scroll down again, and I want to buy a call that's going to lock in this $300 price, if I think Home Depot's going to go up to, say, $320 or $330 in those 30 days, it's going to cost me-- this is the ask right here. It's going to cost me roughly about a little over $1,000, roughly $1,060. These numbers here are in multiples. They're multiplied by 100. One contract represents 100 shares. So it's going to cost me about $1,060.
So now I can go up to the top and I can go into this Analytics tool. And I can test this. And I can see, well, what would happen to the price of that option if it did go up to, say, $330 or something in that nature? Whatever your target is, you can now put it in here at this top part. And now it shows me all the calls for that date I'm looking for. I'm going to type in, say, $330. I'm going to leave everything else the same for now. I'm going to click on Calculate.
And then you're going to see, in the Theoretical Value here, this is what we want to happen, if we go back down to that line. So roughly, we have about $33.88 is what that option price is going up to. So you're almost tripling your money if that stock goes up to where your target is.
* OK, what's the maximum risk here, though, Bryan, if you're playing an option this way?
* Great question as well, and something to be aware of, too. Because you want to know the risk and reward. The risk is that you could lose that full $1,060. The nice thing is that it's defined risk. You're going to lose roughly that full amount, potentially. You could lose 100% of that, if the stock doesn't move above your price by that expiration date.
* All right, Bryan. Quickly, before I let you go, you're going to be back next week on MoneyTalk. We're going to continue the discussion about options. I also wanted to mention that TD Direct Investing is holding an options month in May, where the audience can join in. Tell us a bit about that.
* Yeah, it's the Options Education Month. So it's going to be a full month long of classes. There's going to be master classes, webinars, so something for all kinds of different levels. We have getting started, up to choosing your right options path. There's all kinds of different strategies. So take a look. You could register at www.td.com/oem. And see if you can find something that interests you.
* That was Bryan Rogers, senior client education instructor with TD Direct Investing. I want to emphasize that while the goal of today's segment is to educate you on options, you need to decide for yourself whether trading options is right for you in terms of risk profile, amount of time you have, your resources, just to name a few considerations. Any information we provide does not constitute financial, legal, tax, or investment advice.
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