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In the first of a 4-part series, Kim Parlee speaks with Bryan Rogers, Client Education Instructor with TD Direct Investing, about the benefits and risks of buying a call option. TD Direct Investing is holding an Options Month in June. Register at www.td.com/OptionsEducationMonth.
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Speaker 1 [00:00:03] Brian, it's great to have you with us. I understand you are a client education instructor, you teach people everything from how to place a trade just to buy and sell a stock and everything for to more complex things like options trading. So let's start with the basics on this. I think there's a perception that options are complicated. They're hard to learn and they're risky. So in your opinion, myth or reality?
Speaker 2 [00:00:28] Well, I'm going to sound like a two handed economist in a way, because on one hand, on one hand, they can be really complicated and can be risky. But on the other hand, there are simple strategies that have pretty limited risk. I kind of explain it. It's like learning a new language in a way. You know, you can learn how to order dinner, but you may not be able to have a full conversation. So just like all investing, you do want to make sure that you understand all the risks. There can be significant risks of options. But I think the problem that happens is not understanding certain option strategies, it’s where options can be very risky. So it's really important to understand your own risk tolerance and leverage those resources, those learning resources like this, to go from that basic to advanced topic. And this will help you manage those risks.
Speaker 1 [00:01:18] All right. Well, let's start with the walk up to the conversation. Let's start with the ordering dinner. I like that analogy. So let's just start with what our options and how do you think options to the layperson are different than stocks?
Speaker 2 [00:01:34] Yeah, you know, with buying stocks and most of us are familiar with that, when you buy a stock, it's either going to go up or it's going to go down or it might sit still. But typically you're looking to make money if it goes up and you might lose if it goes down. But buying an option is more like paying a down payment or a fee to lock in a price for a certain period of time. So in that case, depending on the type of option it can make, you look at different alternatives. You can make money when the market is up. You make money when the market is down or sideways. And you know, it's going to allow you more choices. You can have the ability to define risk. You can use less cash, and sometimes you can protect your stocks as well.
Speaker 1 [00:02:17] I just for point of clarification, too, is that an option is much like it sounds it is the option to own something where an equity is you're actually owning something. So that's something I think people need to keep in mind as well. But when someone's thinking about today's market conditions, how should they be thinking about options? I mean, how are they relevant in today's market?
Speaker 2 [00:02:41] Well, yeah, and right now, today's market is very unpredictable, so options can give you a little bit of that flexibility and creativity. So depending on the type of option and the strategy, you can seek to capitalize on big market moves, for example, with other option types and strategies you can seek to generate income. And lastly, you can also seek to use strategies to protect your portfolio on a stock that you already own, maybe have some protection, especially with the markets that are really high point.
Speaker 1 [00:03:12] That is something I know we're going to get into in the next little while in terms of our strategies over the next four weeks. Let's just start, though, with the beginning. For someone who is just learning how to trade options, what do you think is the most basic option strategy?
Speaker 2 [00:03:27] Well, the one we seem to all learn first hand is buying a call, and that's a trade where you're going to temporarily own the right like you were just mentioned as well. You're going to own the right to buy the stock at a certain price. There's always a time line. So there is going to be a date where it's going to expire. But for that temporary time, you're going to actually be able to own the rights to buy the stock and at a set price. So you're hoping the stock goes way up, the stock price increases, you can sell that right to someone else. That's one of the options you have. And then you can buy at the lower price. So you could exercise your option and say, I want to buy the stock at a lower price. So the faster the stock moves up and the higher it goes is the more money you're going to make.
Speaker 1 [00:04:07] And it's important that you mentioned to this is a right, but not an obligation. So it's something that you could, if you wish to, to move through that we would have to in that particular one. So if you're buying a call, what is the maximum risk to that strategy?
Speaker 2 [00:04:22] Well, yeah, there's always a downside to everything, you know, the downside is the investment has an expiry date. So I'd say that with options, when you buy a stock, you can own it for however long you want. Sometimes you may, you know, should have given it to should get rid of it earlier, but you can hold it as long as you want. With an option, the downside is you can lose that whole investment, that amount you paid, that smaller payment or down payment, that whole thing could be lost.
Speaker 1 [00:04:44] I know this is always something it's best when you kind of explain a real life example. So maybe you could give me some numbers. Give me an example how it might work.
Speaker 2 [00:04:52] Well, you know what, I was making all my trips to Home Depot, you said there's that stay at home environment right now, know you're making home improvement projects. And I was thinking to myself, I was looking at Home Depot a while ago. And if you looked in March, the Home Depot was trading at about two hundred and fifty dollars a share. So if you're like that option sentiment, I think, you know, I think this stock is really going to take off. You could look at an option contract or you could look at buying the stock. Buying the stock would include you'd have to pay twenty five thousand dollars us to buy one hundred shares because at the time it was 250$ a share. And then or you could decide, I don't want to sell anything. I don't really have the cash. I'm going to look at a call option. So one call option at the time, expiring in about 50 days, was costing about eleven dollars. So that would be eleven hundred dollars, which because it represents one hundred shares, each option does. So you know what happened 50 days later? Home Depot went to three hundred and twenty three dollars. So a significant increase and that was just within that 50 days. So if you would buy that option, you now have the ability to buy 100 shares at two hundred and fifty dollars a share. You make a pretty significant profit. Or, you know, when Home Depot did rise to three hundred and twenty three dollars, you could decide to sell the option for pretty much the same profit or maybe even a little bit more.
Speaker 1 [00:06:06] So that's interesting again. So it's a smaller outlay for a bigger outcome, but there is risks to that. So let's talk about the other side. If that's when it turned out and went the way that you wanted. What happens when it doesn't? What's the maximum risk
Speaker 2 [00:06:22] When it doesn't? Still, that's the nice thing about options. As I mentioned earlier, your only risk is that eleven hundred dollars. So that actual amount, your outlay, your initial outlay is all you could lose. Instead of putting up that full twenty five thousand, you would lose the eleven hundred if it didn't go above the 250 dollars enough to make it worthwhile.
Speaker 1 [00:06:40] All right. So this is the first time we're going to be talking about options. And again, we're talking about the basic call on today's conversation. You're going to be back for the next three weeks. And I also want to mention that TD Direct Investing is holding an Options Month in June where audiences can join in and get more information. Make it tell us a bit about what you plan on doing in Options Month.
Speaker 2 [00:07:03] Yeah, the entire month is dedicated to live interactive classes, which we do all the time, we do all kinds of different topics, but this is exclusively going to be focused on options. You can learn about various options, strategies from beginner to advanced or whatever level that we usually find something that's for you. And we're actually going to have five different webinar guests. And I know it's a friend of yours, Kim. We are going to have Phil Davis, on there as well. So you can register if you're interested. Register at www.td.com/OptionsEducationMonth.
Speaker 1 [00:07:35] Brian, thanks so much.
Speaker 2 [00:07:37] Thanks Kim.
Speaker 2 [00:00:28] Well, I'm going to sound like a two handed economist in a way, because on one hand, on one hand, they can be really complicated and can be risky. But on the other hand, there are simple strategies that have pretty limited risk. I kind of explain it. It's like learning a new language in a way. You know, you can learn how to order dinner, but you may not be able to have a full conversation. So just like all investing, you do want to make sure that you understand all the risks. There can be significant risks of options. But I think the problem that happens is not understanding certain option strategies, it’s where options can be very risky. So it's really important to understand your own risk tolerance and leverage those resources, those learning resources like this, to go from that basic to advanced topic. And this will help you manage those risks.
Speaker 1 [00:01:18] All right. Well, let's start with the walk up to the conversation. Let's start with the ordering dinner. I like that analogy. So let's just start with what our options and how do you think options to the layperson are different than stocks?
Speaker 2 [00:01:34] Yeah, you know, with buying stocks and most of us are familiar with that, when you buy a stock, it's either going to go up or it's going to go down or it might sit still. But typically you're looking to make money if it goes up and you might lose if it goes down. But buying an option is more like paying a down payment or a fee to lock in a price for a certain period of time. So in that case, depending on the type of option it can make, you look at different alternatives. You can make money when the market is up. You make money when the market is down or sideways. And you know, it's going to allow you more choices. You can have the ability to define risk. You can use less cash, and sometimes you can protect your stocks as well.
Speaker 1 [00:02:17] I just for point of clarification, too, is that an option is much like it sounds it is the option to own something where an equity is you're actually owning something. So that's something I think people need to keep in mind as well. But when someone's thinking about today's market conditions, how should they be thinking about options? I mean, how are they relevant in today's market?
Speaker 2 [00:02:41] Well, yeah, and right now, today's market is very unpredictable, so options can give you a little bit of that flexibility and creativity. So depending on the type of option and the strategy, you can seek to capitalize on big market moves, for example, with other option types and strategies you can seek to generate income. And lastly, you can also seek to use strategies to protect your portfolio on a stock that you already own, maybe have some protection, especially with the markets that are really high point.
Speaker 1 [00:03:12] That is something I know we're going to get into in the next little while in terms of our strategies over the next four weeks. Let's just start, though, with the beginning. For someone who is just learning how to trade options, what do you think is the most basic option strategy?
Speaker 2 [00:03:27] Well, the one we seem to all learn first hand is buying a call, and that's a trade where you're going to temporarily own the right like you were just mentioned as well. You're going to own the right to buy the stock at a certain price. There's always a time line. So there is going to be a date where it's going to expire. But for that temporary time, you're going to actually be able to own the rights to buy the stock and at a set price. So you're hoping the stock goes way up, the stock price increases, you can sell that right to someone else. That's one of the options you have. And then you can buy at the lower price. So you could exercise your option and say, I want to buy the stock at a lower price. So the faster the stock moves up and the higher it goes is the more money you're going to make.
Speaker 1 [00:04:07] And it's important that you mentioned to this is a right, but not an obligation. So it's something that you could, if you wish to, to move through that we would have to in that particular one. So if you're buying a call, what is the maximum risk to that strategy?
Speaker 2 [00:04:22] Well, yeah, there's always a downside to everything, you know, the downside is the investment has an expiry date. So I'd say that with options, when you buy a stock, you can own it for however long you want. Sometimes you may, you know, should have given it to should get rid of it earlier, but you can hold it as long as you want. With an option, the downside is you can lose that whole investment, that amount you paid, that smaller payment or down payment, that whole thing could be lost.
Speaker 1 [00:04:44] I know this is always something it's best when you kind of explain a real life example. So maybe you could give me some numbers. Give me an example how it might work.
Speaker 2 [00:04:52] Well, you know what, I was making all my trips to Home Depot, you said there's that stay at home environment right now, know you're making home improvement projects. And I was thinking to myself, I was looking at Home Depot a while ago. And if you looked in March, the Home Depot was trading at about two hundred and fifty dollars a share. So if you're like that option sentiment, I think, you know, I think this stock is really going to take off. You could look at an option contract or you could look at buying the stock. Buying the stock would include you'd have to pay twenty five thousand dollars us to buy one hundred shares because at the time it was 250$ a share. And then or you could decide, I don't want to sell anything. I don't really have the cash. I'm going to look at a call option. So one call option at the time, expiring in about 50 days, was costing about eleven dollars. So that would be eleven hundred dollars, which because it represents one hundred shares, each option does. So you know what happened 50 days later? Home Depot went to three hundred and twenty three dollars. So a significant increase and that was just within that 50 days. So if you would buy that option, you now have the ability to buy 100 shares at two hundred and fifty dollars a share. You make a pretty significant profit. Or, you know, when Home Depot did rise to three hundred and twenty three dollars, you could decide to sell the option for pretty much the same profit or maybe even a little bit more.
Speaker 1 [00:06:06] So that's interesting again. So it's a smaller outlay for a bigger outcome, but there is risks to that. So let's talk about the other side. If that's when it turned out and went the way that you wanted. What happens when it doesn't? What's the maximum risk
Speaker 2 [00:06:22] When it doesn't? Still, that's the nice thing about options. As I mentioned earlier, your only risk is that eleven hundred dollars. So that actual amount, your outlay, your initial outlay is all you could lose. Instead of putting up that full twenty five thousand, you would lose the eleven hundred if it didn't go above the 250 dollars enough to make it worthwhile.
Speaker 1 [00:06:40] All right. So this is the first time we're going to be talking about options. And again, we're talking about the basic call on today's conversation. You're going to be back for the next three weeks. And I also want to mention that TD Direct Investing is holding an Options Month in June where audiences can join in and get more information. Make it tell us a bit about what you plan on doing in Options Month.
Speaker 2 [00:07:03] Yeah, the entire month is dedicated to live interactive classes, which we do all the time, we do all kinds of different topics, but this is exclusively going to be focused on options. You can learn about various options, strategies from beginner to advanced or whatever level that we usually find something that's for you. And we're actually going to have five different webinar guests. And I know it's a friend of yours, Kim. We are going to have Phil Davis, on there as well. So you can register if you're interested. Register at www.td.com/OptionsEducationMonth.
Speaker 1 [00:07:35] Brian, thanks so much.
Speaker 2 [00:07:37] Thanks Kim.
