Huge Options Trading Blunders Series: Owning Long Options for “Free” (episode 2)

Рет қаралды 38,242

Күн бұрын

This video continues our series on Options Trading Blunders and covers the ridiculous and false and dangerous notion that you can buy a long option for "free" by selling a put on that same stock for the same price. This video provides a vivid example of just how dangerous this practice is. Register for our free intensive trading webinar smbu.com/seth
#LongOptions #CallOptions #OptionsTrading
SMB Disclosures www.smbtraining.com/blog/smb-...

Пікірлер: 87

@JosefTorkelsen Жыл бұрын

Just to be clear, the syntheric long option is a great option strategy. Jusy understand the risks as you mentioned.

@tiffanywoods4759 4 жыл бұрын

The highest pay out that I saw was 144,000% from LNKD stock was up 50% on bought out by MSFT. I hate to imagine how the seller felt about the OTM $195 ( bought out price) ATM at the time was 83,000% payout if sold NAKED!...Thank you.

@FadiD86 4 жыл бұрын

Thank you Seth for always dropping top grade knowledge!

@sethfreudberg4750 4 жыл бұрын

Thanks Fadi.

@razzyp3999 4 жыл бұрын

Your spot on Seth ..Risk is where it's at.. Nothing got free it life! Great video!

@sethfreudberg4750 4 жыл бұрын

Thanks Razzy.

@j.davidsapp6212 4 жыл бұрын

I burned my hand doing this *once* -- thankfully, when I did it I defined the risk, so it didn't end up hurting me too bad...it's a bit like a synthetic futures contract. Loving these -- Thanks Seth!

@sethfreudberg4750 4 жыл бұрын

It's actually long synthetic stock essentially, which takes away the risk limiting aspect of owning a long option.

@TiburonFXT 4 жыл бұрын

Wow well said seth. Truly appreciate the information your giving to the KZfaq community. That lawn mower scenario was very well explained and made me understand what the topic is about. A poorly executed trade with basically huge loop hole to the bottom. However if fb would of rally beyond the long call that would of been great.

@smbcapital 4 жыл бұрын

Thanks! if FB rallied the trade would have turned out well but the potential cost adds incredible risk that's never worth taking. Staying in the game is the most important thing

@sethfreudberg4750 4 жыл бұрын

True, but the point of the video of course was to point out the flaw in thinking that the call was owned for free while opening up a gaping risk in the situation.

@abhilash0518 4 жыл бұрын

Thank you for this series

@sethfreudberg4750 4 жыл бұрын

these are important pitfalls to avoid.

@arthurclemente8821 Ай бұрын

Very valuable info...Thanks!

@probingone8810 4 жыл бұрын

thank you for creating this series.

@sethfreudberg4750 4 жыл бұрын

Your welcome Probing.

@anthonyrutto5006 4 жыл бұрын

Great insight for option traders.

@smbcapital 4 жыл бұрын

thx Anthony

@andreaskunst4344 4 жыл бұрын

Think a little different: What if you would consider this combination as a Cash Secured Put (with taking the risk of owning the stock for e.g. Selling Calls against it) BUT with a huge upside potential if the stock starts rallying? In case the price stays between 210 and 220 you don't make money but in case it starts rallying you would receive the premium of the SP and the gain in the call. I mean you don't need to realize the loss in the stock but to keep it for either selling calls against it or considering this as a long term, dividend paying position (maybe FB is not the ideal choice for that approach). What are your thoughts about that considerations?

@emanuelbale6298 4 жыл бұрын

Seth is best!

@timstrack4573 4 жыл бұрын

This is awesome

@sethfreudberg4750 4 жыл бұрын

Glad you enjoyed it.

@Lifefacts564 4 жыл бұрын

This is a synthetic stock, not a long call 🤨

@sethfreudberg4750 4 жыл бұрын

exactly dispatch. The put and call strikes were not the same, but in essence you are correct.

@foley2k2 4 жыл бұрын

This video explains why I focus on long options.

@sethfreudberg4750 4 жыл бұрын

Yes Foley although short options have their place--with protection and proper protocols.

@apivovarov2 4 жыл бұрын

Naked short Put requires Level 3 at least. Plus you need lots of cash. 21,000 in this particular case. Or pay % for margin.

@SoltariTrooper Жыл бұрын

Probably cash covered put

@biztelegraph5934 4 жыл бұрын

I don't know sir, if you needed to mention that a brokerage wouldn't let you 'sell to open' PUT if you didn't have enough money as collateral in case they exercised that PUT option.

@johnt6810 Жыл бұрын

Yes selling a put has risk.

@jackhudkins542 4 жыл бұрын

Yeah, that is nuts!

@sethfreudberg4750 4 жыл бұрын

You have to understand the risks and the rewards.

@emanuelbale6298 4 жыл бұрын

'pround owner of 100 shares of Facebook' lol :)

@FMf1ghter 3 жыл бұрын

Wouldn’t the trader have sold it once it got to 210? Or closed it just before? One doesn’t have to wait till expiration, right ?

@aisniper4095 3 жыл бұрын

essentially, he's saying that you're creating a risk reversal strategy without knowing it and your downside is not limited. Even worse, if you're choosing the same strike for P & C, you're creating a synthetic long/short which is similar to being long with the leverage of 100. which means If you are a noob, and haven't protected your position, you're blown already.

@averagejoey2000 4 жыл бұрын

it's not really a long option, it's synthetic stock. you copy the P/L graph of owning the stock by assuming the right to buy and the obligation to buy.

@sethfreudberg4750 4 жыл бұрын

Joseph that would have been true in this example if the short put was at the same strike as the long call, but they are slightly different strikes. your point in general though is true. So the trader goes from controlling the downside risk to not controlling it, yet thinks he has "free call".

@pascal7724 4 жыл бұрын

@@sethfreudberg4750 Its also called "Risk Reversal" ;-)

@douglasgantt9548 4 жыл бұрын

So how should he have managed the put, or the downside-other than never having sold the put in the first place?

@douglasteachout1958 4 жыл бұрын

This trade should never be placed. With that aside, the trader can place a long put option one or two strikes below the short put to "cap" the risk (loss). Ultimately, this synthetic can be protected using a hedge. Conversation for a different day, though.

@InJunoWeTrust 4 жыл бұрын

Where are you finding these people? Wallstbets?

@serleon6165 4 жыл бұрын

Robinhood wouldn't let you buy this position without reserving the margin for the short put anyways.

@antwha5526 3 жыл бұрын

correct, because his risk was 22,100. not probable, but possible.

@gregoryjules2005 4 жыл бұрын

The way I get my options for free is I buy an ITM call or put and when the market goes in my direction enough, I sell a further OTM call or put respectively for my original premium. Eliminated risk completely and still have Max gain of distance between the strikes

@sethfreudberg4750 4 жыл бұрын

Gregory of course you do have the initial risk of the market not going your way, but once it does, you have alot of options to lock down the trade. You could also just close the long call and that's the surest way to lock in your gain :)

@serleon6165 4 жыл бұрын

You've invented the poor man's covered call =).

@aaronjames5078 2 жыл бұрын

??? Where do I find your training videos in order...they are all out of order on KZfaq

@serleon6165 4 жыл бұрын

This basically describes what it's like to hold a leveraged bull ETF. Looking at you $UPRO.

@TruthWatcherD 3 жыл бұрын

How would one become a remote options trader for SMB?

@_jamesbradley__ 4 жыл бұрын

😎👍very good

@sethfreudberg4750 4 жыл бұрын

Glad you enjoyed it!

@JR-nt2zv 4 жыл бұрын

Wouldn’t you need to have collateral for selling the put option? Either cash or 100 shares of the underlying stock? Tried to set that up on my platform just to see. The trade would require cash for collateral so it can buy the shares...don’t think any broker would allow the trade for zero dollars. At the very least, they would on to your shares.

@sethfreudberg4750 4 жыл бұрын

Yes your broker would definitely margin you for the short put John.

@antwha5526 3 жыл бұрын

the real irony is by doubling his upfront coast by purchasing a put ($280) (total upfront $580) and therfore making 3500-580= 2920 by selling the put in the money after facebook crashed

@damaddog8065 6 ай бұрын

synthetic stop position. 1) you have a naked put (okay the stock can not go below zero, but your still naked). You can wipe your account out in minutes doing this.

@jtoman9999 4 жыл бұрын

Good examples. Your broker would likely not even allow this position due to the margin requirements of selling a naked put. Red flag number one.

@sethfreudberg4750 4 жыл бұрын

Well you might be able to place it if you had enough capital, but it still has this danger that is not recognized by many.

@GeminiOneFive 8 ай бұрын

unless the trader is bullish on the stock, since both of those trades are bullish

@LightYOURwayTOtheFUTURE 3 жыл бұрын

Is what u just explained a debit spread??

@nyx211 3 жыл бұрын

No, it's a synthetic long stock.

@insurancecasino5790 4 жыл бұрын

There is a way to trade for free, but you have to have the stock paid off. Basically keep selling options until you get the stock for free, from there you can keep selling options on that stock to finance other option trades. Another way would be selling options against a price range, but that is a little more complicated.

@sethfreudberg4750 4 жыл бұрын

You'd have to sell an awful lot of options, and have them expire worthless, to pay for stock. Not sure what you are referring to exactly, Insurance.

@insurancecasino5790 4 жыл бұрын

@@sethfreudberg4750 There is a guy you had on this channel that does covered calls. Core Position I think, his P/L was up to 50k one year, so that "would' pay for 100 shares of stock out right that was priced under 500 a share. So basically he could just keep selling otms on that stock that was paid off, and literally trade for free. Form what I learned from some of the pros, that is their goal.

@mo938 2 жыл бұрын

writing options, long or short, is extremely risky. like EXTREMELY. if you're new dont ever write options. just stay to the long side.. long call or long put.

@justtryanother7290 3 жыл бұрын

you need to understand why, I cannot imagine people missing the full picture like this THERE IS A REASON THEY PAID YOU understand why then calculate if that’s a risk you want to take.

@jamesdonofrio2375 3 жыл бұрын

Wow !!!!

@kalef1234 3 жыл бұрын

EPIC 🚜

@esji8736 4 жыл бұрын

Remembering that we can put a STOP on a contract. Or a profit taker as well....

@sethfreudberg4750 4 жыл бұрын

Yes Esji. The point of the video is that the trader may not understand how bad the trade can get because he has deluded himself into thinking that he has a "free call" without understanding the risk.

@sc0or 4 жыл бұрын

Depending on a sector (pharmaceutical or not) risk/reward won’t be a straight line. Because IV is increasing when a typical stock goes south, and you have to lose more than you will gain if a stock goes north with the same distance.

@esji8736 4 жыл бұрын

@@sethfreudberg4750 Yes. I understood that. I watched the video.

@joegeorge3367 4 жыл бұрын

i don't agree with how and why the trader entered this trade - but wouldn't he really have closed it well before $FB dropped so largely - say when he was down $400 or so?

@ricomajestic 4 жыл бұрын

What if the stock gaps down by 4 standard deviations?

@calicorex8014 4 жыл бұрын

The drop in $FB happened after hours, during the earnings call. You can't trade options after hours. By the time the trader was able to do anything at market open, it was too late. I think the example is meant to illustrate a trader going into this trade, with the market moving drastically against him almost immediately.

@sethfreudberg4750 4 жыл бұрын

Possibly Joe, but the point is that the uninformed trader just doesn't even understand that risk because he's so focused on the cash flow.

@luisrios3446 4 жыл бұрын

I think the problem was that the trader got into a trade right before earnings report, which are big catalysts for stocks, and it can produce hugh gaps to the upside and the downside. But still you need to have sharp technical analysis skills to place that kind of trade and a really high risk tolerance level.

@dek2000utube 4 жыл бұрын

Crazy that people believe it is free!

@sethfreudberg4750 4 жыл бұрын

It should be obvious, shouldn't it Dave.

@gregoryjules2005 4 жыл бұрын

You should not be trading if you buy a long call and sell a put at the same time lol. He could have at least covered his naked put but that would sacrifice a few extra bucks haha

@sethfreudberg4750 4 жыл бұрын

Exactly, Gregory.

@tiaxi6779 11 ай бұрын

never sell put if you are not willing to own the stock, also, it is very bad practice to sell a put just for a free call option, it is not free at all, time is money , your cash are collateral while you are in put contract,

@mansawes1120 3 жыл бұрын

you just talked about how free stuff is bad

@andrewjohn4222 4 жыл бұрын

Where is this idea that you own the call for "free" by financing it with the sale of a put being propagated? I've never seen or heard anyone make such a claim.

@ricomajestic 3 жыл бұрын

People do it all the time.