Make money by waiting with put options

Hi, welcome to this new video. Would it be good to make money while you are waiting for the price of your favorite stock to reach the level you would like it to reach? For example, if you have a long term portfolio and you want to accumulate shares of some stock or etf, but the price is currently too high and you're waiting for the price to drop, now what you can do is just wait. Nothing wrong with that. But there are some instruments in the stock market and that's what I want to show you today that allow you to make money while you're waiting for the price to drop. And I know it may sound crazy, but actually it can be done. And I want to show you a real trade that I made on DBC that is an ETF tracking commodities. So in this video we will go through the reasoning and hopefully at the end you will understand that this is another opportunity, another instrument that you have to make money even when you think there is no way to do it. So let's start first with dbc again is an ETF tracking commodities. And why am I looking at that? Because in one of my strategies for a long term portfolio, I want to make a balanced portfolio and part of it is commodities. So I wanted to buy DBC and I had to buy $1,500 of DBC. So I was looking at the chart and then I said, well, $15 seems a good price. You know, I would be happy to buy DBC at $15. Now since I wanted to buy 1500, it means I have to buy 100 shares. Now this number 100 is very important. Why? Because if you know options, you know that every option contract will allow you to buy or sell, it depends. Hundred shares. And actually option is the instrument that I use to get some more money while waiting. Now this is not a tutorial on option. I would not explain the difference of options. There are so many video online to do that you can find really a lot. And if you really need, just let me know in the comments, I may make a video about that. But for this video we just explain to you only the type of option that I use that is a put option. And basically I sold a put option. What does it mean? Well, a put option is just a contract that is like an insurance, right? You want to sell an insurance to someone because that's a nice thing about the stock market. With options you can buy, but you can also sell. And if you sell a put option, what are you doing? You are basically giving the right to someone to sell to you. Hundred Shares of something, in this case DBC at a particular price within some deadline and you have the obligation to buy at that price. Now I know it may sound complicated, so I want to give you more details on that. This is called option chain and this is the instrument dbc. You will see here my position. Okay, so what is the meaning of this? I sold one contract of one put option with strike price $15 expiration 15-11-2019. What does this mean? It means that when I sold this option, one contract, remember is 100 shares. The person who bought from me now has the right to sell to me hundred shares of DBC at $15. That the strike price within the 15th of November. Now why did I do that? What is the reasoning behind the thing is this. I wanted to buy 100 share at $15. I was completely happy to do that. This is the first condition. And the second one, I had enough cash in my account to buy in case the person who bought the option want to sell me the shares. So when you sell an option, you need to have the cash to buy the shares in case the person who bought your option really want to exercise it. And at that time when I bought the option, the price was above 15 and it was going down. Okay, so I want to compare the two scenarios. Let's say number one, we want to buy directly the shares at 15. Number two, we sell the option. Okay, so let's do a comparison here. Okay, so let's say you have the case one, you just buy 100 shares at $15. Okay, now the price is as I said, it was slightly above 15. So it was something like. We can write here. Imagine this was 15. The price was going down, but it was above 15. Okay, So this is the scenario number one. Number two is sell one, put options option, add $15, strike again. What does it mean? It means that we are selling a contract giving to someone the right to sell us 100 shares at 15. That is exactly what we wanted to do. We wanted to buy 100 share at 15. So if this person is exercising the option, we are obligated to buy 100 share at 15. That is what we wanted to do anyway. But what is the difference here is that by selling this contract we get a premium. As you probably know, if you buy an insurance, you have to pay the person who sell the insurance to you. And in this case we are those selling insurance. Now in this case, what I got was $30. Now what is $30? Well, if you consider that in case the option is executed, I have to buy 1500. It means that I get paid 30 to buy an amount eventually of 1500. And this means that I got paid 2%. That is not bad. So I got paid 2% just for waiting for the price to go down. Okay, so again, this is scenario one and this is scenario two. Scenario one, I'm still waiting. Scenario two, I got $30 first. Now what can happen? Well, number one or a, let's call it a scenario A is that the price goes up. So it was going down right at 15. And actually it never touched 15. It goes up. So in this case we are waiting to buy at 15, but we cannot buy a 15 because it will never reach that level. So we are still waiting and nothing happened in this case. What is the difference? The difference is that, yes, we don't buy because if by the expiration of the option that was the 15th of November, the price is not at 15 or lower, basically the option will expire worthless. Because it doesn't make any sense from the person who bought the option to exercise it. Because if now the price is, let's say 16, why this guy would like to sell to asset at 15, it will lose money, right? But the difference here is that if the price is never going at 15 or below, we keep the premium and we can repeat the same thing again. So here we get zero. Here we keep $30. Scenario two, the price goes down. That is what actually happened. Now you have your level 15 and the price is going down. Now in this case, you will buy your shares at $15 and you pay the commission, right? In this case, if by the end of. Usually people exercise option at the end of the right before the expiration. But let's say that the price at that time is below 15. Well, yes, you have to buy a 15, so technically you lose some money, but you will lose the money here as well, because you wanted to buy a 15. But again, what is the difference that we get the premium and the premium can offset the loss. Why? Because just consider this. Here we get $30. Actually $30 minus $125. That is what I paid for as commission for this option. So we have 2875. Okay, now here, if we buy at 15, we get 1,500. This is how much we pay, right? And we buy at 15. But here, yes, we buy at 15. So we paid 1,500, but actually we also got 2875. So in practice, what does it mean? It means that in reality we didn't pay $15. $15 for the hundred shares but we paid around is around 14.71. Okay, because the premium that we collect allow us to lower the average price for share. And what does it mean? It means that if the price is going, let's say at 1480, okay, here we are losing money, here we are still profitable because the price is still above the average price that we, that we collect. So just to recap, the thing is that whenever you want to buy 100 shares of something or multiple of hundred, it can be 100, 200. Of course, every hundred you sell a contract and you are waiting, for example, in a long term portfolio perspective, the price to drop and the price starts to drop and is reaching your level, you may find useful to sell an option because with the premium that you collect first, you are in case the price is going below the strike price, you will basically lower your average price from 15 to 1471 in this case. And if the price is never going again to that level that you were interested in, at least you keep the premium, while here you don't keep anything. Now there are many other considerations that you should take into account. For example, what is the expiration date? Because the price of like the premium that you get really depends on the strike price, depends on the volatility, depends on how many days you have before expiration. But to me, if I can get a 2% like that, I'm quite happy. And maybe I will repeat it again, you know, if eventually 15 of November, the price is above 15 and the option is not executed, well, I have $30 and I will maybe sell another option when the price is good. Okay, so this was just for you at least to understand that there are many ways to make money in the market. Even when we are not trading but investing and we want to buy something at a low price and the price is still above our prefer price. Options can be something that you can use to make money while waiting. And remember, I want to repeat again because options can be very risky if you don't know what you're doing. So the two key things when you are selling a put options are number one, you need to have enough money in your account to buy hundred shares at the strike price. Because if the option is executed, that's what you will have to do, right? So in this case I need to have at least $1,500 plus something for the commission. And number two, remember that you need to buy multiple of 100 shares because one option contract is associated with 100 shares. So if you want to buy 37 shares then selling a put option is not the best way. Okay. And again there are many videos about options and explaining the difference. For example, you may do something like that when you already have the shares and you want to collect these 1, 2% by selling calls. It's called selling covered calls. And this is another technique that we may explore if you are interested. But for now I wanted to share this one that I think is quite useful to know because if you look at the statistics, there are people that buy option and there are people that sell options. And as I mentioned there are many things that affect the price of the option. There is a strike price and, and the expiration and the volatility. So when you buy option to make money, you need to get all of them right. But when you sell option, all these things are actually working for you because the more, the closer you are getting to the expiration, the more likely is that your work that the option will expire worthless because there is less time for the price to move. And basically this can be really a good way to boost somehow your long term portfolio. Especially when you have some target price that is not yet achieved. If the price is like in this case, you know here it went up, I think it was when there was the attack, the oil a few weeks ago, I think it was in Syria there was these attacks. So the oil ETF and the commodity ETF went up a lot and then they started to go down. So this combination of volatility and price going approaching my 15 was giving me this $30, this 2%. That to me was good and that's when I decided to sell this option. So I hope you enjoyed this video. If you if you have any question, please write me a comment if you want me to touch other things related to options. It's not one of the main strategy I use but selling this is called cash secure put options or selling covered calls to me seems like good strategy that can really help you make a little more every year on top of your normal investing strategy is. So with that I conclude the video. Thank you for watching and see you next time.