Options for Beginners [2025]

So, options can be a great tool for people wanting to strategically diversify their portfolios. But where can you get started actually using this stuff? I mean, prices, contracts, volatility, Greeks—you feel overwhelmed, and you really just want someone to lay out a clear roadmap for you to follow to take you from feeling intimidated by the markets to confident enough to make that first trade. Well, I'm Jim Schultz, Finance PhD from the University of Memphis, which is one of the leading institutions in the world in the field of market microstructure. I started trading about 16 years

ago, and my career actually started as a finance professor teaching both undergraduate students and graduate students. So, give me, I don’t know, a couple of hours, and I will give you everything that you need to start trading options. I'll see you inside. [Music] So, welcome to the Options Crash Course 2023! My name is Jim Schultz, and I’m going to be your tour guide for this entire crash course. Here’s what I want to do: let’s lay out the goals, the objectives, and the mission at the very beginning. I’m going to assume that you don’t know anything.

I’m going to assume that you know nothing when it comes to the world of options. Over the course of the next two, three, I don’t know, man, maybe four hours, I want to take you from nothing to novice. Let’s get you to somewhat self-sufficient trader in just a few hours! I want this to be your one-stop shop for all things option trading as a beginner. Now, what we’re going to do as we move through this crash course is break things down into distinct sections. So, if you want to bounce around, you can easily find the

different sections; you can easily find the different chapters. I want to make this very easy for you guys to navigate! But understand that my intent, how I expect you all to consume this content, is sequentially, from one section to the next, because they are going to build on one another—again, starting from nothing and going all the way up to some understanding to where you feel very confident in doing what it is that you’re trying to do. And you know, one final thing, one final comment that I want to make before we dive headfirst into all

the details inside of this Options Crash Course—I mean, hey, we got four hours, man, we got plenty of time! I firmly believe that options have a place in every investor's portfolio, every single one. Whether you want to use options exclusively as, like, a 100% options portfolio—you’re super active—that’s one way that you could use options; that’s one way that you could use this product in your portfolio, of course. But some of you out there might be a little bit more conservative; some of you out there might be a little bit more long-term with your focus, and

you have your passive index fund stocks that you love. You kind of have that chunk of assets that’s kind of the driver of your portfolio. Well, guess what? You can use options in that portfolio too! So, regardless of which side of the fence you might find yourself on—wanting to be super active, super aggressive, or more conservative, kind of more passive in nature—I want to show you how options can fit into both of those worlds. All right, so without further ado, let’s do it, man! Let’s dive right into the Options Crash Course 2023. So, everything that

we do moving forward—however many sections we get through, however many hours we might go—everything that we’re going to do moving forward, it can all be traced back to one source concept: the option contract itself. This is essentially a transaction between the option buyer and the option seller. All right, so with that understanding as kind of our foundation here at the very beginning, there are two things that I want to point out that are going to make things much, much easier for you moving forward. The first is this: there are groups of terms that you want

to understand that are oftentimes used interchangeably, so you kind of want to internalize these categories, if you will. Number one: buyer, owner, and long all mean the same thing in the concept of an option contract, so buyer, owner, long—synonymous. Similarly, seller, writer, and short are also all synonymous within the world of options. So, don’t get tripped up if you hear these terms used interchangeably; they’re oftentimes pointing back to the exact same thing: a seller and a short—same thing; a buyer and a long—same thing. And second, and it is absolutely critical that you frame your learning

and understanding in this way: the option buyer—the long side—buys the contract from the option seller—the short side. I really cannot express to you how much more seamless your learning is going to be if you visualize the transaction in that way. The buyer buys the contract from the seller. Okay, so now that we’ve got those few things under our belts, let’s now turn to the option contract itself. Now, the contract itself has a number of standardized characteristics, a number of standardized features that you know on trade entry, and they do not change over the life of

the option: the stock, the underlying stock that’s underneath the option; the strike price; the expiration date; and the quantity. These are all standardized, these are all known on trade entry, and they are fixed over the life of the option. So, let’s take a closer look at each one of these guys. So, starting with the stock, this one is pretty obvious: it’s the underlying stock that the option is tied to, so Apple or Microsoft. Or Netflix, or whatever the strike price, this is effectively the transaction price that the shares will be bought or sold at should

the long side of the contract choose to use, or the correct term in the world of options is exercise the option. We'll talk about this in more detail later. On the expiration date, this is the last day that you can trade that option, which is the third Friday of the month for standard monthly options, but it can be any Friday for weekly options, and even in certain cases, like with SPY, one of the major indexes in the whole world of the financial marketplace, you can have some intra-week expiration dates. Lastly, the quantity: standard options are

always in 100 share increments, so each option contract effectively gives you control over 100 shares in the underlying stock. All right, so those are the standardized variables that are fixed on entry, but there's still one really relevant variable left: the price. Now this is oftentimes referred to as the cost or the premium of the option contract, and this variable isn't fixed; it actually floats as the market floats. Okay, so those are some option contract basics. Well, now I want to turn our attention to a little bit of market functionality. Whenever you go to buy or

sell basically any product in the financial marketplace, you're going to be met with what is referred to as a bid-ask spread differential. So let's unpack what's going on with this bid-ask spread differential. With a bid-ask spread differential, the first thing that you'll notice is you effectively have two prices associated with whatever option contract you might be looking at. If we're focusing on options specifically, you have an offer price, or ask price—the price that you can buy the option for—and you also have the bid price, the price that you can sell the option for. Standing on

the other side of your order is a counterparty, oftentimes referred to as a market maker or liquidity provider; that is effectively the middleman that connects the buyers with the sellers. What the market maker effectively does is he buys when you want to sell, and he sells when you want to buy. So the difference between the bid and ask spread becomes a profit for him, whereas it is a cost for you. This is because he is effectively making a market for you to allow you the opportunity to transact in whatever option you might be interested in.

Now, an easy way to remember the bid price and the ask price is just to keep in mind that you always, always get the short end of the stick; you have to pay more when you buy and receive less when you sell. This is just a cost of doing business that is effectively the compensation for the counterparty, the market maker or the liquidity provider. Now, we'll have more to say about this later too, especially when we get into liquidity specifically, but right now just know that we usually try to transact somewhere between the bid price

and the ask price. So when we want to buy, we usually try to pay a little bit below the offer price, and when we want to sell, we usually try to receive a little bit above the bid price, oftentimes ending up somewhere around the mid-price between the bid and the ask. All right, so that's a little bit about contract specifics and a little bit about marketplace functionality. The final piece that I want to add to our foundation, which we're going to keep coming back to throughout this entire crash course, is going to be the four

basic option types: long call, short call, long put, and short put. Every single option strategy that follows—every single one, from the simple ones to the complicated ones—they can all be formulated; they're all some combination of these four basic option types: long call, short call, long put, and short put. So what I want to do now is work through each of these guys. Let's unpack the directional bias and take a look at the risk-return dynamics so that we can best understand these four individual option types. Remember, think of all of these in terms of the option

buyer buying the contract from the option seller. Starting with the long call, by far the easiest of the four types: a long call is a bullish strategy that benefits most from the stock rising. This is essentially because long call holders have paid the short call holder for the right to buy shares in the underlying stock at the strike price before the expiration date. Now, since the strike price is fixed over the life of the option, as we just learned a few minutes ago, the stock price could rise far above that strike price, and this would

be great for the long call holder. For example, let's say the strike price of the call contract was 100. If the stock rises to 120, that's great for the long call holder because he can now buy the stock for 100—the strike—when it's actually worth 120. Or let's say the stock rises to 130, even better in this situation, because again the long call buys it at the strike of 100 when it's actually worth 130. So, the possible return for a long call is unlimited because there's no cap to how high stocks can possibly go. As for

the risk, the risk is limited to the cost of the option—what the buyer paid the seller. This is because if the stock falls below the strike to, let's say, 80 in this example, the long call can just walk away from the contract. He's not going to buy something for 100, the strike. Price, when it's only worth 80, the stock price, so he has the option to walk away. He is not required; he is not obligated to use his option if he doesn't want to, and in this case, he would simply be out the premium that

he paid for that option. Okay, so let's stick with the call option, but now let's hop on to the other side of the fence, the other side of the contract—the short call. Essentially, what's helpful to know here is that whatever the long call holder wants to do, the short call holder has to honor it. So, if the long side wants to exercise the option, i.e., buy shares at the strike, the short side has to honor that. If the long side wants to walk away, the short side cannot stop him. From a bias standpoint, the short

call wants the exact opposite of the long call; he is bearish and wants the stock to go down. This is why options are often referred to as a zero-sum game: whatever one side wins, the other side loses, and vice versa. So, going back to our example with a strike price of 100: if the stock price rises to 120, that was great for the long call, but it's going to be not so great for the short call. This is because he has to sell the stock at the strike price, because the long is buying at the

strike price of 100 when the stock is actually worth 120. If the stock rises all the way to 130, it's even worse: now the short call has to sell stock at 100 that's actually worth 130. So effectively, there is no cap to how much the short call could lose here, which is why short options are often referred to as naked or undefined risk strategies. Okay, but what about the return potential? How does this short call make money? Well, it's simple: if the stock stays below the strike price, then the long side walks away because the

option doesn't help him. The short call keeps the premium he collected on entry, and this is the max return for the short call. Remember, the long side paid the premium to the short side to get the contract started on trade entry at trade origination. These scenarios for call options, where the stock is above the strike and the long call benefits, are referred to as in-the-money options—in-the-money call options. Where the stock is below the strike and the short call benefits, those would be referred to as out-of-the-money options or out-of-the-money call options. In the rare cases where

the stock price is sitting right on the strike price, those would be referred to as at-the-money options. All right, so that was a lot! I understand and can appreciate that that was a lot of information coming at you in a very short period of time, so watch that a couple of times if you need to. But let's complete the picture here: we've got the calls situated in terms of our foundational understanding; now let's turn our attention to the put side. So a long put, this is a bearish strategy because it actually gives the long side

of the contract the right to sell stock at the strike price. The long still buys the contract from the short, but here he actually wants the stock price to go down as low as possible so he can sell it at that higher strike price. For example, let's say the strike price in this example is 50. If the stock price falls to 40, then the long put holder could go into the marketplace, buy the stock for 40, and immediately flip it around and exercise his option to sell it for 50 at the strike price. That's what

a long put gives him the option to do, clearly yielding a $10 profit. Now that's $10 per share, and there are 100 shares per option contract, so a total gain of $1,000 per contract. Okay, but what if the stock falls down to 30? Well, that's even better for the long put holder because he can now buy the stock for 30, flip it around, and sell it for 50 at the strike price, and boom! You have a $20 gain in this situation. So what is the maximum gain? Well, if the stock goes to zero—which technically isn't

unlimited, but for all practical purposes when you're dealing with S&P 500 stocks, it is unlimited; it has an unlimited feel to it at least—long put holders effectively have the potential for unlimited gain. Okay, so how does the long put lose? Well, hopefully, you're beginning to see the pattern here. The long put loses if the option isn't worth anything to him. So when does that happen? If the stock goes above the strike. So, let's say it goes up to 60; the long put isn't going to sell the stock at the strike price of 50 when he

can just sell it in the open marketplace at 60. So in that case, he loses the premium he paid for it and he walks away from the contract. So his loss is capped at whatever the premium was on the option. All right, so that brings us to our last option type: the short put. This is the other side of the long put contract, and remember, the long put wants the stock to go down, so the short put must want the opposite of that—the stock to go up. Thus, a short put is a bullish position. Now,

just like with a short call, a short put has to honor whatever the long put wants to do. So if the long put wants to sell... At the strike, the short put has to buy at the strike. If the long put wants to walk away, then the short put has to let him walk away. But, of course, at this point, you might be able to recognize that, hey, if the long put wants to walk away and I'm the short put, I'm not going to stop him. But keeping with our example, if you have a 50

strike put and the stock falls to 40, that's not good for the short put. He effectively has to buy the stock at the strike of 50—the stock that the long put is going to sell to him—but it's only worth 40 in the open marketplace. So for him, he has a $10 loss. Right? The long put had a $10 gain; here he has a $10 loss. Again, you see that zero-sum game aspect kind of bubbling up to the surface here, and of course, if the stock falls to 30, that's even worse. Now the short put has

to buy stock at 50 that's only worth 30, and if the stock keeps going down and down and down, it gets worse and worse and worse for the short put holder. So this is why a short put is effectively an unlimited loss position, even though it's capped at zero. We typically think about this as an undefined risk position. Okay, so that's the risk side to the short put, but what about the return side to the short put? How does the short put make money? Well, now that we're in number four of four possible options types,

my hope is that you can see how the short put is going to make money if the stock rallies. This is where the short put benefits. If the stock goes to 60, let's say the long put isn't going to use his option to sell it at 50 when he can just sell it at 60 in the open market. So the long walks away, and the short put keeps the premium collected. This is the best-case scenario for the short put holder. Now, these scenarios for put options, where the stock price is below the strike price and

the long put benefits, are referred to as in-the-money put options. Where the stock price is above the strike price and the short put benefits, those are referred to as out-of-the-money options. In the rare cases where the stock price is sitting right on top of the strike price, those would be your at-the-money options. All right, so that's pretty good for our foundation. I mean, we just covered a ton of material in a very short period of time, but I'm willing to bet that I know exactly what you're thinking right now. You're thinking, "Wait a minute, Jim.

Did I hear you right? Unlimited losses, undefined risk, no cap on how much I could lose? Like, I'm not even going to consider that! Like, I am out. That doesn't make any sense!" Well, maybe not right now, but if you hang with me throughout the rest of this crash course, I might be able to change your mind, starting with the very next section where we are going to begin to break down that option price into its component parts. All right, so now that we have a foundation of option contracts, market functionality, and the four basic

option types, I want to dive a bit deeper into the option price itself. Now, when it comes to option pricing, there's really two different angles that you could take to this whole idea: there's a theoretical angle and there's a practical angle. Now, over the course of the next couple of minutes, I certainly want to address both, but I think we should probably spend most of our time on the practical side of things since that will get us up and running the quickest. But still, let's address the theoretical angle first, because there are some very important

elements of the theoretical understanding of option pricing that can really help us. And for those of you that want to dive even deeper into theoretical option pricing, I will offer up a few suggestions along the way. So, option prices are determined by an option pricing model, and more specifically, there are six inputs that are needed to compute an option’s price: the stock price, the strike price, time, implied volatility, dividends, and interest rates. All of these are used simultaneously to determine where an option price should be set—that's the theoretical foundation. Now, from a practical standpoint, once

an option contract is in the marketplace, its price is largely going to be determined by supply and demand, just like all prices are determined in the financial marketplace. So it's kind of like an option pricing model gets us started, and then supply and demand keeps us going. So an option price is really a blend of theory and practice; it's really a combination of a theoretical foundation and a practical understanding. But when you dig even deeper into the option price itself, it always has two distinct components: intrinsic value and extrinsic value. Now, before we get into

the practical application and understanding of intrinsic value and extrinsic value, here's a little theoretical nugget for all of you out there—all the guys and all the gals that really want to dig a bit deeper into the theoretical understanding of option pricing. Here's an interesting way to think about the connection between intrinsic value, extrinsic value, and options price, and the option pricing model, such as a Black-Scholes option pricing model. If you look at a standard application of the Black-Scholes model for pricing a call option, it effectively has two terms associated with it. Now, don't let there

being only two terms confuse you; this is quite possibly the... Most elegant piece of mathematics ever developed in the world of finance! But for those of you wanting to really dig into the theoretical aspects of the Black-Scholes model, a good place to start is to recognize the following: the first term in this equation is effectively trying to measure a probabilities-based value for where the stock price is today, and the second term in this equation is effectively trying to measure a probabilities-based value for the strike price, or the potential transaction price that we've already been introduced

to today. From there, if you dig into this model, what you'll notice is that the first term is largely concerned with the intrinsic value of the option, and the second term is largely concerned with the extrinsic value of the option. Now, that's very much a blanket statement; there is certainly overlap between the two terms, but that gives you a really nice starting point for wanting to learn and understand this option pricing model—the Black-Scholes model—even better. So, there's a quick nod to the theoretical understanding of the option pricing model, specifically the Black-Scholes option pricing model. Let's

now move swiftly into the practical application of option pricing and start with intrinsic value. Intrinsic value is actually really, really, really simple; it basically just answers the following question: Is this option worth anything to the long side of the contract right now? In other words, is this option contract in the money—something we just recently learned about? If the answer to that question is yes, then the option has intrinsic value; in fact, it has intrinsic value exactly equal to the amount that it might be in the money. If the answer is no, then the option has

no intrinsic value; its intrinsic value will be zero. It's really that simple. So, for example, with a $100 strike call, if the stock is at $110, it would be in the money by exactly $10, so it would have intrinsic value of exactly $10. This is a valuable situation for the long side of that call contract. If the stock were at $85, however, the option would be out of the money, and the intrinsic value would be zero. Another example: take an $80 strike put. If the stock is at $100, that put is out of the money,

so it does not have any value to the long put holder; thus, the intrinsic value is zero. If, however, the stock price were $75, the put would now be in the money; it would be in the money by exactly $5, so it would have intrinsic value of exactly $5, as the long put can now sell stock at $80, the strike price, that is only worth $75, the stock price. And just like that, you now know all there is to know about intrinsic value—it's really that simple! Quick little warning, though: don't get overconfident at this point,

because where we're headed next, into extrinsic value, man, it is anything but simple. Okay, so we just learned about intrinsic value, and we also know that an option's price only has two parts: intrinsic value and extrinsic value. So, if I know intrinsic value and I can somehow figure out a way to crank out extrinsic value, then I will have everything I need to complete the picture for a full option's price—that is correct! So, let's dive in! But before we do so, let me remind you and let me reiterate: it is so helpful to process all

of this information thinking about things in terms of the long side of the contract buying the contract from the short side of the contract. Now, extrinsic value is an incredibly deep and detailed metric in the financial world, and it's going to take you a lifetime to really be able to appreciate and understand all the different aspects to it. Still, however, I think there are a few relationships that we can establish right here and right now that are really going to help you get started moving along that learning curve. So, first up, the factors that impact

extrinsic value. This one's actually pretty simple because it happens to coincide perfectly with the variables inside of the Black-Scholes option pricing model. Remember, there were six: stock price, strike price, time, volatility, dividends, and interest rates. These are also going to be the six factors that impact extrinsic value. Now, from there, we can actually pare down that list a bit more because, when it comes to extrinsic value—and specifically changes to extrinsic value on a day-by-day basis—dividends and interest rates play a role, but it's pretty minor, at least up against the other four variables relative to the

other four variables that impact extrinsic value on a daily basis. So, for our purposes right here and right now, we're going to take dividends and interest rates, we're going to put them up on the shelf for a future project in terms of how they relate to extrinsic value. So that leaves us with stock price, strike price, time, and volatility. Now, each of these has a very important relationship with extrinsic value, so I want to work through each of them individually, and I actually want to start with time because I think it's going to be the

simplest one to understand. So, simply put, more time means more extrinsic value, and less time means less extrinsic value. The reason why this is the case traces back to our relationship between the option buyer and the option seller. So, first, remember for the 12th time now, the buyer buys the contract from the seller—got it? But second, remember from our learning the four basic option types: the risk-return dynamics of option buyers and option sellers are very, very different. Whether it's a call or a put, it doesn't... Matter the option buyer always has limited risk with unlimited

profit potential, whereas the option seller has the opposite: limited profit potential with unlimited risk. So, take these two ideas and put them together: the seller is taking unlimited risk, and he's selling the contract to the buyer, who has the potential for unlimited gains. So if the buyer wants even more time, i.e., a later expiration cycle with more days to expiration to try to hit those huge potential gains, guess what happens to the price? It goes up. It goes up by way of more extrinsic value—a longer period of time the short has to hold, unlimited risk.

The greater the price, he's going to charge the long to enter into that contract. Thus, more time equals higher extrinsic value. All right, so that's time and its impact on extrinsic value—not too bad. Let’s now turn to the second variable that I want to look at and study its impact on extrinsic value: volatility. So much like time and extrinsic value, volatility and extrinsic value also share a positive relationship. When one goes up, the other one goes up; when one goes down, the other one goes down. And the reason is actually similar to what we saw

with time. The long buys the contract from the short with unlimited potential gain and limited potential loss. Volatility, by definition, measures the potential movement of the stock. So, higher volatility stocks can be expected to move a lot more than lower volatility stocks. As a result, a higher volatility stock has a greater potential to make a large move in one direction relative to a lower volatility stock. Therefore, as an option buyer—calls or puts, it doesn't matter—I would much prefer more volatility in the stocks that I have options on, as that gives me a better chance at

a huge move in my favor, and my losses are capped anyway. Okay, hopefully that makes sense. But what about the other side of the contract? What about that short side? Well, his losses aren't capped, and any gains that you make, he loses. So, if you want an option contract from him, remember you’re buying it from him—the short—in a higher volatility stock, guess what happens to the price? Well, ceteris paribus, all other things being equal, the price is going up by way of more extrinsic value. Remember, the short is taking all the risk on this trade.

So if you’re asking him to take even more risk with a higher volatility underlying stock, he needs to be compensated for that risk. Thus, higher volatility—higher implied volatility to be exact—which just means future estimated volatility: more volatility, more extrinsic value. All right, so that’s time's relationship with extrinsic value; that’s volatility's relationship with extrinsic value. That’s a lot, I know, so go back and review those last few minutes a few times if you need to. But now I want to turn to our final relationship with extrinsic value, which is going to lump the stock price and

the strike price together in what I like to refer to as the proximity effect. Now this proximity effect—which, by the way, is just my own term—you’re not going to find that on Google; you’re not going to find that on the internet. So don’t Google it because you’re not going to get anywhere. It’s just going to lead you right back to this very video: the proximity effect—stock price and strike price. It's obviously used to determine the intrinsic value of the option; that’s pretty obvious, that’s pretty clear. We saw that just a few minutes ago. But when

it comes to the extrinsic value of the option, it also plays a critical role. And here is how to begin thinking about this. Now keep in mind this is a very, very multifaceted, nuanced thing—the proximity effect and its relationship to extrinsic value. Looking at an out-of-the-money option, call or put, it doesn’t matter: the closer the stock price is to the strike price, the greater the extrinsic value. So if you had a stock price sitting at $50 and you were looking at out-of-the-money calls, you would see that the $52 strike has more extrinsic value than the

$55 strike, which has more extrinsic value than the $60 strike, which has more extrinsic value than the $65 strike, and so on and so forth. Similarly, if you were looking at out-of-the-money puts, you would see that the $49 put has more extrinsic value than the $47 put, which has more extrinsic value than the $45 put, which has more extrinsic value than the $40 put, and so on and so forth. So, starting with the at-the-money strike and moving further out of the money, you will see extrinsic values drop; and starting far out of the money and

moving closer to at the money, you will see extrinsic values rise. This is effectively the proximity effect: the closer the stock is to the strike, the greater the extrinsic value. Now that’s a pretty good start when it comes to the proximity effect. As I've already alluded to, there's a lot more going on here. There are some very, very special relationships around the at-the-money region, especially when you move over to the in-the-money side. So this is not a simple thing to understand; it’s actually quite complicated. But for what we’re trying to do right here and right

now, the scope of this project and this crash course is to take you from nothing to novice, so I don’t really want to get lost in the weeds of the finer details of the proximity effect. But still, we can say this: the reason why we see the proximity effect... Behave the way that it behaves in terms of strike prices having greater extrinsic value the closer they are to the actual stock price. It all traces back to the risk to the short side of the contract. Remember back, I don't know, 20 or 25 minutes ago when

we learned how does a short get hurt on an options contract? He gets hurt when the option moves in the money. Now, I know; I understand; I recognize there's a lot more things happening. There are so many moving parts in terms of volatility changing, time decay, and a bunch of things we're going to talk about later on in future sections inside of this crash course. But, right now, based on what we've learned, what do we know? Shorts are hurt when an option moves in the money. Okay, let's take that idea and let's now apply it

to the proximity effect. If a given strike price is closer to where the stock price is right now, it obviously has a greater likelihood of moving in the money sometime soon, probably. So, if that's the case, what do you think the short on the other side of that strike is going to do to the price associated with that option? He's going to increase it. He's going to increase it because he's assuming more risk simply by way of a greater likelihood that that strike moves in the money. Now, again, the proximity effect in this relationship is

quite complex; it's quite complicated; it's quite nuanced. I mean, it's a central piece of the elegant piece of mathematics that is the Black-Scholes option pricing model. So, I'm not even going to pretend that you know all there is to know about proximity effects, but I do think you have a very, very good understanding for being able to appreciate the relationship between stock prices, strike prices, and extrinsic value. All right, so now things are starting to come together. We've got option contract specifics, we've got marketplace functionality, we understand the four basic option types, we understand moneyness,

and we now have a handle on option pricing. So, what comes next? Well, let me adjust my hairstyle just ever so slightly, and then let's answer the question that every aspiring options trader wants to know: How do you make money trading options? Let's take a look. Okay, so we just talked about extrinsic value and specifically the three main factors that are driving extrinsic value: time, volatility, and the proximity effect. Well, that is actually a perfect segue into how you actually make money with options. Now, whether you're on the long side of the option contract or

the short side of the option contract, it actually doesn't matter. Your P&L in the world of options is going to be driven by three things, and three things only—three things that are very closely related to what we just saw with extrinsic value. But before we get into the actual drivers of option profitability, let's make sure that we're all on the same page with something. What is the goal of the stock market? The goal of the stock market is pretty simple: you buy low and you sell high. Like, people that aren't even in the stock market

know that that is the goal of the stock market. Well, with options, guess what? It's the exact same thing for option buyers. You want to buy the option contract at some relative low down here and then eventually sell that option contract at some relative high up here. So, it's the same thing: you're buying low and you're selling high. Now, with options, the prices themselves are a little bit more detailed; they're a little bit more intricate. They're not as simple or straightforward as it might be in the stock market with the stock price because options have,

you know, intrinsic values and extrinsic values and all those things. But at the core, the same goal is the same goal: you want to buy low, and you want to sell high. Okay, that's option buyers. With option sellers, it's the same thing, just in reverse. You start by selling high on trade entry at some relative high point in the hopes that on trade exit, when you have to buy it back, it's at a lower point. So, you're still buying low and selling high, but you're just doing it backwards, so to speak. You're starting by selling,

hopefully high, and then eventually, to close the position, you are buying, hopefully, low. Now, right now, I know what many of you are thinking if you're brand new to this. If this is your first foray into the world of trading and the world of options, you very likely have this very question: "Jim, how is it possible for me to sell something that I don't even own? How is it possible for me to sell something on trade entry when I don't even have that something in my possession?" That's a great question, and the answer lies in

something that we've already seen in marketplace functionality: the counterparty. Remember, we have the market maker, the counterparty—the person who is willing to be on the other side of our trade. So, when we want to buy, he is standing ready to sell; when we want to sell, he is standing ready to buy. That is the key to how we are able to sell something that we don't own, so to speak—how we can get into a position at trade entry by selling first and buying second—because he will be on the other side of the trade. So, we

are not required to buy first, own the thing, and then sell it later; he will stand ready to be our counterparty if no one else will. So, that alone is incredibly advantageous for us as option traders because we can do whatever we want. Are 100% free to choose the side of the contract that makes the most sense to us for reasons that we're going to talk about later on in this crash course. But if you want to get into an option contract and be long, you can get into an option contract and be long; he

will take the other side. If you want to get into an option contract and be short, you can get into an option contract and be short; he will take the other side. So whether you want to buy or sell, it doesn't matter—remember, you are free to do either. There are three things that will be driving your option profitability: direction, time, and volatility. So let's dig into each one of these, starting with direction. So, direction—this one is pretty straightforward. If you have a bullish position on a given stock and the stock goes up, you're going to

make money on the directional side of the trade. Conversely, if you're bullish and the stock goes down, you're going to lose money on the directional side of the trade. Pretty simple! Your bullish strategies, such as a short put or a long call, are going to make money when the stock goes up. Now, if you have a bearish position on a given stock and the stock goes down, you're going to make money on the directional side of the trade. If the stock goes up, you're going to lose money on the directional side of the trade. So,

here, we'd be talking about your short calls or your long puts—again, fairly straightforward from a directional side of the equation. Okay, so that's direction, and that's pretty simple and straightforward, I would hope. But there are still two other elements that are driving this option profitability equation: time and volatility. So let's dive into time. Options are often referred to as decaying assets. They're decaying in that the extrinsic value that we learned about in the last section is on a collision course with zero at expiration. In other words, if there is no time left, there can be

no extrinsic value left. This is simply because once the hourglass is empty, there is no more risk to the short side of anything extra happening. Therefore, he can no longer demand compensation for the risk of something happening because the time has run out, and nothing else can happen. So obviously, as the extrinsic value is changing over the life of an option, with the pressure being to the downside, that is going to affect profit and loss, specifically because extrinsic value is affecting option pricing. In fact, as we've learned, it's one of the two components to option

pricing. Now, whether the time element is working for you or against you depends specifically on which side of the option contract you are on, and we'll cover that in more detail later on. But for now, just know that the simple passage of time is a key driver of option profitability. All right, so two down, one to go. We've covered direction, we've covered time, let's now look at volatility. So, as we learned in the last section on extrinsic value, volatility—or more specifically, implied volatility—has a positive relationship with extrinsic value. That relationship is very important when it

comes to option profitability, too. This is because, remember, an option's price only has two components: intrinsic value and extrinsic value. The intrinsic value is only affected by the moneyness of the option or lack thereof. So, volatility is not going to affect the intrinsic value, but it is going to affect the extrinsic value in the ways that we laid out in the previous section. If volatility is going higher, extrinsic value is going higher, and that's going to affect your P&L. If volatility is going lower, extrinsic value is going lower, and that's going to affect your P&L.

Again, extrinsic value must be zero at expiration, but between now and then, any changes to its value will affect your current P&L. All right, so those are the three drivers of option profitability. But one final note before we close out this section: the market is a living and breathing thing. The market is this huge pot of jambalaya where all these different things are moving around and changing simultaneously. So, you could very easily have a trade—and you will have many trades—that look like this: you're losing on direction, but you're actually winning on time and volatility. So,

even though you made a wrong directional bet, you actually end up with a positive P&L. That's very possible, and it will happen to you many, many times over your option trading career. Or maybe you nail the directional move and volatility is working in your favor, but because of the way that you've positioned your strategy, you are just getting absolutely crushed by time. So the net result is actually a negative P&L, even though you nailed two of the three profitability drivers. All those different scenarios can and will happen to you if given enough time in the

marketplace. So, just remember: there are three distinctly different drivers of option profitability—there's direction, there's time, and there's volatility. Okay, fair enough? That's a pretty good start. In this next section, what I want to do is dive even deeper. Let's take an even more detailed look at what's driving option profitability by looking at some option Greeks. So, we just learned about option profitability; that means right now is a really good time to dig into the option Greeks because that profitability that you're gunning for is actually controlled by the option Greeks that we're going to talk about

right here and right now. Now, a quick little mention: we already have an entire crash course on the YouTube channel about option Greeks, and that crash course actually covers... More option Greeks than we're going to cover today, and it covers them in more detail than we're going to cover today. So definitely use that additional crash course as a supplement to what we're going to talk about right here and right now. But what I do want to focus on right here, right now, are the four horsemen of option Greeks, so to speak: Delta, Theta, Vega, and

Gamma. Here is what is really cool about where we just came from with option profitability: Delta is effectively direction, Theta is effectively time, and Vega is effectively volatility. So can you see the parallel with option profitability and what we're about to cover? Okay, so let's begin with a deeper dive into Delta. Delta effectively has three uses and interpretations for us as traders. It measures option price changes with stock price changes, it approximates probability, and it substitutes as a share equivalent. Now, we'll cover the probability angle and the share equivalent angle a bit later, but right

now, I just want to focus on the option price changes. So, Delta formally measures the option price change per $1 change in the underlying stock price, and Delta is always presented in both decimal form and whole number form. In other words, what that means is this: when you look at an option chain and you see a Delta of 0.3, that is oftentimes also interpreted as a Delta of 30. So why do we have a difference? Well, the technical output of Delta from the Black-Scholes model is always in decimal form, as it is showing the Delta

on a per-share basis—so 30 cents per share. But remember, there are 100 shares per option contract. So if you wanted the full contract Delta, so to speak, it would be 100 times 0.3, or 30. So in this case, you could say the Delta was 0.3, or you could also say the Delta was 30, and both would be technically correct. But just understand that in the trading world, no one really refers to this Delta as 0.3; they would say the Delta was 30. This is something you'll want to get comfortable with quickly so you can keep

up with trading content and discussions that you might engage with. Okay, but getting back to the option price change itself: if the stock moves by $1, then the option contract is going to move by 30 cents per share, or $30 per contract. Now, option prices are usually quoted on a per-share basis. So if you had an option price of $4, the stock moves $1, then the option price would be expected to change by 30 cents, up to $4.30 or down to $3.70. Now, which way will it move? Well, that depends on the type of option

you have—a call or a put—and whether or not you're bullish or bearish, which we're going to get into in just a little bit. But for now, hopefully you can see how directly Delta impacts the option P&L because it is directly linked to the option price itself. Oh, and one final thing: it's important to recognize at this point that bullish positions are positive Delta and bearish positions are negative Delta. Now, there's a lot more to Delta, as it's a very dynamic thing, and we're going to unpack a lot more of those things as this crash course

progresses. But right now, the important thing is that you see the link between option Delta and option profitability. All right, so let's now dig into the next Greek that I want to cover today: Theta. So, do you remember how we mentioned, I don't know, maybe 20 minutes ago, that options are decaying assets and their extrinsic values must be zero at expiration? Well, Theta is the formal metric that actually measures that decay over time; it shows you just how much each day is worth in terms of decay. And similar to Delta, it is presented as both

a decimal and a whole number. So, a technical Theta of two cents, as output by the Black-Scholes option pricing model on a per-share basis, is more commonly referred to as a Theta of 2 when viewed from a total contract value standpoint. And just like Delta, no one would really refer to this Theta as 0.2 or 2 cents; they would say 2. Now, when tied to an option's price, that Theta of two cents is showing you that the extrinsic value is decaying at a rate of 2 cents per day. Intrinsic value doesn't decay; it is purely

driven by the moneyness of the option, so it is always the extrinsic value only that is decaying over time. So, for example, an option price that is $150 today can be expected to be $148 tomorrow, and then $146 the next day, and then $144 the day after that, and so on, ceteris paribus, from Theta alone. All right, so the last thing you want to understand at this point is that Theta is either positive or negative. And here, the positive or negative isn't bullish or bearish like it was with Delta; instead, it's actually referencing the decay.

Specifically, in other words, does this option decay help you or hurt you? If it helps you, you're positive Theta; if it hurts you, you're negative Theta. Okay, so that's a really good start to Theta. Let's now move into the next Greek on the list, which is going to be Vega. The reality is Delta and Theta are by far and away the most important Greeks that we use on a daily basis. That means when it comes to the others—especially for the scope of this crash course—let's get up to speed on the basics, but not necessarily get

bogged down in a bunch of details that might not even be that important. Anyway, so when it comes to Vega, it measures how option prices will change when implied volatility itself changes. Remember how we just learned that volatility and extrinsic value share a positive relationship? Well, here we're going to see the same thing, just in a more formal way. When volatility goes up or expands, then option prices will go up by way of increased extrinsic value; but more formally, it is actually Vega that is showing you how much they will indeed go up. And when

implied volatility goes down or contracts, then option prices go down by way of decreased extrinsic value; but again, it is actually Vega that shows you how much they will indeed drop. So, option buyers want option prices to go higher, as we've already seen, so they are positive Vega because implied volatility expansion helps them, and implied volatility contraction hurts them. Option sellers want option prices to go lower, again as we've seen, so they are actually negative Vega because implied volatility contraction helps them, and implied volatility expansion hurts them. Okay, so that's a really good foundation to

Vega, and it's an important concept—not because we use it every single day, but because the relationship between changing volatility and changing option prices, and thus P&L, is a very, very important relationship. In fact, it's such an important relationship that we're going to talk about this specifically in a very different way that doesn't necessarily have to do with Vega in just a little bit, so stay tuned for that. That's coming on down the shoots. But let's now turn our attention to the last Greek today: Gamma. So, what is Gamma? Well, Delta, Theta, and Vega—those are all

dynamic; those are all changing; those are all moving as the market changes and the market moves. Well, even more specifically and more formally, those are first derivatives of the Black-Scholes option pricing model. Gamma is actually a second derivative of the Black-Scholes option pricing model. It measures how Delta itself changes as the stock price changes. So, while Delta is giving you some measure of your directional exposure, Gamma is underneath Delta, measuring how that directional exposure itself could change as the market begins to move. A very simple analogy or illustration that we could use to describe this

point is to think of a moving car. The car is moving at some speed—that's Delta—but that speed itself could change as the car moves even more; it could accelerate, it could decelerate—that's going to be Gamma. So, Delta is like speed, and Gamma is like acceleration. Now, how we use Gamma specifically—how we measure it, how we manage it, how we analyze it—it's actually a bit more well-suited for our discussion on undefined risk, which is also coming on down the shoots in maybe 45 minutes or an hour. So sit tight for that. It's going to be a

little bit more appropriate for us to put a more detailed Gamma discussion in that little bucket inside of this crash course. But it's good and it's important that we've already been introduced to this idea and exposed to the whole idea of Gamma, so that later on, when we address it in more detail, it should make a little bit more sense. Alright, so we've covered option profitability, and we've even covered the option Greeks, at least at a basic level. There's probably a question that you have right now that you're waiting for the answer to: "Jim, should

I be buying options or should I be selling options?" Well, that is a very, very important question. So let me go iron my shirt really quick. I'll be right back, and we'll start to answer it. Alright, so I had every intention of getting right into option buying and selling right here and right now for this next section, but then I realized there's one final piece to the option premium puzzle that I want to make sure that we nail down before we answer that age-old question: should you be buying options or should you be selling options?

That involves taking a closer look at implied volatility. As we've already seen a couple of different times, actually, implied volatility has a direct impact on option pricing. But if we actually step back and kind of take more of a bird's eye view, we're actually going to be able to add another branch to that tree. So, volatility by definition measures the movement of something; implied volatility, as evidenced by the word "implied," is going to measure the anticipated movement of something. So you're looking out into the future; you're trying to forecast what is going to happen to

a given stock. If you take the implied volatility of whatever stock you might be looking at, you're trying to measure, "Okay, what is expected to happen over the next 30, 45, or 60 days?" That's what you want to focus on—what's going to happen in the future; what is the anticipated price movement? Well, in the world of options, we actually have a formal metric that captures this whole idea—that measures this anticipated movement and gives us a tradable range. It's called the expected move. So, let's take a look. To calculate the expected move, you need three variables:

the current stock price, the implied volatility, and the duration of the trade. Once you have those in hand, the expected move calculation is actually really straightforward. You simply take the product of the stock price, the implied volatility, and the square root of the time left in the trade divided by 365. What that gives you is a plus-minus anticipated range of the stock. So, if the expected move output is five, that means the stock is expected to have a range of plus or... minus $5 over the next however many days you might be looking at—so 30

days, 45 days, 60 days, whatever. If the output was 12, then that would be a plus or minus $12 range and so on and so forth. Now, of course, the market is a living and breathing thing; it's random and unpredictable, so there is no guarantee that the stock will stay within this range. It could go much higher, or it could go much lower. But the reason why this is the expected move is that, using the properties of the normal distribution, we know that we can reasonably expect the stock to indeed fall within this range two-thirds

of the time, or approximately 67% of occurrences. Okay, so that's a good start to the expected move. Can you see how this might be helpful in structuring your option strategies? More on that a little bit later, but for right now, notice the wording that we've been using: implied, anticipated, expected. Right? These are all forward-looking metrics that are trying to make some sense of what the future might hold. However, as is the case with most market prognostications, the market's randomness and unpredictability are so good at simply laying to waste any ideas that anyone might have about

what the future does indeed hold. The randomness and unpredictability are simply difficult to overcome, and when it comes to implied volatility and expected move specifically, the empirical research that we've done at Tasty has uncovered an incredibly reliable result: realized volatility is consistently less than implied volatility. Now, what does that even mean? Well, let's take a look. So, one of the ways that we use implied volatility is to set the expected move that we just referenced and worked through. Well, here's something that's important to recognize: once the expected move is set and then the market moves,

we can go in after the fact and actually calculate what the move in the market was for that time period. In other words, if it's March 1st today and we've calculated the expected move for the next 30 days to be plus or minus $6, then on March 31st, when those 30 days are over, we can go in and record what we actually observed. So, let's say it was only plus or minus $4. This would be a case where the implied volatility forecasted a move of plus or minus $6, but the realized volatility that was actualized

only produced a move that was plus or minus $4. So, in this case, the realized volatility was less than the implied volatility. Now, if the actualized move ended up being plus or minus $8, then the implied volatility would have been less than the realized volatility, which of course can happen too, but on average, what the empirical findings have shown is that implied volatility is consistently greater than realized volatility. So, the actualized moves in the market are oftentimes less than what they were anticipated to be. Isn't that crazy? Isn't it crazy that that just consistently, regularly

happens? It is. What we need to figure out is how we can use it as option traders. So, to do just that, you guys remember when we looked at the option pricing model at the very beginning of this crash course, and specifically the six inputs that went into that model? Well, let's look at it again, but this time let's take a slightly different angle. So, remember, there are six variables that go into the model, with the option price that we are solving for being effectively the seventh variable. Well, if we take the option price in

the market as given, having been established by the supply and demand forces that we referenced earlier, then the only variable left that we don't know at this time is implied volatility. So, even though something like a Black-Scholes model is indeed an option pricing model, we will often use it to actually calculate the implied volatility, the only unobservable variable in the model. Okay, now take this approach and pair it with the empirical finding that we just uncovered—that implied volatilities are routinely higher than realized volatilities. What does that mean? Well, one thing it could mean is that

one of these model inputs is also consistently off; it's either too high or too low. So, let's take a look at the inputs of the model one by one to see what we can learn. Again, interest rates and dividends have a small impact here, so we'll eliminate those from the start because they're not really going to be the big players in this model. So, could it be the strike price? No, that's set at contract origination and fixed over the life of the trade, so that's probably not going to be what we're looking for here. Okay,

what about time? Now, there's really no dispute about how much time is left in the option contract; it's either 25 days or 30 days or whatever. There's really no chance that that's too high or too low. Okay, what about the stock price? Well, maybe, but in a market that's pretty random, that would be really difficult to deal with—to try to figure out, is this number too high or is this number too low? Not to mention, when you're dealing with calls and puts, it's obviously going to behave very differently. So that leaves us with the option

price itself. Could this be the variable that is consistently off? And if it were, what would that mean? Well, remember that implied volatilities have been shown to be consistently higher than realized volatilities, and we also know from what we've learned in this very course that implied volatilities and option prices have a positive direct relationship, which simply means they move together. So, if implied volatilities are too high relative to realized volatilities, and we hypothesize... That it is the option price itself that's causing implied volatilities to be too high. Then we can reasonably conclude that option prices

themselves might be too high. Well, that, my friends, is indeed our hypothesis: that implied volatilities being too high relative to realized volatilities and expected moves being too wide relative to actual moves is indeed caused by and driven by option prices themselves being too high on average, and that that is what we intend to take advantage of. How are we going to do that? Well, remember the option contract has two sides: you have the option buyer and you have the option seller, along with all the asymmetric risk-return relationships that go on either side of the contract.

Remember, the buyers effectively have low risk and high return potential, and the sellers effectively have high risk and low return potential. So, in essence, option buyers are buying big movements, and option sellers are selling big movements. Or, to put it another way, option buyers are basically buying implied volatility, and option sellers are basically selling implied volatility. But based on what we just learned, one side has effectively a built-in advantage. So now we are ready to finally answer the question: Should you be buying options or selling options? So let's do it! All right, at this point,

man, we've got option contract specifics, we've got marketplace functionality, we've got P&L, we've got Greeks, we've got realized volatility, we've got implied volatility, we've got expected moves—we have all these different things. It's finally time to answer the question: Should you be buying options or selling options? From our vantage point, selling options is the way to go. Now, does that mean that you can never buy another option again? No, not at all! But when it comes to the core foundation of your portfolio, we feel very strongly that that needs to be built from the short side

of the option contract. Now, why do we feel that way? Well, for starters, let's go back to some of the drivers of profitability that we've already looked at: Delta, Theta, and Vega, and let's add a few new elements to the mix. So, starting with Delta: If I buy an option, I need Delta to drive my profitability. In other words, I need to get the directional move correct; otherwise, I'm not going to make money. I'm not going to make money because the other two profit drivers, Theta and Vega, are working against me. If, however, I sell

an option, Delta's impact on profitability can help me, but I don't necessarily need it to be profitable. In other words, when I sell options, I can make money without being directionally correct. That's really important, and the reason why I can do that is that now Theta and Vega are working for me. So remember that we learned that options are paying assets, and their extrinsic values are headed to zero at expiration. This means there is going to be this persistent downward pressure on the option price by way of this gradual drop in extrinsic value over time,

if nothing else changes. Well, if I'm an option buyer, that's going to hurt me. That's going to hurt me because I want option prices to rise—remember, buy low and sell high. So here, as we've already started to see, earlier this negative Theta is causing time to work against me; that is not good. But if I'm an option seller, this is going to help me. It's going to help me because I want option prices to fall—remember here, it's sell high and then buy low. So here, the positive Theta I have is causing time to work in

my favor; that's very good. Lastly, with volatility: Option buyers want volatility to expand because that pushes option prices up, which again is what an option buyer wants. Option sellers want volatility to contract because that pushes option prices down, which is exactly what an option seller wants. So who has the advantage? Well, volatility in the market is usually in a state of contraction. It's not equally weighted; it's not 50/50 between expansion and contraction. More than 80% of the time, volatility is contracting, and this is largely because volatility tends to move inversely with market prices, and over

time, the market tends to grind higher. So that means that over time, volatility tends to grind lower; thus, sellers have an advantage here. Now, of course, this isn't to say that volatility can't expand, because it certainly does, and this isn't to say that if you sell options you're guaranteed to make money because of this persistent volatility contraction—that's not true either. But statistically, over time, it does give the nod to option sellers. Okay, so let's put this all together. If I buy options, I better make money from the directional side of the trade. I better make

money from that directional side of the trade because both time and volatility are working against me. So that unlimited profit potential that I'm going after is stacked up against two pretty sizable obstacles in terms of the time and volatility dragging down my profits. Conversely, if I choose to sell options and the unlimited risk hasn't scared me off yet, a pretty formidable advantage that I'm left with is not needing to be right directionally, which in itself is a pretty big gain—not to mention I have time working on my side—another advantage—and volatility working on my side—yet another

advantage. So can you see why we prefer to sell options as opposed to buying options? Hopefully, by now, the advantages are pretty clear. Now yes, there is this elephant in the room of unlimited risk. I'm not going to pretend this is something that it isn't; I'm not going to pretend that there won't be times when you take... One upside the head and your under roofs get soiled; there is absolutely going to happen—that is just the truth. But by selling options, specifically out-of-the-money options, we're able to position ourselves with very high probability setups just like this.

So, when you buy a stock, it's pretty simple: it's a 50/50 proposition. Well, maybe 53/47 with positive drift, but we'll keep it really simple: the stock goes up, you make money; the stock goes down, you lose money; the stock goes nowhere, you break even. But if you buy options, it's actually usually worse than 50/50. You might have a probability of profit (POP) of 40% or 35% or whatever. This is because you have to overcome the randomness and unpredictability of the market, get the direction correct, all while time and volatility are working against you. But if

you sell options, again specifically out-of-the-money options, you'll have a greater than 50/50 POP—so maybe 58%, 65%, or 70%, or maybe even higher. This is because not only do you have positive Theta helping you (time passing) and short Vega helping you (volatility contracting), you also have the buffer between where the stock price is now and the strike price that you've selected. That distance is where the stock could move, and the option still isn't in the money, which, again remember, is where the short side of the option contract really gets hurt. So, by selling options—out-of-the-money options—you put

yourself into high-probability situations where both time and volatility are working in your favor, and you don't need to be directionally correct. To us, that sounds like a winning strategy, and maybe it does to you too. But I know there will still be a number of you out there, maybe somewhere around 100%, that are thinking, "Jim, my brother, the unlimited risk potential—I still can't swing it, man. Is there anything that you can do for me on that?" Well, you, my friend, are in luck because in this very next section we are going to cover defined risk

strategies. So, let's do it! In the world of options, there are two different categories of strategies: there are defined risk strategies and there are undefined risk strategies. In this section, we're going to cover defined risk, and in the next section, we're going to cover undefined risk. Now, a couple of things before we get rolling in this section: there's already a crash course on the YouTube channel all about strategy management, so definitely use that as a supplement to what we're going to cover right here and right now. My objective in this crash course is not to

cover all the details, and all the gimmies, and all the "go-as" associated with every single strategy. That's more so what that other YouTube crash course is doing about strategy management. What I want to do right here and right now is I want to get you up and running. I want to get you up to speed on a couple simple things that you can begin doing right away, and then use that as a catalyst for continued learning. But second—and this is just the cold, hard, unfiltered truth—consistency with your trading, in terms of outcome, in terms of

profitability, in terms of risk control, is going to be found primarily with undefined risk strategies. I know, I know—it seems totally backward and completely counterintuitive, but in my own experience and my conversations that I've had with traders over the years—thousands and thousands and thousands of conversations—the one common denominator that keeps coming back across all the successful traders, or most of the successful traders, some are bulls, some are bears, some do this and some do that, but they all share this common denominator of a strong, consistent emphasis on undefined risk strategies. But we'll get more into

all of that in the next section. In this section, let’s focus on defined risk strategies. So, defined risk strategies are effectively strategies where you're going to be able to take advantage of some of the benefits of short premium without being exposed to the potential of unlimited losses. You'll have a line in the sand that you determine, where you want to put it, that will effectively cap your maximum loss on a given position on a given trade. Now that safety net that you're going to put in place—that's a pretty big gimme! And for every gimme, there's

a gotcha. So, what's the gotcha here? Well, notice how just a couple of seconds ago I said that with defined risk strategies, you're going to be able to tap into some of the benefits of short premium. That's right: to define your risk on a given strategy, you're going to have to bring long options into the mix, and then you're going to have to absorb all the costs that come along with long options, like negative Theta and positive Vega. Now, because of the way that you structure your trades—which we're going to go through here in just

a little bit—you’re still going to be net positive Theta (time working for you) and net negative Vega (volatility contraction working for you), but it’s going to be a very watered-down effect. It's not going to have nearly the potency or robustness of an undefined risk strategy, as we will see in the very next section. So, to see how all of this works, I want to set up two strategies here in this section: a short vertical spread and a short iron condor. Again, use the YouTube crash course we already have out there on strategy management to supplement

this material, as I'm not going to be able to go into a deep dive into every strategy that's out there. I want to focus on the short vertical spread and... The short iron condor is a short vertical spread. This is going to be composed of two legs: one short option and one long option. The short option is going to be the driving force of the strategy, and the long option is going to be the risk-defining element of the strategy. Now, you can choose a bullish short vertical spread or a bearish short vertical spread. Bullish short

vertical spreads would be short put spreads, just as short puts are bullish strategies. Bearish short vertical spreads would be short call spreads, just as short calls are bearish strategies. The key with either is that the short option is always closer to the stock price; that's what makes it the driving force of the strategy, which ultimately gives you net positive theta and net negative vega. This is because, similar to extrinsic value being the highest at-the-money, both theta and vega are highest at-the-money too for a given expiration cycle. So, because we're selling an option closer to at-the-money

and buying an option further out-of-the-money, the theta that we sell on the short option is larger than the theta that we buy on the long option, and the vega that we sell on the short option is larger than the vega that we buy on the long option. Now, let's take all that and set up an actual vertical spread. Here is a short put spread set up in IWM, the Russell 2000 equity index. You can see the stock price is about 175, and the strikes for the short vertical spread are 172 and 169. The 172 is

short, with the "S" next to it because you're selling that leg, and the 169 is long, with the "B" next to it because you are buying that leg. This makes you net positive theta; you can see you have 20 cents a day, and that's already 20 cents—not 0.20 as a decimal—and then convert it into $20. The trade bar on Tastyworks already converts it to a whole number for you, and net positive delta as this is a bullish trade. You can't see it here, but you're also net negative vega on this trade. You can also see

that your probability is over 50/50 at 60%. Specifically, your max profit is $100 or the credit you collected of $1 times 100 shares in the contract. This would happen if the price of the spread fell to zero. Remember, when you sell options, you want to sell high and buy low. So here, you would sell this short put spread for a dollar, and if the options stayed out-of-the-money like they are right now, the value of the spread is going to slowly decrease. Because again, we have that downward pressure being placed on the extrinsic value of the

option price, and fall all the way to zero at expiration if the options stay out-of-the-money. This is because the price of out-of-the-money options is only extrinsic value, as their being out-of-the-money means intrinsic value is zero; thus, the price of this spread must be zero at expiration if it's out-of-the-money, because it's only extrinsic value, and extrinsic value is zero at expiration. Notice also that the max loss of this strategy is $200. This is found by taking the width of the spread of $3 in this case and subtracting the credit you collected of $1, which gives you

$2 multiplied by 100 shares in the contract, giving you a maximum loss of $200. This is what I meant when I said that the long leg of the spread essentially defines your maximum loss; it sets the width of the spread, which in turn sets your maximum loss on the strategy. So if IWM goes down here and both options move in-the-money, then this vertical spread is going to be worth a maximum of $3 at expiration. It doesn't matter how low it goes; the maximum value of the total spread is $3 because the short put and the

long put will always cancel each other out at any point above a $3 spread value. So if it comes to it, and the spread is in-the-money and you have to buy it back for, let's say, $250, then you would lose $1.50 or $150 total on the contract. If you bought it back for $275, let's say, you would lose $1.75 or $175 on the contract. Or if it reaches its maximum value, then you buy it back for $3, and you lose $2 or $200 on the total contract. That is your worst-case scenario in this example. Man,

that was a lot! I know that was a ton of information coming at you in a very short period of time, but I would go back and rewatch those last couple of minutes on those slides a few times. Take some notes and really sit with that information, because a lot of what we just went through in the last couple of minutes really ties together so many different things that we've been learning and building upon up until this point. Then, what I would do is challenge you to hop into your Tastyworks platform and try to build

a short call spread—the other side of the market, the bearish side of the market. Try to build that on your own; see if you can use the principles, insights, and ideas that we just laid out on the short put spread side and build for yourself a short call spread. In fact, I challenge you to pause the video right now and do it before you continue. But what I want to do now is move to our second strategy, the short iron condor, and for those... Of you out there, all my overachievers that didn't pause the video—just

Jim! I'm just plowing through the content. Well, you, my friend, are in luck because I'm about to give you the cheat code to the short call spread, because it is part of the iron condor strategy. So let's take a look. An iron condor is a neutral strategy where you're not bullish or bearish; you're actually neutral, and you effectively want the underlying stock to stay within a range. This is because what you have with an iron condor is a short put spread below, which we just went through, and a short call spread above, which you just

attempted on your own. Now, same setup with each: you're a little out of the money with the short option and then further out of the money with the long option. The important thing here is the width is symmetrical on both sides of the iron condor for a standard iron condor. Now, with the standalone short vertical spread, short put spread, or short call spread, we usually had to collect about one-third the width of the spread in credit. And with an iron condor, it's the same thing, except here it's one-third the width of the spread from both

sides, not from each side. So, like with this $5 wide iron condor that we've got set up in the diamonds (DIA), we're collecting about 94 cents from the short put spread and $1 from the short call spread for a total of $1.94. Okay, so now that our iron condor is set up, what do we want to have happen? Well, we want diamonds to stay within our short strikes because that would mean both sides of the strategy are out of the money, which is exactly what we want. If possible, we want both sides to remain out

of the money so their prices collapse and we're able to buy them back lower than where we sold them. Okay, easy enough, but what happens if the stock doesn't stay within our short strikes? Well, that's where our risk is. This is a neutral strategy, so we can effectively get hurt on either side, because if the short put spread goes in the money or the short call spread goes in the money, then that's not good. If either of those happen, then the strategy is heading towards its maximum value, which is always the width of the spread—

or, in this case, $5. If we had to buy the strategy back for $5, then we'd be at our maximum loss, which you can see in this case is $36, or the width of the spread ($5) less the credit we collect ($1.94), so 30.6 times 100 (100 shares per contract) or $36. But we still have a better than 50/50 probability on the trade, and we're collecting positive theta from the start, so the odds are in our favor at trade entry. Okay, so there's a quick primer on short vertical spreads and short iron condors. And remember,

guys, this is not intended to be an exhaustive list of all the different strategies that we use, or even all the different details of a specific strategy. It's more so intended to be a catalyst to get you going and get you started. But now you are armed with the foundational elements of two of the most common defined risk strategies that we use every single day: short vertical spreads and short iron condors. But before we dive headfirst into undefined risk strategies, one final thing: defined risk strategies are great because you have that safety net in place,

but of course, you have to give up a lot in exchange for that safety net. But that's not necessarily a bad thing. This is because if you're just starting out, which I assume is many of the people that are watching this content and digging into this crash course, if you're just getting going, then your primary focus should be on defined risk strategies. Yes, I really think you're going to have more success ultimately with undefined risk strategies, which is where we're going in the very next section, but you can't skip this step. You have to cut

your teeth on defined risk strategies. You have to understand how the market moves; you have to make some mistakes with short vertical spreads and short iron condors and other defined risk strategies before you move on to undefined risk strategies. So with all that being said, let's now move on to undefined risk strategies and see what's so great about them. All right, so now that we've got a couple of defined risk strategies in our back pocket, let's turn our attention to the next section, which is going to focus on undefined risk strategies. So, as I mentioned

just a little while ago, I truly believe that it is undefined risk strategies that are going to ultimately be your pathway forward to consistency and reliability. That has not changed; that is still the same. But naturally, you might be wondering, "Jim, how can that possibly be? How can that possibly be if you have unlimited risk and you're going to have to absorb these three, four, or five standard deviation moves from time to time? Aren't those going to set you back so significantly that they're going to negatively impact the end results?" That's a great question, and

that's an important question, and I want to get to that. But before we get to that, let's go ahead and set up this section the same way that we set up the previous section. In the defined risk section, we went through a couple of strategies that can get you up and running, that can get you started. Let's do the same thing with undefined risk strategies. Let's go through two of the more popular undefined risk strategies. Strategies that we use all the time, and then again use that strategy management crash course that's already on the YouTube

channel as a good supplement to what we're going to cover right here and right now. So, let us now turn our attention to our first undefined risk strategy: the short put. Now, the great thing about a short put is that it is simply the undefined risk version of what we've already seen with the short put spread. So, let's dive in and take a look. A short put is about as simple as they come in terms of strategy setup. There is only one leg, and it is the short put. Where a short put spread was a

short put and a long put, here you're removing the long put, which makes sense because, remember, the long option in a short vertical was the risk-defining element. Here, we don't want a risk-defining element by the nature of this being an undefined risk strategy, so we remove that long leg. Without having that long leg in place, we don't have to water down any of the positive Theta or negative Vega that we collect from the short options. So, here, we're much more advantageously positioned to benefit from short premium. Where defined risk strategies only capture some of the

benefits of short premium, undefined risk strategies capture all of the benefits of short premium. Like right here with this short put that we have set up in GLD, the ETF that tracks the spot price or current price of gold, here you can see that the price of GLD is almost 169, and we have set up a short put at the 164 strike. Our credit collected is $164, and our probability of profit is a pretty robust 74%. So, the first thing you should notice is that probabilities of profit on undefined risk strategies are generally much higher

than defined risk strategies. That makes sense since you're taking on unlimited risk; you have to be compensated for that unlimited risk, and that is what we see here. Also, notice that the Theta at $2.80 is significantly higher than what we had with our short put spread, which I believe was only about 20 cents or so. So, not only do you have higher probabilities, but you have a whole lot more time decay working for you in the form of higher positive thetas. Now, from a Delta standpoint, you're positive about 28 Delta. So that means you can

reasonably expect the option price to change by 28 cents for every $1 move in GLD. Another way to think about this Delta is that this position is going to feel like holding 28 long shares of GLD stock. That's kind of the share equivalent that I referenced much earlier in the crash course. Lastly, also notice that your max profit is still the credit collected, so in this case, $164, if the option price falls to zero. But also notice that both your max loss and buying power reduction are much higher than they were with a defined risk

short put spread. That makes sense because you no longer have that long leg defining your risk; so the max loss of $116,000 is indeed your maximum loss. Now, what would need to happen for that to actually materialize? Well, GLD would have to fall to zero; in other words, gold, as in the physical asset, would become literally worthless. Is that likely to happen? No, it is not. But that doesn't mean that GLD can't make some really big moves. So, that is why the buying power required to hold this position is about $3,000. This is a more,

let's call it, practical measurement of what you could expect to lose in the event of an unusually large move against you. So, lower in this situation, now just to be clear, that doesn't mean you will automatically lose $3,000 if GLD moves lower and against you, nor could you lose more than $3,000 in some cases. But it just gives you a good reference point for just how much risk you are actually taking and how large this position practically is. Okay, so those are the basics of how you set up a very simple short put strategy, and

I personally think a short put is a great beginner strategy because you have three things that are effectively working for you with a short put strategy: you have positive Theta, you have negative Vega, and you also have positive Delta. So, in essence, you're able to take advantage of all the things that come with options—positive Theta and negative Vega—but you're also playing the market to the upside. You're playing the market to rise higher, which is something that you're probably already familiar with with stocks and mutual funds and things of that nature. But now, let's turn our

attention to our second strategy: the short strangle. And just like a short put was the undefined risk version of the short put spread, a short strangle is going to be the undefined risk version of the iron condor. So, let's take a look. Here, we have a short strangle setup in Apple, and the only change that we've made here from the short put is adding a short call to the top side of the strategy. So, just like how an iron condor is a short put spread below and a short call spread above, a short strangle is

a short put below and a short call above. So, not only are you taking advantage of positive Theta and negative Vega on one side, you're actually taking advantage of positive Theta and negative Vega on both sides of the strategy. Therefore, you'll frequently be able to generate pretty nice amounts of theta on strangles, as we see here with a daily theta of over $8. The pop is also pretty nice at 74%, which again is much higher than the Iron Condor pop that we saw with the diamonds; I believe that was around 55% or so. Now, your

Delta here is around zero. Much like an Iron Condor, this is a neutral strategy, as you simply want the stock to stay within your short strikes and not go too high or go too low. The credit collected is a respectable $2.9, and the buying power is about $300, which again is put in place as a practical measurement of the likely risk that you would face in the event of a sizable move against you. What you'll also likely notice here, as you know, is kind of the mini elephant in the room, so to speak: your max

loss isn't even a huge number; it's just infinity. Like, there is no cap to how much you could lose. That's pretty scary! Now, theoretically, that is true; there is no cap to how much you could lose. But what does that actually mean? What would need to happen for you to be headed in that direction? It's not the stock falling down, because the lowest it can fall to is zero, and that has a defined loss associated with it. So then it must be the stock rising, and that is correct. The reason why there is no theoretical

cap to how much you could lose is because there is no theoretical cap to how high Apple could go or any stock can go for that matter. Now, practically, it would take a monumental catalyst—just an incredible event—for Apple to go up $30, $40, or $50 in the next month or two, let alone doubling or tripling or getting anywhere near this infinitely large cap. This isn't to say you couldn't have a big loser on your hands; you absolutely could. But it does give us a better sense of what infinity actually represents in this context. And there

you have it! There's the short strangle and a basic foundation for understanding the short strangle. So, you are now armed with two undefined risk strategies: the short put and the short strangle. Now, let's circle back to this whole idea of undefined risk strategies offering you more consistency, more predictability, and more reliability over time in the face of these potentially really large moves against you—these potentially infinitely large moves against you. How can that possibly be so? Well, the secret lies in the unfiltered exposure that these strategies give you. Well, as you've just seen with these undefined

risk strategies, you have a lot more positive Theta and presumably negative Vega working for you on a single trade. Now, on one trade in one singular occurrence, is this going to make a big difference? No, it's not, when compared up against a short put spread, a short call spread, or an Iron Condor. But do this every week, do this multiple times per week, per month, per quarter, per year, for multiple years, and you can see how the differences are really going to accumulate over time. That advantageous nature of being exposed to more time decay and

being exposed to more volatility contraction can really add up to huge amounts in the end over time. But also remember: we just learned that implied volatility is consistently greater than realized volatility. In other words, the actual moves in the marketplace consistently come in underneath the expected moves that the marketplace predicted. Well, what type of strategy can take advantage of this empirical finding? Short premium strategies! Okay, let's go even further: what types of short premium strategies can best take advantage of these empirical findings? Undefined risk short premium strategies. Now, why is that? Well, it's very simple:

with an undefined risk strategy, you don't have that long leg in place that's effectively slowing you down, dragging down your positive Theta, your negative Vega, and your overall probabilities on the trade, just like we've seen in this section and the previous section. Now, I know, I recognize it's super counterintuitive; it probably doesn't make sense to you right now, and I don't even expect it to make sense to you right now, but just file it away in your memory banks and get in the arena. Start making trades, start putting on strategies, start watching how they react

to given market movements, and you are going to see sooner or later exactly what I mean. Okay, that's all well and good. Right now, you're probably wondering, "All right, Jim, you sold me on defined risk strategies; I'm still kind of on the fence about undefined risk strategies, but I'll give them a shot." All right, now that I've got them on, now what do I do? How do I manage these guys? What am I looking for? What am I not looking for? Like, what do I do day to day with these strategies? You know, those are

some really great questions, and it's almost like I knew they might be coming, because in the very next section, that is exactly what we are going to cover. Okay, so now you've got some strategies working for you. You've got these guys on, you've got these guys going—that's great! But now what do you do? What do you do when you have a winner? What do you do when you have a loser? What do you do when you have something that's kind of not a winner or a loser—it's just kind of hanging out, just kind of in

between? Well, that is exactly what I want to cover in this section, and at the risk of beating this reference to death, I do have to mention now for the fifteenth time in the last I don't know 35 minutes or so: definitely use the strategy management crash course. As a supplement to what we're going to cover right here and right now, it is just going to give you a lot more depth and detail around the specific management techniques that we might employ for a given strategy or set of strategies that's beyond the scope of what

I'm trying to cover in this crash course. I'm really just trying to cover a broad-based overview of how we approach managing our positions in general, and then give you a few things to think about to get you up and running. So, generally speaking, our approach to the markets is actually pretty simple: we manage our winners, we close our winners early, and then when we have a loser, we try to extend the duration of that trade when we can to give it a chance to come back. This is the basic idea in a nutshell behind how

we approach the management of all of our strategies. But a bit more specifically, let's talk about three of the different categories of management that you might see us utilize here at Tasty: managing winners, managing losers, and managing early. Now, unless otherwise noted, we will lump defined risk and undefined risk strategies together and treat them the same, and I'll point out when that might not be the case. So, let's start with a deeper dive into managing winners. Managing winners is one of the most classic Tasty strategies when it comes to our approach to the overall markets.

Essentially, what we want to do is close our positions when they reach some percentage of max profit, usually around 50% of max profit, although this can vary depending on the specific strategy in question. Remember that when you're selling options, your max profit is capped by the credit that you collected. So, the closer you get to 100% of credit collected, the more you're risking to achieve greater percentage returns. That just doesn't make sense to us. So, instead, when the market moves in our favor, we prefer to take the trade off, book that win, and move on.

One of the ways that you can easily implement this strategy is by using GTC orders, or good-till-canceled orders. Set them at 50% of max profit or whatever profit level you might be looking at, and then when the market gets there, you will automatically get out. Okay, so there is a brief look at managing winners, which is more of an offensive strategy, right? This is more of a strategy for the trades that work. What do we do for the trades that maybe don't work? What do we do for the times when, as rare as they might

be, we happen to have a losing trade on our hands? Let's take a look. So, unfortunately, losing trades are inevitable. It's going to happen; nobody bats 1,000 in the market. So, when it does happen, you need a strategy. Now, what follows is specifically aimed at undefined risk strategies only, because defined risk strategies already have a loss mitigation mechanism built in with that long option in the strategy defining your max loss. Now, generally, there are two basic strategies to managing losers. There's managing at some predetermined multiple of credit received or just holding indefinitely with no predetermined

exit point, both of which are pretty simple and pretty straightforward. A predetermined exit point simply means you're going to exit when your credit reaches 2x or 3x of credit received. So, for example, if you sold the strangle for $2, a 2x loss would be the strangle selling for $6; you lose $4 or 2x of your original credit received. A 3x loss would be the strangle selling for $8; you lose $6 or 3x your original credit received. Pretty simple and pretty straightforward. Now, no predetermined exit point is even easier. I mean, you have no exit point

planned, and you simply monitor the position on a regular basis, deciding when it's time to finally exit based on your perception of the position, the portfolio risk metrics, or whatever you decide to look at at that point in time. So, which should you choose? Well, you could really go either route, and the Tasty research has shown there isn't really a clear advantage either way. But I would say if you're brand new, then having a predetermined exit point makes a lot of sense, whether it's 2x or 3x of credit received. There are gimmies and gotchas to

both; I would just choose one, stick to it for a while, and see how you like it. From there, you will likely make adjustments to fit your own personal trading style. Okay, so that's managing losers, which is more of a defensive tactic. Let's now turn our attention to the third and final management strategy that we're going to look at here today, which is managing early. It's a bit of a hybrid between managing winners and managing losers. So, managing early is a more recent management approach that's come online, maybe in the last three years or so

at Tasty, and it involves closing or rolling the position long before expiration day, specifically at 21 days to expiration in the cycle. The strategy is a hybrid because it actually possesses characteristics that will help boost profitability and characteristics that will help control risk. From a profitability standpoint, it helps because the research has shown theta to be more reliable in the first half of the cycle. So, by managing at 21 days to go here, we're able to tap right into that, which ends up improving our P&L. But it also helps risk, too, because do you remember

little old gamma? How a few episodes back I wanted to put it on the shelf until the right time? Well, that time is right now. Gamma, as you might recall, measures how delta itself moves as the underlying stock moves. So, it is very much an added layer of directional risk. The more gamma you have on a position, the more added directional risk you have on that position because your deltas are going to change more and more quickly. Well, gamma naturally rises as you approach expiration, a phenomenon often referred to as gamma risk, and this is

something that, as premium sellers, we are trying to avoid. By managing at 21 days to go, we're able to effectively eliminate gamma risk completely because we never get close enough to expiration for it to really matter. This must be valuable because the tasty research has shown that most big losers do tend to occur in the second half of the expiration cycle. So, managing early is an effective strategy that could be used by both defined risk and undefined risk strategies, but it is really more suited for undefined risk strategies because those are the strategies that are

exposed to gamma risk. All right, so there is an overview of how to manage your positions on a day-by-day basis and what you are looking out for. Again, definitely use the Strategy Management Crash Course as a supplemental resource to what we just went over. In addition to that Strategy Management Crash Course, there's actually another resource that I would also recommend at this point. We just covered three different management techniques: managing winners, managing losers, and managing earlier. But there's actually a fourth option that we use on a very, very regular basis: rolling. Now, as luck would

have it, we actually have an entire crash course all about rolling that's also on the YouTube channel, so I would absolutely check that out. It will serve as a great addition and as a great extension of what we talked about right here and right now. All right, so I kind of can't believe it, but we are really, really close to the end. The train has almost reached its final destination: that is the Options Crash Course 2023. There's just a few more things that I want to drop on your doorstep— a little bit more mortar that

I want to fill in between the bricks— before we wrap it up and call it a day on this crash course. These things are coming in this final section of the course. Now, in this final section, my main objective is this: I want to try to tie up some of the loose ends that still might be flapping in the wind after all the work that we've done up to this point. Now, full disclaimer: even after we get done with this section, even after we tie up a couple of these loose ends, you will still have

questions. There are almost certainly still some things that are unclear; there are still some things that I didn't explain fully enough; there are still some things that you're slightly confused about. All along the way, I tried to be as complete as I could be about a given concept, a given strategy, a given idea, but I almost assuredly fell short in certain spots. So, what I want to do at the very end of this section is give you some resources and point you in a direction that's going to help you get some of those questions answered.

But for right now, in this section, I want to address four things. I want to talk about liquidity, I want to talk about implied volatility rank, I want to talk about position sizing, and then I want to talk about the most important thing that you need to be successful as a trader. We'll do that at the very end to try to build up a little bit of drama here in this final section. So, liquidity. Now, I mentioned this way back in the beginning in the Marketplace Functionality section when the crash course had just begun. It

is critical; it is absolutely paramount that you only trade the most liquid stocks in the world. You trade these stocks and these underlyings exclusively. You only focus on the most actively traded stocks in the world. This is going to do a few things. Number one, it's going to ensure that you're able to transact at fair prices. It's going to ensure that you're working with tight bid-ask spread differentials, and you're buying at a fair price and selling at a fair price. But also, number two, it's going to ensure that you can get in when you want

to get in and you can get out when you want to get out. There is nothing more frustrating than getting a trade right but not being able to get out. There is nothing more frustrating than having a trade that you really, really like but not being able to get in. Well, focusing on the highest liquidity stocks in the world is going to really, really minimize the chances that you run into those situations. Now, to do this, I mean we could talk about stock volume, option volume, open interest, and all these different things, and you should

Google these different things inside of the tasty website. You should look into these things on your own, but what I want to do right now is make this as simple as we can and as efficient as we can. I have a great resource for you right inside of your tasty platform. So, inside of the tasty platform, you already have pre-loaded watchlists where the stocks are screened by various metrics. If you're just starting out, I would strongly recommend focusing on two watchlists: the Tasty Default Watchlist and Tom's Watchlist. These watchlists give you all the stocks that

we all trade day in and day out, and they will... Be the most liquid, most actively traded stocks in the market. So effectively, anything on these lists is going to be set and ready to go in terms of liquidity. Also, that's liquidity. Let's now turn our attention to implied volatility rank, or IVR. We've already looked at implied volatility a number of different ways. We've looked at implied volatility inside of the option pricing models themselves with a Black-Scholes model. We've looked at implied volatility and its relationship to realized volatility, and we've been introduced to how important

that relationship is. What I want to do now is offer up a third angle to implied volatility housed within this idea of implied volatility rank, or IVR. So let's take a look. IVR effectively measures IV relative to itself over the previous 12 months. Much like a standardized test score, it essentially shows you where you stand in the distribution of implied volatilities over the last year. For example, if your IVR was 40, that means the current IV is in the 40th percentile of the previous year's distribution of implied volatilities. If the IVR was 75, then the

implied volatility is in the 75th percentile of the previous year's distribution of implied volatilities. If the IVR was 106, then that means that the current implied volatility is actually 6% higher than the previous range of implied volatilities over the last year. So what this effectively shows is where implied volatility sits relative to itself. Now, why is that important? Well, another aspect of IV that has both mathematical and empirical support is that IV is a mean-reverting metric. When it's on the higher end, it's more likely to fall back to its mean, and when it's on the

lower end, it's more likely to rise back to its mean. And now that we have implied volatility rank, we can take advantage of that. We can take advantage of that because when IVR is higher, then short premium strategies might have an advantage, as falling implied volatility would reduce option prices. When IVR is lower, the long premium strategies, which we didn't cover directly in this course but you can certainly learn about on the Tasty site, might have an advantage as rising implied volatility would lift option prices. Now, of course, as is the case with everything else

in the marketplace, nothing is certain and there are no guarantees. So while volatility mean reversion has been shown to be reliable over time, there is no guarantee that it's going to mean revert when you want it to mean revert or need it to mean revert. Okay, so there's a quick overview of implied volatility ranks. Certainly not everything there is to IVR, but hopefully enough to get you up and running and to help you start to make better decisions with trade entry, trade exit, trade management, strategy selection, and all these different things. But next, let's turn

our attention to position sizing, which is actually critically important when it comes to your success or lack thereof as a budding trader. So one of the core tenets of the Tasty philosophy is to stay small with your position sizing, as we want to give the probabilities a chance to work over time. So naturally, that begs the question: what is small? Well, here it's important to differentiate between defined risk strategies and undefined risk strategies because defined risk strategies will naturally be much smaller than undefined risk strategies, just by the very nature of the risk being defined

and the max loss being known. So with defined risk strategies, generally speaking, 1% to 5% of your total account net LCK per position is pretty small. If you have more capital to work with, like $50,000 or $100,000 or more, then you can easily hit the lower end of this range. If you have less capital to work with, like let's say $10,000 or $7,000, then you'll likely be on the higher end of this range. With undefined risk strategies, a range of 3% to 10% of your total net L per position is also pretty small. Again, if

you have more capital, you'll be on the lower end of this range. If you have less capital, you will be on the higher end of this range. Certainly not a hard and fast rule that must be obeyed at all times, but these ranges will give you a really good starting point for sizing your positions correctly. All right, so liquidity is in the books, implied volatility rank is in the books, position sizing is in the books. This brings me to what I believe is the most important thing that will determine your success or lack thereof as

a trader, and it's very much in line with what we just talked about with position sizing: staying small. This alone, this one singular thing alone, I believe, is what is needed to unlock whatever you're looking for in the world of options, in the world of stock, in the world of futures; whatever product you ultimately want to use. I believe that staying small on order entry is the most important part of the whole process. This is because when you stay small on order entry, here is what you're able to do: you're able to manage your risk,

you're able to build your profits, you're able to act strategically, you're able to analyze objectively—all things that can be traced back to having the right position size on at order entry, specifically a very, very small position size. If you don't stay small enough on order entry, you're going to find for yourself that it's very hard to control your risk, it's very hard to act strategically, and it's very, very hard to make decisions objectively. But all of those things can be avoided as long as you stay small on order entry. Believe it! But we made it.

We made it to the very end of the crash course: the Options Crash Course 2023. It's over. It's done. It's in the books! And let me just say that I am so thankful for you guys. For those of you that went all the way through, even if you just bounced around and grabbed the content that you needed, I'm so thankful for you. I’m so grateful that you chose to invest in my content. Like, thank you, thank you, thank you from the bottom of my heart! I'm so humbled that those of you who chose to spend

your precious time, effort, and resources on some content that I've created. So, thank you guys very, very much! If you guys are going along and you have questions and you want to reach out to me personally, please do so! I am here; it is my absolute pleasure. But also, for some additional resources that might be able to answer some of the questions that you still have—questions left unanswered from this crash course—I would check out all the other terrific programs that we have on the Tasty Network, Monday through Friday. All kinds of different shows, all kinds

of different personalities, all kinds of different angles, where you can find a wealth of information and resources to help you learn more, to help you understand new things, and to find answers to those questions that you might still have. So, that is it. That is a wrap! The Options Crash Course 2023 has come to a close. I appreciate you guys; I thank you guys. And if I can help in any way, you guys let me know. Until then, I will see you guys next time!