Putting Out & Booty Calls

Your Guide to Understanding Options

Hello Everyone and Happy Tuesday! Apologies for the late newsletter - I am going to start publishing these by 8 am PST/12pm EST each week to bring some consistency. Last week, we gained another 100 new subscribers and I am overwhelmed by all of your love and support. If you would be so willing to spread the word to your friends, I would be so grateful!

Story Time

One of my best friends has been seeing a new guy for a few weeks now. For the purpose of this story, we will call her Ember. She loves hanging out with him, they are super compatible, and he’s very cute but there’s one major red flag - she only ever hears from him on Fridays or Saturdays after 10pm. 

Now, it’s only been a few weeks and I want to give him the benefit of the doubt but I’ve been getting major booty call vibes from this man. He doesn’t send your typical “u, up?” text, but his timing is just inconvenient enough to make me wonder. A few weeks ago, Ember and I had a heart to heart over a few margs to talk things through.

“Are you okay? I haven’t heard you talk about Booty Boy in awhile.”

“Yeah, at this point, I don’t think either of us want anything too serious. So, I think I’m okay.”

“Do you think you should talk to him about it?”

“No, I think if it goes somewhere, it goes somewhere. If not, I don’t really see the point?”

“Okay, I just don’t want you to get hurt. You gotta protect yourself!”

WTF is an option?

Options are financial derivatives (in other words, “contracts”) that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. 

WTF do options and Booty Boy have in common?

  1. Low Upfront Commitment - It’s pretty clear, my friend is protecting herself emotionally. She doesn’t know where the relationship is going so not letting herself get too invested in order to protect herself. Options are super similar. If you aren’t fully ready to commit to buying or selling a stock, you can purchase an option to give yourself THE OPTION to buy or sell. No commitments, no regrets right?

  2. Unlimited Downside Risk - While options can protect you from risk, they can also have unlimited downside risk in certain cases. Unlike an option buyer (or holder), an option seller (writer) can incur losses much greater than the price of the contract. When an investor writes a put or call, they are obligated to buy or sell shares at a specified price within the contract’s time frame, even if the price is unfavorable (and there’s no cap on how high a stock price can rise). 

  3. Speculation - Trading options has a lot to do with speculation. It’s all about whether you think a stock will go up or down. In the case of my friend, she keeps Booty Boy in her back pocket with the hope that maybe someday he will turn things around, but she’s not putting all her money on him. My girl has plenty of other suitors in line, but she still speculates if he will be the one.

How do they work?

There are 2 main options strategies - Call and Put Options. Within these strategies, you can buy or sell (also known as “write” an option). Some people will also say long (buy) or short (sell) an option because the world of finance was designed to be annoying and wordy. I try to just think about buying or writing because long/short language gets complicated and I like to make finance simple. F the noise. 

  1. Call options give buyers the right, but not the obligation, to buy a stock at a specific price. 

    For Example: Let’s say you bought a Sephora coupon for $20 that allows you to buy any skin serum product. The coupon essentially gives you the option to buy any serum. Why would you use the coupon? Well, you’d use it depending on the price of the serum. If the serum is currently worth $25 and the coupon only cost $20 - you just saved $5 (aka, you are IN THE MONEY)! However, if the serum is on sale for $15, you probably wouldn’t use the coupon that you paid $20 for. In that case, you’d be losing $5 worth of value (aka, you are OUT OF THE MONEY)! 

    In the real world, let’s say you wanted to buy TESLA but you weren’t quite sure if you were ready to commit. You could buy a TESLA option (aka the right to buy TESLA at a certain price) for a premium. Let’s say the premium is $100 for the right to buy 100 TESLA shares at $420/share. If TESLA goes above $420, your option would exercise (aka, you would buy the shares at 420 at a discount -- wohooo sale!). If TESLA stays below $420 and never goes above that amount, you probably won’t exercise your option. Why would you buy it for more than it’s worth?

  2. Put options give buyers the right, but not the obligation, to sell a stock at a specific price. 

    For example: Let’s say you own a bunch of TESLA but you’re worried it might go down in value. It’s trading at $500/share, but there is word that Grimes is about to start her own electric car company that is apparently way better than TESLA. You’re not sure if it’s just a rumor but you want to protect yourself in case TESLA dips. In this case, you buy a PUT option (the right to sell). In this case, you might buy a put option at a $100 premium for the right to sell 100 TESLA shares at $490/share. If TESLA dips below $490 and even gets as low as $300/share, you would still get $490/share because of the option.

Let’s Get Naked!

You’re probably like, omg this blog has gotten out of hand… But here I want to tell you about a few options trading strategies that I did not make up. Who came up with this language and how can I join forces with them?

  1. Naked Call -  A naked call is an options strategy in which an investor writes a call option on the open market without owning the underlying security. Naked because, if the buyer of the call decides to exercise the call, the writer will owe them the shares at the decided upon price (even if the price has risen greatly) - yeah uncovered, naked, and exposed.

    Example: Let’s say TESLA is trading at $400/share. I believe TESLA is going to go up, so buy I buy a call option for 100 shares at $420/share of TESLA for $100 premium from Booty Boy. Booty Boy decided he thinks TESLA is going to go down, so is willing to write a naked call even though he doesn’t own the shares. Boy’s getting a little cocky. TESLA goes up to $800/share, I exercise my option and Booty Boy owes me 100 shares. He has to buy TESLA for $800/share in the market and I get to buy the shares from him at $420/share. His loss is $800-420-premium. Not great huh...

  2. Straddle - A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date. By doing a straddle, the trader is able to catch the market's move regardless of its direction. If the market moves up, the call is there to protect them; if the market moves down, the put is there to protect them.

What are the benefits?

  1. Make Money Honey - You could make money if a stock goes up or down (depending on if you had a call or put). They are simply a more sophisticated investment vehicle. In terms of a booty call, we all now the positives and negatives. Just make sure to exercise protection.

  2. Less $$ up front - With options, you pay a premium up front. You don’t pay for the shares until they are “exercised” (if you are IN the money). 

  3. Protection - If you own stocks, options can help you protect those positions in case things don’t turn out like you planned. Like I said earlier in the article, say you own a bunch of TESLA and are afraid it might go down but aren’t quite ready to sell, buying a put option might be your best strategy.

How Do I Trade Them?

Fact is, options are risky and can be quite expensive. While you can make money with them, hedge your portfolio risk (aka protect yourself), you can also lose a lot with them. With that being said, most brokerages will check to see if you’re ready to trade them. They might also require more capital, especially in the event your downside risk could be unlimited. So before you start trading them and falling in love with your booty call, know the risk and be prepared for heartbreak. While you may find love, ALWAYS protect yourself first. 

If you’re interested in learning more, check out this Nerd Wallet article here: https://www.nerdwallet.com/article/investing/how-to-trade-options

What’s next?

This week’s topic is brought to you by Richa Pandya who wanted to learn more about options! If there is a topic you want to discuss, please DM me on Instagram @notyourbfsinvestmentadvice or email me at kelsey@tardiapp.com. I also am building a company called Tardi to help individuals on their journey from cautious savers to savvy investors. If you’re interested in joining the beta, sign up here: https://www.tardiapp.com/

See you next week lover!

Disclaimer: All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.