In This Article
Ever wondered what options trading is all about? In this insightful episode, Tiffany Grant introduces Jason Brown, who provides an easy-to-understand explanation of the world of stock market options.
From the basics of how to buy a call option to understanding the difference between a ‘call’ and ‘put’ option, Jason reveals why options trading isn’t as risky as it first appears. If you’ve been looking for an effective guide on how to get started with options trading, then this is the episode for you! Tune in & get ready to take your financial journey to the next level today!
About Our Guest
Jason Brown is the founder of The Brown Report, a personal brand he created with the goal of providing free education and support to new traders seeking success in the stock market. With over a decade of experience in stocks and options trading, Brown has positioned himself as a trusted guide for those navigating the financial markets.
In addition to his work with The Brown Report, Brown has expanded his brand into Power Trades University, which appears to be a product or service offshoot of The Brown Report. His educational endeavors don’t stop there – he also offers tutorials on how to trade stocks and options on his YouTube channel, where he has amassed thousands of views.
Connect with Jason
Visit his website: thebrownreport.com
Intro/Outro: You know what it is. That’s right. It’s time to talk money with your money nerd and financial coach. Now tighten those purse strings and open those ears. It’s the money talk with Tiff podcast.
Tiffany Grant: Hey everyone. I am so excited because I have Jason Brown on the line and Jason’s here to talk to us about options.
I know a lot of people are interested in options trading and honestly I am as well. So Hey Jason, how are you?
Jason Brown: Tiff, I’m doing great. I’m excited to be here and share about options.
Tiffany Grant: Awesome. Awesome. So let’s just hop right into it. Cause that’s just how we roll over here. So what is an option?
Jason Brown: Yeah. So options for those who don’t know what options are, we’re talking about options specifically in the stock market.
Cause I’m a stocks and options trader. But people deal with options in every facet of their life So I like to give you an example where people use options in their everyday life and then share with you how it works in The market but well, let me give them the market definition first. It’s the ability to control A stock for a certain period of time at an agreed upon price.
And so what that simply means is instead of buying Amazon stock, for example, you could say, I want to buy an option and I want the, to control or the right to buy Amazon stock for the next 30 days. And so that’s an option. There’s a asset, which is the stock, which is Amazon. There’s a timeframe, which in this case is 30 days.
It could be all the way up to, I believe, two years with leap options. And then an agreed upon price. And so you’re agreeing to buy it at a certain price. So let me give you an example in real life, um, that may resonate a little bit better with people. Uh, most people have bought a house or they understand the house buying process.
So when you go look at a house and let’s just say this house is 200, 000. You go look at the house. You say, great. I like the house. I want to buy it. You don’t usually just write a check for 200, 000. You give a person what’s called an earnest money deposit. So you put 2, 000 down and they say, okay, for the next 30 days you can get an inspection, you can get an appraisal.
So when you look at it from an option standpoint, we have the asset, which is the house. Okay. We have the agreed upon price. You agree to buy it for 200, 000. And then you also have your down payment or your cost of the option, which is 2, 000. And you have your timeframe, which is 30 days. Right? So if you were to get your inspection, get your appraisal, and it’s like, good news.
This house has a praise for 220, 000. You have that house under contract. You have an option contract on that house to buy for 200, 000 you can now turn around and sell it to someone else is that I really wanted that house But I missed out on it. You say hey great you can buy it for 220, 000 basically they would give you 20, 000 for your option your piece of paper and then they would go buy the house for 200, 000 so they paid 20, 000 for the option contract from you and they paid 200, 000 for the house.
They got the asset for 220, 000. You, however, was able to control a 200, 000 asset for 2, 000. You didn’t have to have the full. 200, 000 up front. You only have to have 2000 to control it for 30 days. And when that in price increased in 30 days after the appraisal and inspection, it had equity in it that you could turn around and sell to somebody else who actually wants to live in the house.
And so that’s how, when you’re trading stock options. You could take 2, 000 and hypothetically turn it into 20, 000 in 30 days and get ridiculous returns and people are like, how are you making those kinds of returns? It’s because I controlled the asset versus owning the asset. And if that price increased in that 30 days, I was able to capitalize on it and make a much higher return versus if I had bought the house for 200, 000 and only made 20, 000, then I would have made 20 percent or 10%.
But by taking 2, 000 and making 20, 000 I made something like a thousand percent. Does that make sense?
Tiffany Grant: Yeah, it makes complete sense. And honestly, I’ve never heard anybody explain it in that way. And how you explained it was crisp. Like, I mean, I definitely understand. I never thought about the home buying process and equating that to buying and selling options.
So thank you for that. I actually learned something new today. Oh, go ahead.
Jason Brown: I just wanna say a, a lot of times I, I, I found out that that’s my superpower. So people say what makes you different, uh, about the stock market? I don’t have a monopoly on the stock market. It’s just, I explain it the way normal, regular, everyday people need to hear it.
’cause I was like, well, why didn’t they explain it like this once I found out how it worked? Mm-hmm. . And the other thing about that, that’s important to understand is that I am here to make. Stock trade and option trading simple. And most people will say something like, I heard option trade and that’s risky or that’s, uh, that, you know, that’s complicated.
But then I’m like, well, you bought a house. Was that risky? Was that complicated? Because you just bought a call option when you bought a house. And then when we have time, I’ll tell you about put options, which we all participate in as well. And most people just don’t even know it. Well, let’s just
Tiffany Grant: go ahead and hop right in.
You just segwayed perfectly into my next segment, which is what are the different types of options and what do they mean? So, you know, you said call, but what exactly is a call or a put option?
Jason Brown: Yeah, so when you think about call the easiest way to think about it is you pick up a phone and you call a friend Up so call option You usually believe that the price of the asset is going higher or it’s going up You believe the stock is going up.
You believe the house is going up. Whatever the asset is So typically if you’re buying a call option You hope the price increases over the next 30, 60, 90 days, whatever the timeframe is. The second type of option, there’s only two, there’s only cause. And there’s puts. So put options. Think about you put the phone down.
So you hang it up, you put the phone down. So when you’re buying a put option, you believe the price of something is going down. And the way I like to explain put options and it’s when people understand how it works, you’re like, Oh my God, I didn’t know I was participating in put options. So the way a put option works in the stock market is if a stock is trading for a hundred dollars, let’s just say you buy a 90 put, You’re basically saying I can force somebody to buy my stock.
I can put it to them at 90. So what happens is some news comes out, the company’s going bankrupt. The CEO’s a crook, whatever stock falls all the way down to 20 a share. Most people are like, Oh my God, I just blew up my account. Well, if you had a put option, when it falls down to 10 a share, you can force somebody, you can put it to them at 90.
You can make them buy it at 90. Even though it’s only trading at 10. So basically you can get 90 percent of your money back from the stock falling from a hundred down to 10, but you can get made whole and they’ll buy buy it back at 90 because you have that put option. You can force them. Now, the way I like to explain it in everyday terms, because people might be like, wait, say that again.
I didn’t get it. Don’t worry. Let me give you another example.
Tiffany Grant: And that I probably like too many numbers put call what? Yeah.
Jason Brown: They usually say don’t share numbers on the podcast because people, you know, they start hearing numbers and they zone out. But stick with me. Let me give people an example that they can relate to.
And that’s why I always like to give the technical stock answer and then like a real life example. So if you drive a car, Tiffany, I’ll use your example. You drive a car, right? And you have to have insurance on your car. And so what’s your, what’s like a, well, let’s just say your dream car is a Mercedes Benz.
It costs a hundred thousand dollars. So you buy this Mercedes Benz for a hundred thousand dollars. You pay maybe 300 in insurance. And you pay that every 30 days. So there’s the time component. So the asset is the car. The 300 is the cost of the put option. And then the strike price or the price that you’re saying, Hey, I want to ensure is 100, 000.
God forbid you go out here tomorrow, you get into a car accident through no fault of your own. And the car is total the car is now worth zero dollars is total you will call up your insurance company and Exercise that put option you will say hey you now can take this 100, 000 card that’s worth zero and you can have it and you guys have to cut me a check for a hundred thousand dollars That is how put options work.
It can a protect your account Or you can actually make money from stocks falling by buy and put options on stocks that you think are going to go down in value and then forces somebody to buy it from you at a higher price.
Tiffany Grant: I love that analogy and see y’all just being real with you. I took an investing class.
As part of my degree and nobody explained options like this. I mean, I understood options based on like the, the, the basic terminology and stuff, but now that he’s explaining it, like this is gold, this is gems. Um, so hopefully that, um, you know, kind of tells you what. Call and put options are, but let’s take it a step further.
Okay. So let’s say for instance, we have a person in the audience listening and they’re like, I get it. I understand the concepts. Now what? Like, how do I get into trading options? Do I need to own stocks or, but how do you, how does one get into doing this?
Jason Brown: Yeah. So the first step is to realize that you’re already participating in it in everyday life.
We just gave you an example. If you buy a house, you’re participating in it. We just gave you an example. If you drive in a car, most people want to protect their car. The other example would be if you have life insurance, you are protecting your life. You are buying a whole life or a term policy for 30 years and saying, Hey, um, if something happens to me, I want my family to get cut 300, 000 half a million, whatever the case may be.
The problem, and we’re going to get to the first step. The problem is, We’re always the average person is usually involved with options with things that don’t make them any money, right? Buying life insurance doesn’t make you any money. It’s a check that comes out of your bank account every single month in case something happens.
Paying for insurance on a depreciating asset like a car, you’re buying put options. But you’re not buying put options on something that can make you money. So the first step is to say, I’m already participating from a consumer side. How do I get over here and participate from the investment side? And so there’s two ways that you can participate.
So number one, if you own a hundred shares of stock, you can do what I call the rental income strategy. So a lot of people want to go out and buy real estate and buy houses. They don’t realize you can do the same thing in a stock market. So if you own a hundred shares of stock. You can sell call options against your stock.
Then what that simply means is we’ll stick with Apple. If you own Apple at a hundred dollars, you can sell $105 option, and that basically says if Apple goes up to 105, someone will buy it from you at 105. But maybe you get paid 500 for selling that option. So if it doesn’t hit 105, you get to keep that 500 and you can do it again in 30 days again.
So you can collect 500 in rental income just by owning at least a hundred shares and then selling what’s called an out of the money option against your Apple shares. So that’s one way to get involved with. Selling options. The other way is to buy options So if there’s a stock that you’d say like I know the price of Tesla’s going up, but I can’t afford to own That many shares of Tesla true, but you can’t afford to control the stock by buying options So maybe you can’t afford some of the higher price stocks But you’re going to afford to control the op, the stock for 30 days using the options.
So that’s one other way that you can get involved is start to look at stuff that you would love to buy, but possibly can’t afford and say, but what if I bought the option? And then look out 30 days and say, what would have happened had I bought the option? Did it increase or did it decrease? Those are two ways from a call option standpoint.
The other way is maybe you have a portfolio of a hundred thousand dollars, 50 or 10, 000. It doesn’t matter, but most people are scared of losing all their money. Or you hear about stock market crashes or during the pandemic, everyone lost 50 percent of their account. From a put option standpoint, we know that you can buy insurance on your life and on your car.
Most people don’t buy insurance on their trading or their investment account. And so you don’t have to wake up and wonder, am I going to lose all my money? Cause the fed hike interest rates or cause the debt ceiling talk is going on right now, or cause Russia and Ukraine is at war, you can actually buy insurance or protection on your portfolio and you can sleep good at night knowing.
That if anything happens, you can put that stock or your portfolio to somebody and force them to buy it at the higher price.
Tiffany Grant: So, what’s interesting is, when you talk about the put options and you say force someone to buy it, how do you force people to buy them? Like, how does that
Jason Brown: work? So, it’s no different than the way you can force your insurance company to pay for your car once it’s torn up, right?
So, sometimes we get to the stock market and we… Make it more complicated than it is Insurance company already said hey for you paying me three hundred dollars a month I am willing to buy your car at a hundred thousand if something happens to it Same way with a put option the person who sold you that put option for three hundred dollars They have already agreed in advance that they would be willing to buy it at that price.
So if something happens, they can’t turn around and say, just kidding. I don’t want to buy it at that price anymore. No, no different than your insurance company can say, just kidding. We really don’t want to insure you now that you got into an accident. It’s like, no, we already had an agreement. So for them taking your 300, that is the agreement that they entered into.
Now, a lot of people may say, well, why would somebody enter into that agreement? Well, no different than the insurance company. They want to ensure people that they don’t believe we’ll have an accident in the stock market. People will agree to buy your stock at a lower price because they don’t believe it’s going lower.
So there’s always a marketplace. There’s somebody that’s scared that something may happen. So you’re buying the insurance and there’s someone who’s willing to take on that risk because they don’t think it’s going to happen and they can collect that premium every single month. So that’s the relationship between the buyer and the seller of put options and the ability to be able to force them to buy something.
If the price goes lower, they don’t think it’s going to go lower and you’re buying insurance because just in case it does, just in case you have an accident in the stock market. You don’t want to be out on the streets.
Tiffany Grant: Interesting. Interesting. So let me ask one more question because we can’t give it all away.
Uh, but if people were interested in getting started, we told them how to get started. Are there any things that they need to be aware of as they’re jumping into this? Like, um, I know you mentioned some people are like, oh, but it’s risky. Like, of course, any investment is risky. So there’s that. But, um… Is there anything to be aware of as they’re thinking about this?
Um, investing in options?
Jason Brown: Yeah, absolutely. So trading options is not risky, no different than driving a car. Isn’t risky. It’s the driver that makes it risky. It’s the person that drinks alcohol and gets behind the wheel that makes driving a car risky. It’s going out on. New Year’s Eve at midnight when everyone’s drinking party and not paying attention, that makes it risky.
And so it’s the same thing with the stock market. If you leave an episode like this and say, I got it all figured out, I’m going to jump in and buy an option. It’s kind of like drinking and driving. Like you got a little high off the concept and then you just went out there and thought you could just go buy an option.
And then you crash and then you’re in trouble. So I would say people need to be aware that the little bit that we gave them is just to get them interested in doing the homework to truly understanding how it works. How do you, so for example, if you’re going to buy call options, we told you cause me and you think you’re going up.
You’re going to want to know how to identify if you believe a stock is going up or not So we want to teach people how to read stock charts and identify if we think it’s going up If you’re going to buy a put option for protection You want to know when are the best times to buy a put option for protection?
For example, maybe around earnings when a company releases earnings, which is four times a year once a quarter You ever see a company miss earnings and the stock just gets crushed might be a good time to buy earnings It’s kind of like New Year’s Eve good time to have insurance from your car when all the drunk drivers are out Same thing when earnings are coming around.
It’s a good time to have insurance on your portfolio Or specific stock. If the fed is going to speak and announce if they’re raising interest rates, have they ever spoken in the market, just tanked or sold off? You want to understand those are moments when you should have put options. So again, you don’t want to just leave here and think, you know, it.
You want to get the information to say when are the best times to use call options? When are the best times to use put options? What are the storms that I should be looking out for so that I either have the right insurance or when are the good times where I think things are going to move higher? So that way I can buy call options and participate in the upside.
Because if you get those two wrong or get the timing wrong, you could technically lose all of your money as well.
Tiffany Grant: Awesome. Awesome. And see, this is where people need you. Um, so we segue in right into wrapping this up. And so if people are interested in learning more about options, how to do all the things you just said, or learning more about you, where could they find you?
Jason Brown: So the best place I would recommend people going is just to my website, which is the brown report. com and on our homepage, we have what’s called the stock option starter pack. And if you download the stock option starter pack, we walk you through costs, put options, some of the things to look for. We talk about how to open a practice account so you can practice trading options.
Let me give you a couple more in depth examples. So if people are super charged about options and like this makes sense, I got to learn how this works. The best place to go is the brown report dot com. Check out the stock option starter pack. And then also my YouTube, my Instagram, all that information is on there as well.
If they want to connect with me. Perfect. Perfect.
Tiffany Grant: Thank you. And I will make sure that link is in the show notes for our audience, just in case they’re doing something else while they’re listening, check the show notes and you can find Jason’s info there. So thank you so much, Jason, for coming on the show
Jason Brown: today.
I appreciate you having me and I hope your audience got a lot out of. Thinking about how options can help them in the future and how they’re already participating in it.
Tiffany Grant: I’m sure because your analogies are a one. Um, so thank you so much for coming and I hope you have a wonderful rest of the
Jason Brown: day. I appreciate you having me.
Tiffany Grant: Bye. The information that you hear in this episode is for educational and entertainment purposes only. This is not investment advice, so don’t take it as such.
Intro/Outro: Thank you for listening, joining, and being a part of the money talk with his podcast this week, you can check tip out every Thursday for a new money talk podcast, but if you just can’t wait until next week, you can listen to previous podcast episodes at money.
Talk with t. com or follow tip on all social media platforms at money. Talk with the team until next time, spend wise by spending less than you make a word to the money wise is always sufficient.
Jason Brown: Okay. Bye.
Have you ever been curious about the world of options trading but found it too complex or intimidating? Look no further! On this episode of the podcast, Tiffany Grant introduces her guest Jason Brown, a stock trading expert, to demystify options trading for beginners.
In this engaging and informative conversation, Jason breaks down the basics of options trading in simple terms, drawing on real-life examples to help clarify concepts. If you have been searching for an easy-to-understand guide to starting your options trading journey, this episode is a must-listen!
From Houses to Stocks: A Simple Analogy For Understanding Options
One of the most profound moments in the podcast was when Jason explained the concept of an option in the stock market context. He compared options trading to the house-buying process, a familiar example that made the concept much easier to grasp.
In essence, when you buy an option, you’re acquiring the ability to control a stock for a specific period at an agreed price. This is quite similar to the process of buying a house, where you secure a contract and agree on the price before making the final purchase.
Unearthing the Call and Put Options
Jason went on to explain two essential types of options in the stock market:
- Call Option: The holder believes the stock price is going up and hopes the price increases over the next period. This can be compared to buying a house with the expectation its value will rise.
- Put Option: The holder anticipates the stock price is going down and profits if the asset’s price decreases. Think of this as taking out insurance on your house to protect against damage – you may not want the damage to happen, but you want to be protected if it does.
Debunking the Myth of Risk
Contrary to popular belief, options trading is not as risky as it seems. Jason’s goal in simplifying stock trading is to dispel this misconception and encourage more people to enter the market. He emphasizes the importance of understanding options trading thoroughly before jumping in and stresses the need to learn how the market works.
For instance, he suggests that the period surrounding earnings releases might present a good opportunity to buy options. This is because companies can often miss earnings expectations, causing their stock prices to plummet.
The Key to Successful Options Trading: Do Your Homework
A valuable takeaway from this episode is the need to fully understand the market and study the best times to use options before diving in. Jason advises listeners not to jump into buying options immediately after grasping the concept but rather to do their homework and become proficient in market analysis.
To learn more about options trading and get a wealth of practical insights, be sure to listen to the full episode above.