What's going on everyone, i'm matt, and in this video i will show you how to take a short position on the robinhood training platform. As a quick reminder, shorting a stock allows you to make a profit when its price declines, the ability to short, is a great tool to have, because it's one way you can make a profit off of a bearish move on most trading platforms. You typically establish a short position by first selling stock and then buying it back later. When you want to close the position, it's the perfect inverse of a normal trait.

If you want to know more about shorting and exactly how it works. There's a video posted in the description below conceptually. This is easy enough to understand. The problem is that robinhood doesn't allow you to create a net short position by directly selling stock.

So what's the workaround, how do you create a net short position on robinhood? There are a few viable answers, but the one i'll be showing you today involves put options to get the most out of this video. You should have a basic understanding of how options work. I know they may seem complex at first, but i promise they will make more sense. The more you deal with them.

There's a basic introductory video in the description. If you need a reference buying, a put option allows you to sell a stock at a specified price within a certain time period. The specified price is referred to as its strike price, and the option is only valid before the expiration date. What you pay to own? The option is referred to as its premium when it comes to options.

I personally find examples to be the most informative to help you better understand what it is. I'm talking about i'm going to show you two live examples in my own robinhood account for the first example, i'm going to create a net short position on spy. I'm going to do this by purchasing a put option with any option. You have to select an expiration date.

I pick july 1st. Then you have to choose your strike price. For this example, i decided on 300 for this one put option. I will have to pay 440 dollars because options are leveraged by a magnitude of 100 excellent.

It looks like my order was successfully filled all right. What does this mean? I bought one put option on spy and it costs 440. The strike price is 300 and the expiration date is july, 1st, which is about two weeks away. Let's discuss how this could play out.

The first possibility would be when the expiration date rolls around and spy is trading above 300. This situation is known as being out of the money. I don't want this to happen because it means i would suffer the max loss in this particular trade, i'm risking what i paid for the option, four hundred forty dollars. The second possibility is that spy is trading below three hundred dollars on july.

First, this scenario is known as being in the money: i'm rooting for this to happen, because it's how i would make money on this particular play. The amount of profit depends on how far below the strike price spy is when the option expires. As i mentioned before, options have one hundred to one leverage. This means: if spy is trading at 299 dollars when the option expires, i wouldn't make one dollar.

I would make 100 since i paid 440 for this option. I would need spy to drop to at least 295 dollars and 60 cents to cover the cost of the premium. The more it drops past that point, the more money i will make with all. That being said, i don't have to wait until the expiration date to exit the position.

Options are traded throughout the day like a stock, which means i can sell the put option before july 1st, because this is a net short position, the option would become less valuable as spy moves upward. If this were to happen, i could sell the option early and recover a portion of the 440 dollars i spent on the flip side. If the spy were to drop and the premium becomes worth more than four dollars and 40 cents, i could take profits early. As a quick side note, you should know that the value of an option isn't only directly related to the price of the underlying stock options.

Pricing is an extremely complex topic and honestly it deserves its own video. For now you should know that other aspects, such as volatility, play a huge role in computing, an options premium premiums go up as volatility increases and premiums go down, as volatility dies off. This only comes into play before the expiration date ad expiration, your profit or loss is simply calculated by taking the difference between the strike price and the price of the stock. Great you now know that buying a put option creates a net short position and allows you to profit.

If the stock drops. Let's take this up a notch. I'll show you one way you can get the same exposure, but with less risk. For this example, i will be creating another short position on spot, except this time around.

It will involve two separate put options. Once again, i selected the july 1st expiration date, similar to the first example. I'm going to be buying a put option at the 300 strike price. What's different now, is that i'll be selling a put option at a lower strike price? I decided on 290.

As you can see, this particular play is actually cheaper and that's because you have to pay for the first option, the one that you bought, but you are credited the premium from the second option because you sold it great. The order for this put option spread was filled. What i just created is called a bare put spread. The key is selling not buying the second put option at a farther away strike price.

If you recall from the first example, the break even price was 295 dollars and 60 cents, which is equal to the strike price minus the premium, for this bear put spread the break. Even price is 298 dollars and seven cents. This is calculated by taking the strike price of the first option and subtracting its premium like before, but now you would add the premium of the other option. The net effect of this second option is that i paid less for the position 193 dollars and i don't need the spy to fall as far to make a profit.

As with all things in life, this risk reduction comes at a cost. In the first example, the profit increases as spy falls all the way to zero. In the second example, the max profit is capped much earlier. If the stock drops past the strike price of the second option.

In my case 290 dollars, no extra profit is made. The profit would be the exact same from 290, all the way down to zero. If you want to learn more about the specifics of bare put spreads, there's a link to a video in the description below in general, this was a basic discussion about put options. You should take the time to learn about call options, option, greeks and the impact of picking a different expiration date.

Also, this spy short trade was just an example. I would advise against copying it there. You go there's two ways: you can create a net short position on the robinhood trading platform. If you enjoyed the video, let me know by hitting the like button and leaving a comment.

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