All right so this question comes from YouTube’s comment
I always like for you guys to submit actual comments here on the website. You could go ahead and go to contact us and submit one by voice, if you like, that way it’s more detailed.
Today’s question here comes from Paul Camp.
So thank you so much for your kind comments. Well they’re not essentially the same thing.
You have two different types of situations, two different types of options: one you’re selling and one you’re buying. You make money if they go in the right or appropriate direction but they do function differently.
So let’s take a look at selling a call and buying a put.
I’m gonna go to the panel, this is the ThinkOrSwim or TD Ameritrade platform.
Let’s go ahead on a McDonald’s trade.
We go in about 45 days and we’re buying a put and sell a call at a different expiration so you could see the difference.
Buying a Put
If I buy a put, money comes out of my wallet. I own and hold a put that means I have power to that put but I had to pay for that. Doesn’t matter if it’s a 170 put or 180 put. I know bought something.
You bought a banana, you own that banana and you can bite that banana. Same thing here, you buy a McDonald’s put, you own that put — you have insurance.
You can cash in that insurance if things go against you. The value of that insurance increases if the stock price goes down because this is insurance on the downside.
You also have the insurance on the upside — the call side. If you own the put, you have it, you own it, and you can use it if you want.
It’s just like buying an Apple, do you have to eat the apple because you bought it? No, you don’t have to but you have that opportunity.
In this case, you’ve got a delta of negative 76 which means you make money as this thing goes down.
You make $76 for every one dollar move. Here you lose $20 a day to have that insurance because you bought it. Every day you’re losing money. The amount that you can resell is less because you’re using up your time premium.
Selling a Call
Let’s look at selling a call.
When you sell a call you still make money from the direction.
So in this case I make $125 for every move $1 move down. Compare that to the put, well why is one more than the other? Well remember we’re doing different timeframe for now. You still make money from things going down just like a put.
The problem here is when you sold something.
I’ve sold something here at 1.55.
So let’s say you had a guitar and you sold that guitar for 155 dollars. Once it’s sold, it’s sold. You only made 155.
In buying a put, you have unlimited almost until zero downward bias and that means you can make an unlimited amount of money as long as that price keeps heading. But the problem the trade-off to that is you lose twenty dollars a day for the premium.
Just like an apple decays, a banana decays with time.
Whereas when you sold something, you’re collecting your time premium because eventually it’s not gonna be worth anything. You sold this contract as long as it goes kind of in your favor or just stand still, you still make your money.
The problem here when you buy a single put, stock stands still you lose because you lose on the premium.
If you bought a put, stock stands still you lose. Stock goes against you, let’s say it moves upside, you lose.
If you’re looking for a downward direction, stock goes down slowly, you could still lose because you got your time premium problem. You have to make enough to offset that time premium problem.
When you’re selling something, the way that you make money is if stock stands still. You make money if it goes down and if it goes up a bit.
The only way you lose is if it goes up a lot. That’s kind of the big difference in these situations. This has a higher probability of success but you make less money if it works out in your favor.
Whereas buying a put, you have less chance of success but you can make more money.
So it’s kind of which one do you want you’re either a buyer or a seller.
It’s not that one is better than the other it’s just there’s trade-offs. That’s what I want you to understand in this situation.
Even though they’re both to the downward there are trade-offs to both
So be very careful.
