Call vrs Put- part 2 (Basic Options 14)

Buying a Call vrs Selling a Put- part 2 (Basic Options 14)

This is the second of two videos where we look at buying a Call Option versus Selling a Put Option

Vid text:

Hello and welcome.

In this video, we will continue our discussion of comparing buying a Call Option to selling a Put Option.

Let's compare buying a Call Option to selling a Put Option, using SLV the silver ETF as an example. At the time of making this video, SLV is currently trading for $20.65 a share. Let's compare buying the 21.50 call to selling the $20 Put.

If the trader buys the $21.50 Call Option, his total risk is 40 cents a share. His possible profit is unlimited as theoretically the price of SLV can climb to any price. Therefore, there is a much greater possible reward than the amount he is risking to lose. However, for the trade to be profitable, the price of SLV has to move above $21.90 within the next month. This trader is hoping that the volatility over the next month is enough that price moves above $21.90 faster than the time runs out for the option. The current price of SLV is $20.65, so the odds or chances of this occurring are not very good, which is why the option only costs 40 cents.

If the trader sells the $20 put, he is paid 40 cents up front. 40 cents a share is his maximum possible profit on the trade.

However, his maximum possible loss is theoretically $20 a share, minus the premium of 40 cents he was paid up front for the option, as he is committing himself to buy SLV for $20 a share, and the price of a stock or ETF can theoretically drop all the way down to zero.

Therefore, this trade means that the trader is risking a possible large loss, yet his maximum possible gain is only 40 cents a share. The small gain versus the possible large loss is offset by the fact that the odds or chances of any loss occurring is very small.

If the trader buys the $21.50 Call Option, the price of SLV has to move from the current price of $20.65 to over $21.90 before the option expires in about a month. If the price of SLV is below $21.90, the trade loses money. After the trader places his trade, volatility becomes his friend because an increase in volatility increases the chance of price moving to where the trade is profitable. However, time is his enemy as each day his option loses value from time decay.

If the trader sells the $20 Put Option, the price of SLV just needs to stay above $19.60 until the option expires. If the price of SLV does not move at all, if the price rises, or if the price drops down some, but not all the way down below $19.60, then the trade is profitable. For this trade, time is the trader's friend. However volatility is his enemy as an increase in volatility increases his chance of the trade moving to where he will lose money.



If the trader buys the Call Option, the price of SLV has to make a significant move in one direction before time runs out for the trade to be profitable.

If the trader sells the Put Option, for the trade to be profitable, the price of SLV has to NOT make a significant move in one direction while time is running out.



The option trader is constantly weighing the possible profit versus the possible risk versus the probability of occurrence.

Remember that one can choose to be an option buyer or an option seller- For instance, the trader could start a trade by buying the $21.50 Call, and he could start a trade by selling the $21.50 Call, he could start a trade by selling the $20 Put, and he could start a trade by selling the $20 Put. Therefore, options are necessarily priced based on probability or odds of occurrence.

As we move next into discussing option strategies, it is important to always keep the possible profit versus possible risk versus the probability of occurrence in mind.

I hope you enjoyed this video. Thanks for Watching.

by Tekmnd via InformedTrades