Here’s the older video:
Stock Options: Difference in Buying and Selling a Call or a Put
And we had a question here from Joe:
“What’s the difference between selling a call and buying a put?”
It may seem like it’s the same thing because if I’m selling a call, I’m buying a put.
Isn’t that the same thing?
No, it’s not.
Well, it’s not the same thing because the rights and obligations are different.
I’m going to explain that to you here in just one second on paper.
The risk profile graph tells you your profit and loss. And the way that it works is on this graph.
The risk profile graph for buying a put is to the downside. You make money as the stock goes down.
If you were buying a put, it would look something like this. If it moves up, you lose your money. If it moves down, you make money because here’s the stock price.
Let’s say this was 10, 20, 30, 40, and so on. And here is the zero line. This might be your where you’re now into the negative. This could be negative $100 negative $300. And this one up here could be positive $100. I’m positive $300 and so on.
As this stock moves down, you make money when you buy a put. As the stock moves up, you lose money because your curvature on this is going to look something like this.
That line will get closer and closer to expiration because this is your expiration line.
This is today’s line, and that’s at expiration, and your theta will bring you closer to that area.
When you look at selling a call, it’s a bit different.
In this case, you have a different effect on it. When you look at a call, here’s the best way to explain it.
A call typically goes this way if you buy a call.
But if you’re selling it, it’s going to go in this direction.
This would be selling a call.
When you look at selling a put, it’ll go this way.
This will be selling a put.
And this one is buying the put.
You have the opposite effect.
If you’re looking at selling a call, the profile picture is going to look like this.
Your zero line will be somewhere over here. In this case, you have an unlimited loss. How does this work?
You have an unlimited loss when the stock heads higher. And you make money from theta as long as the stock goes down. But you make a flat amount. You make a flat amount depending on what you sell it at. Because here you sold it at a certain point, so you make whatever that is.
In this case, when you buy a put, you have unlimited profit potential when the stock goes down.
You have a limited loss because you’re capping it here. That’s the way it works.
Here we go on buying a put. We’re going to do a Shopify, and you get to see the actual thing in the trading panel.
When you buy a put, here’s how it works. There you go. There is the actual item from the trading panel. So stock goes down, you make money.
Stock stand still, you’ll lose money on the premium that you pay because you’re buying something. If it goes up to the upside, you lose money whatever you paid.
Stand still, and you lose money. It has to go up, and it has to go up quite a bit to cover that theta difference.
If I sell a single call and analyze this, the difference here is stock stands still, and you make money. The stock goes down, you still make money, but you make that flat amount we talked about.
The stock goes up, you lose money, and you can lose in the unlimited amount. In this case, when you sell a call, that’s called, or that’s named a selling a naked call. And typically what people will do is they’ll buy a single one further out for protection. That way, it caps your losses. In other words, you could convert it to a vertical.
I hope that makes more sense because they’re not exactly the same thing.
When you are buying a put or buying a call, you have unlimited gains. But you lose money if it’s stock stands still.
When you sell something, you basically can make money. Even if the stock doesn’t move, but you have unlimited lost potential, but you have a flat amount that you would make. That’s because you’re still making money even if it doesn’t move.
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