Call Options: Buying vs. Selling

Kal Zurn
A free video tutorial from Kal Zurn
Option Trader | Founder of "Option Trading for Rookies"
4.7 instructor rating • 7 courses • 43,546 students

Lecture description

Time to learn how to Trade Options correctly and that means we are going to start Selling them instead of Buying them.  What?!

Learn more from the full course

Options Trading for Rookies: Understand Options Completely

Part 1: Learn everything you need to know about options, what they are, how they work, buying vs. selling and more!

02:17:07 of on-demand video • Updated September 2020

  • Understand options and how options work (strike prices, bid-ask spread, etc.)
  • Learn the foundation of options trading (leverage, POP, etc.)
  • Learn the differences between calls and puts
  • Learn the difference between buying options and selling options
  • Learn how to trade calls and puts effectively
  • Understand and use the most important rules in options trading
  • Learn the basics of trading verticals, the Almighty of option trading
English You're going to be only in the process of selling options specifically selling calls. So let's do a quick recap of a few the things we learned and are going to play into what we learn today. So we learned at option is just a contract between two parties. What are those parties. One's a buyer and one's a seller. And in the case of calls what that means is we buy a call if we believe the stock is going up and we sell a call if we believe the stock is going down and when we buy or sell something we always like to agree on a mid-price which is the most fair price for both people. And just to summarize buying call options. Why do people buy call options at all. Well it's because of something called undefined, which we labeled, profit and all that means is we can spend a relatively small amount of money with the potential to make a relatively large amount of money. Similar to buying a lottery ticket let's say. But when we do that what's working against us well everything. Probability of profit is working against us. Our POP or our chance of making money on this trade is only 35 percent which means we will lose 65 percent of the time break even price is working against us. The stock price has to move in our favor has to go up in this case or we lose. And time is working against us. Not only must the stock price move in our favor but it must move in a certain time because remember options expire. So what does that look like. Well when you buy a call option it turns out that in three out of four scenarios we lose money if the stock goes down stays unchanged or even goes up a small or medium amount. We're going to lose money on this trade only when the stocks have big moves are we guaranteed of being a winner when we buy a call option. So let's look at that on a trade page. So let's go back to buying this call option that we've talked about before. The different days the numbers have changed. In this case the stock price is $1,218.80. We're going to buy that 1215 call. Why. Because it's the call directly below where the stock price is it's the closest we can get. And we're going to pay $45.55 per share for that which means our break even price prices over here which our software shows nicely for us. What is that. We take our strike price we add on our price per share and we get our breakeven price of $1,260.55 Now we know that the stock price right now is $1,218.80. So the stock has to go up quite a bit just to get to our breakeven price right it's $1,218.80 it's got to go all the way to $1,260.55 for us just to get to the break even point of this trade. And not only that if you look down here at the time there's 34 or 34 days till expiration. So we've got 34 days working against us for the stock to go all the way up to $1,260.55 at least. And because of all those factors working against us breakeven price and time you can see here our POP only ends up being 35 percent. There's only a 35 percent chance that we make at least one dollar profit on this trade at expiration. So if this is buying an option all the things working against us wouldn't it make sense that selling an option should be the exact reverse. Right. There's only two parties there's a buyer and a seller. So let's look at what would happen if we sold this option instead. So we'll go back here. We've swapped that to selling instead and pay the same price. And what happens when we sell this option now. Well here's the option same one the 1215 but now we're selling it. And wow look what happened. Our POP went up to 65 percent which coincidentally is the exact opposite of buying it. That was 35% remember. Probability says 100 percent chance of something happening or not happening. So if you take the buyer and the seller and put them together it has to equal 100 percent. 35% POP of winning for buying the option must mean there's a 65 percent chance of winning. On the other side for selling the option and if we look at selling an option summary you see that everything here is the exact reverse of buying an option. The pros are everything that was working against us when we bought an option POP works in our favor. It's 65 percent as opposed to 35 breakeven price is going to work in our favor. And time is going to work in our favor. We'll learn more about how that works later but once again I want you look here it's the exact reverse. Now when three out of four scenarios we saw an option we're a winner only in one scenario are we a loser and there's only one con just like there was one pro pro for buying was undefined profit which means the flip side has to be true for selling. So the con for selling an option is now undefined losses. And we'll learn more about that as we go forward as well.