Calls vs Putts
A free video tutorial from Corey Halliday
professional trader and educational instructor
4.5 instructor rating • 9 courses • 29,174 students
Learn more from the full coursebuild a solid foundation for trading options
We teach you which options to trade and which to avoid due to liquidity
54:07 of on-demand video • Updated June 2016
- Understanding. You will be able to read an option chain and determine what the options are trading for. How much money it would cost and the risk associated with the position and much much more!
English [Auto] Now we're going to introduce calls and puts As I said remember that in option trading there's only two types of options. You trade calls or puts. Now the name of these options actually says something about what you're able to do with them when you buy a call option. You can call the stock away. That's what the name comes from. If I buy a call I have the right to take the stock from someone else. I call it a way. And the reason for that is we've entered into an agreement. If I'm the call buyer then someone else is the call seller and as such I can call the stock away. Well that means that they have an obligation right to give me the stock. And that was that was pre-determined by this contract. We entered into options trade in what they call contracts because you're literally in a law abiding contract that you have the right as the call buyer but not the obligation to be able to buy the stock or take it away for the strike price amount on or before the expiration date. So understand this when you buy a call option you literally have gained rights to be able to own the stock for the strike price amount. Now what if we were on the other side of that trade though what if we sold this stock or it sold the call Pardon me. Then your stock can get called away in that flip side if we're on the opposite in the now. We don't have the right option. Buyers have rights options sellers have obligations. So I always compare options selling to an insurance contract. Insurance companies have the obligation to do something just as insurance buyers have the right to be able to do something. Think about it if I buy a contract of insurance on my car then what's the agreement. Well we've entered into a law abiding contract is the insurance buyer have the right to be able to sell my car no matter how much damage I get to give the insurance company the car. It might be worthless and totaled but I get to give it to them and their obligation is that they have to pay me the full value of the car we entered into that contract ahead of time here the same process is at work. When you buy the call you have the right to be able to take the stock away when you sell the call you have the obligation to sell the stock for the strike price email on or before expiration. If the call buyer chooses to exercise his right to take the stock from you. Now each one has advantages there are advantages to each side of this trade. Don't think for a second that one is good and the other is bad. No there's advantages to being the call buyer. There are advantages to being the call seller when we get into strategy. We'll talk more specifically about when and where and why you'd want to do one over the other. But for now for our purposes just focus on again writing down these definitions that call buyers have the right call sellers have the obligation. Now we turn to a puts. It flips things around a little bit in that. Now we're talking about being able to put or sell the stock having the right to buy the stock is exactly opposite to having the right to sell the stock when you buy a put. You're not gaining the right to be able to buy the stock. You're gaining the right to be able to sell. You can put the stock to someone else. You can force sell it on someone else. In other words when you buy a put option you're entering into a law abiding contract that gives you the right not the obligation to sell the stock to someone else for the strike price amount on or before the expiration date. Meaning if the stock were to take to the downside fall dramatically you still get to sell it at the higher price point. Even though it's fallen in value. So buying a put gives you protective abilities. And again we'll talk about the advantages there. And then of course if there's a buyer then we could be on the other side of the trade and be a seller. What's the advantage there. Well the advantage is to selling options that you collect a premium. You collect money upfront like the insurance company. But here's the risk. I can be put the stock I can be forced I can be on the other side of the trade where I'm obligated to buy the stock for the right price amount honor before expiration. If the put buyer X's exercises their right to do it now there there's not one of these positions that scary we're going to show you throughout class that we can put on these trades and know exactly how much money we can lose to the penny. Exactly how much money we can lose as a worst case scenario. In fact a lot of traders like to spread trade as we call it. Now what spread trading is is basically saying that I'm going to pull up my drawing tools here saying OK I want to buy a call at this strike price and sell a call at this one. So for example I could buy the 40 strike calls that gives me the right to be able to buy the stock at the strike price that's $40 at expiration and then I'm going to sell a call against it maybe I'm going to sell the 45 calls that gives me an obligation to sell the stock at the strike price at expiration. So I've entered into contracts at two different strike prices. I have the right to buy the stock at 40 and if it's above 45 the obligation to then turn it over at 45. The difference between those two equals my profit potential which is five bucks. The difference between 40 and 45. I have limited real risk reward limited risk. I know exactly how much money I can lose in this trade to the penny. We'll go through that. So I realize I'm kind of jumping ahead but I just want to show you that you know anytime something's new. People think it's kind of scary. They think well you know this is a little bit scary going into these positions that I don't really understand fully where you're going to understand that we're going to show you how to calculate max risk and Max reward on any trade. We're going to show you how to calculate breakeven. We're going to show you how to position size. All of the critical elements that are necessary to understand before you move forward as a professional options trader so not to jump too far ahead. But I just want to show you that there are some really cool strategies where you can risk a hundred bucks to make $400 a profit and have a pretty good probability to do so. I'll show you the breakdown.