Call Vs. Put Options - Should I Buy Or Sell Them? - YouTube

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In this lesson, I want to talk to you about calls versus puts and what's the difference.

So, the chart that I'm showing right here is SPX, the S&P 500 index, and I want

to look at both calls and puts from the long and short side to give you an idea of what

the difference is.

So if we go to the Analyze tab, the first thing I have checked on down below is a long

call.

And I did these options right at about the 30 Delta.

So what you'll notice on this long call is that I've set this price slice right at the

break-even point at expiration, which is annotated by this dotted vertical line.

And so the first thing you'll notice is that you've got about a 70% probability of losing

money on this trade and about a 30% probability of making money at expiration.

Okay?

So not very good probabilities.

Right?

And the reason is, is because when you buy options, that time decay is working against

you.

So, if we go down to our date down here.

The date of this recording is 03/06/18.

I'm showing these options at an expiration cycle of about 45 days out.

So on April 20th is when they would expire.

Well, what if we took this position through a theoretical time warp and just clicked on

the days going up and up and up?

Well, look what happens to that pink line.

That's our profit line on the day that we're displaying below.

So as you can see, as we get closer and closer to expiration, that keeps going down, down,

down, down, and down.

And, you can see if price stayed relatively stable, if it stayed in the same spot, by

the time you got to expiration on 04/20, you would have lost your entire investment.

In this case, one contract controls 100 shares.

We're looking at an index here.

So the bottom line is one contract is worth $2,170, and you would have lost that entire

amount had you kept it all the way until expiration and price just stayed level.

So, what you'll see is price would have had to have moved all the way up past 28, 16,

75 basically.

That's when you just start making money, and if you watch this box as I hover over, you

can see how much you would have made had it crossed that line and continued higher.

So the probabilities of buying, in this case, a 30 Delta Call are very low when it comes

to profiting.

Okay?

So, that's a long call.

Let's take a look at a long put.

So, it works very similar except the opposite.

If you buy a put, you want the price of the symbol to go down.

Okay?

So, I moved my price slice over here to the break even point on the put now, and what

you'll see is it's relatively similar, right?

We've got a just over 71% chance that this trade is going to lose money, a little over

28% chance that it'll actually make money at expiration.

So same thing, if we move through time, you can see that profit line just continues to

go down, down, down, and if we don't cross over that break-even point, you know, at some

point pretty quickly, we have a pretty good chance of losing and a decent chance of losing

the whole amount.

In this case the puts are actually worth a little bit more.

So you would have had to pay $3,350, and if it continues all the way to expiration without

you getting across that break even point, you would have lost the entire amount, $3,350.

Okay?

So, we are typically not buyers of out of the money puts or calls.

Now there are very specific times that it can be a profitable trade around earnings

and different things which I'm not going to get into.

It's beyond the scope of this class.

We do a whole course on earnings trades and how to profit from those, and buying directional

options is one of those strategies.

But, as it relates to just general trading and on ETFs and in general markets, typically

buying out of the money options is not a very good idea.

So, the next point is, well, what if we don't buy those?

What if we take the opposite position, and we actually sell those same calls?

So, we're selling around the 30 delta call.

So we're selling the out of the money options.

First one we'll look at is selling the out of the money call, moving my price slides

back to break even.

Now, what you'll notice is that we've got over a 70% chance of making money on this

trade and a little under 30% chance of losing.

So when you sell options, the key to remember is that now you have that time decay working

in your favor.

So, if we take a look, and we use the theoretical calendar down here, and we move through time,

now look what happens to that profit line.

It continues to move up, up, up, up, and if price stays in our range, meaning if it doesn't

have a huge move up and break out of that upside, which again I said it had over 70%

chance of staying below this line between now and expiration.

If it continues to stay there, you will collect and keep all of the credit that you sold it

for.

So, if you go all the way to expiration on 04/20, you can see the total amount of credit

you initially collected on this position was $2,100, and assuming it stays in this range,

you will keep that entire $2,100.

So, as long as it stays below your short strike, in this case it's the 2795.

So as long as it stays below 2795, you'll keep the whole amount.

Between 2795 and the break even point of about 2816, you'll still keep a portion of that.

As you can see as I scroll my mouse along, you can see what that amount would be, and

anything below 2795 down to no matter what.

So even if it crashed down to the downside, you're still going to keep that at 2100.

So the key is here, when you're selling options, you're putting the probabilities on your side.

Time decay is working in your favor.

The downside is that your upside profit is capped.

So we're capped at a total profit of $2,100.

But that's what we want to do.

We want to put the probabilities on our side, cap the amount of profit and put that time

decay in our favor.

So in most of our strategies that we teach at Navigation Trading, we are net sellers

of options.

And this is the only way to have that consistent, successful trading profits over time.

All right, so let's jump over to the put.

If we're selling the put, we can move our break-even slice over to the break-even point

here.

And same thing.

So now on a put, remember puts are typically worth more, and so what you'll see is the

total credit collected here is 3270.

So, assuming price stays above our short put strike, which is the 2655, then we will collect

that entire $3,270 if we held it all the way to expiration.

So again, as we go through time, that profit line continues to move up, and we continue

to make that money until we go all the way to expiration.

If price is above that short strike, we keep the entire amount, in this case, $3,270.

So, the key thing to remember is again, when you sell options, time decay is working in

your favor.

You can set it up so that you have a very high probability of success, and when you're

buying options, you need a very sharp move in your direction in a very short period of

time.

So, not only do you have to be right on direction, but you have to be right on the timing of

that trade to make a profit.

And, one last point about puts and calls, just to recap.

When you buy a call, you want the stock to go up.

When you buy a put, you want the stock to go down.

When you sell a call, you want the price to stay down, to steady.

And when you sell a put, you want price to stay steady to higher.

So, that's the basis of puts and calls.

I hope this was helpful.

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for consistent income, just go to our site NavigationTrading.com.

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