Options Series Ep.1 - What are Calls and Puts? - YouTube

hey everyone thanks for watching another Money with Michael video today we're

gonna be talking about what are calls and puts I'll be going over definitions

as well as some examples stay tuned...

ok so let's get right into it first of all

a call and a put are two different kinds of options now an option is a contract

which gives the buyer of that option the right but not the obligation to buy or

sell an underlying asset or instrument at a specified strike price prior to or

on a specified date depending on the form of the option now I know that's

long basically we're going to be talking about stock options so the underlying

asset is going to be a specific stock and so if you're a buyer

of either of these options it's going to give you the right (not obligation) to buy or sell

that stock at a specified strike price and on or by a specific date now for

option contracts specifically relating to stocks they trade in quantities of a

hundred shares so if you see that a an option costs $1 you're actually going to

be paying $100 for that option because that $1 price is going to be per share

so just important to realize that if you buy one contract you have the right but

not the obligation to buy or sell a hundred shares of the underlying asset

at a specified strike price and date now every option has something called time

premium a lot of beginners with options they think that it would make sense to

just exercise the option when you're happy with how much you've made and that

is not going to be the case with very very rare circumstances that generally

involve dividends that could be but for 99% of the time you're just going to

want to sell that option on the open market you're going to make more money

doing that and I'll get into that a little bit later now

even though your option may not be exercised you can trade

it as the price of the option and underlying asset change just like stocks

so just like you can trade a stock anytime throughout the day and the price

changes the option reacts the same way and it's all relative to that underlying

asset which again is going to be the stock that you buy your option based on

so now that you understand what an option actually is let's talk about a

call now a call option gives the shouldn't buyer the right but not the

obligation to buy a stock at a specified price within a specific time period so

the seller of that option would then collect a premium and in return allows

the option buyer the above right which I just read now if you look at this chart

down here this is going to be where you buy the contract so if you buy a call

which again is gonna be a long call you kind of start out below your profit

because if the option expired right now you would lose the premium that you paid

for that contract now in order to make money the price of the of the stock

would have to increase by more than the premium that you paid so you can see

here that if your strike price let's say is $100 and then let's say this is a

hundred and ten right here and you paid ten dollars for the contract you can see

here that if it if it went above your strike price and went to 105 and then it

expired here you would actually lose five dollars and I'll get into a math

problem in a little bit that will sort of highlight that a little bit better

now let's talk about a put a put is very similar but it gives the owner the

right but not the obligation to sell a stock at a specified price within a

specified time frame so consequently the seller of the option again collects a

premium and in return allows the option buyer that right so let's talk about a

call option from the buyers perspective so let's assume SPY is trading at $300

and you buy a call for one dollar and twenty five cents with a strike price of

three hundred dollars the price shown is on a per share basis meaning the option

would cost $125.00 I talked about that earlier and

again that's going to be a hundred shares so time goes by now SPY is

trading at $305 which means that that call that

you bought is in the money the option is now exercised because it expires and you

buy a hundred shares of SPY for $300 and now we're going to

assume that you sell those shares immediately so you're gonna have your

three hundred dollars per share so one hundred shares

that's thirty thousand dollars you would then immediately sell those shares for a

profit because again SPY is now trading at three hundred and five dollars so you

would sell 100 shares for three hundred and five dollars which would give you

thirty thousand five hundred so you have the thirty thousand five hundred and you

have thirty thousand so that's five hundred dollars profit but you can't

forget about the price of the option so earlier we said that that call cost 125

per share so one hundred and twenty five dollars so you have to remember to take

out that that about one hundred and twenty five dollars that you paid for

the option so then you would end up with three hundred and seventy-five dollars

of profit so that three hundred and seventy five dollar profit is great your

max loss is gonna be a hundred and twenty five dollars whereas your maximum

profit that you could make from this option is only limited by how high SPY

will go so let's look at this from another angle so SPY is trading at

$299.99 instead of three hundred and five and the call is out of the money the

option will not be exercised and you will not buy a hundred shares of SPY

for $300 because the market price is lower than 300 the call option has

expired worthless so again you spent that 125 per share to buy the call so

your loss is going to be a hundred and twenty-five dollars which again is your

maximum loss in a scenario like this so let's assume you sold a call option SPY

was trading at $300 and you sell a call for 125 with a strike price of $300

again it's shown on a per share basis so you would receive

125 dollars for selling that option now SPY is trading at $299.99 so that means

that the call is going to expire out of the money the option is not exercised

nothing happens and you keep that credit of 125 dollars now from another

perspective if SPY is trading at 305 instead of the 299 from the previous

example it is in the money and so you're gonna be responsible for making up the

difference so because this call option is expiring in-the-money you're gonna

have to buy these shares at 305 dollars which is going to be the market price

305 times 100 shares equals 30 thousand five hundred dollars you now must

immediately sell those shares for a loss you're gonna have to sell those shares

for 300 dollars which was the strike price of the option you sold times the

hundred shares so you're gonna get thirty thousand dollars which again is

going to be a $500 loss now you did sell the option so you did get a hundred and

twenty-five dollars for giving the buyer that right and so your actual loss is

going to be that five hundred plus the 125 you got and that's going to be a

three hundred and seventy five dollar loss which again is equal to the money

that we looked at in the previous example where your three hundred

seventy-five dollars was profit so again just remember if you're making money

someone else is losing money and vice versa

it's all it all equals out regardless of which side you're on so let's do the

same thing but with a put option so SP y is trading at 300 dollars you buy a put

for two dollars with a strike price of 300 puts in general are going to be a

slight bit higher than calls I'm not going to get into why but if you're

interested in seeing a video about that I could make one just leave a comment

below the price shown is on a per share basis so that option is going to cost

$200 SP y is now trading at $295 and the put is in the money the option is now

gonna be exercised and you would be you would sell 100 shares of SP Y for $300

even though the market price right now is 295 you would then immediately sell

your shares and buy them back for profit so 300

times 100 shares it's gonna be $30,000 which is going to be how much you

receive for selling those shares now if you didn't have the shares to begin with

you would then have negative 100 shares in your account and so you'd be required

to immediately buy them back so you spent $2 to buy the put and then you

would have to buy those shares back at 29,500 so again that's gonna be a profit

of $500 you spent $200 to purchase the put and so you'd be left with 300

dollars of profit so let's say it's trading at $300 in one penny instead of

295 the put is out of the money the option is not exercised it expires

worthless you paid $2 per share so $2 times 100 you're gonna have a $200 loss

in this scenario so now let's assume you sold a put you sell a put for $2 with a

strike price of 300 the price shown is on a per share basis so you receive $200

SP Y is now trading at 3,800 and one penny and the put is out of the money

the option is not exercised and you are not required to buy 100 shares of SP Y

for 300 dollars you receive two dollars for selling the put so your profit is

just going to be the $2 times on your chairs equals 200 dollars profit so

let's imagine s py is now trading and $295 instead of that $300 and the put is

now in the money the option is going to be exercised and you're forced to buy a

hundred shares of SP y for the strike price which was $300 now $300 times 100

shares is going to be $30,000 so you now must immediately buy shares for that

$300 price each now we'll assume you immediately sell them back to the market

for $295 each which again is the market price so you're gonna have what you paid

which is the 300 times 100 shares equals 30,000 and then you're going to receive

29500 which is going to be 295 times a hundred shares so what you received -

what you paid is going to give you a negative $500 balance

but you receive $2 to sell that put so your actual loss is only going to be

$300 so up next we're going to be talking about covered calls naked calls

and cash secured puts I didn't get too much into the practical side of option

trading this was mainly just an introduction trying to cover the

theoretical side and trying to kind of help beginners understand exactly what's

going on with an option trade as it expires and how people make money with

that in reality you normally don't hold an option until expiration in reality

you probably aren't going to be allowed to sell a call without the shares as

collateral if you can you you have to have a very large account if you use

Robin Hood which I know many people do now they don't let you unless you have

that hundred shares as collateral again I'll get into all of this in future

videos this was just supposed to be an introduction theoretical to kind of sort

of lay the groundwork and the future videos will help put everything together

and understand exactly how it all works and how you can take advantage of it all

so I'll see you next time thanks for watching don't forget to comment like

subscribe all of it thanks for watching and stay tuned for the next episode of

money with Michael I have lots of option videos coming