Beginner Q: Buying Call = Selling Put? Misc Q's...

Discussion in 'Options' started by xBoba, Apr 27, 2013.

  1. xBoba


    Hi guys, I'm currently in the process of understanding Options, and I have 3 questions:

    1.) I'd like to know if the analogy of buying a call is the same as selling put, and if buying a put is the same as selling a call.

    If I buy a call, I expect the price of the underlying to increase.
    If I sell a put, I expect the price of the underlying to increase.

    If I buy a put, I expect the price of the underlying to decrease.
    If I sell a call, I expect the price of the underlying to decrease.


    2.) When I want to buy a put option, would the seller (underwriter) be the person selling the call? Please reference question 1.


    3.) Can I sell a call without owning the option? Or would I have to own the call first in order to sell it?


    4.) When I buy a put, it is granting me the right to sell the underlying stock. Does this mean I have to own the shares first before being able to buy a put?


    I just want to re-confirm some of these questions as I am pretty confident that what I have in mind is correct. And yes, I am currently reading a Beginner to Options book.

  2. you take on obligations as a seller/writer of options.. you buy rights when you buy options.. there is an absolute definition to your risk when purchasing premium.. selling options does not have well defined risk..

    if you sell a put.. your collecting a credit with the obligation of being put the stock if it trades below the strike at expiration.. theres more to that with americans options as oppose to european.. but what i said is the most important part... you sell a put you can end up long the stock.. which might be what you want... you sell a call you might end up short the stock.. you might want that..

    i suggest books to read..

    Euan Sinclair's Volatility trading
    and his other book "option trading" chapter 2... read it..
  3. I suggest starting with McMillan's Options as a Strategic Investment. He walks in great detail through everything from "what is an option" to different option "spreads" (combinations of multiple options) to trading strategies. It will give you a solid foundation to build on. From there, I think Natenberg's Options Volatility and Pricing would be a nice follow-on. I have not read Sinclair's Options Trading, but his book Volatility Trading is excellent (but also requires a foundation first).
  4. Sinclairs "option trading" is a precurser to the volatility trading.. and its a better start for sure.. I read Mcmilllian's stuff to.. thats a great start to..
  5. There are three things you can do with options:

    - buy
    - sell
    - write

    "Selling" and "writing" are sometimes used interchangably, but "writing" means creating a new option that someone else buys from you, and "selling" can also mean that, but it can also refer to selling an option that you previously bought.

    You can write a call without owning anything.

    You can sell a call that you have previously purchased.

    When you buy a put, it gives you the right to sell the underlying at the strike price. So let's use SPY as an example. Right now SPY is trading at $158.24, but you think it's gonna go down, so you buy a May $155 put for $0.57 (which costs you $57 plus commission).

    When that option expires, if SPY is above $155 then the option expires worthless and you don't get any profit.

    If SPY is below $155 then you can either exercise the option and use your right to sell the shares and end up with a short position, or you can just let it expire in the profit. For example, if SPY closes at $150 on options expiration day your put will probably be worth a bit over $5.00 (I made that up but you get the idea) which will give it a sale price of $500.

    The value of the option at expiration will be worth approximately the value of buying the shares at market and selling them for the strike price. Since each option is worth 100 shares, if SPY is at 150 and your put expires with a strike price of 155, it will be worth roughly $500, since selling the shares at the strike price and then immediately buying them back at market would give you a net profit of $5 per share * 100 shares.
  6. xBoba


    Awesome explanation.

    When you say that "you can sell a call that you have previously purchased," does this mean that if I were to buy a call, hold, then sell , I would be a "call seller?"

    What I want to understand is what constitutions a call seller. I'll give 2 scenarios; please tell me if they are both considered "call sellers."

    Scenario 1: I sell a May 50 call for $3 (I get $300 profit). This stock falls to $40, and the option value falls to $1. I can buy it back for $1, which will cost me $100, and my profit would be $200 (300-100). And I just let the option expire worthless because exercising it will give me a loss since I shorted at $50 and buying at $40. (This part is redundant but I just wanted confirmation that my thought process is correct.)

    Scenario 2:I buy a May 50 call for $3 (I pay $300 premium). The stock rises to $60, and the option value rises to $5. Because of the increase in the option value, I want to sell it to someone else, who is expecting the market value of that stock to go down. In this scenario, do I also become a "call seller?"


    PS: I am currently reading Getting Started in Options by Michael C. Thomsett (the 2013 edition). It's a GREAT book for COMPLETE beginners... Very easy to understand examples :)
  7. xBoba


    845 ex.

    Another question:

    Question: If I sell the put, would my profit be a.) strike price - current market value of stock or 2.) selling the put option @ $2? This confused me...
  8. If you buy an option for $1, and later sell it for $2, then your profit is $2 minus $1 = $1. In the the example you gave though, the market value of the put would not be $2 but rather would be at least $5 (distance between the strike (50) and the stock price (45) for the in-the-money put). The reason for this is that you could buy the stock in the market at $45, then immediately exercise your $50 put which allows you to sell the stock at $50, and make the $5 difference (minus what you paid for the option, and commissions and fees). Additionally, there should generally be some time value left on the put as well with two days to expiry, so its actual market price would be a little bit more than $5. All of these dollar figures would be multiplied by 100 for most options as each is for 100 shares of the underlying (or 10 for minis). The above also assumes American-style options which can be exercised at any time.
  9. xBoba


    Thanks for the reply. My scenario was a hypothetical one not taking anything else such as TV into account so as to not complicate the problem.

    So to sum it up, there's 2 ways to profit in this scenario:

    1.) Buy put low, sell it high

    2.) Buy put low, market value of underlying falls, buy 100 shares immediately and exercise the option, and sell the shares for $5 per share profit

    Is this correct?
  10. Yes. As a retail investor, you will probably generally do #1 to save on commissions and fees (this avoids the stock commission and potentially an exercise fee depending on your broker), as well as capital required. You will also generally receive more than the intrinsic value of the option by selling it before expiration, as there is still some time value remaining.
    #10     Apr 30, 2013