Quote from 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.
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2.) When I want to buy a put option, would the seller (underwriter) be the person selling the call? Please reference question 1.
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3.) Can I sell a call without owning the option? Or would I have to own the call first in order to sell it?
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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?
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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.
Thanks!
Quote from 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?"
Thanks!
Quote from 1a2b3cppp:
The phrase "option sellers" usually refers to people who write options, not people who sell an option they previously purchased.
If I buy a call option and then decide I don't want it later so I sell it, I wouldn't say I'm an "option seller." I mean technically I did just sell an option, but I don't think that's what it usually means.
If you're doing like covered calls or something it's probably less confusing to just say "I'm going to write an option."