Buy a Call Option v Sell a Put Option

[zdreg]

Thanks. I'd be grateful for a brief explanation (example). I can understand how I might believe a stock is going to rise to x in y days but how do I match that / compare that with the implied volatility?

CALL OPTION
I buy a CALL Option believing the stock will rise above my Strike price. I profit when I close that Option at a price above my Strike Price.

SHORTING a PUT OPTION
I short (sell) a Put option believing the stock will rise above my Strike price. I profit when I close that Option at a price above my Strike Price.

Both Option contracts profit when the Share Price rises above the Strike Price. If I believe that the Share price in Widget PLC is about to rise why would I choose one Option contract over the other?

Note1. I don’t hold any stock in Widget PLC.
Note2. I understand that the Premium received factors into the ‘profit’ equation with the Short Put Option

These kind of questions show intellectual laziness. Get a book or a video or google for an answer.

 

[MarkBrown]

OPTIONS AS DIRECT INDICATORS

 

[zdreg]

This is hard to respond with brief responses, but I'll try. Feel free to call me later. If you buy a call option, you profit when the stock goes up and you exit the position at a higher option price. IF you wait to exit until expiration day, the stock needs to exceed the strike price by the premium paid and you need to be able to find a buyer at that price or higher. You do not have to wait until that day and can exit at any time. If the stock goes up slowly or if premiums contract, you can lose money if the stock does not go up enough from decay or IVOl contraction. If you sell a put you make money if the stock does not go down or if IVOl does not expand. You do not need the stock to go up. At expiration, if the Put is in the money, you will need to exit in order to avoid being put the stock.

Tell him the reality. If the stock blows up you will lose your shirt on the put you sold. If you buy a call you will lose is what you pay for the call. In addition there are margin regulations when a put is sold in an opening transaction.

 

[Robert Morse]

That was not his question and not my place to decide his risk levels for him.

Tell him the reality. If the stock blows up you will lose your shirt on the put you sold. If you buy a call you will lose is what you pay for the call. In addition there are margin regulations when a put is sold in an opening transaction.

 

[zdreg]

OPTIONS AS DIRECT INDICATORS

This should have been the only post in response the OP(original poster).

 

[zdreg]

That was not his question and not my place to decide his risk levels for him.

It is not for you to decide his risk level but since you decided to answer the question a caveat should have been included.

 

[djcorner]

CALL OPTION
I buy a CALL Option believing the stock will rise above my Strike price. I profit when I close that Option at a price above my Strike Price.

SHORTING a PUT OPTION
I short (sell) a Put option believing the stock will rise above my Strike price. I profit when I close that Option at a price above my Strike Price.

Both Option contracts profit when the Share Price rises above the Strike Price. If I believe that the Share price in Widget PLC is about to rise why would I choose one Option contract over the other?

Note1. I don’t hold any stock in Widget PLC.
Note2. I understand that the Premium received factors into the ‘profit’ equation with the Short Put Option

Selling a put will pay less but has much more risk because you could have a falling knife thrown at you. However, a lot of people make money selling puts. Selling a put is not really a bullish stance; it’s more of a not-bearish stance or more accurately a mildly bullish one. You get to keep the premium you earned if the stock stays above the strike. You don’t own any of the price movement above that so your max profit is fixed at the premium. If the stock rises a lot you will benefit by your short puts becoming worthless. If the stock continues to rise and rise then that doesn’t help you.

When buying a call you are risking your entire premium and no more. This is a bullish position and you will continue to profit no matter how high the stock goes. You “own” all of the price movement above the (strike plus premium) BE point.

If you do both (buy the call, sell the put at the sa,e strike and expiration) then you have a long position in the underlying at the strike.

 

[expiated]

That was not his question and not my place to decide his risk levels for him.

Personally, I appreciate members who are willing to respond to questions as asked. I also feel like this thread is giving me a lot of the kind of information I've been seeking in terms of options—providing me with a better idea as to what any publication I eventually buy needs to explain clearly. As for risk levels, anyone who feels they see a gap or shortcoming in any of these responses is certainly free to fill them in. The bottom line is, I appreciate the answers you and others have offered to try to help out the original poster.

 

[newwurldmn]

These kind of questions show intellectual laziness. Get a book or a video or google for an answer.

you are the laziest poster on this site. Your greatest contribution has been a short lived
Thread of attractive women.

you are capable of more than just snide remarks. It’s a shame you don’t.

 

[lindq]

Thanks for the helpful post - I will take some time to study it.

If you intend to trade options as directional plays on the underlying - betting on a rally or a decline - then you FIRST need to have confidence in your ability to trade the underlying directly.

If you can't do that first, then options, for many reasons, will just accelerate your losses.