lystn

Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. In today's daily call, we are going to talk about the differences between buying and selling calls and puts with stock options. There’s basically four different ways as the major building blocks or fundamental mechanics of how you can trade options and the four different ways are – You can buy a call, you can buy a put or you can sell a call and you can sell a put. And so, today, I want to go through each one of these and break them down just a little bit more, so that you understand what each one entails and what the obligations and the risks are associated with each one of these. Now again, these are the building blocks. This is the framework of how you basically can create any option strategy payoff diagram you want by using these four core fundamental different option types. The first one is to buy a call. When you are buying a call option, you’re basically buying the right to go long 100 shares of stock at a specific strike price at a specific time in the future or before an expiration date. This is the one that most people learn to begin with. They learn about long call options or buying call options and the association here is that you pay a little bit of money upfront, but you have all of this potential upside risk. Now, we’ve talked that nausea about all the benefits and drawbacks to doing this, so you can check out other videos and trainings on this. But again, with a buying of a call option, you’re buying the right to go long 100 shares of stock basically in the future. Now, when you buy a put option on the other hand and you’re still option buying at this point, you’re buying the right to sell 100 shares of stock at some predetermined price at some predetermined point in the future or expiration date. As opposed to a call option where you are generally bullish on the stock because you want to buy shares, with a put option, you’re generally bearish on the stock because you want to sell shares at a higher strike price, assuming that you could buy them back in lower at a lower strike price in the future. Buying a put option means that you’re very, very bearish on the stock, you’re looking to sell stock and then buy it back in a much lower price in the future. Now, let’s switch things over because now, at this point, we’ve done only option buying which again, is how most people get started in the options market. They understand the dynamics of buying a call and buying a put. Now, where it really becomes confusing in most cases is when you actually turn the card over and we start talking about option selling. The first one is option selling where you’re selling a call option. Now, you're taking the other side of the option buyer contract in this case. When you sell a call option, you are basically taking the obligation to sell 100 shares of stock at a predetermined strike price at a predetermined point in the future. Now, it doesn’t mean that you have to go through the assignment process. You can buy and sell these contracts and close them out before expiration. But with an option sell order where you’re selling a call, you are taking in a premium from the buyer and you're hoping that the stock does not go above your strike price. Although you’re selling a call and you might think to yourself, a call option is associated just with a bullish strategy, but when you're selling a call option, it’s actually more of a bearish strategy. You want the stock to stay where it is, it can still rally a little bit, but as long as it stays below your strike price, you keep that entire premium from the option buyer. On the same side or on the other side, you have the sale of a put option. When you sell a put option, you also have the obligation then as opposed to buying of a put option to buy stock at a specific price in the future at a specific expiration date. Again, remember, a long put option buyer wants to sell stock at the strike price. That means if you are a put option seller, you’re going to be required if you go through the assignment and expiration process to buy that stock at that strike price. When you are selling a put option, you actually are entering into a bullish position on the actual stock. You're collecting a premium from the put option buyer and as long as the stock stays above your strike price, you keep that entire premium. You don't want the stock to actually go down. This is actually a very popular strategy, a very effective strategy for generating income and also, one that people use if they want to get into a stock. Sometimes they will sell a put option, collect some premium with the intentions that they want to get put the stock. That’s the term, is getting put the stock because the stock goes down in value and that's basically a way to buy stock cheaper if it does go down in value, is to sell a put option and collect money along the way. These are again, the four basic building blocks of how you can use calls and put and buys and sells to basically build out any strategy you want and from here, it’s just a matter of putting these different contract types together into different payoff diagrams like credit spreads and iron condors, straddles, strangles, iron butterflies, etcetera. As always, hopefully this helps out. If you have any questions or comments, let me know. Until next time, happy trading!