Understanding the difference between calls and puts can be easy in the beginning, but as you start selling calls and puts, it gets a little more complicated.
I want to take you through the four different situations in relation to calls and puts. Buying a call, selling a call, buying a put and selling a put.
Buying a Call
Calls have an expiration date and infinite amount of profit. So unlimited upside and limited downside.
Buying a Put
A put will give us an unlimited profit if the stock heads lower, but limited loss if the stock heads higher.
Selling a Call
You have to sell at a lower price but limited downside.
Selling a Put
Also sells at a lower price, but if the put goes higher – will have a very big upside but the opposite is also true, if it goes to the downside, potential to lose money is also a huge risk.
Anytime you’re selling a call or put – it’s best if there’s no movement, as you’ll get your investment back. However, if a call moves up, you lose money. If a put moves up, you make money.