BECOME A MORE PROFITABLE TRADER WITH THE RIGHT EDUCATION

Get on our mailing list so you know when we release free training, live classes, new courses, and even discounts and promotions.

Options Trading: Why Sell a PUT When You Can BUY a Call

A lot of people that get into trading options understand that there’s probably four parts to the trade.

4 Parts of a Trade

  1. You could buy a put
  2. You could buy a call
  3. You could sell a put
  4. You can sell a call

Each one of these gives you a different way to make money or profit depending on the contract position that you have on the trade.

So you could be a buyer or a seller.

Why would you buy a call rather than selling a put? Why would you sell a put rather than buy a call? What’s the advantage and disadvantage to these things?

I hear people talk about that it’s the same exact thing and it’s not. It’s actually very different. There’s very different concepts when it comes to the liabilities part because you’re dealing with legal contracts. But that’s what we’re going to cover here in a little more detail.

When we look at buying a call this is the profit, the zero line and the price of the stock

So when we look at buying a call the structure and the risk profile picture of buying a call looks something like this

What does that mean? That means that as we look to our line, this is the line at expiration.

Here’s the line today.

This is called the T+0 line in the industry. When we look at the T+0 line here, if you get this at around 170, where it’s the break even. So there it is at zero with time that line gets closer and closer to expiration.

Which means you have a theta decay that’s negative. When the green line gets closer to the black line, you’re losing money when you buy a call.

Now what’s the cool thing about this? What’s great about it? Well, you have unlimited profit potential. Stock moves, you have a very fast delta. In other words, you can make a lot of money if the stock moves in your favor .

What’s the downside?

We lose money:

  1. If the stock stands still.
  2. If the stock goes down or up a little.

This is because of the time value problem that we have.

Options lose money with time.

The only time you make money is the stock has to go up a lot. It has to go up a lot enough to cover the difference of the premium you lose. Because if it moves right away you’re good.

If it moves a little bit later, let’s say this was 30 days, and it moves in two days, you’re fine. If it moves 20 days from now, well you might need a way bigger move to make it work and happen.

That’s one of the issues but it’s still an upward move. So let’s check out selling a put.

Some people wonder well why in the world would you sell a put. We got a call and you can make unlimited amount of money. The way I look at it is I don’t believe in stocks going up to the moon.

That’s just my world view and perspective. I just don’t think it’s going to happen. I mean some stocks do but it really doesn’t most of the time.

So here’s kind of what happens when we sell a put.

You still make money from the stock heading higher.

Let’s say here’s our price.

What’s bad about this? What is good or great about this?

What’s great is stock can stand still and you still make money. Why? Because you have a positive delta.

Think of your insurance company.

Who makes more money in the insurance industry, is it you the buyer? Or is it the seller when they sell you car insurance?

Think of it like this, when you buy car insurance, is money coming out of your wallet and going into theirs? Or is money coming out of their wallet and are they sending you checks?

No. It’s not going into your bank account. You’re taking money out of your wallet and you’re handing it to the insurance company.

The same thing here, most of the time the big businesses make money by selling.

Anybody makes money by selling a product. So as we look into this, you typically want to be a net seller.

What’s the downside?

If nobody buys your stuff or products, you got problems.

Here we’re in the insurance business, if we got a crash, stock goes down. We could lose quite a bit of money because you have unlimited risk up until zero.

But the good news is,

  • stock stands still, you make money.
  • stock goes up, you make money.
  • stock goes down a little, you still make money.

The problem is, if it goes down a lot, then you can lose some money.

Here when we look at this you do have the positive theta.

Why would you do this? Because you’ve got a higher probability and chance of success.

Think of it, would you rather have an 80% chance of success and make 200 dollars or a 10% chance of success and make 4000 dollars? Some of you will say the 10%. I’ll take the 10 because I’m gonna make a lot more

The thing with this business is you want consistency. This is where people fail because you’re making money time and time again. Maybe you’re making less but you’re consistent. Whereas a lot of people choose this 10% probability of success. They might make a lot more but every time they buy a call, they’re getting a lower chance of success.

You’re losing out and you’re constantly paying this premium. You’re losing 1200 four times and eventually you might make your 4 000 but you’re constantly losing money to make that.

How does this look in a trading panel and platform?

Let’s go ahead on Disney here.

The current stock price is about 110. We will go in say 53 days.

I’ll buy the single at the 120 and we’ll just say 10 contracts just for conversation’s sake. I’ve got my calls on Disney.

So stock goes up, I’m making money. Problem is, I got a theta of negative 54.

What in the world does that mean? That basically means I lose 55 dollars in every single day.

So watch this white line, if it just stands still, I lose 3500 dollars. Those people will think buying a call is better. You’re losing 3500 dollars if it doesn’t work.

Now, is there situations that you would do this? Yeah, absolutely. But for beginner, be careful.

Let’s look what happens with the T+0.

As I move this date forward, every day you’re losing money.

Your profit and loss continues to decay. White line gets closer to the green line.

Look just to break even.

You’ve got to get that stock to go up like 3 to 4 bucks. If I keep going and it moves later in time,

I got to get it go up like 6 to 7 bucks. If it gets close to expiration, well I’m almost down 3,000 dollars, I got to get that stock to go up like 9 dollars if it just stood still.

So that’s the issue just to break even. It’s got to move in that direction.

You could make a fortune, right? There’s your four grand but it’s it’s really got to move

Let’s take a look at selling a put. Look at the difference here.

I’ve got a positive 65 theta versus the other one which is negative 55 theta.

Now what does that mean?

That means:

  • Stock stands still, I make money.
  • Stock goes up, I make money.
  • Stock pulls back even a little bit, I still make money.

The only problem is, I have this downside movement. So here watch this date closely.

Stand still, you’re already up a thousand bucks.

Then you can get out of it early. You don’t have to stay in it the whole time.

Now again this depends on your risk management. But you could say 4500 thousand dollars every 40 to 60 days. This is considered a naked position that if it does go against you, you could have some astronomical losses. This is what some people will argue, if stock goes to zero you could have almost a 100,000 dollars in losses.

This is where you get into the risk management business of this. Really learning and understanding what in the world you’re doing. So if you’re just starting out I wouldn’t recommend doing this from scratch, all on your own.

How do you protect this trade?

Well here’s what I would do, we would buy some protection. Analyze the trade and now look what I did

I flattened and cut off my risk there Now does that kill and reduce my theta? Yeah it does because I have to buy this protection. The one that I buy loses 43 dollars.

The one that I sell makes me 65 dollars a day.

That protection cost me 43 dollars a day. I’m losing 43 dollars a day but the one I’m selling, I’m making 65 dollars a day. Net total — I’m making 22 dollars a day.

That’s still better in my opinion.

I don’t have a negative position.

On a day-to-day basis, I still have a positive position. Your upside is limited that’s the issue. Selling is how you make money even in a stock.

If you invest in a stock, you don’t make money by buying it.

You make money by selling it. When you sell it, that’s when you collect your premium and profit So you buy it first and then you sell it.

In our case we’re selling it and later on we would buy back.

Whereas when you’re buying a call, this is why a lot of people lose money in options.

Most of the things you bought, losses its value. It’s got to really move quite a bit for you to pan out and and make money on these. If you’ve been trading these and you’ve been losing out money then it’s because of this time decay problem that you have.

Join other traders who get a trading edge each week with our newsletter

Get our free stock market tip, video reviews, and exclusive announcements.

No spam, no gimmicks, no junk - Unsubscribe anytime

I'M SASHA.

Thanks for joining me on my trading website where I share with you about trading stocks and options.

DOWNLOAD 100 Stock trading tips Book

Ready to check out some of our best-selling books that can help you become a better and more profitable trader? Check them out by clicking the link below… 

Video recaps on the recent market trends

Summary of recent market activity looking at swing chart opportunities, potential setups, and technicals.

Stock market picture charts annotated

Quickly review screen captured stock charts with annotations. Includes support, resistance, ABCD patterns, and possible breakouts.

want some helpful advice?

Pay-Per-Minute Coaching

I am scheduling helpful coaching sessions for people who are interested in real-world advice & guidance where you only pay per session. No long term commitment required.

This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Ready to Get Our Educational Videos Each Week?

If you are serious to learn how to trade stocks more profitably, make more money, and trade with confidence...

 

Then sign up to get our free educational videos!

AWESOME!

In order for you to get your goodies and freebies you have to confirm your email address.

 

To confirm your email address, just go to your email inbox (or check your spam) and click the link that's inside the email that states you want to receive messages from us.

 

That's its!

Just one more thing... 

THINKORSWIM

OPTIONS PLATFORM

Learn to see how I personally use the ThinkorSwim platform to trading options and what are some of the tips and tricks to using this platform efficiently!

VIDEO TRAINING

OPTIONABLE STOCKS

Enter your email address below and get access to our downloadable report on the 50+ great stocks for Options Traders!

50+

DIVIDEND PAYING ETF's

Want to know the top 7 ETFs that pays the biggest dividends in 2020? Download this list now and start earning your dollars!

7

15 HOT STOCKS

WARREN BUFFETT LOVES

Trade and earn like Warren Buffet! Here are the stocks he invests in!

Ready to Get Our Educational Videos Each Week?

If you are serious to learn how to trade stocks more profitably, make more money, and trade with confidence...

 

Then sign up to get our free educational videos!

AWESOME!

Just one more thing... 

Ready to Learn Profitable Strategies to Trading Stocks?

If you are serious to learn how to trade stocks more profitably, make more money, and trade with confidence...

 

Then sign up to get our free educational videos!

AWESOME!

In order for you to get your goodies and freebies you have to confirm your email address.

 

To confirm your email address, just go to your email inbox (or check your spam) and click the link that's inside the email that states you want to receive messages from us.

 

That's its!

Just one more thing... 

Portfolio Allocation - Percentage of Each Stock

If you are serious to learn how to trade stocks more profitably, make more money, and trade with confidence...

 

Then sign up to get our free educational videos!

Quickly Calculate Mid-Day Volume

This Excel sheet will allow you to quickly find out if your stock's volume is trading above or below the daily average during the middle of the day.

Top 15 Dividend Stocks for Retirement in 2020

Download our list of the best stocks for retirement. Simply enter your email address below to get the PDF!

Buying or Building a Trading Computer for 2020

Learn how to buy the right computer for your trading needs or choose the perfect parts if you are custom building a trading computer!

 

 

VIDEO COURSE

Top 25 Tech Gear for Traders

If you are serious to learn how to trade stocks more profitably, make more money, and trade with confidence...

 

Then sign up to get our free educational videos!

Awesome Phone Apps for Traders

Discover these awesome phone apps most traders use on trading! Earn money anytime, anywhere with these apps!

Do you want to download a list of over 125+ popular stocks that you should keep your eye on?

 

Enter your email below and we will email you the list of 125+ hot stocks!

OPTION TRADING GEEKS

Download my easy worksheet so that you can quickly see and know what the greeks will do to your position! 

 

Enter your email address below to download it!

OPTION STRATEGIES

Enter your email address below and get access to our video strategy session on 25+ option strategies and how to set them up!

25

How Long Will it Take to Reach $1,000,000 in The Stock Market?

Want to see for yourself how long it will take you to reach $1,000,000 based on your personal return?

 

Then download my Excel cheatsheet for FREE to see and play with the numbers!

OPTIONS GREEKS

Ready to get a deep understanding of the option Greeks?

 

Get access to my video training by entering your email address below!

VIDEO TRAINING SESSION