That's it. My elderly dad's friend apparently is crushing it. Before I take a deep dive, what are the basics to know? What are the risks of losing my shirt selling?
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Explain selling calls and puts like I'm 5
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Last: 1 mo ago by LMCane
A five year old should most definitely not be trading options let alone writing them.
Google it when you are older to at least learn the basics.
Google it when you are older to at least learn the basics.
ChatGPT's response to the prompt:
Imagine you have a toy that everyone wants to play with, but you're not sure if you want to share it yet. So, let's talk about two games we can play with your friends about this toy, using something called "calls" and "puts."
Calls - "I Want to Buy Your Toy Later!"
This is like making a promise with a friend that you might sell them your toy in the future at a price you agree on today. Let's say you tell your friend, "You can buy my toy from me next week for $10, even if other kids want to pay more for it later." Your friend gives you $1 for making this promise. If next week comes and everyone else wants to pay $15 for your toy, your friend can still buy it for $10 because of your promise. If no one wants it, your friend can decide not to buy it, but you still keep the $1 for making the promise.
Puts - "I Want to Sell You My Toy Later!"
Now, let's say you're worried no one will want your toy in the future. You make a different promise with another friend. You say, "You have to buy my toy for $10 next week if I want to sell it, no matter if others only want to pay $5." Your friend gives you $1 for agreeing to this. If next week comes and everyone only wants to pay $5 for your toy, you can still sell it to your friend for $10 because they promised. But, if everyone wants to pay $15 for it, you might decide to sell it to someone else instead, and your friend doesn't have to buy it. You still keep the $1 for the promise.
So, "calls" are like making a deal to possibly sell your toy later for a set price, and "puts" are like making a deal to possibly make someone buy your toy later for a set price. And no matter what, you get a little bit of money just for making these promises!
Imagine you have a toy that everyone wants to play with, but you're not sure if you want to share it yet. So, let's talk about two games we can play with your friends about this toy, using something called "calls" and "puts."
Calls - "I Want to Buy Your Toy Later!"
This is like making a promise with a friend that you might sell them your toy in the future at a price you agree on today. Let's say you tell your friend, "You can buy my toy from me next week for $10, even if other kids want to pay more for it later." Your friend gives you $1 for making this promise. If next week comes and everyone else wants to pay $15 for your toy, your friend can still buy it for $10 because of your promise. If no one wants it, your friend can decide not to buy it, but you still keep the $1 for making the promise.
Puts - "I Want to Sell You My Toy Later!"
Now, let's say you're worried no one will want your toy in the future. You make a different promise with another friend. You say, "You have to buy my toy for $10 next week if I want to sell it, no matter if others only want to pay $5." Your friend gives you $1 for agreeing to this. If next week comes and everyone only wants to pay $5 for your toy, you can still sell it to your friend for $10 because they promised. But, if everyone wants to pay $15 for it, you might decide to sell it to someone else instead, and your friend doesn't have to buy it. You still keep the $1 for the promise.
So, "calls" are like making a deal to possibly sell your toy later for a set price, and "puts" are like making a deal to possibly make someone buy your toy later for a set price. And no matter what, you get a little bit of money just for making these promises!
That is fantastic.
2012Ag said:
Puts - "I Want to Sell You My Toy Later!"
Now, let's say you're worried no one will want your toy in the future. You make a different promise with another friend. You say, "You have to buy my toy for $10 next week if I want to sell it, no matter if others only want to pay $5." Your friend gives you $1 for agreeing to this. If next week comes and everyone only wants to pay $5 for your toy, you can still sell it to your friend for $10 because they promised. But, if everyone wants to pay $15 for it, you might decide to sell it to someone else instead, and your friend doesn't have to buy it. You still keep the $1 for the promise.
this part doesn't make sense? why would the friend pay you $1 for either having to buy for more that others want to pay or not being able to buy because others want to pay more?
I think that explanation mixes up who sold vs who bought the option compared to the who owns the toy. The person with the toy has to pay the $1 premium to the friend, potential buyer of the toy who is also the seller of the option. That's why the friend would do it, to potentially get that dollar for nothing. If the value did go up to $15, the friend got a free dollar. And if he value does go down to $5, the friend must have been ok buying at what's really $9 and had the $9 to pay.
Selling puts is a way to buy something you wanted to buy anyway but collect income along the way. Just have be comfortable with the risk that the price might drop even more than expected.
2012Ag said:
ChatGPT's response to the prompt:
Imagine you have a toy that everyone wants to play with, but you're not sure if you want to share it yet. So, let's talk about two games we can play with your friends about this toy, using something called "calls" and "puts."
Calls - "I Want to Buy Your Toy Later!"
This is like making a promise with a friend that you might sell them your toy in the future at a price you agree on today. Let's say you tell your friend, "You can buy my toy from me next week for $10, even if other kids want to pay more for it later." Your friend gives you $1 for making this promise. If next week comes and everyone else wants to pay $15 for your toy, your friend can still buy it for $10 because of your promise. If no one wants it, your friend can decide not to buy it, but you still keep the $1 for making the promise.
Puts - "I Want to Sell You My Toy Later!"
Now, let's say you're worried no one will want your toy in the future. You make a different promise with another friend. You say, "You have to buy my toy for $10 next week if I want to sell it, no matter if others only want to pay $5." Your friend gives you $1 for agreeing to this. If next week comes and everyone only wants to pay $5 for your toy, you can still sell it to your friend for $10 because they promised. But, if everyone wants to pay $15 for it, you might decide to sell it to someone else instead, and your friend doesn't have to buy it. You still keep the $1 for the promise.
So, "calls" are like making a deal to possibly sell your toy later for a set price, and "puts" are like making a deal to possibly make someone buy your toy later for a set price. And no matter what, you get a little bit of money just for making these promises!
Headlines of this reads more appropriately to a forward contract rather than an option.
Calls and puts are just buying or selling insurance.
Just be wary...for every 1 person crushing it, 99 are getting crushed. Everyone I know that never misses on options, also always leaves Vegas with more than they went with, kind of uncanny!
Discipline is the name of the game in options. I stopped (outside of covered calls) because I wasn't disciplined, couldn't size options trades right, wasn't disciplined, didn't manage losses, and wasn't disciplined.
There's some disciplined traders here that can teach you well.
Discipline is the name of the game in options. I stopped (outside of covered calls) because I wasn't disciplined, couldn't size options trades right, wasn't disciplined, didn't manage losses, and wasn't disciplined.
There's some disciplined traders here that can teach you well.
I am nowhere near an expert, and won't get into the details of explaining it because I wouldn't do a good job of it.
But, I basically sell puts on stocks I want at a price I am comfortable with, so that if it gets exercised, I'm fine with it, and if it doesn't, I got paid anyways.
Then, if it's something I don't want to hold long term, I will sell covered calls at an equal or higher price than I sold the puts. If I do want to hold it long term, I'll either just hold it or only sell covered calls on a portion of the shares.
Now, this doesn't get into the opportunity cost of whether or not I could make more money over the next 50 years just throwing the money I have tied up into VOO or something. But I like staying engaged and I feel like it helps me at least stay interested in the stock market and what is going on there, which I think is important.
It's not something I'm doing to get rich; I learned my lesson the hard way doing options trading. Right now I try to make $50-100 a month doing it. When I have more free time I want to learn more about day trading but that just isn't realistic for me right now.
But, I basically sell puts on stocks I want at a price I am comfortable with, so that if it gets exercised, I'm fine with it, and if it doesn't, I got paid anyways.
Then, if it's something I don't want to hold long term, I will sell covered calls at an equal or higher price than I sold the puts. If I do want to hold it long term, I'll either just hold it or only sell covered calls on a portion of the shares.
Now, this doesn't get into the opportunity cost of whether or not I could make more money over the next 50 years just throwing the money I have tied up into VOO or something. But I like staying engaged and I feel like it helps me at least stay interested in the stock market and what is going on there, which I think is important.
It's not something I'm doing to get rich; I learned my lesson the hard way doing options trading. Right now I try to make $50-100 a month doing it. When I have more free time I want to learn more about day trading but that just isn't realistic for me right now.
Definitely Not A Cop said:
Calls and puts are just buying or selling insurance.
There's a lot of reasons this isn't quite correct. Most specifically, it isn't insurance by definition if you don't own the underlying asset.
I think it is more like a time-specified price guarantee.
If I had $17500 and wanted to buy 100 shares of AAPL sometime in the next month I could sell a covered put for ~$186. I get to keep that $186 no matter what happens. If AAPL drops below 175 in the next month the contract might get executed and I will have to pay $17500 for the 100 shares, but again I still get to keep the $186 so it's kind of like I only paid $173.14 per share.
If I currently owned 100 shares of AAPL but wanted to sell them at $185 sometime in the next month I could sell a cover call for about $321. If the price of AAPL doesn't make it to $185 in the next month I keep the $321 and my shares. If it goes over 185 and the contract gets executed I lose my 100 shares but get paid $18500 and still keep the $321 so it's as if I sold them for $188.21 a share.
If I currently owned 100 shares of AAPL but wanted to sell them at $185 sometime in the next month I could sell a cover call for about $321. If the price of AAPL doesn't make it to $185 in the next month I keep the $321 and my shares. If it goes over 185 and the contract gets executed I lose my 100 shares but get paid $18500 and still keep the $321 so it's as if I sold them for $188.21 a share.
In the case of a call, it's like taking a non-refundable deposit for the sale of the stock.
More to your last question, and the overall reason for asking (someone making good money doing it).
You make money by purchasing calls and puts before the change in stock price happens. Your profit or loss comes by the premium being paid, and the market price of that premium after you purchase it (and obviously before the expiration date). Each call or put is the right to buy or sell 100 shares. So if the premium on an option you're looking at is $1.00, you pay $100 for that one call/put. The hope is the stock price increases (for a call) or decreases (for a put) after you purchase the option, which then increases the premium cost; allowing you to then resell that option and take the profit.
Pros: if you're right, that $1.00 premium can quickly turn into $1.50 (so $150), $2 ($200), and much more; which can allow you to quickly reap nice profits (50 and 100% profit in this example). But, the flip side, and the key thing, is you can just as quickly lose all of it if you guess wrong or try to chase a stock that's on the move.
Honest advice, don't throw money into options unless you're willing to lose it all, at least until you really really have it figured out. Been doing some myself the last couple months and it's a steep learning curve. The person you know that's doing it (if they are truly successful at it) is very knowledgeable in reading charts and has probably been doing it for a really long time.
You make money by purchasing calls and puts before the change in stock price happens. Your profit or loss comes by the premium being paid, and the market price of that premium after you purchase it (and obviously before the expiration date). Each call or put is the right to buy or sell 100 shares. So if the premium on an option you're looking at is $1.00, you pay $100 for that one call/put. The hope is the stock price increases (for a call) or decreases (for a put) after you purchase the option, which then increases the premium cost; allowing you to then resell that option and take the profit.
Pros: if you're right, that $1.00 premium can quickly turn into $1.50 (so $150), $2 ($200), and much more; which can allow you to quickly reap nice profits (50 and 100% profit in this example). But, the flip side, and the key thing, is you can just as quickly lose all of it if you guess wrong or try to chase a stock that's on the move.
Honest advice, don't throw money into options unless you're willing to lose it all, at least until you really really have it figured out. Been doing some myself the last couple months and it's a steep learning curve. The person you know that's doing it (if they are truly successful at it) is very knowledgeable in reading charts and has probably been doing it for a really long time.
permabull said:
If I had $17500 and wanted to buy 100 shares of AAPL sometime in the next month I could sell a covered put for ~$186. I get to keep that $186 no matter what happens. If AAPL drops below 175 in the next month the contract might get executed and I will have to pay $17500 for the 100 shares, but again I still get to keep the $186 so it's kind of like I only paid $173.14 per share.
This is just selling a put… not a covered put.
Reading the comments should make you nervous. Brokerage firms have to approve you to do options, some do a better job than others, but it's to protect their butts because lots of people don't understand what they're doing and lose their ass. Plus it ties you the computer more, particularly using volatile stocks.
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Let me share what I learned by taking about $20k and setting it on fire over the course of one week.....
***Nobody who has to ask what they are should ever consider selling naked calls or puts.***
***Nobody who has to ask what they are should ever consider selling naked calls or puts.***
El Chupacabra said:
Just be wary...for every 1 person crushing it, 99 are getting crushed. Everyone I know that never misses on options, also always leaves Vegas with more than they went with, kind of uncanny!
Discipline is the name of the game in options. I stopped (outside of covered calls) because I wasn't disciplined, couldn't size options trades right, wasn't disciplined, didn't manage losses, and wasn't disciplined.
There's some disciplined traders here that can teach you well.
Well said. Same for me. I couldn't manage it closely enough and ultimately became more like gambling to me. I also stick with covered calls and the occasional put for insurance or to collect a little premium. But trading options just to try to make profit took more skill/effort than I could manage without learning more the hard way.
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AG
Try paper trading first. If you do awesome in the first week, keep paper trading another month or so and see if you are still doing awesome. Understand theta and iv, and never ever naked short (sell shares that you have borrowed on margin with the promise to buy them back later, hoping that the price will go down) or sell calls naked (i.e. you don't hold the underlying shares that you are promising to sell at the strike price of the call you are selling). Those are how you lose your house
Unlike your thread title, basically, if you want to speculate, you should only BUY puts and calls. You have a known downside (what you paid), with either theoretically unlimited (buying calls) or finite (buying puts and stock goes to zero) return potential.
The only way a beginner should SELL puts or calls is to learn everything you can about writing covered calls (either on existing long positions or as a buy/write). This is actually a risk-reducing approach.
The only way a beginner should SELL puts or calls is to learn everything you can about writing covered calls (either on existing long positions or as a buy/write). This is actually a risk-reducing approach.
It's unlikely your dad's friend is crushing it.
It is very likely this is what he is telling people.
It is very likely this is what he is telling people.
depends on the definition of "crushing it"...but there is literally 0% chance he's "crushing it" SELLING options using my definition...ZERO!!!
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Bull market is back, if he's been running the wheel since October he probably has been crushing it. He just better hope it doesn't turn around on him and stick him with some heavy bags
First time I've ever understood Calls and Puts and then some of you know it alls come along and dispute this explanation.
I will remain on the sidelines of this particular investment method.
I will remain on the sidelines of this particular investment method.
Charismatic Megafauna said:
Bull market is back, if he's been running the wheel since October he probably has been crushing it. He just better hope it doesn't turn around on him and stick him with some heavy bags
Exactly. Wait until the market drops 10% and ask him how he's doing. I suspect he will be less talkative at that point.
Read some books on options - i can only tell you my experience. I spent countless hours and money trying to learn the market and attempting success at it. Even with small bouts of success, the margin for error is thin and the market is RUTHLESS to day traders. It's humbling and I have mad respect for people that can do it successfully. Best thing I could do was get out of my own way and let someone help me. If your going to do options, take a very small account and don't go naked - EVER.
72% of calls/put writers lose.
Unless you sell naked BOIL calls :-)
IMO you should ask yourself the following question:
Why do I want to get into options trading?
Why do I want to get into options trading?
- Answer 1: I nerd out on markets, companies, valuation but want to take it to the next level on the quant sde. I am familiar with Black-Scholes, valuation of options, and risk management in a book or portfolio that I'd build. I'm obsessive about this. In short, I'm doing this because I love this stuff.
- Answer 2: I heard that someone got rich quick "trading options". In short, I'm doing this because I want to get rich quick.
Side note, here's an interesting video that dropped yesterday on Black-Scholes/Merton equation and the ties to Physics:
The worst thing that can happen is you make a little bit of money in a bull market and convince yourself that you're smart and not lucky. That's how you loose your shirt.
I created a Black-Scholes model after learning all of this. Most of it I didn't learn, just learned the formula. Each component of the formula is its own formula. It's extremely complicated. I never use it. But going through that process was invaluable as I learned the actual mechanics of what happens with options. What feeds into what and what drives each segment. Fascinating, but overkill for the average trader. The biggest factor on trying to predict a future options price is the actual future price and the volatility. You can pick a future price out of the air based on technicals and where you see a stock going. Picking the volatility that's going to happen to get there is nearly impossible and can lead to a WIDE array of possibilities. There are people who can get close. But it requires deep study of an instrument, its historical IV, implied IV, and multiple other factors. Even getting the volatility right but missing a little on the RFR can blow up your expectations.Serotonin said:
Side note, here's an interesting video that dropped yesterday on Black-Scholes/Merton equation and the ties to Physics:
100% chance losing your shirt based on this post.NoahAg said:
That's it. My elderly dad's friend apparently is crushing it. Before I take a deep dive, what are the basics to know? What are the risks of losing my shirt selling?
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