Alert

Looking for even more trade ideas? Sign up for Alpha Boost, a FREE email from quiet foundation!

Buying and Shorting Options | Ryan and Beef Show

Apr 19, 2016

By: m slabinski

To buy an option or to short an option -- that is the question. Well, for new traders anyway. This episode of the “Ryan and Beef Show” will help you understand why we like shorting options over buying them.

Buying a Long Call

With the SPY, Ryan and Beef first look at buying a 206 call in the SPY (S&P 500) for $3.37. Buying a call option is a bullish trade, which means they want the SPY price to go higher. To buy the option, they pay a $337.00 debit (3.37 * 100 shares the option controls). For the trade to be profitable at expiration, they need the SPY to be at least $3.37 above the long call’s 206 strike price. The trade has a low probability of profit (POP), because the price of SPY needs to move a significant amount to reach $209.37.

An option’s value is derived from uncertainty around its underlying stock’s movement over a period of time. We talk about this uncertainty using the terms volatility and days to expiration (DTE). We have to pay more for options when we increase the DTE due to the increase in uncertainty. As time passes, options lose value to theta decay (all else being equal). That works against any option that we buy.

Buying Options Characteristics

  • Unlimited potential profitability
  • Lower probability of profit
  • Theta decay (time) works against you
  • Defined risk: the most you can lose is the price you pay

Selling a Short Put

When Ryan and Beef place a short put on the trade page, we can immediately see some differences. The SPY doesn’t have to go up in price for the option to be profitable, which gives us a much higher probability of profit. Instead of theta decay working against us, we collect credit each day that passes (all else being equal).

Choosing short option strategies with high POP and theta decay on our side helps us maintain consistently profitable trades.

Ryan and Beef end their segment by encouraging traders to know their probabilities to make more informed trade decisions. Understanding profitability, probabilities, theta decay, and types of risk can help us be more knowledgeable in how we go about buying and selling options.

Positives of Selling Options

  • Limited profitability
  • Higher probability of profit
  • Theta decay works for us
  • Undefined risk

Have questions about trading options? Email us at support@tastytrade.com.

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.