 What's the difference between calls and puts? That's the question we're gonna answer in today's video lesson. Let's get started When I first started trading over 20 years ago Puts and calls were extremely confusing to me And so I actually printed out something just like this and I kept it by my computer so I could keep these straight and While it might seem confusing as a new trader. I promise it'll become second nature after you start trading for just a little while And just remember every option strategy is just made up of a combination of buying and selling calls and puts So if you've heard some of this terminology around different options trading strategies like iron condors butterflies calendar spreads Strangles straddles and all these different things that you may not be familiar with just keep in mind All they are is a combination of buying and selling calls and puts So before we jump into the platform with examples, let's just take a minute to do a quick refresher When you buy a call, that's bullish meaning you want the stock to go up If you're selling calls, that's bearish meaning you want the stock to go down With puts if you're buying puts, that's bearish meaning you want the stock to go down And if you're selling puts that is bullish meaning you want the stock to go higher I don't know about you, but I'm a visual learner So let's jump over to the thinkorswim platform to give you an actual visible example In this lesson, we are going to be utilizing spy, which is the s and p 500 etf If we go to the trade tab in thinkorswim, that brings up the options chain Now again, if you're new to trading, this is all going to seem very confusing But it's a very simple defined Format that you'll get used to very quickly Most trading platforms are set up the same way where you have your calls on the left hand column And your puts are on the right and this column down the middle That's what we refer to as the strike price of the options So let's get started with a couple examples of calls We are going to both show an example of buying a call and selling a call Now as you can see, there are a lot of different options that we can choose from as far as the different strike prices For this example, we are going to simply choose the strike price that represents the closest At the money options you can see up here that spy is trading for around let's call it $268 So we're just going to go to the 268 strike price and choose those options In that case, it's right here So this is the what we call the bid and the ask as you can see As I toggle back and forth if I hover over the ask It pops up as buy if I hover over the bid it'll pop up as sell So let's start with buying a call if I simply just left click on the ask It'll populate buying a call What I like to do to give us a visual representation is right click Take it over to the analyze screen And that's the visual representation of the risk profile graph for buying a call So like I said, the current price of spy is about 268 And you can it's actually hiding behind this little red one But there's a little gold hash mark right behind that and that represents where the current price is trading So I'm going to use this hash mark To put it right on the current price so we can kind of help keep track of it Now the market's open so the price is moving around But we're just going to use this as an example So remember back to our first slide when we showed that buying a call is bullish Meaning we want the price of spy to go up if we buy a call Now the price in this example Is indicated by these numbers down here below So like I said, the price is trading at about 268 And the pink line on this graph represents the current profit or loss In this trade obviously we haven't even placed the trade yet So it's hovering right at the zero mark We have no profit or no loss on the trade yet And the teal line represents what the profit or loss would be at expiration And if you keep your eye on this box right here, you'll see as I move my mouse around You can see that the PNL of both the pink current PNL line and the teal at expiration Give you the values of what would be represented by your profit or loss At these different price points So if you bought this call today and price moved sharply up to 280 You can see that you'd be up about $700 on this trade However, if you held this trade through time and the price made it up to $280 But you were right at expiration You would actually be down about $180 on this trade And I'm getting that negative $180 focus on the teal number here If I hover over the price of 280 you can see at that point I'm down about $180-ish at that point So why the difference between a move today versus a move at expiration Well, the difference is because options have time decay Because options expire at some point in the future They are worth more today than they are as you get closer and closer to expiration They start to lose value as you get closer to expiration In fact, that is the major drawback of buying options For example, if price stayed right where it is today Remember, we're paying $1374 or $1,374 for this option So if price stayed right here all the way until expiration You would actually lose $1,374 Now you can make money, but this price has to move higher And it has to do it relatively quick to make money buying a call And the last thing I want to point out before we move on to the next example is Take a look at this number right here It's called Theta Theta is one of the Greeks that we use to track theoretical values of options I'm not going to go too deep in this today because it's beyond the scope of this video However, the one thing I do want to point out is you'll notice that Theta in this case is negative It's negative $17.5 And so what that means is that at the current price level That option is going to be losing about $17.5 every day And remember that's just representative of a snapshot today If we use our theoretical calendar and we move through time You can see that Theta accelerates how negative it gets And you can also see the pink line of the P&L as we move through time as we get closer to expiration That Theta decays our option is losing value And now we have to make a further move in price just to make a profit on this trade So you can think about it from a standpoint of The quicker you can make a move in your favorite direction The more money you're going to make with this strategy And it's got to happen quickly because you've got time working against you Okay, now let's go back to the trade tab and give you an example of selling a call So this is kind of confusing at first But you can actually sell a call to open a trade Most people think of when you're investing or trading that you have to buy low and sell high to profit In this case, we're actually selling the contract to open And we want to buy it back for a lower price and keep the difference So now you're seeing a visual representation of selling a call or what we also call a short call So I'm going to delete the green box because that was our long call And I've checked on just this one where you can see that we're selling this And we're using the same strike price the 268 right at the money Now what you'll notice is the graph is essentially an inverse of the long call that we just looked at previously The pink line still represents the current P&L and the tealine still represents your P&L at expiration If we move our theoretical calendar through time Now you're seeing your P&L line actually go up when you sell options when you sell a call The time decay is actually working in your favor So the closer and closer it gets to expiration you can see our profit is actually going up If price stayed exactly where it is right now all the way to expiration You can see we would keep this entire premium Of $1,348 and remember selling calls is bearish. We want the price of the stock to go down So as you can see as price were to move down We're going to continue to have a better probability of keeping that entire premium in this case of $1,348 You'll also notice and I'll bring my calendar back to today's date But you'll also notice that the breakeven point is way out here So if we set our price slice, you'll see at entry we have over a 67 probability of success That will make money on this trade and only a 32 chance that will lose money So selling options is a much higher probability trade The main difference is that your gains Or your potential profit is capped Whereas with a long option you have theoretically unlimited potential profits The other thing you'll notice if I put the price slice back on the current price Is that that theta component that I mentioned before is actually a positive number So we're actually making $17 every day if price and volatility were to stay exactly where they are And as we move through time on our theoretical calendar You can see the profit line moves higher and our theta number accelerates So we're actually making more and more money each day as we stay in this trade Okay, so let's take a look at an example of a put I'm going to delete the call here I'm going to go back to the trade tab. I'm going to go over to the right hand column as indicated by the puts We are going to stick with the exact same strike the 268 strike We're just going to look at the examples on the put side. So let's start with the buy I'm going to click on that and I'm going to analyze this trade And so what you'll notice is here's the visual representation of buying a put and remember when we buy a put We are bearish. We want the price of the stock to go down And so what you'll notice is similar to buying a call Is that the theta is negative? And so as we move through time our p&l line is actually going to go down because our option is losing value As we move through time and the closer we get to expiration the more value it loses And so at this point you have to make a quick move a bigger move to get into profit territory We move our calendar back to today's date and we set our price slice over here at the break even at expiration You'll also notice that you have about a 60% chance of losing money if you held this to expiration and about a 40% chance Of making money if you held this trade all the expiration So those odds are not in your favor the trade-off for having a lower probability of profit is that you have an unlimited profit potential All right, so let's delete that one and we'll come back and show you selling a put using the same strike the 268 we are going to sell this one You also notice that thinkorswim Indicates selling or collecting a credit with the red bars whereas buying or paying a debit for something Is indicated by the green color So again our risk profile graph is basically an inverse of the last one that we looked at Because remember if we're selling a put we are bullish We want the stock to go higher And since we're selling our theta number is positive So as we move through our theoretical time You'll see that theta number accelerate because now we have the time decay working in our favor And selling options gives us a higher probability of success With our hash mark at the break even point you see in this case We've got about a 60 probability of making money on the trade And just a 40 probability of losing Because we have a higher probability of success You'll see that we do have a cap on the amount of money that we can make on this trade Just remember there's always a relationship between risk versus reward Lower risk higher probability means lower reward if you have a lower probability You might have a higher potential for profit Now there are a lot of different strategies and ways that you can utilize the selling and buying of puts and calls And at navigation trading it's not that we never buy options But overall we prefer to be net sellers of options where we have a higher probability of success And we have the time value or the theta component Working in our favor so that we're continuing to make more money as we get closer and closer to that expiration date As opposed to losing money So that concludes our lesson on the difference between calls and puts If you have any questions feel free to drop us a line in our community at community dot navigation trading dot com See there