Difference between selling a Call and buying a Put? | Forex Factory

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Difference between selling a Call and buying a Put?

  • #1
  • First Post: Sep 5, 2007 7:34am Sep 5, 2007 7:34am
Hello-

I have a question for the options gurus out there.

I cannot figure out why selling a call might cost less than buying a put.

Both options are priced at the same time, with the same strike price and the same expiration date (Dec 5, 2007) - see screenshots.

The only thing I can think of is that the put in this example is "deep in the money" - but selling the call at the same price is the same thing, in theory, as buying the put.

The only difference is that you may exercise the put now, but would probably not exercise the call now (in this example, please see screenshots).

So, I guess in this situation I would definitely sell the call, and save a lot of cash.

Can anyone explain this to me, or do I understand this... ?
Attached Image(s) (click to enlarge)
Click to Enlarge Name: Dec 5th Put.jpg Size: 165 KB
Click to Enlarge Name: Dec 5th Call.jpg Size: 177 KB
  • #2
  • Sep 5, 2007 11:56am Sep 5, 2007 11:56am
Let me try to explain you some basics here, i dont trade much options in forex but i do some in stocks..

When u sell an option (a Call in your example) it does not cost you money, but u charge a premiun to the buyer, the issue here its that if u dont cover that position u may have infinite loss depending how the intrument moves (and depending your, expire date, stoke price etc etc) so in this situation money goes to your pocket.

When u buy an option (put in this example) u pay the premiun to the seller, and now u have a fixed amount of max posible loss (what u paid for the premiun) and the seller its the one that have infinite posible loss exposure.

In both circustances u expect the price to move down (in the case u sold a call u want price to fall so u can keep the money u took for the call u sold, and in the case u bougth a put, u want it to fall so u can recover the price u paid for the premiun and make more profits of course)

Its more compex than this of course, but i hope u can see the main diference..

this is how it is on stocks, if im wrong, someone please feel free to correct me

Matias
PS: Sorry if my english its not good
  • #3
  • Sep 5, 2007 12:43pm Sep 5, 2007 12:43pm
Quoting pip_bagger
Hello-

I have a question for the options gurus out there.

I cannot figure out why selling a call might cost less than buying a put.

Both options are priced at the same time, with the same strike price and the same expiration date (Dec 5, 2007) - see screenshots.

The only thing I can think of is that the put in this example is "deep in the money" - but selling the call at the same price is the same thing, in theory, as buying the put.

The only difference is that you may exercise the put now, but would probably not exercise the call now (in this example, please see screenshots).

So, I guess in this situation I would definitely sell the call, and save a lot of cash.

Can anyone explain this to me, or do I understand this... ?
They are absolutely not the same thing. Since the GBPJPY is trading at 233, buying a put at the 236 strike would be 300 pips in the money (also called intrinsic value) since you will have the right to sell. Sure you could exercise it but what's the point of buying it if you intend to exercise right away? You will make nothing off of that transaction.

Selling a call at 236 gives someone else the right to buy. This has no intrinsic value but has some extrensic value due to the fact that it won't expire for 3 months.

Unless you have a position to cover the sell the call you are selling naked and as discussed that contains an unlimited amount of risk. Never, ever, ever, do this. Even so called seasoned professionals have done this and been wiped out. If this were a stock option you wouldn't even be authorized to do this unless you had level 5 approval which isn't easy to obtain.

You are correct in that buying a put and selling a call is the same thing from your outlook on the market in that you believe the GBPJPY will go down. But saying the transactions are the same could not be more wrong.
  • #4
  • Sep 5, 2007 4:04pm Sep 5, 2007 4:04pm
Thanks for the messages here, I appreciate your help.
  • #5
  • Sep 5, 2007 5:11pm Sep 5, 2007 5:11pm
Quoting pip_bagger
Hello-

I have a question for the options gurus out there.

I cannot figure out why selling a call might cost less than buying a put.

Both options are priced at the same time, with the same strike price and the same expiration date (Dec 5, 2007) - see screenshots.

The only thing I can think of is that the put in this example is "deep in the money" - but selling the call at the same price is the same thing, in theory, as buying the put.

The only difference is that you may exercise the put now, but would probably not exercise the call now (in this example, please see screenshots).

So, I guess in this situation I would definitely sell the call, and save a lot of cash.

Can anyone explain this to me, or do I understand this... ?

As explained by philmcgrew, they are not the same thing. The call is out of the money while the put is in the money and here is a big difference although both transactions you are talking about (Selling the call or buying the put) puts you in the bearish side of the underlying.

Also as explained by Matiasfx, selling the call exposes you to unlimited risk with limited profit potential while buying the put exposes you to limited risk with unlimited profit potential (Actually buying puts have limited profit potential for any underlying that can come down to zero, not in currencies of course).

The main difference is the probability of the underlying going that way and the volatility of the underlying as well. This creates a BIG difference especially the volatility. Usually, market makers and market participants measure the volatility in which direction and price this into either calls or puts. For example, if you notice, the volatility of the GBP/JPY lately is towards the downside more than towards the upside, meaning that down days tend to be more volatile than up days and consequently you will find more premium inserted into the price of puts than calls.

Combine this with how deep is the option in or out of the money and you will find that as far as you choose a put which is deep into the money, the less premium you will see for volatility and probability of the underlying moving in that direction.


Thanks,

Nader
  • #6
  • Last Post: Sep 19, 2007 5:24pm Sep 19, 2007 5:24pm
Whoah... don't you DARE go selling either a call or a put until you actually understand what you're doing. If you sell the option that means YOU are the one assuming the risk. Whereas if you buy the option the MOST risk you can have is the premium + spread.

Actually... don't even go buy a call or put until you can do intrinsic value calculations and at least roughly understand the greeks.

Buying far out of the money options are very very low percentage win rates.
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