SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Long Call Vs. Short Put - Options Trading Strategies


In options trading, a long call and short put both represent a bullish market outlook. But the way these positions express that view manifests very differently, both in terms of where you want the market to go and how your P&L changes over the life of the trade.

The most obvious way to demonstrate this is showing you a payoff profile (the possible path of your P&L for the trade at different underlying prices):

 

Long Call:

image.png

 

Short Put:

image.png

 

There are immediate differences.

 

You buy a long call when you think the market will go up a lot. You're optimistic and willing to risk some cash in the hopes of making a multiple of that.

 

You sell a put when you think the market won't go down a lot. You're confident that the market won't go down. By selling a put to another trader, you're almost acting as a bookie, taking a fee to allow another trader to make a big bet. If he's wrong, you get to keep his bet. For him to be right, the market has to move enough to neutralize the cash value of his bet.

 

When To Use a Long Call

Reason #1: You Have Reason to Believe the Market Will Go Up. A Lot.

If you're bullish on a stock, there's a lot of things you can do to express that view.

 

     You can buy the stock

     You can buy calls on the stock

     You can buy the stock and sell covered calls against it

     You can buy the sector ETF or a basket of related stocks for a sympathy play

     You can sell puts against the stock

     You can enter any number of directionally bullish options spreads

 

All bullish outlooks, but very different P&L paths.

 

Buying a long call makes the most sense.

 

Reason #2: Other Traders Disagree With You (Low Volatility)

Professional options traders are fond of saying that anytime you trade options, you're making a bet on volatility, whether you intend to or not.

 

This is because option prices are inherently tied to the expected future price movement of the underlying asset. In other words, buying options is expensive when people think the market will move a lot, and vice versa. Hence, buying puts or calls on a stock like Tesla is much more expensive (as a percentage of the stock price) than a more tame stock like Johnson & Johnson. Tesla makes wild price moves all the time, while Johnson & Johnson remains stable most of the time.

 

In the options world, this idea of the market's expectations about future price fluctuations is called volatility. When options traders say a stock is "high volatility," they mean that traders expect the stock price to fluctuate a lot in the future and options on that stock are expensive.

 

Imagine Tesla is announcing earnings tomorrow, in the first quarter after the Tesla Semi is on sale. If the results are bad, the stock will tank. If results are good, it will skyrocket. All traders know this and hence buying puts and calls is expensive to account for the big move. There's no free lunch.

 

But while Tesla's baseline volatility is high compared to the average stock it has it's own ebb and flow cycle. Volatility is relative. You can't say Johnson & Johnson's volatility (i.e. option prices) are cheap because it's cheaper than stocks like Tesla. Both of them are priced the way they are for good reason.

 

Instead, volatility is relative to itself. So you should compare Tesla's volatility to the stock's own historical volatility. Is volatility cheap, average, or expensive today compared to recent history?

 

One way to do this is using a measure like implied volatility rank, or IV Rank. It measures how expensive a stock's options are as a percentile compared to the past 12 months.

 

When To Use a Short Put

Reason #1: To Capitalize on Expensive Option Prices

As we discussed, every option trade is an implicit volatility. Buying an option outright is taking the view that volatility (or the market's estimate of how much the market will move until expiration) is underpriced, and vice versa.

 

If you spend time in professional trading circles, you'll find that successful option traders tend to sell volatility far more often than they buy it. This is due to the "volatility risk premium."

 

This idea of a volatility risk premium comes out of academia. Scholars have essentially found that traders that sell volatility when it's high tend to make excess returns. And there's a good reason for that. High volatility indicates a high level of market stress.

 

And when investors are stressed, the first thing they want to do is protect what they have. Everyone doing this at once pushes up the price of protection temporarily until the market calms down.

 

When a stock declines quickly, investors will rush to buy puts and they'll become expensive--opening an opportunity to sell potentially overpriced options.

 

But it's not as simple as selling expensive options. Selling a put is a directionally bullish strategy--in other words, you need a compelling reason to be bullish on the underlying stock.

 

Reason #2: You're Moderately Bullish on a Stock

There are times when you're more sure that a stock won't fall than you are that it will rise.

 

There are plenty of situations like these.

 

A stock stuck in a long-term trading range with no evident catalysts.

 

Or perhaps a stalwart stock within a bull market. While Apple (AAPL) isn't the highest flying stock, it's rare to see its shares plummet in a stable bull market.

 

Some traders will even sell puts against takeover targets, surmising that there's a "floor" to their stock price due to the takeover interest.

 

Buying calls and playing for the home run isn't the right move for stocks like these. But you still have a market view you're confident in and want to profit from. Selling a put allows you to generate income as long as the stock doesn't decline a lot, which comes in handy in stable bull markets.


 

image.png

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 2,518 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 2,612 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 2,773 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 2,795 views
  • Diagonal Spread Options Strategy: The Ultimate Guide

    A diagonal spread is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.

    By Kim,

    • 0 comments
    • 3,331 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 6,404 views
  • Why New Traders Struggle: 3 Key Concepts New Traders Never Grasp

    Everyone knows the statistic - 95% of traders fail. Whether or not that's an accurate statistic, it's certainly true that few that attempt trading ever make life-changing money. Part of that is because most don't take it seriously. But what about those that do and fail?

     

    By Pat Crawley,

    • 0 comments
    • 5,082 views
  • Long Call Vs. Short Put - Options Trading Strategies

    In options trading, a long call and short put both represent a bullish market outlook. But the way these positions express that view manifests very differently, both in terms of where you want the market to go and how your P&L changes over the life of the trade.

    By Pat Crawley,

    • 2 comments
    • 5,003 views
  • 12 Tips For Building Long-Term Wealth

    Building wealth is a lifelong aspiration for many people, yet it’s frequently regarded as reserved for a select few. However, this perception is not entirely true, especially when it’s possible to accumulate wealth and live an abundant life.

    By Kim,

    • 0 comments
    • 6,027 views
  • Retirement Strategies for Senior Citizens to Grow and Protect Their Wealth

    Retirement is a time of life that many people look forward to, but it requires careful planning and preparation. One of the most important aspects of preparing for retirement is calculating your retirement needs and starting to save early. In this section, we will discuss some key points to consider when planning for your retirement.

     

    By Kim,

    • 0 comments
    • 14,240 views

  Report Article

We want to hear from you!




Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs