Syndicate
Selling a Buying Call Option
The investor that is in a short call option, selling buying options, acquires a commitment with respect to it. For that reason, the results that he will obtain from selling the buying option will be the contrary from that obtained by the buyer in each situation.
The gains of a salesman will be the loss of the buyer and vice versa, the benefit obtained by the buyer will be the loss of the salesman.
If the salesman of buying options has a pessimistic vision of the market and foresees a descent of prices below the exercise price, the buyer will not exercise the option and he will obtain the premium received as a profit from the operation. In any case this profit is limited to the premium received. However, if the prices rise the option buyer will exercise it, from which the salesman will enter the loss zone that will be as high as the rising of the prices above the exercise price.
Concluding, the salesman of buying options has possibilities of limited premium profits and unlimited possibilities of losses (and vice versa in respect to that of the buyer). So then, the salesman of a buying option will wait until the price of the underlying asset is stable or that it falls a bit.
Buying a put selling option
When buying a selling option (long put position), the holder of the option has the right, but not the obligation, to sell at the established price the underlying assets. The decision to execute or not the option will be taken after comparing the exercise price with the assets market price.
The following are three different cases of the buying of a put selling option:
- If the market price (S) is less than the exercise price (E), the buyer of the option will exercise it, due that he will obtain for the underlying assets higher price than he would by selling it directly at the market. In this case the option is in the money that means that it has value.
This situation is the opposite to that of the case of the buyer of call option. The results obtained by a put buyer will be the difference between the exercise price and the addition of the market price and the premium paid for the option (x), E- (S + X). So then, the buyer has unlimited possibilities of profit, depending only on how low the prices at the market are. Always that S E the option will be exercised.
- If the exercise price (E) is equal to the market price (S’), the option is “at the money”. In this case, the put holder will indifferent to exercise or not the option, due that it would be the same to acquire the underlying asset through the market than to exercise the option. In both cases the loss will be as presented in the case of a call option, it is interesting to know the break point of put options.
In the section comprehended between the break point and the exercise price, the option buyer will keep on having rising losses until it arrives to the exercise price, where the losses are limited to the premium paid.
So then, at this section he is also interested in exercising the selling option due that in this way the losses will be less than if not exercised, in which case he will totally loose the premium.
- If the exercise price (E) is below the market price (S”), the buyer of the put option will not exercise it. In this case the option is “out of money” it is worthless.
The holder obtains ASA result the loss of the premium paid for so then, always that E S”, the option won’t be executed and the results obtained will be the loss of the premium (X).
Concluding, to say that a buyer of a selling option has unlimited possibilities of profit and limited for losses.
For that reason, this investor has a pessimistic vision of the market and waits that the prices fall very much with the finality of obtaining positive results.