Buying Options vs. Selling Options (Risk/Reward, Probabilities & More) | Summary and Q&A

122.0K views
April 26, 2019
by
projectfinance
YouTube video player
Buying Options vs. Selling Options (Risk/Reward, Probabilities & More)

TL;DR

This video discusses the key differences between buying options and selling options as trading approaches, including risk and reward potential, profit and loss potential, and probability of making money.

Install to Summarize YouTube Videos and Get Transcripts

Questions & Answers

Q: What is the main attraction of options trading?

The main attraction of options trading is the concept of leverage, which allows traders to make a lot of money from a small investment and control their risk and reward potential.

Q: Why do many traders prefer buying options over selling options?

Many traders prefer buying options because the reward potential is typically greater than the risk taken for a trade. In buying options, the risk is limited to the amount paid for the option, while the profit potential is theoretically unlimited.

Q: What happens if the stock price does not increase when buying a call option?

If the stock price does not increase when buying a call option, the option will lose value over time due to time decay. If the option expires worthless, the trader will lose the full amount paid for the option.

Q: How does selling options differ from buying options in terms of profit potential and risk?

When selling options, the profit potential is limited to the premium received for selling the option, while the risk is typically greater than the potential profit. Option sellers can make money as long as time passes without a significant movement against their position.

Q: What is the main difficulty associated with buying options?

The main difficulty with buying options is deciding when to sell the option and take profits, as there is no limit to how much the profit can grow. Traders may be tempted to hold onto the option in anticipation of further price increases.

Q: Why is selling options considered a high probability trading approach?

Selling options is considered a high probability trading approach because traders can make money as long as time passes without a significant movement against their position. The probability of making money is theoretically greater than 50%.

Summary & Key Takeaways

  • Buying options offers the potential for high rewards and limited risk, but requires a significant stock price movement in a short period of time to make money.

  • Selling options offers a higher probability of making money, but the risk is typically higher than the potential profit. Time decay can work in favor of the option seller.

  • Option buyers have control over when to exercise the option, while option sellers have no control and may be assigned shares unexpectedly.

Share This Summary 📚

Summarize YouTube Videos and Get Video Transcripts with 1-Click

Download browser extensions on:

Explore More Summaries from projectfinance 📚

Summarize YouTube Videos and Get Video Transcripts with 1-Click

Download browser extensions on: