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Current time:0:00Total duration:3:10

Video transcript

let's think about how put options can give us leverage on a downside or I should say on a bet that the stock will go down relative to shorting and this one's a little bit more complicated because shorting is a little bit less intuitive but if you were to short a stock in order to shore it you might say hey wait I don't have to put any money up front because I essentially just borrow the stock immediately and then I would sell it for $50 but the reality is you do have to put some capital upfront because the short can move against you and usually you have to put at least 50% of the value of the short so in our short scenario you would have to put at least $25 up front and then you would borrow the stock sell it for 50 and so you would essentially have 75 dollars to play with that you would eventually have to use to buy back the stock but the upfront capital is 25 now in our scenario where the stock went down which was a good thing if you're shorting you want the stock that was your bet you want it to go down in the scenario where the stock went down to $20 you made a profit of $30 you were able to buy that stock for 20 and then give it back to the original person so you were able to keep that $50 although net for that 20 so you made $30 so you made $30 on a 25 dollar investment so your your gain you make a hundred and what is that you make $25 and then another $5 so that's a hundred and twenty percent gain so let me write that down you made a hundred and twenty percent gain of course of course in this scenario you gained when the stock went down in terms of loss here when the stock went up the stock went up to $80 we lost $30 by shorting so we had a hundred and twenty percent loss so once again a hundred and twenty percent loss and it's important to realize in a short situation the best thing that can happen for you is your stock go to zero in which case you can kind of you can buy it back for nothing which means you could keep your $50 so in the best possible scenario you have to put $25 up front you can keep the $50 that you from borrowing and selling the stock so you can make a 200% return in the worst case scenario this is the the best scenarios this is 200% in the worst case this would be infinite so you have to be very careful while you're shorting but let's think about the put option in the put option we only have to put five dollars upfront to actually buy the put and when the stock went down to 20 dollars when the stock went down to 20 dollars we made 15 so this was a 300% gain and on the other side of the equation when the stock went up the worst we could do is just lose all of our money so the worst thing we could do is just lose 100% so once again we were able to multiply we were able to multiply our gains relative to shorting although it's a little bit more mixed on the downside because the put gives you a little bit of protection there