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Put vs. short and leverage

Put vs. Short and Leverage. Created by Sal Khan.

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  • blobby green style avatar for user Jaeson Bang
    why would one use Shorting instead of PUT option?... isnt PUT OPTION safer and better?
    (20 votes)
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    • blobby green style avatar for user Rick.Thompson
      When you buy a put, you purchase it with a given strike price and with a given expiration date. If the trade doesn't move in the correct direction by the end of expiration, then you loose you total trade or 100%. If you had shorted the same stock and the stock goes down a little but not as much as your were expecting then you get a small gain instead of a total loss. Or if the stock goes up a little you have a small loss. Also, there is no time limit. Let's say you feel certain that AAPL is going from 350 to 320. Do you know exactly WHEN this will happen? Each type of trade has its advantages and disadvantages. Keep in mind that a large percentage of options expire worthless because you are not buying anything real except perhaps time. If you get the timing and direction it can pay.
      (58 votes)
  • blobby green style avatar for user xylosx
    If an option is in the money, what is the difference between "selling the option" and "exercising the option"? Which one is better?
    (4 votes)
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  • leaf grey style avatar for user Jeremy Lesley
    Is it true that call options are more often sold than exercised, even if it's in the money prior to expiration? If so, why would this be?
    (1 vote)
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  • duskpin ultimate style avatar for user Jan Stefan
    Sal didn't mention it, but wouldn't a buying a call when shorting a stock protect you from a potential infinite loss if the stock rises?
    (1 vote)
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  • starky ultimate style avatar for user Sudhanshu Sisodiya
    I didn't understand the use of the upfront capital for the short --
    (2 votes)
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    • ohnoes default style avatar for user Tejas
      When you ask the brokerage for a stock to short, the brokerage will not just give it to you. They want to make sure that you don't just run away with the stock. So they'll ask for some capital which they can collateralize so that they know that you won't just run away with it.
      (3 votes)
  • blobby green style avatar for user Michael Cho
    Why would anyone shorting a call or put then? since you can operate either put or call if you expect the price to go down or up
    (3 votes)
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  • blobby green style avatar for user surangasa
    In the video, Sal says that the put would've earned him 300% but that is if you exersized the right which is true but what if I sold the option itself?
    (2 votes)
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    • ohnoes default style avatar for user Cameron Cotten
      Assuming that you are at the end of the option's term, a rational buyer of this option would give you exactly what it is worth: $15, the value of exercising the option. The only thing they could do at this point is exercise it. If you aren't at the end of the option's term, the seller might be willing to pay some premium in addition to the options current value of exercising, for the possibility that the stock will continue to go down. Or they might not be willing, if they think the stock can't go down any more.
      (1 vote)
  • mr pants teal style avatar for user Zhehan Shi
    I am confused about the percentage gain for the shorting. Because when the trader makes $30 as profit by shorting, which he sells the borrowed share for $50 and buy back at $20 to give back the shares. However, the trader pays the $25 capital upfront to satisfy the requirement, which is at least 50% value of the borrowed shared. Then the trader's net profit is $30-$25=$5, then the percentage gain must be 5/25= 25% instead of 120% because $30 is not the net profit. In call options and stock cases, they all use net profit to calculate percentage gain, why in the case of shorting, the presenter does not use the net profit?
    (1 vote)
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  • blobby green style avatar for user Neil Dey
    I am looking at AAPL's calls and puts. My first very basic question shows my inexperience I know, is WHY is there a put and a call for the price of $220. The Stock price right now is $226, so how does a 'Call for $220' even make any sense?

    Does my question even make sense?

    https://imgur.com/a/tjFhg5y
    (1 vote)
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    • male robot hal style avatar for user Andrew M
      Because the call option is good until expiration, and you don't know what the price of AAPL stock will be then. As you get very close to the expiration date, the price of an "in-the-money" option like that will be equal to the difference between the market price and the strike price. So if that option were expiring today it would be priced at $6 because it lets you buy a $226 for $220. The person selling it to you won't sell it for $5 because she could choose instead to exercise it, pay $220 for the stock and then get $226, which is a profit of $6, which is better than 5. You won't pay $7 for it because if you want a share of stock its better to buy it for $226 than to pay someone $7 for the right to pay $220, thereby costing you $227 for something you ould have paid $226 for.
      (1 vote)
  • piceratops seed style avatar for user Kit McCarthy
    Who can you buy these options from, and what are the requirements to do so?
    (1 vote)
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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. 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 short it, you might say hey, I don't have to put any money up front, because I essentially just borrowed the stock immediately. And then I would sell it for $50. But the reality is that 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'd essentially have $75 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 investment. So your gain, you make, what is that? You make $25 and then another $5, so that's 120% gain. So let me write that down. You had made 120% gain. 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 120% loss. And it's important to realize, in a short situation, the best thing that could happen for you, is your stock go to zero, in which case 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 got from borrowing and selling the stock. So you could make a 200% percent return. In the worst case scenario, so the best scenario is 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 $5 upfront to actually buy the put. And when the stock went down to $20, 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 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.