In this article, we’ll cover the definitions of buying call vs selling put options and the advantages of buying call options as an investor. Additionally, we’ll discuss buying and selling pressure indicator information.
What is the Difference Between Buying Call Options and Selling Put Options?
The differences between buying option puts and calls present different levels of risk and reward for traders. So, if you’re interested in buying stocks with options you should be aware of how this differs from selling put options.
What is buying a call option?
Buying a call option means that you are buying the right to purchase the underlying asset at a fixed strict price before the expiry date.
Once bought, keep an eye on the underlying asset’s market price. If the price increases above the strike price, sell it at the higher market price for a profit.
What is selling a put options?
On the other side of the equation, when you sell a put option, you are selling the right to sell the underlying asset at the strike price before the expiration date. Your hope, in this case, is that the underlying asset’s price remains the same or drops below the strike price.
That way, the buyer will lose their premium (which you keep). But if the underlying asset’s price goes up, you’ll lose the asset sold at the strike price and buyer’s the premium.
Advantages of Buying Call Options for Investors
With buying call options explained, let’s dive into the advantages of buying call options. Here’s what you should know:
- There’s a limited risk of loss when buying call options. You’ll only lose out on the premium paid on the call option if you fail to sell the asset for a profit.
- There’s the potential for high returns if you manage to sell the underlying asset once the price rises significantly compared to the strike price.
- You don’t need as much capital to get started with trading call options compared to buying the actual asset.
- There’s flexibility in how you can make money from call options. This includes profiting from selling call options.
How to Determine Your Options Buying Power and Overnight Buying Power
Your brokerage makes this information visible in your account’s dashboard.
What is day trade buying power?
Many new traders ask “What does buying power mean on Robinhood” for example. To determine your day trading power for options contracts, check your brokerage account dashboard. It’ll confirm your margin compared to the margin requirements for the options contracts you want to trade.
What is overnight buying power?
Overnight buying power refers to how much capital a trader has available to hold positions in their account overnight. Your account balance, margin requirements, and the value of any positions you currently hold play a role in determining the overnight buying power.
The Meaning of Day Trade Buying Power, Margin Buying Power, and Stock Buying Power
The above all refer to the amount of capital a trader has for buying stock premarket or during the market trading hours. Here are more details:
- What is day trade buying power?: How much capital a trader has available for making day trades.
- What is margin buying power?: The amount of capital a trader has to purchase securities on margin.
- What is stock buying power?: How much capital a trader has available to purchase securities without using margin.
Buying and Selling Pressure Indicator: What it is and How to Use it in Options Trading
Besides taking note of buying calls explained, you also need to take note of technical analysis tools such as the buying and selling pressure indicator. Traders use it to identify the balance between sellers and buyers in the options trading market.
It’s based on the belief that an option’s price is influenced by the demand for the options. More options for buyers than sellers increase the price. On the other hand, more sellers than buyers decrease the price.