Options question?

Question

What is the difference between assigning a call and exercising a put? With both of them, aren't you betting that the particular stock will go down? I don't get how they are different... and which is more profitable...

Answer 1

either can be more profitable depending on what the underlying asset actually does.

if you sell a naked call, you expose yourself to theoretically unlimited risk in exchange for the fixed premium that you collect.  if you buy a put, then you pay the fixed premium in exchange for a finite range of possible returns.

with the call, you're hoping that the price of the underlying asset stays the same or goes down.  with the put, you hope the the price of the underlying asset actually goes down.

if the underlying asset remains flat, then you would profit more by selling the call (as you would collect the premium on the call, while both the put and the call would expire worthless).  if the underlying asset goes down, then the put could be more profitable, as every dollar that the underlying asset depreciates would be a dollar of profit to you, whereas the call would still expire worthless.

most people who trade options lose money.  i would advise you to stay away from derivatives until you understand them better.

Answer 2

<<<What is the difference between assigning a call and exercising a put?>>>

Only the buyer (holder) of an option can exercise it. If you buy a put option and you exercise it you will sell the stock for the strike price.

Only the seller (writer) or an option can be assigned. He has no ability to say if he will be assigned or not as long as his position is open. The decision is made by the option holder. If you sell a call option and are assigned you will sell the stock for the strike price.

Example:

If one person buys a put option with a strike price of $35 for $1 per share his effective sale price for the stock is $34 per share If another person writes a call option with a stirke price of $35 for $2 per share and is assigned his effective sale price will be $37 per share.

<<<With both of them, aren't you betting that the particular stock will go down?>>>

Buying a put and selling a call both create negative delta positions, meaning they usually profit when the price of the stock declines. To that extent they are both betting that the particular stock will go down.

The exercise/assignment process is not a bet about the future direction of the stock price. It is a way of closing the option position and trading the stock.

<<<I don't get how they are different... and which is more profitable...>>>

Buying a put and writing a call are very different in two ways.

First, the call writer usually wants to profit from less volatility in the stock price than expected, while the put buyer usually wants to profit from more volatility in the stock price than expected.

Second, the risk-reward profiles of the two positions are very different. A call writer has a small maximum profit and a very large potential maximum loss. A put buyer has a small maximum loss and a large potential maximum profit. Of course, in return for risking more option writers will realize profits on most of their trades while option buyers will realize losses on most of their trades.

Assuming the stock price declined to make both the long put and the short call profitable, the size of the decline will determine which is more profitable. A larger decline makes the long put more profitable. A smaller decline makes the short call more profitable.

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If you want to understand more about options I suggest you take advantage of the free educational material at

http://www.cboe.com/LearnCenter/default....

and

http://www.optionseducation.org/

Both of these sites were created by professionals from the options industry to educate people about options. They are not spam and the material is both well presented and accurate.

Answer 3

1. it means using your rights.

2. no, call is in profit if the stock price goes up