Thread by @PowerTradeHQ

1/ Today in our #Powerknowledge series we are going to talk about what happens when you buy or sell Call?

Over the course of this series we will talk about Greeks, Volatility, Leverage, and Spreads, but first we must build a foundation.

A thread. 🧵👇

2/ So what is a Call? I'm sure you have heard it 100 times, a call is the right (but not the obligation) to buy $BTC at a certain price, within a certain time period.

3/ That's the book definition, but I find it helps to look at a real world example. Say you buy one 50k #BTC Call that expires in 60 days. If at expiry #BTC its trading at 52k, you have the right to buy 1 #BTC for 50k. Does that make sense? You just bought #BTC at at 2k discount.

4/ You could then immediately sell that #BTC on the open market and pocket the $2k. Your payout is the difference between the strike price (50k) and the expiration price (52k).

However, Options contracts themselves have a cost, kind of like how insurance policies have premiums.

5/ For example, lets say you you paid 1k for that 50k Call option we mentioned above. What would your actual P/L be at expiry?

Payout = 2k
Premium Paid = 1k
Total gain = 1k

Fairly straight forward, right?

6/ You might be asking, what happens if the underlying (#BTC) never passes 50k, and after 60 days #btc is trading at 49,999. The answer is, tough luck. Your Option just expired worthless and you lost the 1k in premium you paid.

7/ Does an insurance company give you back your 30 years worth of premium if you never have an accident? Nope, of course not. Same concept applies when buying Calls.

So what happens when you sell an Call Option?

8/ Instead of paying the insurance company 1k for that Call Option, you now act as the insurance company. Someone pays you 1k to sell (also known as "write") them the insurance (option).

9/ When you sell a "naked" call. You have unlimited risk and here is why. If the underlying goes above the strike you sold (50k), at expiration, you will have to buy $BTC at whatever market price is, and sell it to the buyer for the agreed upon price of 50k.

10/ Say you sold a 50k option with 60 days till expiration.

And lets say at expiration $BTC is trading at 55k. You would then need to buy $BTC at 55k and deliver it to the buyer of the option, but he would only need to pay you 50k for it. Thus leaving you at a loss of 5k

11/ What happens if $BTC was trading at 100k?

You must buy $BTC at 100k and sell it to the buyer of the Call option for 50k. Which means you are 50k in the hole.

Its easy to see how selling Options can liquidate you quickly if you don't understand them.

12/ When you sell an Option remember you receive a premium. In our example we collected 1k. As the insurance company, if the option expires worthless (ie. 49,999k) do we have to give the premium back?

The answer is no. We keep the premium.

13/ This is how option sellers make money. We collect the premium and keep it when the Option expires worthless.

14/ Question: Why would anyone do this if the loss is potentially unlimited?

Answer: Many reasons, but just know, there is a much higher probability that Options expire worthless than worth something.

A deep dive into selling options is a thread for another time.😁

15/ Last thing, when you sell an Option and collect the premium, its like money in your pocket, you can use it to pay off the Option buyer if need be.

16/ In our example you sold the 50k Call and collected 1k in premium, if $BTC is at 51k at the time of the option expiry you can use the 1k in premium to cover your loss. This is called your break even. Its give you a bit of wiggle room.

17/ Ok, that’s it, that’s the basics of buying and selling a call. If you are interested in learning more check out #Powertrade knowledge on our app for iOS.

power.trade

18/ Tag someone you know needs to hear this!

Also leave any questions or comments below, feedback is always appreciated!

Any thoughts @laevitas1 or @tedtalksmacro?