Options Trading: Single Legged Options

Understanding Options Trading

Episode 02 – Single Legged Options

David McGann (00:17)

Hello to all of our viewers. My name is David McGann. I'm a director here at BMO Investor Line, and I'm thrilled to be co-hosting today's webinar on understanding and trading single legged options. This comes to you as part of our webinar series that really unpacks options trading. If you're newer to options trading, I highly recommend you check out our kickoff webinar, which was titled Getting Started With Options. If you haven't already, once again, we'll be joined today with our friends at OptionsPlay, and I'm pleased to introduce Tony Zhang.

Tony is chief strategist at OptionsPlay, where he leads development of options, trading products, education for investors, and oversees the firm's quantitative options research. He's a frequent contributor to CNBC for analysis on the markets with a specific lens using technical analysis fundamentals, and of course options. We're pleased to have Tony back and I know we have some great content to review today on understanding and trading single Legg options. And with that, Tony, I'll hand things over to you.

Tony Zhang (01:16)

Thank you so much Dave, and thank you everyone for joining here today. Um, as David said, today what we're gonna cover is understanding trading single legged options, which from my perspective is one of the most important topics, especially if you are starting out with your options trading. But even if you are an experienced trading and you're trading, uh, other types of strategies, what we're gonna discuss here today is really the fundamental building blocks of all option strategies. Whether you just trade single legs in your portfolio or you want to graduate to trading more complex, uh, multi-leg strategies, these are the foundational building blocks that you need to understand in order to effectively trade those more complex strategies.

(01:59)

So today what we're gonna do is we're gonna break down the four core strategies, understand when and when you want, want, might wanna utilize them, what the risks are, and outlooks as to when you might wanna trade these strategies. So let's go ahead and get started. Now, before we do, what we are going to discuss here today is purely for education and demonstration purposes. It is not a solicitation or recommendation to buy or sell any of the specific securities that we'll be using as example purposes during our presentation today.

(02:29)

So let's review what we're gonna cover during today's session. First, we're gonna kick off by helping you understand the four basic strategies of an options contract. An options contract can either be for a call or a put, and there can be a buyer or a seller for both of those contracts. So we're gonna review what those contracts obligate or give you the right to do. Um, before we dive into the difference between buying and selling calls and puts, and we're gonna go through example purp, uh, examples because I always feel the best way to learn is by going through an example. And we're gonna look at through each one of these examples when you might want to consider utilizing one of these four strategies, what the risks and trade-offs and potential rewards are for each of these strategies. And at the very end, we'll look at how you can apply these best practices to leverage them for more advanced strategies.

(03:31)

So let's kick off by talking a little bit about stock trading, because I think before we can analyze each of these options, strategies and when we might want to use it, let's first look at something that you as a viewer might be familiar with, which is trading stocks. Now, when we look at stocks, you really have two possible options. You can either buy the stock because you believe that the stock is going to appreciate and value in the future, and you're bullish on the stock, or you can potentially short sell the stock because you believe, uh, that the outlook of the underlying security is bearish and you believe that it's gonna decline in value. Now, if you look at these two types of strategies, you will have immediate gains if you get the directional view correct, meaning if you buy a stock and the stock moves up even by a single penny, you'll be profitable on that trade and vice versa On the short side, now this is what we call symmetrical exposure, and it's incredibly easy to calculate how much your potential gains or losses are going to be depending on where the stock will be in the future because you have dollar for dollar exposure based on the, uh, position that you have. So, and the one thing that you have with, with equity investing or stock trading is the fact that you can buy or hold one of these, uh, positions for as long as you would like, as long as you have the margin to hold it on the short side. And as long as you have the cash or margin to hold it on the long side, you can hold onto it for as long as you wish. So the time horizon is set by you as the investor. So, and the only limitation that I would say you have with stock trading is the fact that if you believe a stock is mostly going to trade sideways, it's not really going to appreciate or decline in value very much.

There's not a, there's not a lot of options for you to trade that particular stock and potentially profit from it. If you believe that this trade is a stock is going to trade sideways, you really have to move on to the next stock that you believe is going to make a substantial move, either to the upside or to the downside in order to be able to profit from it as a stock investor. So that hopefully helps set up, um, uh, you know, how we're going to discuss options today with regards to understanding when you have a bullish or bearish view when you might want to utilize each of the options strategies.

(05:48)

So let's talk about option contracts, because options come in two types of contracts. You have calls and puts calls, gives the buyer the right to buy the stock, uh, puts give the buyer the right to sell the stock at a specific price on or before the expiration date. And this could either be for an underlying stock, an ETF, in an index or potentially even a currency Now, because you can either be a buyer or a seller of a call or a put many times if your first time trader of options having four options versus the two that you have with a stock investor is sometimes a little overwhelming.

So one of the things that I like to do, uh, to help beginners remember what type of strategy is, which is doing a little trick of just using plus and minus and some basic multiplication to help us remember whether, uh, a buying a call or buying a put or selling a call or selling a put is bullish or bearish. So what I like to do is simply assign a positive and negative number to what is intuitive, and then if we do some basic multiplication, we'll be able to quickly get, gather whether something is bullish or bearish. So when we think about calls and the right to buy, we think about that as bullish. So I like to assign that as a positive number. And then a put option is the right to sell. I think of that as bearish. So I assign that a negative number. And then when we also think about buying and selling, buying is typically a bullish, so I assign a positive and selling is a negative, and I assign that a negative sign. So if you simply just do some multiplication, if you're looking to buy a call that would multiply a positive and a positive, that still gives you a positive, and that would mean that you have a bullish strategy and vice versa, if you were to sell a put, which is a negative and a negative multiple, a negative multiplied by a negative is a positive. So that's how you also know a short put is also a bullish strategy and vice versa, a long put and a short call because you're multiplying a negative and a positive ends up with a negative. Those are the two bear strategies. So these are some of the simple ways that I like to look at kind of the four different option contracts and help you remember whether you're trading a bullish and bear strategy. But once we actually dive into the real examples of each one of these four that we're gonna review here today, it's a bit more nuanced than just calling them bullish or bearish. And that's what we're gonna review today and make sure that you understand when you might want to use each one of these four strategies.

David McGann (08:24)

Tony, that's great. I'm gonna jump in here for a minute, if you don't mind. That's great. I think it's great that we're talking about, you know, the essentials and understanding the essential strategies. And some of this is a, is a nice recap actually, uh, from our initial kickoff webinar on getting started with options. You know, and before we go much further, we often hear just in general, options trading is risky, right? And you've just talked about four strategies here. And so, you know, why is there this perception that options trading is risky?

Tony Zhang (08:51)

The perception I think, comes from the fact that there are a lot of options when it comes to trading options and out of all of the options that are available to you, some of them can be incredibly risky or you are risking either, uh, where the probability of loss is relatively high or the dollar amount that you're risking is relatively high. And that's why it's really important for us to review all four examples and help you understand exactly what the risk profile of each one of these strategies, uh, uh, entail so that you can make the right choices for your portfolio and your risk tolerance, um, for, uh, so that you are able to pick not only strategies, but also, um, extras and expirations that make sense for you and your risk profile so that you stay in the right lane for you.

Um, there are a very, very wide variety of strategies that you can trade once you start combining these four strategies into more complex strategies. But actually one of the things that you, I al always think about options is actually a way to reduce risk. And that's actually what we're gonna show you here today, is how you want to think about these strategies in terms of potentially providing you with the outcome that you're looking for while minimizing the risks to the downside if the outlook that you expect doesn't play out.

(10:14)

So with that, let's jump right into it. Let's look at the first, uh, option strategy. We're gonna look at a call option, and we're gonna be looking at buying a call option. So like I said, the best way to always learn is to go through a real example. So what we're gonna do is we're gonna compare the two types of bullish strategies. We're gonna compare a long call to a short put. So let's start with the long call here, and we're gonna use Amazon as an example. And currently when we're looking at this particular example, Amazon's trading just shy of $175. And what we're gonna do is we're gonna look at buying a one $75 call for about $12 and 55 cents. Uh, so, and remember, uh, in our, from our first session, each option contract represents 100 shares of the stock. So if an option contract is quoted at $12 and 55 cents per share, to trade that option, contract is actually a hundred times that which is $1,255 would be the cost to you in order to buy a call option. Now, the, the the risk profile of a call option, as you can see from your screen, is that the upside here is actually unlimited, just like buying a stock. When you buy a stock, if the stock keeps moving higher and higher and higher, you will continue to make more and more profits as the stock keeps going higher and higher and higher. And what you get with a call option is the same risk profile to the upside. But if the stock was to decline as a stock investor, you would also have dollar for dollar exposure to the downside. But in a call option, what you have is limited risk and the risk is completely limited to how much you pay for. And what we're gonna do is we're gonna look at buying a one and 55 cents per share, or $1,255 per contract. And this is the asymmetrical risk that many investors when they're first starting out with options are drawn to, because who doesn't want the ability to, to have unlimited upside, but have limited downside if the directional view that you believe on the stock turns out to be incorrect. So when you think about a a a call option, this is a strategy that you want to, take on if you believe that the value of the stock is going to increase in value in the future because you participate in the upside while your downside is fairly limited. But like I said, I think calling these options, these strategies simply bullish, is not doing it enough service. And there's a bit more nuance to that, and I think it's important for us to understand based on where the stock, uh, heads in the future. After you, uh, buy this call option, we're gonna look at some examples and we're gonna look at how they perform because that's gonna help you inform as to whether or not it makes sense to buy a call option when you are bullish on the underlying security such as we are right now with Amazon in this example.

David McGann (13:04)

So Tony, you know, we, look, great overview on this one example. I'm gonna jump in again if you don't mind. Um, and you know, you, you, you touched on this a little bit, um, break even price and understanding the break even price and just from the standpoint of, you know, like if the stock is trading above my break even price, should I be doing anything at that point?

Tony Zhang (13:27)

Yeah, that's a great point. And so that's what we're actually gonna discuss next on our next slide is to go through the examples and when, when we think about, uh, a call option, right? The, the, the most important thing to remember in my opinion, is the fact that not only does the stock have to appreciate in value in order for you to be profitable, it actually has to go above your break even point at expiration in order for this strategy to be profitable. So if we're paying $12 and 55 cents for a call option that has a strike price of 1 75, that means our break even price is $187 and 55 cents. And remember the call the stock is currently trading at around $175. That means the stock has to appreciate about a 12 and a half dollars between now and the expiration date just to break even, which actually means that you have to believe the stock is going to move beyond that 180 7 55 in order to really justify buying this call option. So that's why when, when the stock does go above your break even price, there are a few things that you can do. One, you can simply let the call option expire, and you will be auto exercise and you would effectively own the stock at that 1 75, price minus, uh, plus the $12 and 50 55 cents that you've paid for the call option.

And now you have, uh, a hundred shares of Amazon stock. And if the stock keeps moving higher and higher and higher, higher, you'll continue to make profits. But if the stock were to decline, you would also suffer losses to the downside. Um, but you know, you have different options. If you, the stock does move above your breakeven price, you can either hold it to expiration and have it exercise. Or what's actually more commonly done is that most options traders will actually simply close their option, add expiration or close to expiration prior, or I'm sorry, prior to expiration because that would allow them to simply profit from the increase in value of the options contract.

And they don't actually want to own a hundred shares of Amazon or be exposed to Amazon after the expiration date. So it's actually far more common, or what's most commonly done is that options traders will simply buy the option if it appreciates in value in the future, they simply sell the option, uh, for a profit and move on without necessarily getting exposure to the underlying security.

(15:44)

So as I said before, just calling a call option bullish, in my opinion, is not particularly, uh, en enough information because from my perspective, as we said, if you buy $175 call option, but you have to pay $12 and 55 cents for that call option, then the break even price of your option of your position is actually 180 7 0.5. So, like I said, the stock has to rally, uh, by about 12 and a half dollars between now and expiration. And just in order for you to break even, which means that you actually have to believe the stock is going to be above 180 7 55, maybe at 1 90, 1 95 in order to really justify buying that call option. Now, that's a pretty substantial rally from my perspective. Looking at the chart here at the stock has already moved quite a bit. And you have to believe the stock will continue moving in that same, uh, with that same momentum to the upside in order to justify buying that call option. Which is why I typically, you know, say that, you know, to a call option is really bullish by a certain amount, and that amount depends on how much premium you have to pay for the option. It heavily depends on what the premium of the option is. You have to factor that into your decision making process, then you have to believe the stock is going to move materially above your breakeven price at expiration in order to justify buying that call option. So it's actually not very common in my opinion, where you have a bullish view on a stock, and it necessarily means that you should just outright buy that call option. And that's a really important, um, uh, lesson to learn because a lot of times beginner traders, they'll buy a call option because they're bullish on a stock and next thing they know the stock has moved in the direction they expect it to, but it didn't move far enough to exceed the breakeven price and they end up losing money on the overall trade.

And that's might be very disheartening, first time trade where you get the directional view correct, but you actually lost money on the trade and it's because of this, um, uh, this concept that you have to overcome the break even price of a call option before you're profitable. And that is, uh, in my opinion, the most important lesson to learn here, before you start trading with a call option.

David McGann (18:08)

So Tony, we, we hear a lot about, you know, things like time value and how time can work against long option holders. How does time value affect my long option? Am I getting ahead of us here, or is, is this the right time to maybe ask a question like that?

Tony Zhang (18:26)

No, I think that's a fantastic question. It really, um, it helps kind of understand why you have to, um, overcome the breakeven price in order to be profitable. So in this particular case, I bought a one $75 call option for $12 and 55 cents. Now, when we talk about time value, we're talking about the, the component of an options, uh, value that's extrinsic value. And in this particular case, because this is an out of the money call option, every dime that you pay for the call option is extrinsic value. And when we talk about time decay every, uh, the extrinsic value of your option will decay to zero at expiration. So as an option buyer, as a hold, as a buyer of an option, the val, the extrinsic value of your option will decay as you go, uh, as you get closer and closer to expiration. And this is what's working against you as an option buyer. So the asymmetrical risk profile that looks so attractive for a lot of investors when they first learn about options, who doesn't want unlimited upside with limited downside, but that asymmetrical risk profile comes with a trade off of time value always working against you. How much time value in this particular case, $12 and 55 cents worth of it. And that means that between now and the expiration date, the stock has to overcome this, this $12 and 55 cents in order for you to break even. And this is what's always working against you as an option buyer. And that's really one of the most important aspects to understand is that that is the trade off that you're making with the asymmetrical risk profile that you're at, that you receive as a call buyer. So it's important to understand the time value is working against you as an options buyer. Um, and this is something that, uh, if you don't grasp that concept initially many times this is really where we find traders where they'll buy a call option expecting that they'll make a profit because the stock went up, but they ended up losing money on the trade because they lost that money to time value.

(20:29)

So I think we'll also, uh, explore this a little bit more in our next example where, um, when we look at a short put.

David McGann (20:37)

Excellent. And, and so, you know, and it's, so, I mean I think you touched on this already, um, when we're on the last slide, Tony, and so we've got a couple of options when we're obviously in a profit with an options trade, we can sell that option immediately and, and just bag the profits on the, the option price itself. The other, the other option we have, of course is to exercise that option before expiry. You touched on already where it's a little bit more common for, for options traders to generally just sell the option for a profit and move on. Are you able to just maybe, you know, like expand on that a little bit? Why, why is that often the, um, the the most common choice for for options traders?

Tony Zhang (21:24)

Yeah, absolutely. So, uh, there's a couple of things here, right? Um, just to, just to answer your last question first, it's most common that traders close out an options contract prior to expiration is usually because they don't want to take on the obligation or even the right to own a hundred shares of the underlying security. They just wanted exposure to the option contract, and they really have no interest in owning a hundred shares or being short a hundred shares of the underlying stock as a result of it, because now you have exposure Why, why is that often the, um, the most common choice So that's really why most traders close out the trade prior to expiration. But to answer your question as to whether or not you want to choose to exercise your option before or on expiration, generally speaking, if you are to ever exercise an option, you wanna do it at expiration. You don't want to do it prior to expiration. I talked about ex IIC value eroding. As you get closer and closer to expiration, if you were to exercise an option prior to expiration, you effectively immediate lose, immediately lose the extrinsic value of the option because that is what's embedded into the value of the option. If you exercise your option, you lose that, that, that extrinsic value, which is why if you ever want to get out of a trade prior to expiration, it's better to close your position rather than exercising it. If you want to exercise your option, you typically wanna do that at expiration because at that point, the value of your option is has no extrinsic value, and you're not gonna lose that because you've exercised that option. Very helpful, thank you. Yeah, absolutely.

(23:02)

So let's take a look at a short put. Um, this is also classified as a bullish strategy, but I also feel from that's, that's not the most accurate description, that's a bit more nuance than simply calling a bullish strategy. And many times this is a strategy that, uh, especially beginners tends to overlook because the risk profile looks so daunting and so poor.

(23:24)

So let's, let's, let's explore this as an example here. Um, in this particular example, Amazon's trading just around that one $74 level, about a dollar lower than the previous example. So let's say we look at selling a put option here, and in the example here that what we're doing is we're going out, um, to the June expiration, and we're looking at selling the 1 65 puts. So a put option that's about $9 below the current price of the stock. And by selling this put option that's, that's below the current price, I'm collecting $6 and 30 cents in credit. So $6 and 30 cents per share, or $630 per contract. And what you go, what you receive with this is limited upside participation, meaning the most you can make when you sell any option is the premium that you collect. So $630 per contract is the maximum, uh, potential profit that you can potentially make when you sell a put option. Vice versa. The amount of risk that you're taking and the obligation that you're taking on when you sell a put option is, uh, at least on the surface, looks quite substantial because in this particular case, uh, I'm collecting $6 and 30 cents by selling the 1 65 put. That means my break even price here is $158 and 70 cents. As long as the stock stays above 1 58 70, I will be profitable. But my maximum risk here is $15,000, and $815,870. Now, if you weigh $630 in potential reward with $15,000 worth of risk, that sounds like a really poor risk to reward ratio. But I think that when you look at that on the surface, while it looks poor, you have to remember, in order for you to lose $15,870, Amazon stock has to reach zero by the June expiration date. So you have to ask yourself, do I realistically believe that there is a shot that Amazon will be worth zero in, let's say two months time? And you might say, I believe that that probability is very low. I perhaps think the probability of the stock being at one 60 or one 50 is relatively low. Um, and so you have to think about, um, what is your true risk reward based on where you think the stock can realistically trade within the timeframe of your, um, your expiration date. And that's really something that when you look at those risk reward ratios, they look far more favorable than the, than the technical risk reward of $630 versus the $15,000 that you're potentially risking in this particular case. But the one thing to remember that when you're selling a put option, a put option gives the buyer the obligation, uh, the, the right to sell the stock, which gives the seller of the put option, the obligation to buy the stock from the buyer of the put option if that buyer chooses to exercise the put. So what that means is that if you were to sell a 1 65 put and the stock trades below 1 65 at expiration, you are effectively obligated to buy the stock at 1 65. But remember, you collected $6 and 30 cents worth of credits to take on that obligation, which means that if the stock does decline below 1 65 at that expiration date, and you are, uh, obligated to purchase a hundred shares of that stock, the $6 and 30 cents that you collect is actually a discount to that stock purchase, which means that your effective net price on that stock purchase is going to be about a hundred and is going to be $158 and 70 cents. So when you think about a short put, it is a bullish strategy and it gives you the obligation to buy the stock. Um, but the risk reward ratio on the surface might not look particularly strong, but you do get a discount if you do end up with the obligation of owning that stock. And that is a really important feature of selling a short put in my opinion. And we're gonna look through an example, uh, of this in order to better understand, when you might wanna sell a short put.

David McGann (27:37)

That's excellent. Tony and I, I know that we have, a number of, uh, of viewers, on today that might actually, you know, use just that kind of a strategy to continuously sell, like a put option with the idea being of hopefully they have to actually, you know, buy that stock. And so, uh, but of course, like you said, add a discount. Um, let's talk about the, the flip side scenario. Like I, I know you touched on this a little bit, Tony, when you said, well, what are the probabilities of Amazon going to zero right in a matter of a couple of months? And, and we know that's, that's pretty slim. Um, but, but nonetheless, like, it it could continue to obviously climb and climb. And, and so, you know, in, in that kind of a situation, you know, how, how are, you know, traders that are actually selling this put, like how are they going to react to that typically? What should they expect? What, what should they consider? Uh, anything to expand on there?

Tony Zhang (28:31)

Yeah, really great question. So, you know, when you sell a put option, like I said, the maximum potential profit on the trade is going to be limited to the credit that you receive on the short put, which in this particular case is six, is $630 per contract. Now, if, let's say you sell this put option and the stock starts to appreciate in value fairly significantly after you sell the put option, the value of that put option will start to decline. And when you're a seller of an option, you want the value of that option to decline. So if, let's say the stock were to rally 10, 15, $20, the value of that option will quickly erode from $6, maybe down to a dollar or maybe even below a dollar. And that gives you the op that gives you the opportunity to buy back that put option for let's say a dollar, collect the, the profits between the $6 and 30 cents that you've, sold it for, and the dollar that you have to purchase that obligation back with. And what you can do is you can choose to sell another call option. Maybe you might wanna adjust the strike prices higher because the stock is now appreciated in value, but you typically might wanna sell another short put and collect more premium. And just to keep in mind that, you know, what you have to think about is how much premium are you collecting in this particular case, $6 and 30 cents, versus how much cash do you have to set aside in order to sell that put, which is roughly a little over $15,000. And you can calculate the yields on that. How much yield are you collecting in the two months between now and expiration? And you might be surprised at how much yield you're actually collecting in that particular case, especially if you compare it to yields that you might get on the dividend or yields that you might get somewhere else in a savings account or a bond. Um, you might, uh, even though the risk profiles of those are, are not the same, it's you might be surprised at how much yield you can collect by such strategies such as a short put, especially as a stock appreciates in value and you actually never own that particular stock. You're just selling that put option for the income.

(30:24)

So let's, let's flesh out this short put here a little bit further, right? So in this particular chart, what we have is the stock trading around that 1 74 level that where we sold the 1 65 put and we collected $6 and 30 cents. And what you see here is that the break even price here is around 1 58 70. And that means that even though I'm bullish on this particular stock in this particular case by selling a put option and I'm collecting premium, I basically have a buffer on this bullish view.

And what that means is that if the stock stays around 1 74, I'm gonna collect $6 and 30 cents and make the full profit. But even if the stock were to decline in value, even if it declines to let's say one 70, uh, I'm sorry, 1, 1 60, that's, that's, that's the stock decline from where it's trading today, but I'm actually still profitable on the trade. So this is really a, a fairly forgiving strategy. It's a strategy that naturally has a higher probability of profit greater than 50% because even if the stock stays where it is, if it increases in value, or even if it decreases in value in little all three scenarios, I will be profitable. The only time I'm unprofitable by selling a short put is if the stock were to decline significantly below 1 58 70, that's when I will start taking on losses for this particular trade. And you know, a lot of times, uh, like I said, when when you look at that risk profile, it looks quite daunting in terms of why would you take on $630 worth of credits in exchange for $15,000 worth of risk? But remember, as an equity investor, when you buy a hundred shares of the stock you are buying, you are taking on $16,000 worth of $16,500 worth of risk if you were to buy a hundred shares of the stock at 1 65. Here you basically have the same obligation as someone who's buying the stock at 1 65, but you'll get to effectively own the stock at 1 58 70. So that $6 and 30 cents gives you a discount on the stock purchase. So if you compare a selling a put option versus outright buying and put up, uh, outright buying the stock at 1 65, you are actually taking on a $6 and 30 cent discount on your stock purchase, which is going to give you a down some downside protection. So, you know, as we kinda review these two strategies, buying a call versus selling a put buying a call option requires the stock to make a big move to the upside before you're profitable. So your natural probability of profit on that is relatively low. The stock has to move a big amount before you're profitable. When you're selling a put option, not only does the stock, not only you're profitable, the stock does move in the direction you're expected to, but even if the stock doesn't move at all or even declines a little bit in all three scenarios, you're gonna be profitable. So you actually have a prob probability of profit that's greater than 50% when you're selling a put option, even though technically it's a bullish strategy. So even though both of these strategies, are considered classified as bullish, they're quite different and they're nuanced, like I said. And it's really important for, traders who are starting out to really understand these two characteristics, how they're different, how the risk profiles are different, and when you might want to utilize one or the other. Generally speaking, you only wanna buy a call option if you believe the stock is going to make a big move in the direction that you expect it to. And generally you might wanna sell a put option if, let's say you are more neutral, uh, you but longer term bullish on an underlying security. Now that we've kind of understood the bullish side by looking at a long call and a short put, now let's look at a long put and a short call, which if you look at these two examples, is really just going to be a mirror image of the first two that we looked at.

(34:01)

But we're flipping bullish now to looking at bear strategies. And this is really something that's also interesting about options trading because when you, um, are a stock investor, generally speaking, a lot of stocks that you might be bearish on, you're probably not necessarily going to outright and short sell a stock one because it might short, short selling a stock itself has unlimited risk. That's a risk profile that many traders might not be comfortable taking. Uh, you may not have the margin account in order to sell short the stock and sell shorting a stock. Not all stocks you can borrow in order to short. However, um, you might find that it's more palatable to look at buying a put option if you do have a bearish review. And a put option, just like a long call option, is basically the mirror image of it. So let's look at an example here of Amazon trading at around 1 75, and we're looking at buying a one 70 put option, a put option that's just slightly out of the money option. And we're paying in this particular case, $8 and 5 cents for that put option, which means my risk is limited to $8 and $58 and 5 cents or $805 per contract, and it gives me unlimited or, or sorry, substantial reward to the downside in this, in this particular case, $161 and 95 cents per share or $16,195 worth of maximum reward. Now again, this risk profile looks very attractive, $805 in exchange for potentially $16,000 of potential reward. But we have to remember, in order to make that maximum reward, Amazon stock has to be at zero by expiration date, which fairly unlikely possible, but fairly unlikely. So we always have to take some of these risk to reward numbers with a little bit of grain and salt and put reality around where we believe the stock is going to potentially be, and then recalculate the actual risk reward to help us better understand whether the risk reward is favorable to us or not. But just like a call option, when we think about buying any option contracts, we have to understand the break even price of that option contract. In this particular case, if we're buying a one 70 put and we're paying $8 and 5 cents for it, our break even cost here is 1 61 95. We're basically subtracting $8 and 5 cents from the $170 strike price. And if you consider the fact that the stock's current currently trading at 1 75, that means the stock has to decline in, in this particular case nearly $13 or a little over $13 before you're going to be profitable on this particular trade. So you have to really think about the fact that even though this is classified as a bearish strategy, how far does the stock need to move in order for you to be profitable? Because that is the decision that you, that is the question that you have to ask yourself before you just simply decide to buy a put option simply because you're bearish on an underlying stock.