[MUSIC] Learning outcomes. After watching this video, you will be able to understand options from a seller's perspective. [MUSIC] All right, now we understand options. We know what is a call and what's a put option. Remember so far we are discussing these options from a bias point of view. We said call option is a right to buy, put option is a right to sell. Right, like in any other transaction, there is a buyer, there is also a seller. So we saw the payoff, right, in call option we saw that payoff. That you pay a premium, if the price goes above a particular level, then you make unlimited profits. Similarly input option, you pay a premium, if the stock falls below a particular level, you will make, is it unlimited profits? No. It's not unlimited. Actually you can make a lot of profit with f put option also but theoretically speaking, it's not because the stock price can only go up to zero because of limited liability. It's a homework you can think widely what is the relation between limited liability and the stock price being bound at zero? That's not the purpose of this course. Those of you who are interested can get material online as to why this should be. But the point is, it's bound at zero. Now all this is from an option buyer's point of view. What happens to an option seller? For an option seller, it's exactly the opposite. It is not an option anymore. So for the option buyer pays the premium, first step. The option seller receives the premium. The way you ought to think about it is think about an insurance company. For a person who's insured, if something goes wrong or whatever insured event happens, he will get the money. In return, he pays the premium. But from the insurance company's point of view, insurance company receives the premium and pays out if something goes wrong or if insured event happens. Similarly, the option seller is like the insurance company. So for call option seller, so what happens to call option seller? The pair of diagram, you should draw yourself, that's a quiz. So draw the payoff diagram of a call option seller. Now you know what the call option buyer's diagram is. I think I suggest you pause for a while and attempt to draw a call option seller's pay off. So when initially you receive money, so you start with a gain. That premium is a gain, right. Now as long as the insured event does not happen, that means as long as the stock price is below a strike price, then the call option seller doesn't have to pay anything. So he or she keeps the premium. That premium amount becomes profit. The moment strike price crosses the stock price, sorry, stock price crosses the strike price, please make a change. Strike price is constant, you fix the strike price. It is the stock price that moves. So moment the stock price crosses the strike price, the buyer starts gaining, the seller starts losing. Let me give you an example. So your strike price is 100. And you're sold a call option for five rupees or $5. Now if the stock price crosses 100, then the buyer will exercise the option. What do you mean by buyer exercising the option? He'll come to you and ask for the stock at 100. So you'll have to buy at 110, 115, 120, whatever. And give the stock at 100. So, that is the loss. The difference is the loss. Now, is there an upper limit for it? Unfortunately not. If the stock goes to 200, your loss is 200- 100- the premium. So you lose 95 rubies. Here, you've received the premium, remember that. It's not just, the premium offsets your loss. But what if the stock goes to [COUGH] 300, then you lose 200- 5, which is 195. So the loss is unlimited for a seller, [INAUDIBLE] gain is limited which is the premium. Now you may be wondering why anyone with a same sense of mind will ever get into this kind of a contract. Therefore one side, the loss is limited but the gain is unlimited. But for the other party, the gain is limited but the loss is unlimited. The same question should apply, why should somebody run an insurance business, right. The answer is also the same. In most cases, options are never exercised. They exist, they end up worthless. So on an average, options sellers make profit. But, yeah, it's true, as Taleb points out in Black Swan. Whenever they lose, they may lose a lot. Imagine an option, call option seller, when the stocks market moved from, S&P moved from 666 to say 1,000. Their losses are unlimited. Similarly, the put option works the other way around. So a put option seller gains. You should pause and continue this. A put option seller gains if the stock, I hope you thought about it. So put, think about the put option buyer. Put option buyer gains if the stock goes down. So put option seller loses if the stock goes down. And put option seller gains if the stock goes up. Because put option buyer loses. So what is the put option person doing? He's supplying insurance against falling stock prices, right? So again, let's think of this 100 strike price. If the stock price goes to 70, so this put option seller has agreed to buy the stock at 100. He will have to buy it [COUGH] 70 stock at 100, so he will lose 30. So put options will seller if the stock goes down. So if the stock goes down to 0, he will lose the entire value. So this is the difference between buying and selling an option. So for a buyer the upside is unlimited in call, and limited up, bound by 0 price. Whereas downside is always limited irrespective of what caller have put. For a option seller, call option seller, downside is unlimited, upside is limited. Put option seller, downside is actually limited up to 0 bound, but it can be huge. But upside is always limited. So, that's the difference between option, buying and selling. I want you to always keep in mind, this will be useful when we talk about momentum crash strategy.