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One of the biggest confusions amongst the traders all around the world is whether to buy options or sell options. One of the most important things that is to note is that there is huge uncertainty in trading and more than 67% of the options go worthless. Hence, before trying to know what kind of Option selling is better for you, it is essential to accept that no matter how many strategies you put in, there is a considerable risk of loss in trading.
Buying Options Vs Selling Options – Which Is Better?
Most of the traders only focus either on the buying options or just on the selling options. However, both of these options can be profitable in their ways. In buying options, the profits are made when the stock hits a higher rate. However, in option selling, there are numerous ways to make money. The first one of these is the major decrease in the price of the shares. Others are selling a call against the stock and collect the premium, selling a put to collect a premium and much more.
The basic difference between the Buying Put options and the Selling call options is only that one gives the right to buy, and the other gives the right to sell. Before getting further into the discussion of what is better than what, let us go through the basics.
What is an option buyer?
An option buyer is a person who buys an option and hopes that its price increases so that it can be sold for a higher amount and substantial profit can be gained.
What is an option seller?
An option seller is a person whose profit depends on the falling of the stock price. If the option is brought back for a lesser amount than the trader sold it, there will be substantial profit.
How to decide between buying options vs selling options?
You need to take in mind four considerations to decide between buying option and selling option.
- Do you positively think that the price of the stock will go down? If yes, then, in this case, you should buy the put option. The maximum loss you will incur is the premium you have paid the maximum profit however you will make is unlimited.
- The next question to ask yourself is whether you are unsure about the stock going up or down. If this is the case, then it is better to sell the call. This should be done when the price of the stock is not less than you have paid for but is not even going higher. Staying at a share for a long time can lead to a possible loss. Here you will not gain profit, but you will also not have to incur any loss. Selling the stock whenever you think it is at its peak price is the best way to go.
- Ask yourself whether you can pay the margins of the trade? The loss that you have to incur while selling a call option is limitless. Hence here you need to take a thoughtful decision. This is not like buying puts where the maximum loss you will incur will be the premium you have paid. Here the damage can be unlimited and if you are not in a condition to do it, selecting selling a call is not a good idea.
- The last thing to consider is whether you want a sharp rise in the market or a sharp fall in the market? If you’re going to see a sharp increase in the volatility of the market, buying a put is the better option. If there is a rise in the market, the profit you will make will be unlimited. However, the losses you will incur will also not be massive. If you are expecting a sharp fall in the volatility of the market then selling the call option is the best. Since the market is going down and the prices of the share will go down, you will earn some profit from selling it. In the worst-case scenario if the cost of the stock has not gone up ever since you have bought it, selling the stock will save you from the loss that the fall in the market would have caused.
The best way to know whether to sell or buy an option is to know the losses and the profits you can make through them. Trading is a gamble, and you need to study the market trends effectively to know whether the volatility will increase or decrease.
Which is better Buying or Selling Options?
Now let us come to the final question, which is better- options selling or option buying. To conclude we would like to say that Option selling is more profitable than options buying. How it can profit you are as follows:
Call Buyer Vs Seller
We know that with a call contract the owner gets the right to buy 100 shares of stocks for a definite period. In this case, the person who buys will only be at a profit if the stock price increases and goes above the price he has paid for it. However, the seller will make a profit if the cost of the stock goes up (Till Breakeven), down or does not budge. This is because the sellers enter the contract with a mindset that the price of the stock will not increase by the expiration and they will anyhow get to keep the price they paid for it. Hence this saves the seller from loss and gives him a higher potential for profit.
Put Buyer Vs Seller
In a put contract, the buyer gets the right to sell 100 shares for a limited period. The profit they make is when the price of the share is lower at expiration than the cost they sold it for. However, in this case, also the seller is profited in every case. Since the seller always gets to keep the price they initially received for the stock, it does not matter whether the price goes down, up or remains the same.
With all this said, selling options is apparently better than buying options. However, if you have a good knowledge of the market trends and can apply some strategies to gain profit, then buying options can also turn profitable.
You can use these 8 Basis Options strategies for beginners
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4 thoughts on “Buying Options Vs Selling Options”
I think option selling can be really profitable and risk free if one Is humble enough to consider the volatility of the market and set the strike price accordingly. Unlike buying options more than 80% of which go wasted.
Upto what extent do you guys approve with my opinion.
Yes we are fully agree with you. But as option Writting caries unlimited risk, so need proper understanding about the option premium, greeks and Implied Volatility.
I m basically shocked to see no article talks about the margin one has to cover for selling an option, this all doesnot make sense if your capital is small.
Here we are not saying just short a call or put instead of Long call or put. Short Strategies required high margins. Even shorting in options is also not advisable, if our capital is small. Here we are not discussing margin required or what rate of return we are getting. We just simply analyse which trade is giving us consistently profitable ratio. Yes, there are some exceptions too, but we are sharing our views on what generally people face.