When it comes to options, many people are confused whether or not it’s better to buy them or sell them. Both buying options and selling options can be worthwhile and profitable however.
Unfortunately, one must keep in mind that a substantial amount of options end up going worthless. This means that there is considerable loss possible.
When one buys an option, the profit potential lies in that the stock hits a higher rate. On the other hand, with options selling, there are several ways to make money. You can wait for a major decrease in the price of the shares, or sell a call against the stock and collect the premium. You can also sell a put to collect a premium.
The difference between buying Put options and selling Call options is not big. One gives you the right to buy while the other gives you the right to sell.
Before you decide which is better for you, let’s go over some basics first.
An option buyer is someone who buys the option and hopes the price will go up so they can sell for a higher amount and gain a profit. An option seller in comparison is someone who relies on a profit that depends on the stock price falling. If you buy the option back for less than what the trader sold it for, there is a big profit to be had.
When wondering whether to buy or sell, you have to figure out if you think the stock price will go down. If you think the price will decrease, then you should buy the put option.
If you are unsure about whether the stock will go up or down, then its better to sell the call. This should only be done when the price of the stock is not less what you have paid for it but it’s also not going to go higher. Staying can lead to a potential loss. Selling at a peak price is the goal.
The other question to ask yourself is if you should pay the margins of the trade. The loss you will incur selling a call option is limitless which means you need to think very carefully. Compared to buying puts, where your maximum loss will be the premium you have paid, the damage here can be unlimited.
Another thing to consider is whether you think the market will experience a rise or fall. An increase of volatility in the market may mean that buying a put is a better idea. The rise in the market can lead to an unlimited profit. Even if you expect the market to sharply fall, you can sell the call option then. You can also earn a profit by doing this.