Thursday, July 17, 2008

Buying vs. Selling options

Buying vs. selling options, which one is better? Each strategy has its own strengths and weaknesses.

If you are Selling options you have the benefit of time. As time goes by the option you sold will lose its value. This way even if the stock goes against you, you can still make money on the trade. With option buyers time works against them.

If you are a buyer of an option the stock has to go in the direction you want it to go faster than time value goes down. This means that the stock can do what you expected it to and you can still lose money as a buyer. Another advantage of option sellers is that they tend to have a higher winning ratio.

On average 80% of options expire worthless so selling them can indeed be a powerful way to make money. Being an option seller is like being the person who sells lottery tickets to people who want to get rich quick, the odds are in your favor.

But there are still reasons in which someone would want to be an option buyer. The first reason is also the most powerful. Buying options can give you an unlimited profit potential while giving you a limited loss potential. That sounds pretty good and has convinced many traders to go after the option buying part of trading.

Option selling does not give you an unlimited reward. If you sell a put the maximum you can make off of that trade is the amount the put was worth.

The second advantage that option buying gives you is the ability to have a limited loss. If you have a controlled limited loss it is easier to control your trade and to only take trades that give you a small loss if you are wrong and a large profit if you are right.

Option selling does not have this. While there are ways in which you can keep your losses small by being a seller your potential loss will always be greater than your potential reward for any 1 trade. Still if you are right the majority of the time that becomes less important.

Both these strategies contain strengths and weaknesses it is up to the individual investor to decide which strategy is best for them.

For more information about the stock market visit

No comments: