Option selling and option buying are two common strategies in options trading, each with its own set of advantages and considerations. Options trading is a dynamic and versatile financial strategy that encompasses two fundamental approaches: option selling and option buying. Each approach offers distinct advantages tailored to the preferences and risk tolerance of investors and traders.
But in the next 5 minutes only we will clear why people should choose options selling over options buying if you want to create a long term wealth. If you want a short term and shortcut then you can choose as per your choice.
Table of Contents :
Benefits of Options selling over options buying are :
Taking Profit is easy :
In option selling profit making is very easy and is the only way to earn a regular income in the stock market. In direct shares trading or even in options buying you have to wait for the movement of the stock. But in selling the options even when the market or the stock is not trending then also you can earn a regular income.
This is because whether stock moves or not the premium of the underlying asset will decay with time. So, option selling is the best option at the time of a non-trending market or even when you know the levels which the stock or index will not cross. For e.g. if CMP of an asset is 450 and you know that by the expiry date of that assets contract the price will not go below 400 then you can sell Put of 390 and earn premium till the expiry.
Winning Probability :
In the stock market or any financial market all game is of probability. If your winning probability is in your favor and you follow a bit of risk management then you can easily beat the market and earn a good income. So, that happens in options selling where the probability of your winning is 80%. This is why because when price fluctuates a little bit on either side or remains constant then there will be profit to the option seller with premium decay.
There is only 20% chances of loss in option selling that is when price fluctuates so much reverse to your expectations but that happens rarely in big companies. And even if that happens then you have risk management to follow. Option sellers often choose strike prices that are less likely to be reached by the underlying asset, increasing the likelihood of the option expiring worthless and the seller keeping the premium.
Time is the best friend :
As an option seller, time decay (theta) works in your favor. With each passing day, the option’s value erodes, potentially resulting in profits for the seller. In options premium is like an ice cube that is put on a hot pot. With time passes it will melt and go in the pocket of the option seller from the option buyer. That is why it is said that time is the best friend of Option seller and biggest enemy of option buyer.
Just predict where the market will not go :
In the stock market when we start trading we always have a doubt about where the market will go. Everyone wants to predict the market. But option selling has that advantage over options buying. Here you just need to know where the market will not go. It’s not compulsory to move a lot by the market to get you in profit.
If you know where the market will not go till the expiry of that underlying asset then also you can earn money because time is your friend. And whether the market moves or not but time will always keep moving. So, it’s the biggest advantage of selling options over options buying.
Risk control easy :
People say that there is unlimited risk in the option selling. But that is only the bookish theory. There is not unlimited risk in option selling if you properly manage it. You just need to follow the 200% rule if you are new and as an expert you can also go with the 300% rule if you like. We know that this 200% & 300% goes bouncer so let’s understand what it means.
Here 200% rule means that if the price of premium of the underlying asset becomes double from the price at which you sold the option then take exit from the trade. In the same way in 300% rule take exit when it goes thrice of your selling price. It is as simple as that. So, now you can see where that unlimited risk went. It is just an illusion which is created by some people to attract you by saying unlimited risk.
Before we go to the drawbacks if you want to learn the stocks that are in focus this month and for education purpose past months. You can go through the article. All links are given below.
- 5 best stocks for trading in June month
- 5 best stocks for trading in July month
- 5 best stocks for trading in August month
- 5 best stocks for trading in September month
Drawbacks of Option Selling:-
But understanding the advantages is not enough. You should also know some drawbacks also which can be with option selling.
Unlimited Risk :
As we discussed above, whenever you study about options selling you will hear that selling has unlimited risk. But it’s not all true. If you properly manage that then there is no unlimited risk in any trade. You just need to know where your Stop Loss is and that is enough in option selling. As discussed above you can use 200% or 300% rule as per your risk tolerance to make your loss limit.
Limited Profit :
People always say that there is limited profit in the options selling. But that is just a mental block. In option buying also there is the limited profit because you will exit after your target gets hit. So, remove that mental block. Also if you thought that you can earn more then you can trade with multiple lots to make a big profit.
What if the market reversed :
Yes, that is the real and practical disadvantage of option selling. But you know very well that how many times an Index moves big or even large cap stocks give a big move. It is just a rare situation and that needs to be accepted as an exception. But for that situation you have proper risk management in your part which we have discussed above. Also you need to be ready for that because there is no thing like 100% accuracy in the market.
Conclusion :
Now finally if we discuss what we should choose then mainly it depends on you that you want a quick money like once in a blue moon or slowly slowly regular income. It doesn’t mean that people don’t earn with options buying but the probability of option buyers is very less and also they are successful because they have been in the market from a long time. But as a beginner or newbie your chances of earning with options buying are less.
To prove that let’s share an interesting fact that in India 95% of options expire without being exercised. Also you should know that, a developed nation like Singapore does not work in options. This is because there are only option sellers and no buyer is there. This is why. But in India there are more buyers than sellers and you & us should take benefit of that situation. But rest all is your call as per your conviction and risk appetite.
Learn More :
Thank you for reading Buffett Money’s guide on the “why option selling is better than option buying”. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
- Penny Stock
- High Growth Stocks
- Dividend Yield Stocks
- False Breakout Stocks
- Fundamentally strong stocks
- Importance of Paper Trading
- Importance of Trading Journal
- AI impact on Algo Trading
- Averaging Down Strategy
- Moving Average Strategy
- Bulk Deal Strategy
- Methods of Stock Market Prediction
Thank You
Happy Investing
Clearly explained about option selling is better than buying