Buying Options versus
Buying Options - Long Position
|Selling Options - Short
An option puts buyer may profit only in a falling
An option calls buyer may profit only in a rising
An option puts seller (writing puts) can be provided
with extra income in a flat to rising market.
An option call seller (writing calls) trader can
be provided with extra income in a flat to falling market.
Time works against the option buyer - If an options
buyer is in a position over a long time, the purchased option may
drop in value – even if the underlying security moves in favor of
the long position but. The longer an option buyer stays in position
the risk is greater.
Time is an option seller's ally - the sale of short
options can bring in a profit even if the underlying security moves
somewhat against the direction of the short position over the prolonged
period of time, due to an option's time value erosion.
For bought calls, the maximum gain is
theoretically unlimited. For bought puts, it is substantial.
Maximum gain from selling short options is 100% of
the premiums received.
The maximum potential loss for long options is
100% of the premiums paid for those options.
The maximum loss is theoretically unlimited; even
though brokers and margin requirements, always restrain traders to a
The option sellers have more opportunities to profit, by
comparing the benefits (outlined in the table above) of selling short
options and of buying long options. If the underlying security moves
substantially against their position (i.e., contrary to the predicted
direction) that is the only way option sellers lose money. It is still
possible to make money (because of an option's time erosion) in the flat
markets – or when the underlying moves modestly against one's position..
Option buyers, on the other hand, have the advantage when it
comes to limiting their potential losses. Traders risk losses that can far
exceed the amounts originally required to establish the position when
selling options short. An option buyers' risk is limited to the amount of
the premium paid only.
In summary: Option
sellers face the risk of larger potential losses, but have more
opportunities to profit.
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