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Buying Options versus Selling Options


Buying Options - Long Position

Selling Options - Short Position
Profitability:

An option puts buyer may profit only in a falling market.

An option calls buyer may profit only in a rising market

Profitability:

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 Factor:

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 Factor:

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.

Maximum Gain:

 For bought calls, the maximum gain is theoretically unlimited. For bought puts, it is substantial.

Maximum gain:

Maximum gain from selling short options is 100% of the premiums received.

Maximum Loss:

 The maximum potential loss for long options is 100% of the premiums paid for those options.

Maximum Loss:

The maximum loss is theoretically unlimited; even though brokers and margin requirements, always restrain traders to a certain extent.

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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