Selling Options Short.
Selling Options
(Short Positions) |
 |
Buying Options
(Long Positions) |
| Profitable - Written puts (i.e., puts sold short) can provide a trader with extra income in a flat to rising market. | |
Profitable - Long puts are profitable only in a falling market. |
| Profitable - Written calls (i.e., calls sold short) can provide a trader with extra income in a flat to falling market. | |
Profitable - Long calls are profitable only in a rising market. |
| Time erosion is an option seller's ally. Even if the underlying security moves somewhat against the direction of the short position, the sale of short options can still bring in a profit due to an option's time value erosion. |
|
Time erosion works against the option buyer. As a general rule, the longer an option buyer stays in a position, the greater the risk that the purchased option will drop in value - even if the underlying security moves slightly in favor of the long position. |
| Maximum gain - You keep 100% of the premiums received from selling short options. |
|
For calls, the maximum gain is theoretically unlimited. For puts, it is substantial. |
| The maximum loss is theoretically unlimited; however, traders are always restrained to a certain extent by their brokers and by margin requirements. |
|
The maximum potential loss for long options is 100% of the premiums paid for those options. |
| Uncovered options are bounded by high margin requirements, which depends on the selected strike price and current underlying stock price. |
|
Most brokers require to have minimum $2000 (margin) on the account in order to be able to buy options. |
By comparing the benefits (outlined in the table above) of
selling short options and of buying long options, it becomes evident that option
sellers have more opportunities to profit. Option sellers only lose money if the
underlying security moves substantially against their position (i.e., contrary
to the predicted direction). In flat markets - or when the underlying moves
modestly against one's position - it is still possible to make money (because of
an option's time erosion which benefits the option seller).
On the other hand, option buyers have the advantage when it comes
to limiting their potential losses. When selling options short, traders risk
losses that can far exceed the amounts originally required to establish the
position. In contrast, an option buyer's risk is limited to the amount of the premiums paid.
In summary: Option sellers have more opportunities to
profit, but they face the risk of larger potential losses. In some situations,
losses may be mitigated by the use of a stop-loss strategy. Index options are
safer than individual equity options in this respect there are no mergers or
buyouts where a stop loss may be meaningless if trading is halted before an
announcement is made.
One single winning trade
could pay for the membership for years to come. DISCLAIMER: THIS INFORMATION IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE ANY FINANCIAL ADVICE. RISK IS INVOLVED IN ALL STYLES OF MONEY MANAGEMENT. Uncovered options trading involves greater risk than stock trading. You absolutely must make your own decisions before acting on any information obtained from this Website. The return results represented on the web site are based on the premium received for the selling options short and do not reflect margin. It is recommended to contact your broker about margin requirements on uncovered options trading before using any information on this web site. Use our " Trade Calculator" to recalculate our past performance in relation to the margin requirements, brokerage commissions and other trading related expenses. Past performance is not indicative of future results.
| 
