Buying vs. Selling Options | What is the Difference?
Buying vs. selling options is crucial to understand if you want to start trading options.
Key Takeaways
When buying options, investors pay a premium to obtain the right to buy or sell the underlying asset at the strike price, and can profit if the price of the asset moves in the desired direction before the expiration date.
When selling options, investors receive a premium in exchange for agreeing to buy or sell the underlying asset at the strike price, and can profit if the price of the asset remains relatively stable or moves in the opposite direction of the option.
Buying Options
Buying options gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specified date (expiration date). The buyer of an option pays a premium to the seller for this right.
Buying Calls (Bullish)
Buying calls is a bullish options strategy where you benefit from a stock price increase.
Traders will buy call options to replicate a long stock portfolio with less capital. For example, if you are bullish on Apple, instead of buying 100 shares, you can buy a call option for much less money.
The downside of buying calls is that there is an expiration date. You can hold shares forever, but call options will eventually expire. Therefore, you can lose all of your investment if you are incorrect in your assumption before the expiration date.
Buying Puts (Bearish)
Buying puts is a bearish strategy generally used to hedge long positions or speculate on a drop in equities. Buying puts is also a long volatility strategy so if you believe fear will increase in the markets, buying puts is a good strategy.
If you have 100 shares of stock, you can buy a put on it and utilize the married put strategy by purchasing a put to limit the downside risk.
Selling Options
Selling options, also known as writing options, is the opposite of buying options. The seller of an option is obligated to sell or buy the underlying asset at the strike price if the buyer of the option chooses to exercise their right. The seller receives the premium from the buyer as compensation for taking on this obligation.
Selling Puts (Bullish)
Selling puts is a bullish strategy where you collect a premium in exchange for the obligation to buy 100 shares of stock at the strike price. Traders often utilize the cash-secured put strategy when selling puts.
The cash-secured put is when you set aside enough capital to buy 100 shares at the strike price and collect a premium from selling the put. You can combine the cash-secured put with the covered call strategy, known as the wheel options strategy.
Selling Calls (Bearish)
On the other hand, selling calls is a bearish strategy that benefits from a decrease in the stock price. Traders generally only sell calls when they already own 100 shares of stock, making it a covered call strategy.
Selling calls without owning shares requires a high-tier margin account since it theoretically comes with unlimited risk. Shorting stocks, generally, is considered risky since stocks can continue up without limit while, on the other hand, the lowest they can go down is 0.
Is it Better to Buy or Sell Options?
Overall, selling options is a much more consistent and reliable strategy. The profits are limited, but if you are looking for consistency learning about covered calls and cash-secured puts is a great way to trade options.
Buying options are best used for hedging your portfolio and speculating on significant moves up on the stock market.
Buying vs. Selling Options | Bottom Line
Both buying and selling options have their own set of risks and rewards, and different strategies may be appropriate for different investors depending on their risk tolerance and investment goals.
How to Learn More About the Stock Market
If you want to learn more about the stock market, joining a community of like-minded individuals is a great way to accelerate your learning curve.
Benefits of Joining a Trading Community
Converse with thousands of other experienced traders
When you join a community, you can talk with other traders with unique viewpoints on the stock market.
Learn new strategies
There are a million ways to trade on the stock market, and you will surely learn new strategies when you talk with other traders.
Stay up to date on the latest stock market news
Additionally, trading communities will keep you updated on the latest economic news. You can also ask questions if you don’t understand some of the complex financial terms.
The HaiKhuu Trading Community
The HaiKhuu Trading community is one of the largest stock trading communities online, with over a quarter million members within its communities.
The community includes beginner and professional traders who can assist with your day-to-day trading activities.
Tastytrade Disclosure
tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Marketing Agent (“HaiKhuu LLC.”) whereby tastytrade pays compensation to HaiKhuu LLC. to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of HaiKhuu LLC. by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of HaiKhuu LLC. or this website. tastytrade does not warrant the accuracy or content of the products or services offered by HaiKhuu LLC. or this website. HaiKhuu LLC. is independent and is not an affiliate of tastytrade.
tastytrade was previously known as tastyworks, Inc.
