Options Buying Vs Option Selling – Which is more Profitable

Options Buying Vs Option Selling – Which is more Profitable


Options Buying Vs Option Selling - Which is more Profitable
Options Buying Vs Option Selling – Which is more Profitable

In Stock market one always specially in derivative market ask himself that Option buying or option selling which is best and which is more profitable basically both are two different strategies used in options trading, and each comes with its own risks and potential rewards. Let’s explore the differences between them.

Option Buying

An option buyer pays the premium to purchase an option he holds the risk of the premium he pays; option buyer always has an advantage of the risk he takes that is the premium as the premium brought unlimited profit and loss, The biggest risk for option buying is of time decay and drop in volatility

Let us take an example

  1. Spot price – 18500, strike – 18450 Premium – 135 bought price is 50, (135-50*50 = 4250) is the profit for the option buyer and loss for option seller.

Max profit/Loss Calculation for option buying ATM/OTM Calls-puts premium

Let’s say the ATM (At the money) option is 145 the buyer bought price is 70 (145-70*50 = 3750) Is the profit at expiry, if the price of option is 40 at expiry it becomes OTM (Out of money) then 40-70*50 = 1500 will be the loss at expiry for option buyer and profit for seller. Here the option buyer has the risk of premium paid

Advantages of Option Buying

Risk: The risk of option buyer is the premium paid which is the limited risk the only loss incurred is the premium

Profits: An option buyer has the potential to make good profits if the market moves in the direction as per buyer anticipation.

Disadvantages of Option Buying

Time Decay: Option buyer has the major factor of Time decay as the time passes the premium value decreases, An option buyer requires premium to increase in favor but as time passes near to expiry the decay in premium results in loss.

Profit probability is low compared to sellers: Option buyer profit is depended on significant move in premium were the market mostly remains Sideways were the seller is profitable


Option Selling

An option selling is writing of options, option seller receives the premium and has an obligation when he sells the premium, option seller always has an advantage over the buyer

Let us take an example

If the Option seller Sells Strike Price 18000 call trading at 120 he receives total premium and any decay is the profit for the seller any momentum in the price is the loss if the price is 150 then (150-120=30) is the loss for the seller


Advantage of Option Selling

Time Decay: In option selling time decay is always favorable the value of the premium decreases near to expiry

Profit: Option seller is mostly profitable as premium expires worthless with the decay in value

Disadvantages of Option selling

Unlimited risk: Option selling carries unlimited risk as any strong move against seller leads to significant losses due to market volatility and momentum

Limited profits: Option selling profits is limited to premium received as compared to buyer he only has an advantage of premium received

Options Buying Vs Option Selling – Which is more Profitable

Both option buying and selling has the risk and rewards as per different market condition and any strategy is profitable with the proper risk management as trading in the options is high risk and high rewards but if not done with clear analysis it leads to big losses and if done with risk and knowledge of markets it is always rewarding. Thus before trading one needs to check with risk involves in derivative market



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