Investors who trade in Futures and Options can often find it hard to choose between whether to sell a call option or buy a put option. Even though both the call option and put option are bearish trading strategies, they do differ from each other.
Where on one hand the call option gives a trader the right to buy, the put option gives the trader the right to sell. When a trader decides to buy an option on trading platforms, any risk or loss that they might face stays limited to the premium they pay. The profits in this regard, however, can be unlimited.
Conversely, when a trader decides to sell an option, the income that can be gained stays limited to the option premium. Here, the losses, technically, can be unlimited. Here we will go deeper into what the difference is between selling a call option and buying a put option.
The Difference
When deciding whether a trader wants to buy a put option or sell a call option, is important to keep the 4 considerations listed below in mind:
Consideration 1
Traders need to ask themselves whether they are sure about the value of the stock or index going down. If they are, then buying the put option would make the most sense in this case.
This is mostly because the risks that accompany the downward trend would be limited to the premium paid, but potential profits if the stock falls, will be unlimited.
Consideration 2
In case a trader seems certain that the stock prices will not rise after a certain point and are indifferent to its fall or stagnation then it only makes sense to sell the call option. The call option needs to be sold at the strike value where a trader believes the stock will top out.
Of course, traders could still sell a lower call option for a higher premium. But this could prove to be risky.
Consideration 3
The third possibility a trader needs to consider is whether they can afford to pay the margins for the trade. When a trader buys a put option, the only liability that they owe is the option premium paid. This value is the maximum loss a trader will incur.
This will not be the case when selling a call option as the loss potential there would be unlimited. This is why traders might have to endure a higher capital outlay as the margin in such a situation will mimic the margins imposed on futures.
Consideration 4
The last question traders need to ask themselves is whether they are looking forward to growing or fading market volatility. Traders who want to trade during a rise in the market volatility should choose trading platforms to buy a put option.
For traders who are looking forward to the reduction in the market volatility, however, selling the call option would be a better choice.
Conclusion
When taking the pick between selling a call option and buying a put option, it is important to consider numerous factors. From analyzing how a stock is moving and their risk appetite to the market volatility they expect and the margin requirements, everything should be considered.
When traders anticipate high volatility in the market, buying a put option would be recommended. Conversely, when the volatility seems low, selling a call option may be suitable.
At the end of the day, however, the decision to either sell a call option or buy a put option depends from one trader to another. However, traders must consider all the factors involved before they make their decision to incur fewer losses and gain more from a trade,