Buying options vs selling options

Buying options and selling options are two great ways to make money in the stock market. But which strategy is better? Each has its own strengths and weaknesses.

If you are Selling options you have the benefit of time decay. As time passes the option you sold will lose its value. This way you can make money even if the stock goes against you. This is contrary to option buyers with which time works against.

If you are a buyer of an option the stock has to go in the direction you want it to go faster than time value goes down. That means that the stock can do what you expected it to and you might still lose money as a buyer. Another advantage the option seller has is that they tend to have a much higher winning ratio.

On average 80% of all options expire worthless. If that’s the case selling them can indeed be a powerful way to make money. Being an option seller is like being the person who sells lottery tickets to people who want to get rich quick, the odds are in your favor.

But even with those disadvantages there are still reasons in which someone would want to be an option buyer. The first reason is also the most powerful. Buying options can give you an unlimited profit potential while giving you a limited loss potential. That sounds pretty good and has convinced many traders to go after the option buying part of trading.

Unlike buying options, selling options does not give you an unlimited reward. If you sell a put the maximum you can make from that trade is the amount the put was worth.

The second advantage that option buying gives you is the ability to have a limited loss. If you have a controlled limited loss it is easier to manage your risk and lets you only take trades that give you a small loss if you are wrong and a large profit if you are right.

Option selling does work that way. While there are ways in which you can keep your losses small by being a seller your potential loss will always be much greater than your potential reward for any one trade. Still if you are right the majority of the time that becomes a little less important.

Both these strategies contain strengths and weaknesses and it is up to the individual investor to decide which strategy fits them best.

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