what is the difference between selling call option and buying put option?
Theoritically both look same for novice like me? Please elaborate.
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If you are flat to modestly bearish selling a call would seem prudent, if you are bearish and expect volatility in your direction buying a put would be the way to go...
If not for the higher margin requirements of writing options most people might have preferred writing to buying option.
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Also, adding to what Nik says, you may want to consider writing options when there lesser number of days to expiry as you can take the advantage of an accelarated time decay.
You can consider buying options when there are more number of days to expiry.
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Selling options you will be exposed to unlimited downside risk and fixed upside profit and buying options you will be exposed to unlimited profit and limited risk. so if you are novice and want to take advantage of leverage i will advice to start with buying options rather than selling options.
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- Both premiums would not be same. Put premium will be less than call premium.
- Buy put option in earlier of the month and sell call options when you are close to the end of the month. This is because volatity (Vega) of the option is interrelated to time value (Theta), both gets reduced when you are nearing the end of the month. Less volatility is good for selling options. More volatility is good for buying option (since more time is there during month start, it gives ample chance for volatility effect to take place)
- In selling option, you incur heavy margins being blocked when compared to buying options, the money which you may be interested in entering some other contracts. So you need to wait until you find a suitable time to square off your selling and get the margin money released.
- Shorting naked options (selling call option here) is accompanied by high risk, you may be thinking that you are right about the market, but the market may deceive you. So do not enter selling options which do not have good amount of liquidity. You may not find a buyer to square off your short position atleast not at better prices what you are looking for (for illiquid contracts). You may incur huge loss if market moves against you.
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The difference between buying/selling options has been well explained above, so , I will not repeat the same.
One thing as a trader that is important is to do trades which you understand and which matches your trading personality. Some traders see option shorting as high risk trades while some find it very suitable. Before employing any options strategy it is important to understand ins and out of it.
You may read this link where I have explained how options work :
http://traderschowk.com/2015/04/06/option-buying-vs-selling-game-of-probability/.
I am sure this will throw some light on your understanding.
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To be honest it can be a little confusing for beginners but there is a difference. The intent of both the actions might be the same, to make profits out of the options trade.
When you sell a call option, it is mainly because you think that the strike price is going to be higher than the price you bought it at and you think you will lose money out of it. In this scenario, if the strike price remains below the price of you selling the call option, the asset price will go to the so called seller of the call option as profit. But if the strike price exceeds the asset price, then the seller is liable to pay the difference to the buyer.
Similarly when you buy a put option, you expect the asset price to be far lower than the strike price. Buying a put becomes profitable when the stock moves below the strike price by an amount greater than the premium paid for the put option.
I hope I could clarify your doubt!