Which is riskier - Short selling or purchasing a put option?

General
2

Hi,

This article throws light on short-selling as well as purchasing a put option.

It underlines the fact that when the underlying asset increases in price, then betting against the stock will be less of a loss for someone buying a put option than someone short-selling the stock.

In the case of a put option, the premium paid to purchase the put is the maximum loss that can be incurred whereas short-selling can lead to much larger losses if the stock moves up. 

It also mentions that profits are similar in the both the cases when the stock price falls.

It also shows a graphical representation of how the profit and loss varies with an increase in stock price.

3

Without going into details, Put options are always less riskier as your risk is limited to the option premium you paid at the time of buying. For naked shorts , intraday in cash or short in Futures, the risk is unlimited.

However, in terms of returns, Short in Futures often gives better returns for the same amount of movement. Why? Because you have paid for the time-value while buying option, so X Rs movement downwards may not mean X Rs option price increase. For more illustration, please read through answer written by Bharat W.

Hope this Helps,

Cheers,