Search
  • Lee

What is the difference between selling a call option and buying a put option?

Technically, both strategies are bearish and will profit if the underlying security moves lower.


Other than the directional similarity, there are big differences in risk/reward.


Buying the put option gives you unlimited profit potential to the point of the underlying security moving to zero.


Also, buying the put option caps your risk at whatever you paid for the option. You can never lose more than that.


With selling a call option, the most you can ever make is what you were paid for it. No matter how far the underlying may fall, you can’t make any more than what you received upfront.


On the flipside, the risk of selling call options is potentially unlimited to however high the underlying security may move. This is some serious risk. Unlimited!


Now, just because the risk/reward is quite different, doesn’t necessarily mean one strategy is better than the other. It all depends on your outlook for the underlying security, your risk parameters, probability of profit, time frame, etc.


If you found this post helpful, give us your comments, or pass along to a friend using the buttons below.


-Lee

91 views

THE SMART OPTION SELLER

©2016-2020 Smart Option Seller                Lee Lowell