Is it better to buy or sell options? That is the question we tackle in this beginner’s guide to buying vs selling options. We’ll delve into the crucial difference between buying and selling options, comprehend the nuances of selling vs buying options, and determine whether it’s better to buy or sell options in various trading scenarios.

Key takeaways

• Buying vs selling options are two different strategies that may aim to achieve profit from the same event but with different methods.
• An outright bullish or bearish position is created when buying options, while a neutral to bullish or bearish stance can be obtained through selling options.
• While selling options limits potential profits, it also offers a higher probability of success compared to buying options. Buying vs selling options requires, therefore, a different risk-reward analysis.

Buying vs Selling Options – The Two Sides of the Coin

In the world of options trading, it’s crucial to grasp the distinction between buying and selling options, as this understanding can be the key to navigating profits and avoiding losses.

Picture it like a coin – each side represents a different role in the options market:

• Buyers: Imagine you’re buying an option. You’re paying for the right, but not the obligation, to either buy or sell an asset at a predetermined price before a specified expiration date. It’s like booking a reservation at a restaurant; you have the choice to show up or not, depending on the market conditions.
• Sellers: On the flip side, there’s the seller. For every buyer, there’s a seller. If you’re selling an option, you’re taking on the obligation to fulfill the buyer’s request if they choose to exercise it. Sellers collect a premium for taking on this responsibility, similar to receiving payment for offering someone that restaurant reservation.

Now, here’s the twist that makes it interesting: the profit and loss are like reflections in a mirror. If a buyer makes a profit, it means the seller is experiencing a loss, and vice versa. This dynamic is fundamental to options trading – it’s a give-and-take where each side has its own risks and rewards.

Understanding this mirror effect is essential for beginners. It provides an intuitive insight into the interconnected nature of trading options. So, as you delve into the world of options, keep in mind that every transaction involves both a buyer and a seller, each with their own set of expectations and risks.

Buying a Call or a Put

Embarking on the journey of selling vs buying options begins with familiarizing oneself with two key strategies: buying calls and buying puts. Buying a call option is a bullish strategy, signaling an expectation that the price of the underlying asset will rise. This gives the trader the right, but not the obligation, to buy the asset at a predetermined price (the strike price) within a specified timeframe. If the price of the asset increases, the trader stands to profit from this upward movement.

On the flip side, buying a put option is a bearish strategy, suited for those anticipating a decline in the price of the underlying asset. This gives the trader the right, but not the obligation, to sell the asset at the strike price within a certain period. If the price of the asset drops, the trader can benefit from this downward trend.

Essentially, the choice between buying a call or a put option largely depends on the trader’s market outlook and aligns with assertive trading styles that anticipate significant price movements.

If you’re wondering what the P&L profile of buying a call or put looks like, the picture below summarizes this aspect for Apple (call case on the left, put case on the right).

As you see, buying a call option gives you an uncapped profit chance, with a limited risk of loss. When buying a put option, the risk is equally limited (in the worst case scenario, you’ll only lose what you invested), with a theoretically uncapped profit chance (although, realistically, a stock price will never decline below $0, hence limiting your returns). The downside is that the probability of profit is usually lower.

Selling a Call or a Put

Switching gears to selling options, we encounter two further strategies: selling calls and selling puts. Selling a call option is a neutral to bearish strategy, implying an expectation that the asset’s price will remain stagnant or decrease slightly. This obligates the seller to sell the asset at the strike price if the buyer exercises the option. In return, the seller collects a premium upfront, profiting from the lack of or negative price movement.

Similarly, selling a put option is a neutral to bullish strategy, catering to traders who expect the asset’s price to remain stable or increase slightly. This strategy obligates the seller to buy the asset at the strike price if the buyer exercises the option, allowing the seller to collect a premium upfront and profit from sideways or slightly upward price movements.

Buying vs selling options is not a question of which strategy is better, but rather which strategy aligns with the trader’s market expectations and risk tolerance (in fact, you may even consider selling options on expiration day). We’ll explain this in the section below.

As we did before, here’s a look at what the P&L profile looks like when selling a put (left side) and selling a call (right side).

There’s a clearly uncapped risk in these cases, as option naked sellers risk losing a multiple of the capital involved in the trade. On the other side, there is a higher probability of profit, as you will profit if the stock stays sideways or goes in your direction. Furthermore, if you like selling options on expiration day, you should consider that even a small price movement may create an enormous variation in the value of your trade.

Key Differences Between Buying vs Selling Options

There are so many strategies that you can evaluate when it comes to option buying and selling, each with its own risk and reward profiles. The choice between buying vs selling options is not a one-size-fits-all approach but depends on individual factors such as market outlook and risk management style.

Market Outlook

The main difference between buying and selling options lies in the direction of the market outlook. When considering whether it’s better to buy or sell options, your market perspective plays a pivotal role.

If you harbor a clearly bullish (or bearish) short-term outlook, expecting the price of the underlying asset to rise (or go down), buying options can enable you to partake in potential upside. This strategy aligns with an anticipation of price growth (or decline) and offers the possibility of significant returns if your predictions prove accurate.

Instead, if you are not sure that the price will follow a strong bullish (or bearish) pattern, and suspect that you may face a sideways or slightly bullish (or bearish) market scenario, selling options might be the path for you. Options sellers can benefit from a neutral to mildly bullish or bearish sentiment, profiting from sideways price movements and collecting premiums upfront.

Buying vs selling options does not require guesswork, but rather relies on educated speculation based on a trader’s evaluation of market conditions.

Your Risk Management Style

Beyond market outlook, your risk management style also influences the decision between buying vs selling options. Buying options presents a classic risk approach, as potential losses are limited to the premium paid. However, the entire premium risks being lost if the market doesn’t move in favor of your position.

Conversely, selling options can provide a steady income stream through collected premiums. Yet, this approach comes with the potential for unlimited losses if the market moves significantly against your position. Realistically speaking, your broker will likely limit your losses through a margin requirement, but it’s essential to account for the possibility of sizable losses when considering this strategy.

However, you could choose to see selling options as acting like an insurance operator: collecting small premiums to cover potential losses, but with a limited payout if everything goes according to plan. If you think of selling options in this way, the approach surprisingly aligns with a more risk-averse stance and offers steady income with a higher probability of success.

When you evaluate buying vs selling options, never lose track of the risk-reward equilibrium. You need to know when to sell an option (the same goes for buying), and finding the right balance between risk and reward is crucial, regardless of your trading style or market outlook.

Buying Options: The Pros and Cons Explained Through an Example

With no doubts, a real-life example can help us put into practice the notions seen above. Assume you’re bullish on HSBC Holdings PLC (HSBC), which is currently trading at $36.26 on the US stock market. An option screener like Option Samurai might highlight the possibility of buying a $36 call option, expiring in 15 days. This is a classic example of a buying vs selling options scenario.

Two potential outcomes can arise from this strategy. First, the stock price might ascend above $36.80, the breakeven point determined by the tool. In this case, you stand to profit, with no upper limit to your potential earnings. This illustrates the potential profitability of buying options when the market moves in your favor.

However, there’s a second scenario. The stock price might end up below the breakeven price, leading to a loss of your entire option premium, plus any trading fees charged by your broker. This underlines the risk inherent in buying options, where time decay is not on your side, especially with a Long Call strategy.

The price history of HSBC shows a support around $36, which might tilt the scales towards a likely profitable trade. However, with time decay playing against you, the stock price would have to appreciate at a relatively fast pace to give you the profit you want.

Selling Options: The Pros and Cons Explained Through an Example

But what if we chose to evaluate a different type of strategy? Assume again that you’re bullish on HSBC Holdings PLC (HSBC), currently trading at $36.26 in the US. Option Samurai may help us locate the chance of selling a $36 put option, expiring in 15 days. This strategy, compared to buying options, presents a few key differences.

Firstly, the maximum profit you can attain is the option premium, minus any trading fees. However, potential losses can be limitless. As mentioned earlier, your broker will likely set a minimum margin for your position, automatically closing it if it falls below this margin.

The most significant difference when selling options is that you can profit from both a price increase in HSBC and sideways movement. As indicated by Option Samurai, for a profitable outcome, all you need is for HSBC’s price to remain above $35.35 by the option’s expiration.

This Naked Put strategy might seem like a high-probability operation, especially considering the clear $36 support level in HSBC’s price. However, you should beware of those scenarios in which the stock’s price may suddenly drop. In this case, your broker could close your position to limit losses, and you might end up with a losing trade. Clearly, buying vs selling options has shown us that both strategies have pros and cons, with different risk-reward profiles.

So, is it better to buy or sell options? We have all the elements we need to answer this question in the section below.

Is It Better to Buy or Sell Options?

Reflecting on the examples above, one might ask: is it worth risking more than the invested capital for the opportunity to earn the option premium? The answer, while counter-intuitive to some, lies in understanding the difference between buying and selling options.

The choice between buying vs selling options is not a simple one. Buying options can offer unlimited profit potential, but at the risk of losing the entire premium paid. Conversely, selling options can provide frequent profits from premiums (meaning higher probability of profit), but with the risk of unlimited losses and limited profits.

If you think about it this way, it all comes down to the way you like trading. If you feel very confident that there will be a trend in the days (or weeks) following your trade, then a long strategy may be what you need.

However, the chance to profit even when the market moves sideways makes selling options a more attractive strategy for some traders. More advanced strategies go beyond the mere “buying vs selling options” dilemma by combining these two ideas and understand when to sell an option, allowing traders to take advantage of different market scenarios. Through paper trading, you can learn more about the strategies for selling vs buying and determine which one suits your risk management style best.

Related

After years of watching the Czech stock market shrink, its boss now sees the very survival of the bourse hinging on how much politicians meddle with the country’s most prized asset.

Author of the article:

Bloomberg News

Krystof Chamonikolas

Published Jan 15, 2024  •  3 minute read

Article content

(Bloomberg) — After years of watching the Czech stock market shrink, its boss now sees the very survival of the bourse hinging on how much politicians meddle with the country’s most prized asset.

Power producer CEZ AS — the biggest traded company in the European Union’s eastern wing with a $23 billion valuation — is entangled in government efforts to boost control over energy industry. While the cabinet is vague about its plans, the risk is that it will end up carving up the utility and taking part of it off the market. 

Article content

Article content

The state has “no reason” to delist CEZ, or its part, after the energy crisis has abated, Prague Stock Exchange Chief Executive Officer Petr Koblic said in an interview. He called on the government to stop seeking more ownership of power plants, and even urged it to sell some of its 70% stake in the utility to help rein in the budget deficit and rekindle trading.

Koblic warned that without CEZ the bourse would probably be kicked out of emerging-market indexes and reclassified as a frontier market, triggering outflows of tens of billions of euros. As that would mean “the end of the Czech capital market,” politicians now appear to be moving away from such option, according to the CEO. 

“The worst-case scenario facing the market right now is some sort of a split, in which one part of CEZ would remain listed, possibly with a much higher free float, while the other part would be delisted,” Koblic, 52, said.

CEZ shares have been more volatile than peers since mid-2022 on speculations about various revamp options and their potential impact on investors and the exchange. The state might get full ownership of the entire company or its power plants, take over its nuclear-reactor projects, or even do nothing.

Article content

Article content

To cut reliance on Russian energy imports following invasion of Ukraine, the Czechs have mostly switched to LNG shipments via western Europe, commissioned by CEZ, while the government has also bought natural gas storage facilities and pipelines.

But gaining more ownership of power plants has proved difficult. Plans to curb state debt make the government unlikely to pay the premium investors would demand in any buyout, while a draft law allowing the state to force an uneven split of CEZ assets without the consent of minority owners is nowhere near approval in parliament. 

Read more: Czechs Delay Verdict on Bill Guiding Revamp of Power Maker CEZ

During two decades in his job, Koblic has had to contend with Czech companies preferring to take loans over selling shares, which has kept initial public offerings at minimum. The bourse has also endured some high-profile departures, including drugmaker Zentiva, telecommunications group O2 Czech Republic, coal miner New World Resources and broadcaster Central European Media Enterprises.

As a result, the turnover within the main PX Index shrank 87% between a peak in 2007 and last year. That compared with a 24% increase for the S&P 500 Index and a 76% surge in neighboring Poland. 

Article content

To slow the decline, Koblic launched the START platform for small companies, which has hosted 15 IPOs since 2018 but has a total market capitalization of just over $500 million. One of its members has recently moved to the main market, with another company likely to follow soon, a trend that the CEO hopes will encourage more startups to go public.

He said the government should also consider an IPO of Prague’s international airport, while still keeping majority for strategic reasons. 

“People keep saying the government could boost the capital market by floating more assets,” Koblic said. “But there is not much more to float, other than the rest of CEZ and the airport.”

Article content

Share this article in your social network

Incorrectly timing rate cuts poses a significant risk, warn strategists at TS Lombard

As the market embarked on a robust “everything rally” fueled by high expectations of imminent interest rate reductions by the Federal Reserve to avert a recession, the risks of miscalculating the timing of these cuts are emphasized by Skylar Montgomery Koning and Andrea Cicione, strategists at GlobalData TS Lombard.

While investors may accurately gauge the scale of anticipated Fed rate cuts, the strategists caution that the peril lies in misjudging the timing. In a client note on Wednesday, they noted, “The market is an average of participants’ views and, caught between outcomes, appears to be pricing in a soft landing with ~140bp of cuts in 2024.”

GlobalData TS Lombard’s team contends that the approximately 200 basis points of rate cuts currently factored in for the entire easing cycle might be “too conservative rather than too aggressive,” especially in the event of an economic downturn.

The primary concern, however, revolves around the optimistic market movements anticipating an early batch of rate cuts in 2024. The strategists highlight the potential risk that the market might not witness the expected priced-in cuts, thereby reversing the 4Q23 trends of a weaker dollar, stronger fixed income, and enhanced equities.

In the fourth quarter, the Dow Jones Industrial Average (DJIA) surged, setting multiple record closes entering the new year. Similarly, the S&P 500 index (SPX) concluded Wednesday poised for its first record close in two years, according to Dow Jones Market Data.

In the fixed income sector, the 10-year Treasury yield (BX:TMUBMUSD10Y) retraced to around 4% in the new year after reaching a 16-year high of 5% in October. The prospect of sudden increases in borrowing costs for a substantial portion of the U.S. economy prompted a downturn in stocks, briefly erasing earlier gains in major U.S. bond benchmarks.

Despite the closely monitored Bloomberg U.S. Aggregate index boasting a 2.41% one-year return, with the iShares Core U.S. Aggregate Bond ETF (AGG) tracking a similar trajectory, the strategists caution of a potential sell-off if the market reevaluates Fed dovishness.

In the currency realm, the ICE U.S. dollar index (DXY), measuring the greenback against a basket of rival currencies, experienced a 3.5% decline over the past three months, per FactSet data. This decline occurred despite the dollar achieving its best first four days in a new year in nearly a decade.

While the dollar reached two-decade highs in 2022 during the Fed’s policy rate hikes, a shift toward rate cuts may lead to further weakening. The consensus anticipates a weaker dollar in 2024 due to substantial Fed cuts, with Koning and Cicione forecasting modest upside for the dollar. A weakened dollar can benefit major U.S. companies dependent on international sales, mitigating the impact of increased borrowing costs.

However, Fed rate cuts could also diminish the appeal of assets tied to the dollar for investors seeking yield.

Called by the nickname, “Gateway City,” Newark, NJ, has become a destination for many people relocating to the East Coast. From its legendary food scene to its easy access to all New Jersey and New York has to offer, it shouldn’t come as a surprise nearly 307,200 people are living in Newark. If you’re considering buying a home in Newark, know that the median home sale price is $475,000, and for renters, the average rent in Newark is about $2,050. 

But if you’re looking for a more suburban lifestyle, we’re here to help you find the right place to buy a home. Redfin has compiled a list of the 8 best Newark suburbs to check out. And they’re all less than 10 miles away from the city. Let’s check them out.

#1: East Orange

Median home price: $420,000 
Average sale price per square foot: $230 
Distance from Newark: 4 miles
East Orange, NJ homes for sale 
East Orange, NJ apartments for rent 

With a median home sale price of $420,000, East Orange is the first place on our list of Newark suburbs. About a 4 mile drive away from downtown Newark, East Orange is home to roughly 69,600 people. Living in East Orange, you can check out one of the parks like Watsessing Park and Monte Irvin Orange Park.

#2: Roselle Park

Median home price: $450,500 
Average sale price per square foot: $346 
Distance from Newark: 10 miles
Roselle Park, NJ homes for sale
Roselle Park, NJ apartments for rent 

The second suburb on our list is Roselle Park. About a 10 mile drive away from downtown Newark, you can explore the Ironbound District in no time. Some popular things to do in Roselle Park include grabbing a meal at one of the local restaurants. When living in this suburb of 13,900 people, you can also spend time exploring the charming downtown.

#3: Elizabeth

Median home price: $485,000 
Average sale price per square foot: $285 
Average rent for an apartment: $2,250 
Distance from Newark: 6 miles
Elizabeth, NJ homes for sale
Elizabeth, NJ apartments for rent 

With a median home sale price of $485,000 and only a 6 mile drive away, Elizabeth is the next suburb. From parks and outdoor recreation to shopping, there are lots of things that make Elizabeth a great place to live. Make sure to take in the water views at Marciante-Jackson-Millet Park, check out the trails at Elizabeth River Parkway, and visit downtown Elizabeth where you’ll find the Ritz Theatre & Performing Arts Center. 

#4: Kenilworth

Median home price: $522,500 
Average sale price per square foot: $814 
Distance from Newark: 9 miles
Kenilworth, NJ homes for sale 
Kenilworth, NJ apartments for rent 

Only slightly more expensive than Elizabeth is none other than Kenilworth. With a population close to 8,400, there’s still plenty to do in this Newark suburb. Plan to spend the day exploring Lenape Park, playing golf at Galloping Hill Park and Golf Course, and checking out downtown Kenilworth.

#5: Kearny

Median home price: $540,000 
Average sale price per square foot: $324 
Average rent for an apartment: $2,183 
Distance from Newark: 4 miles
Kearny, NJ homes for sale 
Kearny, NJ apartments for rent

Drive 4 miles outside of Newark and you’ll find the suburb of Kearny, another great area to add to your list. With 42,000 people living in this town, Kearny is a great option to consider when looking to stay close to Newark without paying the premium for a home in the city. Living in Kearny, you can visit Kearny Riverbank Park along the Passaic River and shop at Kearny Square.

#6: Bayonne

Median home price: $570,000 
Average sale price per square foot: $323 
Average rent for an apartment: $2,425 
Distance from Newark: 9 miles
Bayonne, NJ homes for sale 
Bayonne, NJ apartments for rent 

Another well-known Newark suburb is Bayonne, where the median home sale price is $570,000. Home to roughly 71,700 people, Bayonne is a great suburb to consider moving to. There are lots of activities to do in the area. For example, you can visit some of the scenic parks like Dennis P. Collins Park, Veterans Park, and Stephen R. Gregg Park, explore the downtown Bayonne area, and golf at one of the courses, among many other local favorites.

#7: North Arlington

Median home price: $590,000 
Average sale price per square foot: $334 
Average rent for an apartment: $2,316 
Distance from Newark: 5 miles
North Arlington, NJ homes for sale 
North Arlington, NJ apartments for rent 

Next on our list of Newark suburbs is North Arlington, which is roughly a 10 minute drive into the heart of the city. With a population of close to 16,500, living in North Arlington is a great alternative to city life. If you’re going to call this area home, plan time to visit Richard W. DeKorte Park where you’ll find the Sawmill Creek Trail & Transco Trail.

#8: Nutley

Median home price: $609,950 
Average sale price per square foot: $369 
Average rent for an apartment: $2,469 
Distance from Newark: 8 miles
Nutley, NJ homes for sale 
Nutley, NJ apartments for rent

Last but not least on our list of Newark suburbs is Nutley. This suburb is home to roughly 30,200 residents, so you’ll have a fraction of Newark’s population while remaining only 8 miles from the city. Be sure to visit some of the green parks like Memorial Park, Kingsland Park, and Yanticaw Park once you move to Nutley. 

Methodology: Whether a suburb was under a 10-mile drive from downtown Newark. Median home sale price data and average rent price from the Redfin Data Center during December 2023. Population data sourced from the United States Census Bureau.

(Reuters) -Global political and business leaders meet in the Swiss resort of Davos this week against a complex geopolitical backdrop beset by war, tectonic shifts in monetary policy, climate change and an uncertain election-packed year.

The global economy appears to be avoiding recession for now, but a key litmus test looms for China with GDP figures, while U.S. retail sales data will shed light on its 2024 outlook.

Here’s a look at the week ahead in global markets from Kevin Buckland in Tokyo, Li Gu in Shanghai, Ira Iosebashvili in New York, Karin Strohecker, Stefania Spezzati and Amanda Cooper in London.

1/ GROWING PAINS   

    Just how close China got to realising the official 5%-or-so growth goal for 2023 will become clear on Wednesday, with the release of full-year GDP figures.

    That it hit the target is not really in question. The challenge is how to do the same this year, if Beijing follows its advisers and keeps the goal unchanged. Unlike last year, there’s no 2022 COVID-lockdown slump to flatter the result.

    A hint of what Beijing has planned has come from a key central bank official, who was reported by state media as saying policy tools would be used to support reasonable credit growth.

    Chinese government bond yields neared an almost four-year trough and the yuan bounced off a one-month low, after the central bank left its medium-term rate unchanged on Monday, contrary to expectations for a cut.

2/ DAVOS

The 54th annual World Economic Forum meeting kicks off in the Swiss ski resort of Davos. Central bankers, financiers and business leaders will discuss a challenging global economic picture, shifting monetary policy and rising debt levels.

They will try to seek answers on how to navigate a complex geopolitical framework that includes war in Ukraine and Gaza. U.S. Secretary of State Antony Blinken, French President Emmanuel Macron and key Middle East leaders are due to attend.

One key event is the Jan. 17 closed-door Financial Services Governors Meeting, which will bring together 100 chairs and CEOs from banking, markets, insurance and asset management.

A separate survey released by the WEF showed extreme weather and misinformation were seen by risk specialists as most likely to trigger a global crisis in the next couple of years.

3/ ELECTION MANIA

Taiwanese voters swept the ruling Democratic Progressive Party’s (DPP) presidential candidate Lai Ching-te into power on Saturday, strongly rejecting Chinese pressure to spurn him, as China said it would not give up on achieving “reunification”.

This high-stake geopolitical event marks the start of one of the busiest election years ever: countries making up over 60% of the world’s economic output and more than half of its population hold elections this year.

The United States, Britain, Russia, South Africa, India and Indonesia are just some of the more than two dozen countries holding national elections.

The heavy election calendar has fuelled fears that financial market volatility could soar and fiscal discipline be at risk as growth prospects face and debt hits record highs.

4/ SHOPPING AROUND

The health of U.S. consumers will be in the spotlight, through the lens of retail sales data and bank earnings.

The Jan. 17 retail sales numbers are expected to give a glimpse into consumer spending and offer evidence of the resilience of the U.S. economy in the face of 525 basis points of rate increases from the Federal Reserve since 2022. 

Signs that consumers may be pulling back might undermine the expectation of a economic soft landing that helped boost stocks 24% last year. Economists polled by Reuters expect retail sales rose a monthly 0.3% in December, matching November’s increase. 

Investors are also keen to hear what big financial institutions say about consumers and their own operations, with Goldman Sachs and Charles Schwab (NYSE:) both reporting.

5/ BRIT-FLATION

The next batch of UK consumer price data could be exactly what Bank of England officials and politicians are hoping for: a big enough slide to declare victory on the war on inflation.

With headline inflation at 3.9%, the UK doesn’t look like such an outlier any more compared with other developed nations — a welcome development for a government expected to hold a general election later this year.

Typically stickier price pressures, such as those in services and workers’ wages, are softening, but only marginally. And the near-21% rise in inflation since 2020 still outstrips that of any other G7 economy and is the joint-highest increase in western Europe.

The pound has got off to a relatively firm start to the year, supported by a rise in UK government bond yields. A soft read of inflation on Jan. 17 may prove an unwelcome development for sterling bulls.