Is buying options more risky than selling options?
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Why selling puts is better than buying calls?
You can understand why option selling is better than option buying only after you realize the process involved in buying and selling of underlying assets and the level of risk assessment, and the profitability one can dream of.
With my current experience in derivatives, let me evaluate those facts that shall determine option selling to reap more profitability than option buying.
Let me compare various factors between buy options and sell options before I arrive at the conclusion that Option Selling is the Right Choice for Profitability.
Buy Options at the Start of Expiry/End of Expiry: Impact on premiums
Start of Expiry:
Whenever I trade option calls in a monthly expiry segment, I could make considerable profit because change in price is observed due to Delta.
The ideal time for the decay in premium is quite less, just 5 to 6 days before the start of expiry.
End of Expiry:
Whenever I reach the end of the expiry, theta decay works in opposite direction and only if you identify strong directional move (highly bullish drive), the option shall prevent a decrease in option premium and hence it is not an ideal period to execute buy option.
Sell Options : Impact of Decay on Premiums
Start of Expiry:
Sell options never benefited me in a monthly expiry, and the negative side movement did affect my underlying assets.
I held options for about six days at the start of the expiry and time decay did cause a fall in premium but the main change in price was an outcome of Delta, that occurs in a directional move.
In addition, in the given scenario, the market should be a range bound, to make an option selling.
End of Expiry:
When I executed sell options close to the expiry, theta decay worked for me and my stocks could experience a drastic decrease in option premium in respect to time.
The situation is highly conducive for selling and until a strong directional move against my seller position came, I always incurred a good profiting.
Not just for me, even you can benefit from fast decay in price as your stocks head near to expiry.
Employing Margins for Option buying and Selling:
For option buying, the margin is the premium of the NIFTY option and if the price per share is 100/- and the lot size is 75, then the total premium shall be 75X100 equals 7500/- which is reasonably low.
For Options Selling the margins will be high as 1.2 lakh to sell a lot of NIFTY and hold it. In order to reduce the margin, you can hedge positions with future On the Money option buying as a hedge.
Therefore if you sell 10900 calls and buy 11100 calls then the margin shall be reduced by half. Sometimes I prefer to pledge long term holdings, bonds as a source of collateral.
Risks and Probability of Profits : Options Buying/Selling
In the option buying, the profits are unlimited and your loss is limited. I did obtain the highest profitability when I purchased in the money option and at the money option gave a profitability of 50 percent.
In the option selling the risk of your underlying assets are unlimited and the profitability depends on what option I execute.
When I did sell the Money (OTM) it gave 99 percent of probable success, and at the Money option it gave 50 percent of probable success.
Sellers Must Execute Option Adjustment:
In a realistic situation, 80 percent of options buying expire and show unworthiness.
In case of options selling, 70 percent of the selling options generate small premiums that reflect profitability.
But, if incidentally, one trade goes negative you may end up in losing more than the earned profits.
The payoff can be like +12,+16,+20,+10, -200 and hence as a seller I will be alert at adjusting options. The margin in Option selling is high and it does encounter unlimited risk.