Currently, the number of people trading in the stock market is constantly increasing. Many people enter the market with the hope to make quick money and adopt different trading methods. Options trading is one of the most popular and trending topic these days. There are two main methods of options trading: buying options and selling options, Although both have the potential to generate profit but most experience and data show that selling options is more profitable than buying, In this article, we will understand in detailed.
What is buying options?
When you buy a contract in options and you pay a lower premium. This collected amount is called premium. If the market doesn’t move as you expected, you will lose your premium. Buying options only generates profits when the market moves quickly in your direction with a big trend. If the market remains stable or moves or sideways so, the buyer face or occur a loss due to premium.
What is selling options?
Collecting premium by selling stock, contract or option called option selling. In return, you earn a premium immediately. If the buyer doesn’t exercise that right, the premium becomes your income. That means you didn’t buy anything; you just sold a right and made money. Profit from selling options is made when the market isn’t moving much or is moving slowly.
Time is on the option seller’s side.
Time decay is seller’s best friend and it give the benefits to seller. This means premium or price will be decreased or theta will be decreased. This is a disadvantage for option buyers, as they have less time to realize profits. This is beneficial for option sellers because as time passes, the value of the option they sold automatically drops, and they reap the benefit of the premium.
Premiums are earned from the beginning.
When the option seller sells the contract, they earn the premium from day one. This means their profits are credited to their account immediately. While option buyers have to wait for profits and depend on the market’s direction. If the market doesn’t move in their direction, they simply lose the premium.
Profit even in static or range-bound movements
Another great advantage of selling options is that if the market remains within a range, the seller still makes a profit. But this isn’t the case with buying options. You’ll only make profits when there’s a big market movement. Most of the time, the market moves sideways or in a range-bound position, so option sellers have a higher probability of winning.
Why do most professionals sell options?
When we analyze large investors or institutions, we’ll see that they mostly sell options. The reason for this is that they have more capital and experience. Selling options is more stable and sustainable in future for a passive income point of view. They develop their strategy by understanding market trends, which also reduces their risk of loss.
Timing is buyers’ biggest enemy.
Option buyers must grasp not only the direction but also the right timing. Many times, despite trading in the right direction, losses are incurred due to lack of time or delayed entry. with the time premium reduce its value so thats why its buyers enemy. Even if there is no movement in the market, they still make a profit.
Selling options is risky, but it can be managed.
There a huge or high risk in selling options from pocket and selling of options from pocket Indian Stock Market. If any big moves come in the market so you can face a huge loss. But there are ways to control it. Such as developing a strategy, placing a stop loss, and not investing all your capital at once. Furthermore, risk can be reduced by using certain option selling strategies, such as credit spreads, iron condors, and covered calls.
How to learn and the importance of experience
Jumping into the stock market without learning is detrimental. To learn how to sell options, one should first start with paper trades or small amounts. Gradually, as experience is gained, strategy and risk management improve. A good trader is one who constantly learns, recognizes their mistakes, and sticks to their plan.
Discipline and patience are the greatest assets.
