Tuesday, November 10, 2015

Stock options: What is more profitable? Buying options or shorting (selling) options?

Stock options are popular trading options (lol) for many traders. Compared to trading stocks, where you have to pay in full or if you buy on margin, you still generally have to put forward 50% or so for the position, trading option requires much less cash. If you are buying options, you can trade stocks in the form of stock options with as low as few hundred dollars. Buying stock options is like buying a lottery- if you are lucky/right, you can get much more back. If you are wrong, you lose what you paid for. Very similar to a lottery.  You can buy Call options (right to buy) or Put options (right to sell.)
If you are new to stock options:

What are options? They are like insurance policies. When you buy an insurance, you pay some premium. Your insurance company, like Allstate, Geico etc., sell insurance policy to you and in return they get the premium that you are paying. 
When you buy insurance, you get protection against some risks. You have the right to ask the insurance company to reimburse you for certain events/losses. To obtain some RIGHT, you have to Pay for it.
Insurance company, as a seller, is under obligation to reimburse you as per terms of the policy. To be willing to come under obligation (or to sell some Right to someone to come and demand things from you), the other party has to compensate or pay for it.

You can learn about stock options in detail on this link:

Learn About Stock Options in 10 Minutes Stock Options 101

 The purpose of this post is not about explaining options. The purpose is to try to understand the odds in buying options vs selling options. Incidentally, I traded TSLA options and recorded the trades live on one blog: http://tsla4tesla.blogspot.com/ The objective was to see if it is possible to make enough money to buy a Tesla car trading only TSLA stocks and options. I decided to trade 2 or 4 contracts at most and as I mostly SELL options, you will see that I, I don't think, made any BUY TO OPEN trade in TSLA! Do you want to see how SELLING Options worked out? Use this link below to open up the full list of trades. I am not going to put any summery or recommendation.. You do your analysis and decide yourself what works better: buying options or shorting them!