You think a stock, say Infosys will move down.
Here is the question. Buy a put paying the premium, or sell a call and receive the premium? Assume that you will buy/ sell this option and hold until expiry.
If you sell 900 Call, you will make 30 Rupees if the stock is anywhere below 900 on expiry. This means if the stock goes down, or stays the same, you will make the whole premium. If the stock is anywhere below 930, you do not lose any money. So break-even for the call is Infosys at 930.
Now let us look at the puts, and where they break even – that is the price where will recover the entire premium
Call Vs Put
Since we are comparing a call with puts, we need the stock price at which puts outperform the call. That is, they make more than 30 bucks premium of the call
For the 900 Put to outperform the 900 Call, we need more than 6% move. For lower strikes, the moves are greater. The 840 Put needs as much as an 11% move!
That is not all, the bearish move you are expecting in Infosys has to happen within the option expiry.
If you sell the call, to make money, you just have to be not wrong. Even if you are slightly wrong, anywhere under 930, you will make money.
But with Puts
- You have to be right
- You have to be massively right
- And you have to be right before the expiry, which means timing.
So the next time, do give selling options a chance. Unless you go wrong big time, they might just be a better way to make money. If you want an easy way to compare selling versus buying options, try Options Trade Analyser by Sensibull
Or, if you would like to know which option strategy is the best strategy for you to trade from among thousands of calls, puts, call spreads, put spreads, straddle, strangles, iron condors, iron butterflies etc, use Options Strategy Generator by Sensibull — India’s first Options Trading Platform
PS: You need margin to sell options (80k to 1 Lakh for most stocks), whereas you need only the premium for buying options.