Imagine standing at a crossroads in your trading journey, pondering a question that could shape your financial future: Should you buy options, betting on significant market moves, or sell options, aiming for steady income?
Option buyers can turn small investments into dramatic gains when they correctly predict market moves, while option sellers aim to profit from steady premium collection—much like running an insurance business.
While buying options offers the allure of those headline-making gains, many professional traders prefer selling options. By collecting consistent premiums and carefully managing risk, sellers can compound smaller but more frequent profits into significant returns over time.
The truth is, both buying and selling options can be profitable. The key lies in understanding when and how to use each strategy effectively, aligning them with your trading goals and market conditions.
Whether youre a seasoned trader or just starting out, this guide will equip you with the knowledge and tools to make informed decisions in the options market.
Are you scratching your head trying to figure out if you should be buying or selling options? Trust me, you’re not alone in this dilemma. As someone who’s spent countless hours analyzing trading strategies, I can tell you that both approaches have their merits and pitfalls. Let’s dive into the nitty-gritty of options trading to help you make a more informed decision.
Understanding Options: The Basics You Need to Know
Before we jump into the buy-versus-sell debate let’s make sure we’re on the same page about what options actually are.
Options are financial derivative contracts that give buyers the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (the strike price) on or before a specific date. These underlying assets can be stocks, bonds, commodities, currency pairs, or indexes.
There are two main types of options
- Call options: These give you the right to buy the underlying asset at the strike price before the expiration date
- Put options: These give you the right to sell the underlying asset at the strike price before the expiration date
The buyer of an option pays a premium for this right to choose, while the seller (also called the writer) receives this premium in exchange for the obligation to fulfill the contract if exercised.
Buying Options: Limited Risk, Unlimited Potential
When you buy options, you’re essentially paying for the opportunity to profit from market movements without having to own the underlying asset Let’s break down the pros and cons
Advantages of Buying Options
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Limited downside risk: Your maximum loss is capped at the premium you paid for the option contract. If things don’t go your way, the most you can lose is 100% of your investment if the option expires worthless.
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Unlimited upside potential: If the market moves significantly in your favor, your gains could be substantial—theoretically unlimited for call options.
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Beginner-friendly approach: The concept of paying a premium for potential larger gains is relatively straightforward to understand, making it more accessible for novice traders.
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No margin requirements: Buying options doesn’t typically require a margin account, making it suitable for traders with smaller accounts.
Disadvantages of Buying Options
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Time decay works against you: The value of an option naturally deteriorates as its expiration date approaches (known as “theta decay”). This means you need to be right about both direction AND timing.
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Can lose entire premium: If the option expires worthless, you’ll lose 100% of what you paid.
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Options can be expensive: Premium costs can add up, especially for options with longer expirations or on volatile stocks.
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Volatility sensitivity: Options are highly sensitive to changes in volatility, which can work against you even if the underlying asset moves in your favor.
Selling Options: The Income Strategy with Hidden Risks
When you sell options, you’re taking on the role of the option writer, collecting premiums in exchange for potential obligations. Here’s what you should consider:
Advantages of Selling Options
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Immediate income: You receive the premium upfront, which is yours to keep regardless of what happens next.
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Time decay works in your favor: As the option approaches expiration, its value typically decreases, potentially allowing you to buy it back for less or let it expire worthless.
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Higher probability of profit: Statistically, most options expire worthless, which benefits the seller.
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Can generate consistent income: With proper strategy, selling options can create a steady stream of income.
Disadvantages of Selling Options
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Potentially unlimited losses: Particularly when selling naked calls, your losses could be theoretically unlimited if the market moves strongly against your position.
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Requires margin: Selling options typically requires a margin account and significant capital set aside as collateral.
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Limited upside: Your maximum profit is capped at the premium you receive, regardless of how favorable the market movement.
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More complex risk management: Managing the risks of selling options often requires more sophisticated strategies and deeper market understanding.
Risk Profiles: A Side-by-Side Comparison
Let’s compare the risk-reward profiles of both approaches:
| Aspect | Buying Options | Selling Options |
|---|---|---|
| Maximum Gain | Unlimited (calls) or substantial (puts) | Limited to premium received |
| Maximum Loss | Limited to premium paid | Potentially unlimited (calls) or substantial (puts) |
| Probability of Profit | Lower | Higher |
| Time Decay Effect | Negative (hurts position) | Positive (helps position) |
| Capital Requirements | Lower | Higher (margin often required) |
| Complexity | Lower | Higher |
| Best For | Directional bets, leverage | Income generation, range-bound markets |
So Which Is Actually Better?
I hate to give you the classic “it depends” answer, but… it really does depend on your specific situation. Here are some factors to consider:
When Buying Options Might Be Better
- You’re new to options trading and want a simpler approach
- You have a smaller trading account
- You’re making a strong directional bet on a stock or market
- You want to limit your potential losses to a specific amount
- You expect significant volatility or a major price move
When Selling Options Might Be Better
- You’re a more experienced trader comfortable with risk management
- You have a larger trading account with margin capabilities
- You want to generate consistent income
- You expect sideways or range-bound markets
- You understand and can implement more complex hedging strategies
Risk Management Strategies for Both Approaches
Whichever approach you choose, risk management is crucial:
For Option Buyers:
- Don’t invest more than you can afford to lose
- Consider using spreads to reduce premium costs
- Be aware of upcoming events that could affect volatility
- Have an exit strategy for both profitable and losing trades
For Option Sellers:
- Use defined-risk strategies like credit spreads instead of naked options
- Consider position sizing carefully
- Set stop-loss orders or management rules
- Be prepared for assignment and understand the implications
Popular Strategies to Consider
For Option Buyers:
- Long calls/puts: Straightforward directional bets
- Debit spreads: Buy and sell options at different strikes to reduce cost
- Calendar spreads: Buy longer-dated options and sell shorter-dated ones
- Straddles/strangles: Buy calls and puts to profit from volatility
For Option Sellers:
- Covered calls: Sell calls against stock you own
- Cash-secured puts: Sell puts with cash set aside to buy shares if assigned
- Credit spreads: Sell options at one strike while buying protection at another
- Iron condors: Combine credit spreads for both bullish and bearish scenarios
My Personal Take
In my experience, most beginners should start with buying options to understand how they work before venturing into selling. The defined risk profile is more forgiving while you’re learning the ropes.
However, once you’ve gotten comfortable with options, incorporating some selling strategies into your approach can help generate more consistent returns. Many successful options traders use a combination of both buying and selling strategies based on market conditions.
I’ve found that selling put credit spreads in bullish markets and call credit spreads in bearish markets tends to be a good middle ground – you benefit from time decay while still having defined risk.
Which Fits Your Trading Style?
Consider your:
- Risk tolerance
- Account size
- Trading experience
- Time commitment
- Market outlook
If you want simple, directional trades with limited risk, buying options might be your best bet. If you’re looking to generate income and have the experience to manage more complex positions, selling options could be more suitable.
The Bottom Line
There’s no universal “better” choice between buying and selling options – it’s about finding what works for your specific goals and circumstances. Many successful options traders actually do both, adapting their approach based on market conditions and opportunities.
Remember that options trading involves significant risks regardless of whether you’re buying or selling. Take the time to educate yourself, start small, and consider working with a paper trading account before risking real money.
What’s your experience with options trading? Have you had more success buying or selling? I’d love to hear your thoughts and experiences in the comments!
FAQs About Buying vs. Selling Options
Can I combine buying and selling options strategies?
Yes! Many advanced strategies involve both buying and selling options simultaneously. Spreads, butterflies, and iron condors all combine buying and selling to create specific risk-reward profiles.
What happens if my options expire worthless?
If you’re the buyer, you lose the premium you paid. If you’re the seller, you keep the premium you received, and your obligation to buy or sell the underlying asset is terminated.
Can I exit an options trade before expiration?
Absolutely. With American-style options, you can generally exit your position at any time before expiration by either selling the option (if you’re a buyer) or buying it back (if you’re a seller).
Is options trading suitable for beginners?
Options trading can be complex, but beginners can start with simpler strategies like buying calls or puts. It’s important to educate yourself thoroughly before trading options with real money.
How much capital do I need to start trading options?
For buying options, you only need enough to pay the premium, which can be as little as a few hundred dollars. For selling options, especially uncovered positions, brokers typically require several thousand dollars and a margin account.
Understanding Why Options Buyers Struggle
The allure of options buying is undeniable. Stories of traders turning a few hundred dollars into thousands capture our imagination. Yet the reality is more complex.
Lets examine why many options buyers face challenges and, more importantly, how to overcome them:
Many new traders focus on single-trade potential without considering the impact of a series of trades. Heres why this matters:
If you lose 50% on a trade, you need a 100% gain just to break even. String together a few losses, and the math becomes even more challenging. Lose 50% three times in a row, and you need a 700% winner just to get back to your starting point.
This isnt meant to discourage options buying but to highlight why position sizing and risk management are crucial.
Many traders buy options when implied volatility is high, effectively overpaying for their positions. Using Barcharts IV Rank indicator, you can quickly identify when options are historically expensive or cheap.
Heres what to look for:
- IV Rank below 25%: Options are relatively cheap
- IV Rank above 75%: Options are relatively expensive
The best opportunities for options buyers often come when IV Rank is low, giving you more runway for profitable trades.
Using Barchart’s IV Rank & IV Percentile prebuilt scanner, you can quickly locate and sort stocks with the highest or lowest IV Rank or IV Percentile as shown below.
You can also view the IV Rank and IV Percentile for individual stocks in “Options Overview” within the Price Overview.
Many traders choose expiration dates that are too close, giving their trades insufficient time to work out. While shorter-dated options are cheaper, theyre also more susceptible to time decay.
Using Barcharts Expected Move calculator helps you better align your timeframe with the stocks typical movement patterns. For example, if the Expected Move shows a stock typically needs 30 days to move 5%, buying weekly options expecting that same movement is setting yourself up for failure.
We can use the NVDA graphic from earlier to see how the expected move dollar amount and percentage changes as the expiration cycles extend into the future.
Instead of viewing options buying as a way to get rich quickly, successful traders approach it as a strategic tool. Heres how:
- Use Barcharts IV Rank to time entries when options are relatively cheap
- Align trade duration with expected move projections to increase the probability of success
- Size positions small enough to survive a string of losses
- Focus on high-probability setups rather than lottery tickets
By understanding these challenges and using the right tools to address them, you can improve your odds of success as an options buyer. However, this also helps explain why many professional traders prefer to sell options – a strategy well explore in the next section.
The Fundamental Differences Between Buying and Selling Options
Buying and selling options represent opposing approaches – one profits from dramatic market moves, while the other capitalizes on market stability and time decay.
When you buy an option, youre purchasing the right (but not obligation) to:
- Buy shares at a fixed price (call option)
- Sell shares at a fixed price (put option)
For example, buying a call option that expires in 30 days gives you the right to purchase 100 shares at your chosen strike price anytime before expiration. Your maximum risk is limited to the premium paid, while your potential profit is theoretically unlimited for calls or capped at the stock going to zero for puts.
When analyzing potential trades in Barcharts options chain, focus on these key metrics:
- Strike price relative to current stock price – determines how much the stock needs to move for profitability
- Days until expiration – impacts how much time your trade has to work out
- Option liquidity (volume and open interest) – ensures you can enter and exit trades easily
- Implied volatility – tells you if options are expensive or cheap relative to historical prices
Let’s use NVIDIA’s options chain as an example.
Looking at Nvidias option chain, we can see the $132 strike call option expiring in 23 days trades for $5.70. As a buyer, youd pay $570 ($5.70 x 100 shares). To break even at expiration, Nvidia would need to reach $137.70 – your strike price plus the premium paid.
The payoff graph looks like this:
When you sell an option, youre collecting premium in exchange for taking on an obligation to:
- Sell shares at a fixed price (call option)
- Buy shares at a fixed price (put option)
As an option seller, you receive payment upfront but take on substantial risk if the trade moves against you.
Unlike buying options where losses are capped at your premium paid, selling calls exposes you to unlimited losses if the stock rises, while selling puts risks significant losses if the stock falls sharply.
Lets see how this plays out using Nvidias current option chain:
Using the same option as an example, youd collect $570 upfront as a seller. However, your potential loss is significant if Nvidias stock surges higher, as youd be obligated to deliver shares at $132 no matter how high the stock climbs.
The payoff graph for selling the call option looks like this:
These opposing payoff structures create three critical distinctions between buying and selling options:
- Time Decay (Theta): Time decay works against option buyers, reducing their options value daily. Meanwhile, sellers profit from this decay, earning a portion of their collected premium each day.
- Probability of Profit: Option buyers typically have a lower probability of profit (around 25-40%) but higher potential returns. Option sellers enjoy higher win rates (often 60-75%) but face larger losses when theyre wrong.
- Impact of Volatility: Using Barcharts Expected Move tool below, we can see Nvidias implied volatility currently sits at 37.57% with an IV Rank of 9.50%. This tells us option prices are relatively cheap compared to historical levels. Option buyers want to purchase when IV is low like this, while sellers prefer elevated IV levels where they can collect more premium.
The expected move chart shows NVIDIAs historical price movement patterns and projects a potential $8.63 swing in either direction over the next 23 days. This helps traders assess whether current option prices align with the stocks typical volatility.
This natural tension between buyers and sellers creates opportunities for both strategies. The key is understanding when to employ each approach based on market conditions and your trading objectives.