You're likely to have heard of short selling and put options if you are new to investing. It is often difficult to distinguish between short selling or put options. They are not the same strategy.
Short selling and options are both bearish strategies that are used by speculators to hedge against expected declines in the underlying securities and indexes. These strategies can be used to hedge against downside risks in your portfolio. These strategies share many common characteristics, but it is important to know the differences between short stock and put options.
Let's take a closer look at the differences between short selling and put options.
Short selling is the selling of securities that you do not own, but borrowed from the market. This is what traders do when they predict that a stock or currency will experience a significant downturn in the future. This is also known as short selling or going short. Here's what put options means to help you understand the difference between short selling or put options.
Put options allow you to take a bearish view on indexes and securities. You can buy a put option to purchase the right to sell the underlying assets at the prices specified in options. The put option does not obligate you to buy the asset. Because they are very similar in primary definition, beginners may find it difficult to understand the difference between short call and short put.
Market trends tend to be upwards over the long term, so short selling is dangerous. This is more risky than buying put options. Stock prices can go up indefinitely so the risk is theoretically unlimited.
Put options have a lower risk than short selling, but they can still be a danger. You can lose the most money by buying options, but the expected profit may be much higher. The risk factor clearly favors short selling in short stocks vs. put options.
Margin requirements are often the most important factor in determining costs for assets on the markets. This is exactly why short selling is more costly. When the price of the shorter asset increases, the margin increases as well.
However, a margin account is not required for put options. A put can be initiated with limited capital. You won't be able to trade as fast and you could lose all the money you spent on puts if the trade fails.
Implied volatility is another twist. You might pay very high prices if you purchase puts on highly volatile stocks. These cases are not worth it if there is a risk to your portfolio or long position.
Therefore, the costs of short stock vs. out options are variable.
Short calls can be used to speculate or indirectly hedge exposure. Shorting could be used to hedge exposure and create short positions. You could repurchase the stock at a lower price and keep the difference if the stock falls.
Put options can be used to hedge against risk. Puts can be used to hedge against portfolio decline. Even if you don't see the expected fall in underlying assets, it might offset some of your premium.
The purpose of short-sell vs. put is therefore different even though they may seem similar at first glance.
You can now make an informed decision about whether to go for put option or short stock.
This is a subjective decision. It is strongly recommended that investors have a lot of experience choose one. The following factors will influence your decision on whether you should choose a short sale or a put option:
- Investment expertise
- Risk capacity
Availability of funds
- The purpose of trade: speculation and hedging
Investment knowledge and experience are the most important factors. You cannot predict the outcome of any strategy, it is all a game.