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commandercoolage | What's the difference between Short Selling & Put Options? |
Just as the title asks. I already understand that both are used when an investor thinks the price of a security is going down and that a Put Option is a financial derrivitive giving an investor the option to sell a security. I just need to know the main differences between the two. Thank you. |
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zman492
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(1) Selling a stock short requires the use of margin. Buying a put option does not.
(2) The maximum loss from buying a put option is the cost of the option. The maximum loss from selling a stock short is unlimited.
(3) A put option is a "wasting asset" in that its value normally declines due to the passage of time. A short stock position is not a wasting asset.
(4) A put option has an expiration date. A short stock position does not.
(5) The owner of a put option does not pay dividends. A person with a short stock position does.
(6) The owner of a put option pays a "time premium" (extrinisc value) for the option, and if the stock does not go down enough to cover that premium he usually loses money on his investment. A person with a short stock position can make money on even a the smallest decline in the stock price.
(7) The value of a short stock position depends entirely upon the price of the stock. The value of a put option depends upon on only the price of the stock, but the implied volatility of the option, the amount of time before expiration, and the risk-free interest rate.
(8) A put option normally supplies more leverage than a short stock position, making the percentage gains and losses greater most of the time.
(9) Stock positions, including short positions, can be traded in units of one share. Put options are traded in units of one contract, with a contract usually being for 100 shares.
(10) A short stock position can only be opened/maintained if his brokerage has shares available to be borrowed. A put option does not require shares available to be borrowed. |
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raysor
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Okay one is a stock or share and the other (option) is a derivative. A world of difference. You can buy shares or sell them short (in the hope you can buy them back later cheaper and thereby make a profit)
Or you can buy the right to sell the same shares at a future date at a preset price. Bit different, eh? |
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Sir Readalot
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You stated the difference in your question: "a Put Option is a financial derrivitive giving an investor the option to sell a security." The put option is a contract, and you buy the contract from your broker. It has an expiration date, and you can sell it any time up to that date. Your risk on any option is the purchase price of the option, because an option can expire worthless. An option contract has a strike price, which is the price of the underlying security beyond which the option is "in the money." A standard contract is for 100 shares, and the option is priced in terms of one share. So a price of $3 means you pay $300 for one contract. |
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Roger
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Big difference. If you buy a put, all you are risking is the amount you pay for the put. If you sell short and the price of the share goes up significantly, you would be sitting on a big loss. Some people think that if you sell short, buy a call at the same time to cover you against any major price movement. |
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josephs.myth
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Either may be used, when an investor thinks the price of a security is going down. A Put Option is a financial derivative giving an investor the option to sell a security. |
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Dave W
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One difference is the amount of risk (i.e. money you can lose). With a put option, the most you can lose is the amount you paid for the option. You know that amount at the time you buy it, so you can be sure you're willing to risk losing that much. When you short sell stock, however, your risk is (theoretically) unlimited. Say you sell short 500 shares of a $20 drug stock. You get $10,000 (minus commission). Then the company announces that they've found a cure for cancer and the stock shoots up to $100. It now costs $50,000 to buy the 500 shares you shorted, but you only have $10,000 from the sale, so you have to come up with $40,000 from somewhere else.
Another difference is that there's no time limit on a short sale. Example: You and your friend both think a stock is about to drop. You buy a put option with an expiration date 6 months from now. Your friend sells the stock short. The market takes awhile to see the problems you see and the stock doesn't drop until 8 months from now. Even though you were right about the stock dropping, you had the timing off and lose money because the option expires worthless before the stock drop happens. Your friend on the other hand makes money when the stock eventually drops. Even though it took longer than expected, the trade is still profitable.
To make money buying options (puts or calls) you have to be right about BOTH price direction AND timing. (That's why sellers of option usually make more money than buyers of options.) To make money buying or shorting a stock directly, you only have to be right about the price direction. You can still make money even if it takes longer than you expect for the price to move. |
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jesse
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Short selling- if it goes up you lose money dollar for dollar with the price increase.
Bought Put Option- if it goes up you only lose the premium that you paid for the option.
In either case, if the stock goes down, you earn dollar for dollar. |
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Tatnic
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an option is a noun.....selling short is a verb. You buy an option for a set price and hope you make money on it (more often than not, you will lose money), in this case, you hope the common goes down. Now if you buy a put option that's too far out of the money and to old, then you can still lose all of your money on that particular option. Options are very tricky to get right on a consistent basis for 99% of investors and you're better off without them...but I know you won't believe me..its so much more educational to lose all your money first hand.
Selling short requires a margin account and a marginable stock too....and of course it helps to short a stock that's going down soon and not up...but that's a different chapter all together. To have a margin account and to be able to short stocks, you need to be able to show some scars.
For 99% of investors, they're better off buying index funds and diversifying their holdings across several asset classes. But I realize that's boring as hell and its much more exciting to lose your ***! |
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