However, these approaches are far from interchangeable. Here's a quick primer on when you should use each strategy. Let's start with buying a call. This is a pretty straightforward bullish strategy, because you're expecting the stock's price to rise. Specifically, when you buy a call, you need the stock to make a fast, aggressive move higher.
This big jump on the charts will offset the ill effects of time decay more on that later , and ensure you can collect your gains before the option expires. Your profit opportunity in a call-buying strategy is theoretically unlimited. If the trade moves against you, your maximum potential loss is capped at the premium you paid to enter the position no matter how far the stock falls.
Call buyers also get to enjoy the benefit of leverage. This means they stand to collect gains that are many times greater than their initial investment. You don't necessarily expect the underlying stock to rise significantly, but you at least expect the shares to hold steady above the strike through the lifetime of the trade.
Depending upon strike selection, you may be able to profit with a sold put whether the stock rallies, edges higher, remains flat, or even pulls back slightly. When you sell a put, you collect a premium for the sale upfront.
This is your maximum possible gain on the trade, even if the stock triples in value prior to expiration. This strategy offers a very limited profit potential, as compared to a purchased call. Put sellers do benefit from time decay, which erodes the option's value as expiration approaches.
Conversely, time decay is a negative for call buyers. However, a sold put carries a significantly higher risk profile than a sold call. If the stock price declines and your sold put goes in the money, you could be assigned -- or you might end up buying to close the put at a loss, which can be steep if the shares take a serious hit.
It's also worth noting that many beginning option traders may not be approved to sell naked puts right away, due to the increased risk profile. Additionally, put sales typically carry a margin requirement, which means you'll need additional capital to dedicate to the trade. Let's Get Started Now! Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.
About Schaeffer's Research Legal Notices. When you're bullish, does it make more sense to buy a call or sell a put? Published on Oct 18, at Updated on Oct 18, at Most Active Weekly Options.
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