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Option Strategies

Long Call Vs Short Put

During the study of Long Call and Short Put, we found both are very similar in the thought process, but there are a few differences that we will focus upon in this section. 

 

Long call and a Short put are both bullish strategies. There is a difference between both with respect to the risks involved, and profit potential.

 

Buying a call is a limited-risk strategy whereas selling a put is an unlimited-risk strategy.

 

Which strategy is better in the particular circumstance depends on the risk profile of the trader, time frame, and anticipated magnitude of the move.

 

If the trader is bullish in the short term, then the purchase of a call may be appropriate; however, if the trader is bullish but believes that the underlying stock can fluctuate and the underlying will take time for the bullish move to occur, then selling an Out-of-the-money (OTM) put maybe appropriate.

 

An important aspect which needs to be kept in mind while deciding whether to buy a call or sell a put is the volatility factor. If an increase in the volatility is expected, then buying call options are always better as while selling a put, the premiums may not decay fast.

 

Moreover if you want to sell a put, it is always better to initiate it towards the second half of the expiry period. Since the Expiry is near, premium decays are faster.

 

The table below compares the characteristics of a long call to the characteristics of a short put:

 

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Units 10/26