Why selling puts is better than buying calls?

Selling puts is often considered a more advantageous strategy than buying calls for certain investors due to their inherent characteristics regarding immediate profit, probability of success, and the impact of time decay.

Why Selling Puts Can Be Better Than Buying Calls

While both strategies offer ways to profit from an underlying asset's price movement, selling puts frequently provides a more favorable setup for income generation and higher probability of profit, especially in neutral to bullish market conditions.

Here's a detailed comparison:

1. Immediate Financial Impact

• Buying Calls: When you buy a call option, you pay a premium upfront. This results in an immediate loss on your position, as you are outlaying capital without any immediate return. Your profit potential only begins once the underlying asset's price rises above the strike price plus the premium paid (the breakeven point).
• Selling Puts: Conversely, when you sell a put option, you receive a premium from the buyer. This generates an immediate profit / inflow into your account. This immediate income is a significant draw for many investors seeking to generate consistent returns.

2. Risk Profile

• Buying Calls: The risk associated with buying a call is limited to the option's premium. If the underlying asset's price does not move favorably (i.e., it stays below the strike price or doesn't move enough to cover the premium), your maximum loss is the premium you paid.
• Selling Puts: While it offers immediate income, selling a put carries the potential for future loss with no cap on the risk if the put is uncovered and the underlying asset's price drops significantly. In theory, if the stock goes to zero, the loss could be substantial. However, for most investors, selling puts is often done as a "cash-secured put" where enough capital is set aside to buy the shares, or as part of a spread strategy to limit downside risk. Despite potential risk management techniques, the inherent theoretical risk for an unhedged put can be unlimited.

3. Impact of Time Decay (Theta)

Options have a finite lifespan, and their value erodes as they approach expiration. This phenomenon is known as time decay or theta.

• Buying Calls: Time decay works against the call buyer. Every day that passes without a significant price movement in the underlying asset reduces the value of your call option, making it harder to profit. You need the stock to move up quickly to counteract time decay.
• Selling Puts: Time decay works in favor of the put seller. As time passes, the value of the put option you sold decreases, making it easier for you to profit. If the stock stays above your strike price, the option will eventually expire worthless, allowing you to keep the entire premium collected.

4. Probability of Profit

• Buying Calls: To profit from buying a call, the underlying asset's price must rise above your breakeven point (strike price + premium). This often requires a significant bullish move, which inherently lowers the probability of success compared to a strategy that benefits from less aggressive movements.
• Selling Puts: To profit from selling a put, the underlying asset's price simply needs to stay above the strike price by expiration. This means you can profit if the stock goes up, stays flat, or even drops slightly (as long as it remains above your strike price). This offers a wider range of profitable outcomes, leading to a generally higher probability of profit.

5. Assignment Potential

• Selling Puts: A unique aspect of selling puts (especially cash-secured puts) is the potential to acquire shares of a company you wish to own at a discount. If the stock price falls below your strike price, you might be "assigned" the shares, meaning you are obligated to buy them at the agreed-upon strike price. This can be viewed as a "limit order with income," as you get paid to potentially buy a stock at a price you like.
• Buying Calls: Buying calls does not typically lead to direct stock acquisition unless exercised.

Key Differences at a Glance

In essence, while buying calls is a speculative bet on a strong upward movement with defined risk, selling puts often appeals to investors looking for income generation with a higher probability of success, especially if they are comfortable potentially owning the underlying stock or managing the associated risks.