Why Short Selling is different from Buying Put Option

Both short selling and put option are done when the prices of stocks are high so that one can benefit it from the decline in prices of stocks. However there is difference between the amount of loss which person incurs who do short selling and who buy put option, let’s look at how short selling is different from buying put options.

Short-selling can be defined as the method in which one sells the stock that he or she does not possess at the time of selling them. It is done in the hope that the price of that stock will go down, and the person who has done short selling will be profited by buying back those shares at a lower price. In short selling, loss is unlimited because the person doing short selling has to buy the stocks back at higher prices if stock price rises even further.

A put option contract is one in which the seller (writer) gives the buyer of the option the right to sell the underlying asset, at a predetermined rate at a future date. The loss of buyer in put option is limited to the extent of premium paid by him while the profit is equal to the profit which short seller makes.

Therefore a person who is aggressive can go for short selling while if a person, who is conservative and thinks that stock is overvalued and should be sold, but he or she does not have the stocks to sell then he or she can go for put options.

0 comments… add one

Leave a Comment

Related pages

weaknesses of a command economycalculation of net worth formuladisadvantage of social networkingmeaning of consignor and consigneebarter system and its difficultiesprepaid journal entryadvantages and disadvantages of urban and rural lifelaw of diminising marginal utilitywhat are the benefits of swot analysisreturn outwardsadvantages and disadvantages of working capitaladvantages and disadvantages of specialisationbenefits of ppfcross exchange rate calculationdefinition of unqualified audit opinionadvantages of a decentralised structuredisadvantages of carbon creditsadvantages of monopolisticcapitalist economy advantages and disadvantageswhat is a decentralised structureadjusting entries for unearned revenuefactors affecting elasticity of demandadvantages of fiiexamples of conglomerate mergersbill of exchange disadvantagesmerits and demerits of modernizationconglomerate examplefund flow and cash flowpros of command economyconglomerate merger definitioncompetitor based pricing advantages and disadvantagesexample of nondurable goodsauthoritarian leadership advantagescrr and slr differenceppt on fund flow statementspot rate meaningzero based budgeting advantagesproblems with the barter systemcapitalism and socialism differenceswhat is unsystematicadvantages and disadvantages of capitalist economic systemdirect quote forexpros and cons of traditional economymanaged float exchange rate systemveblen goodsdifference between overdraft and term loanautocratic leader characteristicssingle seller monopolyprepayment journal entriesjournal entry for bills receivabledefine job costingthe advantages of globalisationimportance of capital budgeting techniquesunearned revenue journal entriesadvantages and disadvantages of centralisation and decentralisationadjusting entries for prepaid expensesskimming price strategy definitionoligopoly market examples in indiaadvantages of managerial accountingskimming and penetrationsubstitutes in economics definitionhow to write bearer chequehow to fill out a withdrawal slipmarket skimming examplewhat is durable and nondurable goodswhat are the differences between revenue expenditures and capital expendituresskimming price policy definitionexamples of accounting conventionswhat is job specialization what are its advantages and disadvantagesexamples of skimmingescrow account meaningcharacteristic of capitalist economybalance sheet horizontal analysisstrengths and weaknesses of mixed economydefinition traditional economycongeneric mergercost plus pricing advantages and disadvantagesexamples of indirect quotationbenefits of jit inventoryjournal entry prepaid renthorizontal merger companiesskimmed pricingpayback period finance