The reason why option buying is cheaper than selling is due to the difference in the risks and rewards associated with each strategy. In this post, we will evaluate the potential profit and risk for an Option Buyer Vs. Option Seller.
When you buy an option, you are paying a premium to purchase the right, but not the obligation, to buy or sell an underlying asset at a specified price, known as the strike price, before or on a specific date, known as the expiration date. As a buyer of an option, your maximum risk is limited to the premium paid, while your potential profit is unlimited.
On the other hand, when you sell an option, you receive a premium in exchange for taking on the obligation to buy or sell the underlying asset at the strike price if the option is exercised by the buyer. As a seller of an option, your maximum profit is limited to the premium received, while your potential risk is unlimited.
The market determines the premium for each option based on various factors such as the price and volatility of the underlying asset, the time to expiration, and interest rates. The premium for an option is influenced by supply and demand factors in the market.
In the Indian market, options are traded on various underlying assets such as stocks, indices, and currencies. For example, if you believe that the stock of XYZ company will rise in the future, you can buy a call option on the stock. If the stock price does increase, the call option will become more valuable, and you can sell it at a profit. Alternatively, if you believe that the stock price will fall, you can buy a put option on the stock, which will become more valuable if the stock price does indeed fall.
Conversely, if you are a seller of a call option or a put option, you will receive a premium in exchange for taking on the obligation to sell or buy the underlying asset at the strike price if the option is exercised by the buyer. If the option is exercised, you will need to fulfill your obligation, which can result in a loss if the price of the underlying asset moves significantly against your position.
Also read: 5 advantages of option buying over option selling
https://nseoptions.in/5-advantages-of-option-buying-over-option-selling/
