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.

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