Shorting securities and trading put options are two strategies that work well in falling markets. As the security price drops, the short position or put option value rises.

However, the mechanics for shorting and trading put options are quite different. Knowing the strengths and weaknesses of each strategy lets you decide which one best suits your trading style and the prevailing market conditions. Buying a put option gives you the right, but not the obligation, to sell the underlying security at a set price by a specific deadline. One put option controls stock shares. The strike price of an option is the price at which you would sell the shares at.

Buying a put option has two main advantages: The disadvantage is that the underlying asset price must drop enough so you can at least break even.

Calculate the breakeven point by subtracting the option strike price from the option premium. Shorting takes a different approach to profiting from falling prices. With shorting, also known as short selling, you open the trade by selling the actual security. For example, you want to sell shares of ABC stock short.

Your broker borrowers the shares from another trader and lends them to you. To close the trade, you must buy the shares back so your broker can return them to the other trader. The difference between the sell and buy price is your profit or loss. The disadvantage is that your losses are unlimited if the asset price goes up instead of down.

Your losses will continue to mount until you buy back the shares. The loss is limited to what you pay to buy for the option. On the other hand, the underlying asset price australia day trading hours wa 2016 move enough for you to make a profit before the option expires.

You can hold the trade open indefinitely. Your losses are virtually unlimited if the stock price rises instead of falls.

Short Put Strategies | Scottrade

She received a bachelor's degree in difference between shorting and selling a put option administration from the University of South Florida. Each week, Zack's e-newsletter will address topics such as difference between shorting and selling a put option, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.

This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.

Visit performance for information about the performance numbers displayed above. Skip to main content. Put Option Shorting vs. More Articles How Does a Put Option Work?

How Put Options Work Buying a put option gives you the right, but not the obligation, to sell the underlying security at a set price by a specific deadline.

Put Options Advantages and Disadvantages Buying a put option has two main advantages: How Shorting Works Shorting takes a different approach to profiting from falling prices.

References 5 Mountain Investor Report: Following the Smart Money: David Einhorn The Options Guide: Put Option Online Trading Concepts: What is Short Selling, How It Works, and Why Use It Online Stock Trading Guide: Do You Understand Short Selling?

Shorting vs. Put Option | Finance - Zacks

About the Author Based in St. Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. Editor's Picks When Do Call Options Expire? Exchange-Traded Stock Options What Happens to Shares in a Bull Call Spread? Call Stocks How to Hedge Call Options. Trending Topics Latest Most Popular More Commentary.

Quick Links Services Account Types Premium Services Zacks Rank Research Personal Finance Commentary Education. Resources Help About Zacks Disclosure Privacy Policy Performance Site Map. Client Support Contact Us Share Feedback Media Careers Affiliate Advertise.

Short selling vs. purchasing a put option: how do the payoffs differ?

Follow Us Facebook Twitter Linkedin RSS You Tube. Zacks Research is Reported On: Logos for Yahoo, MSN, MarketWatch, Nasdaq, Forbes, Investors.

Logo BBB Better Business Bureau. NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed.