Put and short are two types of derivatives that are used when betting on the price of a stock or other asset. There are some key differences between put options and short selling that determine which strategy is best for you, so it’s important to know the differences in order to make an informed decision about how to invest your money. This guide will help you compare put vs short selling so you can make an informed choice based on your financial goals and risk tolerance.
The Differences
A short sell is when an investor borrows stock from a broker and sells it with hopes of buying it back at a lower price, later returning it to the broker and profiting off of the decline in price. A put option on a security is like insurance against that security dropping in value below a certain level (called strike price). If you own shares of Apple and buy put options that protect your investment if it falls below $400, you’ll be glad to know that your investment does fall under $400; however, if Apple’s stock skyrockets in value beyond $500, then you’re out of luck since you only protected yourself from losses up to that point.
When to Use Each
Short vs put options both have their place in today’s market, but it can be confusing to know when each strategy is most effective. Here are some questions to help you figure out which one will work best for your investment goals and circumstances: Will you be investing long-term or short-term? If you’re looking to make a few trades over a short period of time, a short sale may be right for you since it can take only a few days (rather than weeks) to close a trade if you need quick cash flow.
Key Takeaways
The two main types of options are put and call options, but what’s the difference between them? While put and call options are both similar—they both let you buy or sell a certain amount of stock for a price at a future date—the fundamental difference lies in their expiration dates. Call options expire on a fixed date whereas put options expire exactly when they reach strike price (the price specified in your contract). Here’s why that might matter to you. When you buy call options, you are betting that prices will go up; when you buy put options, you’re betting that prices will go down because with puts, if things don’t work out like expected, at least your losses are capped.