Option sellers makes more money than option buyers this is actual fact because option seller have some competitive advantage over buyers.
Derivatives market have more volume than equity market. A derivative is a security with a price that is dependent upon or derived from one or more underlying assets like stock price, Gold.
The derivative itself is a contract between two or more parties based upon the asset or assets. Derivatives market have two types that can be traded. First one is Future market and second is Options market.
Why Option Buyer Always Loss Money
There are some basics points or competitive advantage option seller have. Here are some list why option buyer loose more money than sellers.
- Theta Decay
- Time To Expiry
- Deep OTM options
- Less Volatility
- Holding Options
1. Theta Decay or Time To Expiry :- Theta decay is one of the (few) consistencies that option traders can rely on. Long options lose value over time and as they near their expiration date, all else equal, the rate of theta decay accelerates the closer you get to contract expiration.
In simple terms as time passes strike price premium tend to lose. Option buyer loss as time passes. Theta decay is on daily basis and transfer money from option buyer to option seller from underlying strike price.
3. Deep OTM Options :- Option buyer buy deep out of the money options and hold them till expiry and was always make loss, because deep out of the money option have no or less intrinsic value with time.
If index was up or down by huge points then no change occurs in this strike prices.
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4. Less Volatility :- Fourth reason is less volatility in the market because option buyer’s friend is high volatility. High volatility help to change option prices fast and help to make money to option buyers.
5. Holding Options :- Option buyers generally hold losing options and sell profitable options. Holding options can be risky because market can’t be highly volatile all the time.
These are some reasons or competitive advantage to option sellers.
What is Option Buying ?
Option Market again have two types first one is Call Option and Put Option. We can buy call option or sell call option. Also we can buy put option and sell put option.
Buyers ( call or put ) can make limited losses to the extent of the premium paid to buy the option. Option buyers have limited risk when index or stock go against them.
Options buyers have right to buy a securities and option seller have obligation to sell to buyer.
We say call option buyer and put option buyer make less money than call option sellers and put option sellers.
Buyer need not to maintain money for daily volatility while option sellers need to maintain money with brokers for MTM losses.
Option Sellers Meaning
Trader who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Option buyer take granted to option buyer.
Seller have high risk than option buyers because option can go high as much as it can.