Question

What are the advantages and disadvantages of shorting stock over buying a put option?

Answer 1

Advantages of Shorting stock over buying put option:-

- A person doesn't have to purchase or own the underlying asset

- Simpler and not limited by option expiration date

- Shorting can be used to hedge investment partly if one is long on the stock

Disadvantages of Shorting stock over buying put option:-

- Shorting poses high risk. It only makes money if the stock price goes down. If the stock price increases then there can be no limit to losses. Whereas when you buy put option then the losses are only limited to the premium amount

- Short selling can even have worse implications for the company's stock and the stock price as a whole. If majority of the investors takes short position then it can take the stock prices down, which is not the case of buying put options