Buy Call and Sell Put – Which Is Better

If you are just learning about options, there are many webinar training explaining about how by selling put options, you are able to collect option premium. The allure of passive income then attracted the attention of many.

And it is true that it is possible to collect option premium every single month - I have been doing that month after month after all.

However, in this article, I explained why I will never start with selling put options as a beginner.

Difference Between Profits & Cash Flow

Well here's my definition. 

Cash flow is the amount of cash you collect in your pocket, while profits is derived from the capital appreciation/depreciation of the underlying asset.

For example, if I bought a property for $150,000 and I rent it out at $2,000 per month.

Two years later, the property depreciate to $140,000 but I am still collecting the same amount of rental from my tenant.

This means that I made a paper loss of $10,000 but I am still collecting cash flow every single month.

Needless to say, cash flow is real cash that you can actually use to pay for expenses.

Now, what does that have to do with options?

Difference Between Buy Call And Sell Put

Selling put option is a cash flow option strategy. It is meant to generate cash flow from your portfolio. This means that you will not expect huge capital gain from your sell put options (unless it gets exercised).

The reason is simple.

When you sell a put option, the maximum amount of profit that you make is limited by the option premium that you collected.

Call options, however, is a capital growth option strategy. It is meant to grow a smaller portfolio size to a larger portfolio.

Why?

Because call options requires a significant lesser amount of capital to "control" 100 shares. In other words, it is a leveraged instrument.

So why is it that I will never start with sell put options as a beginner?

Don't Fall Into Trap Of Passive Income

Passive income suggests that you don't have to put in much effort to acquire that income. And it is true, it does not take me much effort to make a few clicks to collect the option premium when selling put options.

However, here's the catch.

Passive income only make sense when you have a larger portfolio.

If you are starting with a $10,000 - even a 2% a month return will only yield $200 of cash flow.

Now, take note it is 2% cash flow --> This is not the same as profits.

Now remember the example of the $150,000 property that I mentioned, that is giving you a neat monthly rental income of $2000 every month?

Well, you actually need the capital to buy the $150,000 property in the first place.

This means you need to be able to have capital in order for passive income to make sense.

This is why I absolutely detest the idea of dividend investing.

If you truly want to grow your wealth, it does not make sense to invest for the sake of dividends. Period.

Imagine if a dividend stock is giving you 5% every year.

A $10,000 portfolio will only give you $500 every year. That is not enough to be financially free.

"But Gin, dividend stocks will also appreciate over time."

True, it will slowly appreciate over time if you pick the right dividend stocks..

But let's be true about this, the whole reason why you bought into the dividend stock is because you wanted to collect dividends.

So even if it appreciated in share price, it is unlikely that you want to sell it to realise your profits anyways, since you want to keep collecting the dividends.

This means all your "profits" from your dividend stocks are nothing more than paper profits, or what I call "just for bragging".

The Bottom Line

In other words, passive income only makes sense when you have a larger portfolio.

If you want to chase passive income (such as dividends or selling put options), bear in mind that this will come in the expense of portfolio growth.

This is also why I wouldn't start with selling put options when I am starting with a smaller portfolio. This was in fact the mistake I made when I first started, but luckily, I changed that rather quickly by learning more about call options.

If you want to invest using call options, make sure that you only do it with what I call, "qualified stocks" and follow the strict entry rules.