Directional Versus Not Down

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When we talk about stocks we are inherently talking about a directional play. If you buy a stock then it must go up in order to make money. If you sell a stock short then it must go down to make money. In both cases it makes money point for point in accordance with the directional movement.

However, many option plays are very different. In particular, when we sell a put it is a bet on "not down". Options are inherently wasting assets. They lose value with time. As a result if we sell a put we can simply wait for the time value to expire. Thus a put sale can be profitable if the stock only goes sideways. One cannot say this about a stock trade which is inherently directional.

The importance of this difference is reflected in the probability of making money. When we invest in a stock, either long or short we are always looking at about a 50-50 bet. But when we sell an out of the put option the odds can go north of 90% in our favor. That is a big difference.

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