What is the difference between short selling and buying put options?

Short selling and buying puts are both ways to profit from a stock price decline but have some key differences:

  • Short selling means borrowing shares and selling them, with the obligation to buy them back later. Buying puts gives you the right but not the obligation to sell shares at a certain price.
  • Short selling has uncapped loss potential, while put losses are limited to the premium paid.
  • Short selling requires margin and interest charges. Buying options requires paying a one-time premium but no ongoing fees or interest.
  • Short sales can face restrictions but buying options typically has few limits. Options may be more available on hard to borrow stocks.
  • Short sellers forfeit rights to benefits like dividends but options buyers maintain shareholder rights.
  • Options eventually expire worthless if not exercised but short positions remain open until shares are bought back.
  • Taxes on gains/losses differ for short selling and options. Short sales gains may face higher short-term capital gains rates.