Why Retail Traders Should Avoid Shorting Options: A Lesson in Risk and Reward
I’ve seen countless retail traders fall into the trap of shorting options—whether it’s a call or a put—lured by the promise of collecting a "small but steady" premium. The appeal is understandable: who wouldn’t want to earn a little cash while sitting on the sidelines? But here’s the harsh truth: shorting options is a fundamentally flawed strategy for retail traders. It caps your potential upside, hands over the explosive gains to someone else, and leaves you exposed to risks that you, as a retail speculator, are unlikely to have an edge in managing. In this post, I’ll break down why retail traders should steer clear of shorting options entirely and stick to simpler, more logical approaches: long calls when bullish, long puts when bearish, or just waiting patiently for the right opportunity.
The Core Problem with Shorting Options
When you short an option—whether it’s a call or a put—you’re selling the right to someone else to profit from a big move in the underlying asset. In exchange, you pocket a premium. Sounds like free money, right? Not quite. That premium comes at a steep cost: you’re capping your upside while exposing yourself to potentially devastating losses. The upside of shorting an option is limited to the premium you collect, while the downside can be massive—sometimes even unlimited in the case of shorting a call.
Retail traders don’t have the capital, risk management tools, or market edge that institutional players do. Hedge funds and market makers can short options as part of complex, delta-neutral strategies backed by sophisticated algorithms and deep pockets. You, as a retail trader, are likely just guessing—or worse, hoping—that the market stays flat or moves in your favor just enough to keep that premium. That’s not an edge; that’s a gamble.
Let’s dive into some popular examples of shorting options strategies and why they’re a terrible fit for retail traders. I’ll also add a few more to illustrate just how pervasive this flawed mindset can be.
Covered Calls: Capping Your Dreams for Pennies
A covered call involves holding a stock and selling a call option against it. The idea is to generate extra income from the premium while still owning the stock. But let’s think this through. If you’re holding a stock long-term, it’s because you believe in its potential for significant upside—maybe even explosive growth. Why else would you tie up your capital? Selling a covered call caps that upside. If the stock moons, the buyer of your call exercises it, and you’re forced to sell at the strike price, missing out on the big gains you were betting on in the first place.
On the flip side, if you don’t believe the stock has that kind of upside, why are you holding it at all? You’d be better off selling the stock outright and redeploying your capital elsewhere. Collecting a tiny premium to offset a mediocre investment isn’t clever—it’s a sign you’re indecisive. Retail traders should either go long with conviction or step aside, not straddle the fence with a covered call.
Accumulators (Short Puts): A Costly Way to Buy Low
Another common strategy is selling put options as a way to “accumulate” a stock at a lower price. The pitch is simple: you collect a premium, and if the stock drops to your strike price, you get to buy it cheaper than it is today. If it doesn’t drop, you keep the premium. Win-win, right? Not really.
If your goal is to buy a stock at a lower price, why not just use dollar-cost averaging (DCA) or wait for a market dip to deploy your cash? Selling a put limits your ability to buy at the absolute bottom—your purchase price is locked in at the strike price, minus the premium. In a real crash, the stock could fall far below that, leaving you obligated to buy at a price that’s no longer a bargain. Worse, if you sell a put with a very low strike price to avoid that scenario, the premium you collect shrinks to peanuts—hardly worth the risk when you could just park your money in a fixed deposit or a high-yield savings account and sleep better at night.
Shorting puts isn’t a smart way to accumulate—it’s a greedy grab for a small reward that compromises your flexibility as a trader.
Cash-Secured Puts: The Illusion of Safety
A close cousin to the accumulator strategy is the cash-secured put, where you set aside enough cash to cover the purchase of the stock if the put is exercised. Retail traders often see this as “safe” because they’re prepared to buy the stock. But the same problems apply: you’re locking in a purchase price that might not be optimal, and you’re tying up capital for a measly premium. If the stock doesn’t drop, you’ve earned a small return—but you could’ve done better with a conservative investment like a bond or ETF. If it does drop, you’re stuck buying a falling asset, often at a price higher than where it eventually settles. Where’s the edge in that?
The Wheel Strategy: Spinning Your Wheels, Not Profits
The “wheel” strategy is a favorite among retail traders who love shorting options. It involves selling cash-secured puts until you’re assigned the stock, then selling covered calls until the stock is called away, rinse and repeat. Proponents argue it’s a way to generate consistent income. But let’s be real: you’re still capping your upside with covered calls and limiting your buying flexibility with short puts. The wheel only works in a narrow range of market conditions—sideways or slightly trending markets. In a big bull run, you miss the ride. In a crash, you’re left holding a depreciating asset. Retail traders don’t have the time or resources to babysit this strategy through every market cycle. It’s a distraction from what really matters: finding high-conviction opportunities.
Short Straddles/Strangles: Betting Against Volatility Is a Retail Trap
Some retail traders get fancy and short both a call and a put at different strike prices (a strangle) or the same strike price (a straddle), betting the stock won’t move much. If it stays flat, they keep the premiums from both options. Sounds brilliant—until it isn’t. The problem? You’re exposed to unlimited risk on both sides. A sudden spike or drop in the stock price can wipe you out, and retail traders rarely have the margin or hedging tools to survive those moves. Volatility is unpredictable, and betting against it consistently is a game for quants, not your average Robinhood user.
The Greedy Mindset Behind Shorting Options
At the heart of all these strategies is a flawed mindset: the belief that you can squeeze a little profit out of the market every day, every hour, even when you’re uncertain about its direction. That’s not trading—it’s greed masquerading as strategy. Shorting options tempts retail traders with small, immediate gains while quietly stripping away the potential for life-changing returns. The premium you collect isn’t “free money”—it’s compensation for selling someone else the right to the big wins you claim to be chasing as a speculator.
A Better Way for Retail Traders
Here’s my advice, plain and simple: stop overcomplicating things. If you’re bullish, buy a call option and let your upside run. If you’re bearish, buy a put and profit from the decline. If you’re uncertain, sit on your hands and wait for the market to give you a clear signal. Trading isn’t about earning a paycheck every minute—it’s about positioning yourself for the big opportunities that come when the stars align.
You don’t need to short options to feel like a trader. The edge for retail speculators lies in patience, conviction, and simplicity—not in collecting crumbs while handing the feast to someone else. Leave the premium-chasing to the pros with billion-dollar balance sheets and focus on what you can actually control: your timing and your risk.
Conclusion
Shorting options might look like a clever way to make a quick buck, but for retail traders, it’s a trap. Covered calls cap your upside, accumulators and cash-secured puts limit your flexibility, and strategies like the wheel or short strangles expose you to risks you’re not equipped to handle. The next time you’re tempted to sell an option for that tiny premium, ask yourself: am I here to speculate on big moves, or am I just playing it safe for pennies? If it’s the latter, you’re better off in a savings account. If it’s the former, stick to long calls, long puts, or the sidelines—and let the real opportunities come to you.
I am actively advocating market education on Bitcoin, cryptocurrencies, and web3, with the hope of empowering more people to seize this chance and benefit from these technologies, ultimately achieving genuine financial freedom. Feel free to share this article with your friends and kindly recommend this column to them.