Difference between long a put and short a call

Is it the same thing, please provide an explanation to clarify this concept.

No? Why would you think so?

In one case you’re long a put option, whereas you have the option, but not the obligation, to sell something at a pre-determined price (if it makes sense to you). You have paid a premium for this.

In the other case you’re short a call option, whereas you have the obligation to sell something at a pre-determined price (if it makes sense to the option holder and they execute the option). You have received a premium for this.

So in short call case i will benefit if the stock price goes down or up.

if the stock goes up, you lose.

Payoffs:

  • Long Call: _/
  • Short Call: ¯\
  • Long Put: _
  • Short Put: /¯

If the payoffs look different (and you need to know these payoff diagrams in your sleep), then the options are different.

I am struggling to understand why a combination of a long put and a short call is the best for a “average bearish” sentiment.

If you are a bear and believe the market will drop significantly, I understand that you would take a long put position. But why wouldn’t you also write as many call options as the market will support? If you’re right, there’s no chance any of them will be exercised so isn’t it just free money?

Kaplan states that the most bearish sentiment is express through just long puts. I don’t understand why you wouldn’t double-down and write calls as well?

Thanks for any help

There is another dimension in terms of how your general strategy plays out, and it has to do with volatility. In times of high volatility, the price of the underlying has big swings. Shortselling options are considered unsuitable under high volatility since it exposes you to big losses should your expectation is wrong. Therefore, if you are bearish in times of high volatility, your best bet is simply to long a put option. The maximum loss in that is the price you pay for the put. However, in times of low volatility, your best bet (assuming you are bearish) is to write a call option, since (as you correctly pointed out) the price of the underlying is not moving a lot, hence the call option is unlikely to ever be exercised. In this scenario of low volatility, buying a put is theoretically unfeasible, since your (positive) payout will only happen assuming that the price of the underlying decreases. In summary, your general strategy depends on not only your expectation of the market, but also the volatility of the underlying.