Just want to confirm one thing…all else equal is going short a call the same as long a put?
The reason I ask is because when the text is describing a delta netural portfolio, it specifically calls for short calls, and not long puts?
Thanks.
No.
Draw yourself the payoff diagrams for all positions in all options: long call, long put, short call, short put. They should look like this:
Long call: _/
Long put: _
Short call: ¯\
Short put: /¯
And while we’re at it:
Long underlying: /
Short underlying: \
If you can draw these diagrams (and I encourage you to learn to do so for the exam), then you can create combinations:
Long put (_) = short underlying () + long call (_/),
Short call (¯) = short underlying () + short put (/¯),
and so on.
My pleasure.
A short call is not the same as a long put, if X is equal for both.
The graph for a long put has a positive payoff if S is between 0 and X and is 0 for S>X; the graph for a short call has 0 payoff for S between 0 and X and has negative payoff for S>X.
I was waiting for you or cpk123 to come along to head me off at the pass… 