Hi Hope somebody can help me with my question on options. Ok well the curriculum states 4 types of options 1) Long call - right to buy an underlying asset 2) Short call - obligation to sell the underlying 3) Long put - right to sell the underlying asset 4) Short put - obligation to buy the underlying This is where Im confused. Options are the given right to buy the underlying and with futures/forwards you have the obligation. Now don’t short calls/ short puts contradict this? I mean they both are an obligation rather than the right to make action. Are Short calls just Long puts and are Long calls are short puts? Or are both shorts technically forwards rather than options? Im a little bit confused, I hope I havent confused you. Help! Thanks
If you are SHORT an option, you don’t own the option. Someone else has bought the option from you, so they have the right to exercise. You have the obligation to fulfill the contract if the buyer decides to exercise.
Trogulj- Try looking at them all separately and do not try to create relationships with the different types of derivatives to better understand them. Futures and Forwards are actual contracts to buy or sell something at a future date. You are obligated in both types of contracts as either the buyer or the seller. You have to buy the asset or sell the asset at the contractually agreed price. However, with futures buyers rarely take delivery of the asset and they just find a contract with the opposite position and close out their position so they do not have to take delivery of 2 mill barrels of oil. With options if you short (write) a put or call contract you are obligated to sell the asset at the strike price or buy the asset at the strike price. If you are long a put or a call, you have the right but not the obligation to exercise your option (sell or buy the asset at the strike price). All the short position does is collect a premium which can be used for many different purposes and strategies. Hope this helps, but if not ask more!
trouji, heres the situation, ive been to many nations, but options are all the same
wake2000 Wrote: ------------------------------------------------------- > trouji, heres the situation, ive been to many > nations, but options are all the same Hey Wake! what are you doing over here? Big Gulps huh? Well, see ya later!
You can think of it like this: Futures/Forwards are contracts to buy at a future date at a particular price. Both the long and short side can take a profit or loss on the contract. - If the price goes up long benefits. Short pay off long. - If the price goes down short benefits. Long pay off short. Options are not like Futures/Forwards because it essentially puts a floor on your losses for either side of the trade. - If you long a call option you put a floor on your losses. If the price goes down, you don’t take a loss as you would if you went long on a futures contract. You simply let the option expire as worthless. However if the price goes up, you exercise your option and take your profit. - If you long a put option you also put a floor on your losses. If the price goes up, you don’t take a loss as you would if you went short on a futures contract. You simply let the option expire as worthless. However if the price goes down, you exercise your option and take your profit. This floor on your losses comes at a price. Which is the option premium you pay to the short side to initiate the position. If you go short on a put or call option, you simply collect your option premium. If the price doesn’t go your way you must pay off the long side when they exercise their option.
Thanks guys. I understand this now well. Good luck in June