The Differences of Long and Short Options

The options markets are divided into two main types – the calls and the puts. The possible trades are also divided into two types – the long or the short. To illustrate the relation and complexity of options to trades is that an option that is long might be short on the underlying market just and vice versa. These things might be a little difficult to understand by an inexperienced investor, so let’s take an example. We have a long call when we pay money for an option and when we receive money for that option that is a short call. We have a long put when we pay money for an option and receiving money on an option is considered a short put. It still might seem a little confusing for somebody that is new to the investment business.

As the option market is divided into call and puts, a better definition is that a call option is an understanding that provides an investor the option of purchasing a stock, or any other marketable item (commodity for example) at a certain price at a certain period of time. A put option is an agreement that provides the owner the opportunity of selling the marketable item at a certain price in a certain period of time. To make it easier to remember, calls are for investors and puts are for stock owners. As calls and puts are further subdivided into long and short, a clearer and shorter example is that a long option is the opposite of a short option just as a long put is the opposite of a short put. When money is spent for an option we have a short put or a short call and its complete opposite would be a long put or a long call when money is paid for a specific option.

Rolling options on the other hand, is a term used in the investment business which refers to a contract that offers the buyer the right of purchasing a marketable item at a future date within a certain period of time but for a certain agreed upon fee which is clearly defined from the very beginning of the contract. Rolling options provides the buyer the right of extending the timeframe in which he can use his right, in exchange of an additional fee. Rolling options are mostly used in real estate construction and development. Rolling options can also be applied for covered calls, and it is used when you have a covered call position and you decide to purchase again the option part and put up another option to sell which has a different strike or different expiration date.

Leave a Reply

Your email address will not be published.