Confusion over position

CFA Level I Equities
#1

A trader has a short position when he has sold asset he does not own, and long position when he owns asset or contract.

In other words, a quick way to distinguish is a position is short when one benefits from price decrease, and long when the benefit comes from price increase.

And, even in case of option contracts, long side is the one that holds the right to exercise. Short is the obligator.

Q18, reading 46 - Rober purchased a call option. He also wrote a put on same company shares. Call & put have the same exercise price, expiration date & number of shares. Considering both positions, Robert’s exposure to the risk of the stock is ---- a. long, b. short, c. neutral

The answer is long. I thought neutral… Is it because the question asks about the stock (the underlying instrument) and not the option contract?

#2

You’re right, the question is about underlying instrument. i think best way to think of it is scenarios where if the market price of the stock rallied. he will exercise the call option and buy the stock at the strike price and the put option will expire. the other scenario is if the stock market price decreased, he will not exercise the call option while the buyer of his put option will exercise and he will be obliged to buy the stock. either ways he is long.

#3

I encourage you to practice drawing pictures of the payoffs of all possible option positions:

  • Long call: _/
  • Long put: _
  • Short call: ¯\
  • Short put: /¯

You can then combine positions and draw the payoff for the resulting portfolio. Thus:

Long call (_/) + short put (/¯) = /

Clearly, this last diagram is the payoff of a long position. The payoff of a short position would be “\”, and of a neutral position would be “–”.

#4

Easily spoken “wrote a put” = selling a put = short put. And selling a put means you can cash in the premium if stock price increases. So you you’re long