Difference between the types of Call and Put Options

CFA Level I Derivatives
#1

I have a very basic doubt about the types of options available. As of now, I know the following things:

1) Buyer takes a long position, and seller takes a short position
2) Since the goal is to earn profits, the buyer would want Spot price > Strike price, and the seller would want the Strike price > Spot price, keeping aside the premium rate
3) A call option gives the right to buy the option, but not an obligation
4) A put option gives the right to sell the option, but not an obligation

So how are the call and put option variables included in this whole process, that is, what is the exact idea behind Long Call, Long Put, Short Call and Short Put?

To be more precise, for example, since the buyer takes a long position, and the put option gives him the right but not the obligation to sell, how would one formulate the idea of a Long Put option, that is the buyer selling an option? Similarly for others.

A detailed explanation would be appreciated. Thank you!

#2

  1. Long Call: The Long Call strategy is an options strategy where an investor purchases a call option with the expectation that the price of the underlying asset will rise. By holding a Long Call position, the investor has the right, but not the obligation, to buy the underlying asset at a predetermined price (strike price) within a specific time period (expiration date). The investor profits from a Long Call when the price of the underlying asset increases significantly, allowing them to buy the asset at a lower strike price and sell it at a higher market price.

  2. Long Put: The Long Put strategy is an options strategy where an investor purchases a put option with the expectation that the price of the underlying asset will decrease. By holding a Long Put position, the investor has the right, but not the obligation, to sell the underlying asset at a predetermined price (strike price) within a specific time period (expiration date). The investor profits from a Long Put when the price of the underlying asset declines significantly, allowing them to sell the asset at a higher strike price and avoid losses from the decline.

  3. Short Call: The Short Call strategy, also known as writing a call option, involves selling a call option that the investor does not own. By taking a Short Call position, the investor assumes the obligation to sell the underlying asset at a predetermined price (strike price) if the buyer of the call option decides to exercise it. The investor profits from a Short Call when the price of the underlying asset remains below the strike price, allowing the call option to expire worthless. In this case, the investor keeps the premium received from selling the call option.

  4. Short Put: The Short Put strategy, also known as writing a put option, involves selling a put option that the investor does not own. By taking a Short Put position, the investor assumes the obligation to buy the underlying asset at a predetermined price (strike price) if the buyer of the put option decides to exercise it. The investor profits from a Short Put when the price of the underlying asset remains above the strike price, allowing the put option to expire worthless. In this case, the investor keeps the premium received from selling the put option.

Hope that helps!
Cheers :slight_smile:

#3

Yeah its clear now, thanks!