Long and Short Option Positions

Understanding the four basic option positions is essential for the Series 7 exam. Each position has different profit potential, risk, and market outlook.

The Four Basic Option Positions

Long Call (Buying a Call)

A long call is a bullish strategy used when an investor expects the stock price to rise.

Example

Buy 1 XYZ 50 Call @ $3

The investor profits when the stock rises above $53. Below $50, the option expires worthless and they lose the $300 premium.

Short Call (Writing a Call)

A short call is a bearish to neutral strategy. The writer receives premium but takes on the obligation to sell shares if assigned.

Example

Sell 1 XYZ 50 Call @ $3

Warning: Uncovered (naked) calls have unlimited risk because the stock can rise indefinitely and the writer must purchase shares at market price to deliver.

Long Put (Buying a Put)

A long put is a bearish strategy used when an investor expects the stock price to decline.

Example

Buy 1 XYZ 50 Put @ $4

The investor profits when the stock falls below $46. Maximum gain occurs if the stock goes to zero (the investor can sell worthless stock for $50).

Short Put (Writing a Put)

A short put is a bullish to neutral strategy. The writer receives premium but takes on the obligation to buy shares if assigned.

Example

Sell 1 XYZ 50 Put @ $4

Exam Tip: Short put writers may be required to purchase stock at the strike price even if it falls to zero.

Breakeven Summary

Memory Tip: "CAP" - Calls Add Premium to strike for breakeven. "PSP" - Puts Subtract Premium from strike.