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Long/Short positions

W

WHS

Member
Bit confused here....

A put option gives the right to sell the underlying asset. Therefore the buyer is the party that agrees to sell/deliver the asset.

Isn't this what is defined as a short position? The Core reading says that the purchaser has taken a long position :confused:
 
This can be confusing.

The buyer (or holder) of the option ALWAYS has the long position. This is the person who has the choice whether to buy/sell the asset, and pays the option premium.

The seller (or writer) of the option ALWAYS has the short position. This is the person who receives the option premium and must buy/sell the asset if the other party chooses to exericise.

This will give four different positions to take on an option, namely:

Long Call - the holder who has the right to buy an asset from the call writer
Short Call - the writer who has to sell the asset to the call holder if exercised

Long Put - the holder who has the right to sell the asset to the put writer
Short Put - the writer who has to buy the asset from the put holder if exercised

Don't confuse this with a futures/forward contract, which has only two positions to take:
Long - the person who agrees to buy the asset
Short - the person who agrees to sell the asset

I hope this helps.

PS. The difference between a long call and a short put is that the holder of a long call has the option to exercise or not. The holder of the short put must exercise if the other party decides to. Both will result in the holder buying an asset if the option is exercised
 
Thanks Erik!

This now makes sense. My mistake was in thinking that the long/short position was allows defined in terms of who takes delivery of the asset, regardless of whether we are dealing with options, futures or forwards.
 
I must admit I'm still struggling with this.

I thought Erik's answer cleared things up but then I read Question 1.3 in the notes and got confused again!

The question talks about buying and selling a future - going long or short. I didn't think you really "bought" or "sold" a future. I thought it was more of an agreement to trade something.

Or is this just saying that they agree to buy or sell the asset (rather than the future). Maybe I'm making this more complicated than it is but I'm still a bit confused!

Thanks

Kathryn
 
In terms of options (where you actually buy/sell an instrument) you have a long position if you bought and a short position if you sold it.

For forwards and futures, where you just have an agreement and no additional instrument that you literally buy/sell. Having a long position is where you have agreed to buy the underlying. Conversely, the short position is when you agreed to sell the underlying.

"Buying a forward/future" refers to agreeing to buy the underlying. This terminolgy is used even though there is no price to buy/sell a future.
You could also think of long/short positions in terms of this terminology ie long if you "bought".
 
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