Option basics

[SKuma2148]

Hi @David Harper CFA FRM - I am studying the first options chapter - option market basics and going through the various option types. Per my understanding, a short call can have unlimited loss and limited profit while if we long put, we will have limited losses plus more profits. Could you please explain in this case why will anyone short a call instead of long put. Similarly for long call and short put.

I know this might be a very silly question. am i missing something?

 

[Clay Carter]

Hi @David Harper CFA FRM - I am studying the first options chapter - option market basics and going through the various option types. Per my understanding, a short call can have unlimited loss and limited profit while if we long put, we will have limited losses plus more profits. Could you please explain in this case why will anyone short a call instead of long put. Similarly for long call and short put.

I know this might be a very silly question. am i missing something?

@SKuma2148
Hi, I think the biggest difference you should be aware of is who is receiving/paying the upfront premium.

Short Call: When you short a call option, you receive a premium (payment) upfront but take on the obligation to sell the underlying asset at the strike price if the option is exercised.

Long Put: When you long a put option, you pay a premium upfront to obtain the right to sell the underlying asset at the strike price.

Generally, you would short a call (receive a premium) if you believe the price will be stable over time. Meanwhile, you might go long a put if you expect a decrease in price over time.