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Strategies & Market Trends : Bonds, Currencies, Commodities and Index Futures -- Ignore unavailable to you. Want to Upgrade?

To: Kirk © who wrote (9448)	2/5/2006 4:18:06 PM
From: Patrick Slevin	Read Replies (1) \| Respond to of 12411

If I am SHORT 500 shares of something, I eventually have to buy that something to give it back to whomever i borrowed it from.... since I would be "short" the uncovered number of shares. Not if the stock goes to zero, but by the same logic if you are Long 500 shares you eventually have to sell it. Anyway an Option, just like a stock or a bond, is a security. It's a contract to buy or sell something in the future. Because it is a security I believe the same terminology applies that would apply to a stock. Anyway, I'll defer to the definition on page 11 of Natenberg's book. In a long underlying position a trader will profit if prices rise and lose if prices fall. In a short underlying position a trader will profit if prices fall and lose if prices rise. There is a tendency to carry this terminology over into the option market by referring to any position which will profit from a rise in the price of the underlying contract as a long position, and any position which will profit from a fall in price as a short position. More generally, however, the terms long and short refer to the purchase or sale of a contract, and this is the sense in which we apply these terms to options trading. What he is saying refers in this context to the outright ownership of a call being a Long position and the ownership of a put as being a Short position. Yet when you own an option you do not have to buy or deliver the stock, so there is yet another twist of the English Language for you. On the other hand we are being more specific. If you are Short Puts or Short Calls you may have to buy the stock in either case. To me, I was confused when people said they were short this or that option because I thought the whole idea was to sell options and have them expire worthless, put you into shares at a price you like or take your shares at a gain you are happy to book. In only one of the three was the option holder actually required to purchase something to "cover a short position." That's true. If you do not cover your short position in calls or puts and the underlying moves against you then, unless you settle the trade by covering beforehand, you will have to buy the underlying. In the case of equity calls, you have to produce the stock for delivery. In the case of SP Futures Contracts, they are settled in cash.