Long and short, calls and puts

There are only four basic option positions: buying a call, selling a call, buying a put and selling a put. Every option strategy, however elaborate, is built out of them. This lesson shows what each one pays at expiry.

Long and short

To be long an option is to have bought it: you paid the premium and you hold the right. To be short is to have sold it: you received the premium and took on the obligation.

Every option has one buyer and one seller, so the long and short positions in the same option are mirror images. Whatever the buyer makes, the seller loses, and the other way round, before costs.

The four positions

The chart runs across a range of prices the underlying might finish at. Green is profit and red is loss, after the premium paid or received.

Long call: buying the right to buy

You profit if the price rises above the strike by more than the premium you paid. The most you can lose is the premium; the gain has no ceiling. Break-even is the strike plus the premium.

Short call: selling the right to buy

You keep the whole premium if the price finishes at or below the strike. Above it you lose, and the loss has no ceiling, because there is no limit to how high a price can go. Break-even is the strike plus the premium.

Long put: buying the right to sell

You profit if the price falls below the strike by more than the premium. The most you can lose is the premium, and the most you can make is if the price falls all the way to zero. Break-even is the strike minus the premium.

Short put: selling the right to sell

You keep the whole premium if the price finishes at or above the strike. Below it you are obliged to buy, at the strike, something worth less, so you lose, as far down as a price of zero. Break-even is the strike minus the premium.

At a glance

Why the shapes matter

Buying an option limits what you can lose to the premium and leaves room for a large gain, but the premium is gone if the move does not come, or does not come before expiry. Selling an option earns the premium often, but now and then faces a loss many times larger. They are the same bet, seen from opposite sides of the table.

The options calculator lets you combine these four into spreads and other strategies, and shows the payoff of the whole position.

Work it out on your own numbers

• Options calculatorBuild a strategy from several options and see what it pays.

This lesson explains ideas. It is not advice about what to buy, sell or hold.