Call, Put, Long, Short, Bull, Bear… Confused?
Terminology of option positions may be confusing
Sometimes people have a long put position (they own puts) and they say they are short. They mean their exposure to the underlying stock’s price movement is similar to a short position in the stock (they expect to make a profit when the stock falls).
But in fact the security they really own is the put option. For them to make a profit, the put option must increase in price, so they can sell it for a higher price than for which they have bought it. They are long the put option.
Long put position
When you buy and own a put option, you have a long put position. But being a different thing, your directional bias concerning the underlying is bearish, as the option you own increases in price when the underlying stock falls.
Long call position
When you buy and own a call option, you have a long call position. Your directional bias concerning the underlying is bullish, as the option you own increases in price when the price of the underlying stock rises.
Short call position
When you sell a call option with the intention to buy it back later for a lower price, you have a short call position. Your directional bias concerning the underlying stock is bearish, as the underlying stock going down makes the option you want to buy back cheaper, which makes you a profit.
Short put position
When you sell a put option with the intention to buy it back later for a lower price, you have a short put position. Your directional bias concerning the underlying is bullish, as the underlying stock going up makes the option you want to buy back cheaper, which makes you a profit.
4 basic option positions recap
Of the four basic option positions, long call and short put are bullish trades, while long put and short call are bearish trades. It may sound confusing in the first moment, but when you think about it for a while and think about how the underlying stock’s price is related to your profit or loss, it becomes very logical and straightforward.
Summary: buying makes you long, selling makes you short
Whenever you buy and own something, you are long. You want the security you have bought to increase in price, so you can sell it later for a higher price and make a profit.
Whenever you sell something and hope you will later buy it back for a lower price, you are short.
The deciding factor for the long vs. short terminology is the security you trade (in our case the options) and not other securities, even when those securities are somehow related (in our case the underlying stocks).
Why is using the right terms so important?
It is useful to get familiar with the right terminology as early as possible. Assuming that you want to learn as much about options as possible in order to get competitive and survive in this tough business, you will probably encounter other materials and books about options and knowing what all the basic terms mean will be necessary for you to understand what it is all about.
For example, when dealing with option spreads and more complicated combinations of option positions, you will see terms like bull call spread, bear call spread, or bull put spread, which all sound similar, but as you might expect they have significant differences critical for your P&L.
You might even get to a situation when your online trading platform breaks down and you will have to call your broker in order to quickly close or adjust some of your positions. In such cases, mistakes in communication which might arise from using the wrong terms might cost you a lot of money.