Page 279

and you go short eight of the same contracts your position is now long by six contracts.

This long and short business is nothing more than figuring out how many contracts you have sold or how many you have bought and what your current position is. It’s kind of like saying if you loan a friend $10, you are short $10 and you can settle the loan if you go long $10 (i.e. you collect the $10 debt from your friend or from your friend’s father). Brokerages often use the long and short lingo to describe a client account’s position. Now you know there is nothing complicated about them.

Option Types

There are two basic types of options: call and put. A call option gives the holder the right to buy the underlying stock at a specified fixed price prior to the call option expiration date. Therefore most investors buying call options are hoping for the underlying stock price to rise. The opposite of a call option is a put option which gives the holder the right to sell the underlying stock at the specified price prior to the put option’s expiration date. In this case traders would profit from the put option if the underlying stock price declines. I realize that these are tough concepts to digest for those who are not too familiar with options, so let’s look at an example. We will start with the easier-to-understand type of option, the call option. Then, based on what we have learned from the example, we will cover some topics followed by an example illustrating put options. …