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From Wikipedia:

A long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. An investor goes long on the underlying instrument by buying call options or writing put options on it.

I wonder if "write" means "sell" and "read" means "buy"?

Now come to the meaning of "writing put options" in the quote. If interpreting "write" as "sell", "writing put options" means selling the put option. But it is the buyer of a put option not the seller who has the right to choose whether to trade the underlying instrument in the future, and therefore the seller cannot be benefited from the price of the underlying instrument increasing. So I wonder if "writing put options" means selling the put options or selling the underlying instruments?

Thanks!

  • @Joe: Edited as you requested. – Tim Sep 25 '11 at 21:42
  • I don't see the word "read" anywhere, other than where you've quoted it. To what are you referring instead? – Chris W. Rea Sep 26 '11 at 0:24
  • I am just inferring from "write". – Tim Sep 26 '11 at 0:39
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"Write" means sell to open. It is called that because options writers are creating (i.e. writing) new contracts. No such thing as "reading" an option.

  • Thanks! But as the seller i.e. writer of a put option, he cannot decide whether the trading of the underlying will happen, so how can "an investor goes long on the underlying instrument by writing put options on it"? – Tim Sep 26 '11 at 1:10
  • Long in economic terms, not necessarily in terms of the physical. – Tal Fishman Sep 26 '11 at 1:16
  • Thanks! What do you mean by long in economic terms and long in terms of the physical? – Tim Sep 26 '11 at 1:29
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Apple closed Friday 9/23 at $403.40.

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This is what the Puts look like, note the 2013 expiration. (The rest is hypothetical, I am not advising this.) As a fan of Apple and feeling the stock may stay flat but won't tank, I sell you the $400 put for $64.65. In effect I am saying that I am ready willing and able to buy aapl for $400 (well, $40,000 for 100 shares) and I have enough margin in my account to do so, $20,000. If Apple keeps going up, I made my $6465 (again it's 100 shares) but no more. If it drops below $400, I only begin to lose money if it goes below $335.35.

You, the put buyer are betting it will drop by this amount (more than 15% from today) and are willing to pay the price for this Put today.

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"Writing a put" for a stock means you are selling the right to sell you stock.

Simply put (er no pun intended), "writing put options" means you are selling somebody else the right (a contract) to sell YOU a specific stock at a specific price before a specific date. I imagine the word "write" to refer to the physical act of creating a contract.

The specific price is called the STRIKE and the specific date is the EXPIRATION. By "writing a put", you are agreeing to purchase the stock at a particular price (the STRIKE price) before the expiration. You get paid a fee, the "premium", for agreeing to purchase the stock at the strike price if asked to. If the holder of the contract decides to make you buy the stock at the strike price, you have to do it.

If the stock never dips below the strike price, then the holder of the put contract (a contract you wrote), will never exercise their right because they'd lose money. But if the stock drops to zero, you could potentially lose up to your strike price (times the number of shares at stake), if the holder of the contract decides to exercise.

Therefore, "writing puts" is a LONG position, meaning you stand to gain if the stock goes up. FYI - "LONG" refers direction (UP!), not duration.

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Writing options means "selling" options and "put" options are contracts to sell a defined security (the underlying), at a specific date (expiration date) and at a specific price (strike price). So, writing put options simply mean selling to others contracts to sell. Your profit is limited to the premium but your loss may be unlimited in a falling market.

  • Thanks! In the last sentence : (1) does "you" mean the seller i.e. writer of the put option? (2) how can "your loss" be unlimited in a falling market? The market price cannot fall below zero. When it drops to zero, the loss of the seller of the put option is the biggest, equal to the underlying value at the striking price minus the premium. Isn't it? – Tim Sep 26 '11 at 1:05
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Suppose you're writing a put with a strike price of 80. Say the share's(underlying asset) price goes down to 70. So the holder of the put will exercise the option. Ie he has a 'right to sell' a share worth 70 for rs 80. Whereas a put option writer has an 'obligation to buy' at rs 80 a share trading at rs 70. Always think from the perspective of the holder. If the holder exercises the option, the writer will suffer a loss. Maximum loss he suffers will be the break even FSP, which is Strike price reduced by the premium paid.. If he doesn't exercise the option the writer will make a profit, which can maximum be the put premium received.

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