From Wikipedia:

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

The Payoff/Profit diagram shows that you earn more if the price decreases, which to me would indicate that buying a put option would be a short position. Why is the position called long?

Put Option Payoff/Profit diagram:

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  • 2
    Consider: "the security" referred to in the quoted text, as applied to your example, would be the put itself, not the underlying stock. i.e. you'd be long the put. With buying a put, your exposure to the underlying stock price movement might be similar to a short position in one direction of price movement, but it is not a short position. A short position in the stock has different risk characteristics: unlimited loss potential, for one. Jun 7 '12 at 18:07

"Long" here does not mean you wish for the underlying stock to increase in value, in fact, as the chart shows, just the opposite is true. "Long means you bought the derivative, and you own the option. The guy that sold it to you is at your mercy, he is short the put, and it's your decision to put the stock to him should it fall in value. The value of the put itself rises with the falling stock price, you are long the put and want the put, itself, to rise in value.

  • So, another way to think of it is that when you are long in an option, you want it to go "in the money." Writing the put would be shorting the put because you want the option to go "out of the money"?
    – Alec
    Jun 7 '12 at 18:41
  • Yes, that's fine. You want the value of what you are long to increase and for options, it means being "in the money." I think you got it. Jun 7 '12 at 20:16

You need to interpret "security" appropriately in Wikipedia's definition. You should think of it as saying:

to be long in a put, means the holder of the position owns the put and will profit if the price of the put goes up

And what makes the price of the put go up? -- the price of the underlying stock going down.


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