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I am teaching myself some finance through a book. And I get confused by call/put options having short/long position in the options themselves or the underlying assets. For example, I understand the long call has a long position in the underlying asset, since as the spot price increases, we can buy the asset at a lower strike price. However, what does it mean for a long call to also have a long position in the option itself ? My book doesn't explain very well on this, could anyone show me a detailed reasoning? Thank for your time on this naive question :)

  • Which book are you using ? Have you read the book by John C hull, which every finance guy starts with. If not, you might want to change your book. – DumbCoder Jul 15 '14 at 14:05
  • @DumbCoder I'll bite - what's the title of the Hull book? – Yuck Jul 15 '14 at 14:16
  • @Yuck - Biting willn't take you anywhere. Google John C HUll. THe books will be in the first page itslef. Options, Futures and Other Derivatives – DumbCoder Jul 15 '14 at 15:34
  • Why do you say that a long call is a long position in the underlying asset? A long call is a long position in the underlying asset when you exercise the call, not when you buy (go long) the call – Victor123 Oct 14 '14 at 16:29
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It will be helpful to establish some definitions:

Long

"Long" is financial slang for "to have possession of an asset", legally, and "to debit an asset", financially.

Short

"Short" is financial slang for "to be liable for an asset", legally, and "to credit an asset", financially.

Option

"Option" is financial slang for "to have the right but not obligation to force the liable to perform action", legally. Without limits and when taken to absurdity, this can mean slavery. For equities, this means "to have the right but not the obligation to force the liable to buy/sell a specified asset at a specified price with a specified expiration for that right" for a call/put, respectively.

Call option

By the above, a call option is "the right but not the obligation to force the liable to buy a specified asset at a specified price with a specified expiration for that right".

By the definition of "long" above, a call option is actually not long the underlying.

By the definitions above and with a narrower scope applied to equities & indexes, to be "long" the call means "to have the right but not the obligation to force the liable to buy a specified asset at a specified price with a specified expiration for that right" while to be "short" the call means "to have the obligation to be forced to sell a specified asset at a specified price with a specified expiration for that right".

So, to be "long" a call means to simply own the call.

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Being long the call is being long the option. The call is a type of option. A put is a type of option

If you buy a call, you are long an option and long the underlying asset. If you buy a put, you are long an option and short the underlying asset.

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If it helps you to think about it, long is equivalent to betting for the upside and short is equivalent to betting for the downside.

If you are long on options, then you expect the value of such options to increase. If you are long an option, then you own the option. If you are short an option, then generally you sold the option. Someone who is short a call (sometimes called the writer or occasionally the issuer) has sold a call option to someone who is now long a call.

Buying a call option that will increase in value is itself a form of investment, just as it's investment to buy stock or other instruments hoping they will appreciate in value. An option's value will rise or fall with the underlying, so being long an option is a way to be long in the underlying. Someone can be long in a stock by buying the stock, or long in a call by buying call options in the stock. The long call generally requires less initial investment than buying the underlying, and lets the option-holder avoid the asset downside during the option term. The risk is that the asset may not appreciate to the point that the call option will pay off.

In the conceptual sense, a share of stock is a particular right to the profits and assets of a corporation, both in form of dividends and in liquidation. An option is a particular right to the the share of stock. It's just a further way to formalize and subdivide the various property rights that exist in a corporation. If you can buy a piece of paper with particular rights to corporate profits and assets, then you can buy another piece of paper with particular rights to the former piece of paper.

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