5 min
Long vs Short: Buying vs Selling
The words "long" and "short" come up constantly in options trading. They simply describe whether you are the buyer or the seller of a contract.
What you'll learn
- Understand what "long" and "short" mean in options
- Know the risk profile difference between buying and selling
Going Long (Buying)
When you buy an option, you are "long" that option. You pay the premium upfront and receive a right. Your risk is limited to the premium you paid.
Going Short (Selling)
When you sell (or "write") an option, you are "short" that option. You collect the premium upfront, but you take on an obligation. Selling options can carry significantly more risk.
Long = limited risk. You can only lose the premium.
Short = potentially unlimited risk (for calls) or large risk (for puts). The premium collected is your maximum gain.
Short = potentially unlimited risk (for calls) or large risk (for puts). The premium collected is your maximum gain.
Long vs Short
You buy a call for $10 (long). Max loss = $10. Max gain = unlimited.
You sell that same call for $10 (short). Max gain = $10. Max loss = unlimited if the stock skyrockets.
You sell that same call for $10 (short). Max gain = $10. Max loss = unlimited if the stock skyrockets.
Knowledge Check
If you are "short a put," are you the buyer or seller? What is your maximum gain?
You are the seller. Your maximum gain is the premium you collected. You have the obligation to buy the stock at the strike price if the buyer exercises.