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Dear John,
In BPP text chaper 6-Application of option pricing theory in investment decisions section 2,
(i) -it mentions ”When an investor buys an option the investor is setting up a long position, and when the investor sells an
option the investor has a short position.”Question: ”Could you explain what does LONG and SHORT Position mean? and why? ”
(ii)- 2.2.1 Long call
A call option that has been purchased (ie. a long call) will be exercised at expiration only if the price of the underlying is higher than the exercise price.
”The value of a call option at expiration is the higher of:
The difference between the value of the underlying security at expiration and the exercise price, if the value
of the underlying security > exercise price
Or:
Zero, if value of the underlying security is equal to or less than the exercise price.”Question: How do we calculate ”the value of the underlying security at expiration and the exercise price” ?
P.S : I’d like to apology beforehand if my questions are stupid, since i am doing self-study.
Best Regards,
Sambath1. For all investments, you are taking a long position if you are buying something in the hope that the price will increase and you will therefore make a profit by selling later. You are taking a short position if you are selling something in the hope that the price will fall, and that you will therefore make a profit by buying later.
2. You really need to watch my lectures on options because I explain it all there. The exercise price is chosen when the option is first bought – it is the right to buy or sell at a fixed price. The value of the security at expiration cannot be calculated – it could be anything and is only known at the date of expiration, and it is only then that we decided whether or not to exercise the option.
(Most people using this website are self-studying, using our free lectures 🙂 )
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