intuitive – basic equivalence among option positions

To a person unfamiliar with options, there’s confusion over the interchange-ability among

Long call
Long put
Short put
Short call

(Focus on regular options and ignore barrier option for now.)

Simple rule – in FX options,
– call-buying===buying-put;
– call-writing===writing-put. Not equities, index or commodity options though.

There’s never any equivalence between long vs short option positions. A short position (call or put) represents unlimited downside in FX. An experienced FX option trader once said option-writing is abhorrent.

After we get comfortable with these equivalence rules, then we can throw in PCP (put-call parity). Mixing PCP and the equivalence rule too early leads to brain-damage.

Advertisements
Posted in PCP

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s