Differentiate between long put and short call

In option trading there are different terms involved and different complexities are involved in choosing the best fit or strategy. Each term has its own advantages and limitations.

Some of the aspects to look at are the current market position, investor risk appetite, investor trading experience, profit potential, trade breakeven point, investor intentions and expectations etc.

Long put

This involves buying a put option which means choice to sell option at predetermined date at expiry time. This strategy gives buyers a put option on expiry but not obligation. Premium is paid to buy put options.

In this strategy the investor will exercise his option when prices are down. When he exercises this option when prices are up then he will encounter losses. Timing is very important in exercising these options.

Most suitable time is when the market is highly bearish and expects markets to go down sharply. This option is more suitable in neutral markets. Maximum profit is calculated by deducting the premium paid from strike price (long put).

Short call

Short call means selling a call option. At the beginning it generates net credit by receiving premium. It is also called an uncovered call or naked call.

Strategies are made based on current market conditions, so you need to be aware of market conditions. It is used by experienced traders because any inexperienced traders doing these options may lead to heavy or unlimited losses.

Strike plays an important role in the success of short call strategy. To get higher premiums, strike price must be above current price or close to current market price. In this, profits are limited.

Good time to use this strategy is when traders are quite bearish towards the market. He writes the call and receives a premium. Option is written at a predetermined price and at a higher market price.

Maximum profit earned in this strategy is equal to the premium amount received. Loss is calculated as the difference between security price and strike price minus premium received.

Differences

The major differences between long put and short call are as follows −