8.2 Long and Short Option Positions

The Four Basic Positions

Almost every options question on the Series 7 builds on four positions. Memorizing their market view, premium flow, and risk profile lets you answer max-gain, max-loss, and breakeven items in seconds.

Long Call (Buy a Call)

Bullish. Maximum loss is the premium; maximum gain is unlimited because the stock can rise without ceiling.

Example — Buy 1 XYZ 50 call @ $3:

Above $53 the buyer profits; at or below $50 the call expires worthless and the full $300 is lost.

Short Call (Write a Call)

Bearish to neutral. The writer keeps the premium if the call expires worthless, but a naked (uncovered) short call carries unlimited risk because the writer must buy shares at any market price to deliver them at the strike.

Example — Sell 1 XYZ 50 call @ $3:

Warning: The most dangerous retail position on the exam is the naked short call — unlimited loss. It requires the highest options approval level (covered in 8.6).

Long Put (Buy a Put)

Bearish. Maximum loss is the premium; maximum gain occurs if the stock falls to zero, so gain is capped at strike minus premium.

Example — Buy 1 XYZ 50 put @ $4:

Below $46 the buyer profits. At a stock price of $0 the buyer sells worthless stock for $50, netting $46 per share after the premium.

Short Put (Write a Put)

Bullish to neutral. The writer keeps the premium if the put expires worthless but is obligated to buy 100 shares at the strike if assigned. Maximum loss is strike minus premium (realized if the stock hits zero).

Example — Sell 1 XYZ 50 put @ $4:

Exam tip: A short put is NOT unlimited risk — a stock cannot fall below zero. Only the naked short call has truly unlimited risk.

Breakeven Cheat Sheet

Memory tip: CAP — Calls Add Premium to the strike. PSP — Puts Subtract Premium from the strike. Breakeven is identical for the long and short side of the same contract because both parties "meet" at that price.

Matching Position to Outlook

When a question describes a client's market view, map it to the right position quickly:

A short put is often used by an investor who would not mind owning the stock at the strike — the premium effectively lowers the purchase price to the breakeven. A short call written against owned shares (covered) is an income play, while a short call with no shares (naked) is a pure bearish bet with unlimited exposure.

Common Traps

• The exam loves to ask max loss on a long position; the answer is always the premium, never "unlimited."
• Watch the multiplier: a $4 premium means $400, and a $4,600 max put loss is ($50 − $4) x 100, not $50 x 100.
• A short put is not unlimited risk — only the naked short call is. A short put's worst case is the stock going to zero, capping loss at strike minus premium.
• A long position's gain is the short counterparty's loss and vice versa; the two payoff diagrams are mirror images about the shared breakeven price.