btw, my scottrade guy corrected me when i called my put options “shorts”. he called them long puts. i’m still confused as to what exactly entails “long” or “short”.
Options work different than stocks.. though they tie to the price of the share. Options are holding a ‘bet’ on a future event. All option purchases are effectively ‘long’.
Purchase stock: Long position because of ‘purchasing’ an item (share in this case). You get dividends(if any). Maximum loss can be full price of stock, maximum gains are taxed at either income rate(STCG) or 15%(LTCG) (unless lower income bracket in which case it may be 10% or 5%)
Sell stock short: Short position because you ‘sold’ something you do not yet have (so you are short on that position). You ‘receive’ money when you commit a short position because of the sale. The money has a cost (generally the margin rate on the amount of money involved), but this cost can be written of on your taxes (investment interest expenses). Maximum loss is full price of stock plus carried interest expense. Maximum gain would be like stock purchase but in the opposite direction and of course interest rate subtracted.
Buy a put: Long position on the option to sell stock at strike price at a future date. Betting on stock movement down. (you did not sell a put without having the put. The originators of the put could be said to be having the short position). Puts are a way to control large blocks of stock with a small amount of exposed capital. Maximum loss is only the purchase price of the option. Maximum gain is number of controlled shares x movement above strike price – price of option. Taxed at income rates.
Buy a call: Long position on the option to buy stock at a strike price at a future date. Betting on stock movement up (the originator of the option could be stated as having a short position on the option, but since your action is a purchase.. it is a long position). Calls are also a way to to control large blocks of stock with a small amount of exposed capital. Max loss is only the purchase price of the option. Maximum gain is number of controlled shares x movement below strike price – price of option. Taxed at income rates.
You probably know most of what I stated above.. just being thorough for the other readers out there.
