Lesson 7 of 20 · 8 min
The four basic positions and what each one owes
Long call, long put, short call, short put — four shapes, and only two of them have a floor.
Every option position, however complicated, is built from these four. Knowing their shapes cold means any structure can be decomposed rather than memorised.
The four, each described by its floor, its ceiling, and its breakeven:
- Long call: paid the premium, holds the right to acquire. Maximum loss is the premium. Gain is unbounded above. Breakeven is strike plus premium.
- Long put: paid the premium, holds the right to dispose. Maximum loss is the premium. Maximum gain is strike minus premium, at an underlying of zero. Breakeven is strike minus premium.
- Short call: received the premium, holds the obligation to deliver. Maximum gain is the premium. Loss is unbounded above. Breakeven is strike plus premium.
- Short put: received the premium, holds the obligation to acquire. Maximum gain is the premium. Maximum loss is strike minus premium. Breakeven is strike minus premium.
Notice the pairings. The long positions and short positions of the same contract share a breakeven, because they are two sides of the same agreement — one party's gain past that point is the other's loss, exactly. And notice which cells are unbounded: only the short call has genuinely unlimited loss, because only the underlying's upside is unlimited.
The short put deserves a specific note because its risk is often understated. Its maximum loss is bounded, but the bound is the entire strike minus the premium. On a $50 strike that is $4,850 per contract against a premium of perhaps $150. Bounded and small are not the same word.
These are descriptions of contract mechanics. Nothing here indicates which position anyone should hold; all four are simply what the four cells of the grid contain.
Key terms
- Long call / long put
- Positions where you paid the premium and hold a right. Loss is capped at the premium paid.
- Short call / short put
- Positions where you received the premium and hold an obligation. Gain is capped at the premium received.
- Unbounded loss
- A position whose loss has no arithmetic maximum. Among the four basics only the short call has this property.
Worked example
All four at a $50 strike, $2.00 premium, stock ending at $65
One contract each, 100 shares, evaluated at expiry with the underlying at $65.
- Long call
- +$1,300
- Short call
- −$1,300
- Long put
- −$200
- Short put
- +$200
- Sum of all four
- $0
($65 − $50 − $2) × 100
The exact mirror.
Right unused; premium lost.
Obligation never invoked; premium kept.
Every option is a transfer between two parties.
The four outcomes sum to zero before costs. Options create no value on their own; they relocate it between the two sides of each contract.
Check yourself
Which of the four basic positions has unbounded loss, and what is the maximum loss on a short $50 put with a $2.00 premium?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.