Basic Option Strategies
The four basic strategies of options are:
- Long call
- Long put
- Short call
- Short put
Calls and Puts Diagrams
Call Options and Put Options Diagram
How do we use them and how can they be replicated synthetically?
Long Call
The long call is one of the most simple and popular basic strategies for options. Long call is a bullish strategy since it involves in buying a call option in the expectation that price will rise.
A long call can be replicated synthetically by a long underlying asset transaction and a long put option.
As time passes, the value of a long call option erodes toward expiration value. If the volatility increases, erosion slows. Conversely, as volatility decreases, erosion speeds up.
Long Put
If the trader expects the market is on the fall, he will make profit by buying a put option. As the market falls, the profit of the put option increases.
A long put can be replicated synthetically by a short underlying asset transaction and a long call option.
Short Call
A short call is the opposite position to the long call. The seller sells the option because he believes the market is going down.
A long call can be replicated synthetically by a short underlying asset transaction and a short put option.
Short Put
A short put is implemented by traders who believe that market is going up. It is the opposite position of people who is bearish about the market.
A short put can be replicated synthetically by a long underlying asset transaction and a short call option.
Natural Vs Synthetic Strategies
| Natural Strategy | Synthetic Strategy |
| Long Call | = Long underlying and long put |
| Long Put | = Short underlying and long call |
| Short Call | = Short underlying and short put |
| Short Put | = Long underlying and short call |
| Long underlying | = Long call and short put |
| Short underlying | = Short call and long put |
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Filed under All About Options, Option Trading Strategies by on Apr 16th, 2010. 