Difference between short put and long call?

Draw the payoff graphs and you will see.

If you buy a call, your profit is unlimited and you make money as long as Stock Price > Strike - Cost of Call. Your loss is limited to the price you paid for the call

If you write a put, your profit is capped to the price you sold the put. Your loss is also limited to the strike price of the option - price of option. Assuming stock is worth 0, you sold the put for $5 and strike price was $50. Your maximum loss is $45.

Your exposure to risk is also very different. For example, gamma, vega, theta can be either positive or negative depending on what you do.

"Your exposure to risk is also very different. For example, gamma, vega, theta can be either positive or negative depending on what you do."

both are long delta.

your call is long gamma and vol, short theta. put is the opposite and in equal magnitude if the strike is the same.

if you buy a call and sell a put at the same strike you've recreated a long position in the underlying. which is as you would expect, long delta, and flat gamma, vega, and theta.

plus as long as it's not ATM, gotta look at dvega/dvol and ddelta/dvol

"plus as long as it's not ATM, gotta look at dvega/dvol and ddelta/dvol"

these are minor higher order effects on vanilla equity options.

and why dont you think ATM options would have risk to these?

they do, but dvega/dvol and ddelta/dvol are both 0 when the option is ATM

.... I understood this post till killermikes post. Oh well.

If you are short a put and long a call, then you have essentially sold a collar. This is a net long position and to hedge you would need to get short in the underlying.

On a much more basic level, think about who has the right to exercise when you are short a put and long a call.

".... I understood this post till killermikes post. Oh well."

He was saying that an option's vega (exposure to vol) will change with the level of vol itself. so you might be long 10k of vol when vol is at x% and long 15k when vol is at (x+y)% even if nothing else changes.

Likewise, delta will change as vol changes. If you think of delta as being similar to probability of finishing in the money (which it isn't but a close enough approximation for vanilla stuff) you can see that probability of moneyness will change as vol changes, even if the underlying stock's price is the same.

but again, for vanilla equity options the above are very minor effects. for more exotic stuff they can be EXTREMELY significant and are not necessarily captured properly in models. Also as an aside ATM options dont always have 0.50 delta's so they can have exposure to these effects, which are more dependent on the shape of the underlying distribution.

thanks a lot jimbo.

Are they really that minor? While they play less of a role than first-order risks, we still pay them some attention. dDelta/dVol is especially important to make sure you are running the correct deltas against a particular skew position.

for the exotic stuff at least it tells you why a specific option should be trading above/below what the model spits out

"for the exotic stuff at least it tells you why a specific option should be trading above/below what the model spits out"

not really...we often get asked on stuff that doesnt trade at all all so who knows if the market is anywhere near right. we also get levered skew exposure through some of the products

out of curiosity, on most options desks, how high an order of greeks to you consider (ie - delta = 1st, gamma = 2nd, dgamma = 3rd, etc)? I imagine it varies from option to option based on how you want to hedge your exposure.

we try not to short things that we dont get paid for selling. you can have exposure to 4th, 5th, 6th moment stuff. dont want to be short it.

wow....i think i asked a relatively simple question about diff between short put vs long call...and i check back a week later and you guys are talking about stuff i never heard before lol...someone school me on greeks lol..thanks

good job getting it started, what else have you got

i liked 'black swan' so I picked up taleb's options theory book 'dynamic hedging' - anyone familiar with that? care to comment? it's pretty dense and i'm making my way through it slowly, but it's a lot better than the options literature i had in training or in school. i'm a credit guy, but it's interesting stuff

"i liked 'black swan' so I picked up taleb's options theory book 'dynamic hedging' - anyone familiar with that? care to comment? it's pretty dense and i'm making my way through it slowly, but it's a lot better than the options literature i had in training or in school. i'm a credit guy, but it's interesting stuff"

it can be a bit fx focused but it is an excellent book

dynamic hedging i a good book with interesting concepts.

To mack387: I would recommend you perusing john hull.