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Chapter 2. Option Basics > Long and Short

Long and Short

The decision to go long (buy options) or short (sell options) involves analyzing opposite sides of the risk spectrum. The interesting feature of options is that strategies cover the entire range of risk, often with only a subtle change. Long options is disadvantageous in the sense that time works against the buyer; time value disappears as expiration approaches. Given the certainty that time value evaporates by expiration, it is difficult to overcome that obstacle and produce profits consistently. The less time until expiration, the more difficult it is to profit from buying options; and the longer the time until expiration, the more the speculator has to pay to pick up those contracts. Long options can be used to insure paper profits, but the more popular application of long options is to leverage capital and speculate.

There are circumstances in which conservative investors will want to go long in options. For example, following a large price decline in the market in a short time span, prices of strong stocks may rebound; but not being sure where the market bottom is, investors tend to be the most fearful when the greatest opportunities are present. In these cases, buying calls allows you to control shares of stock, limit potential losses, and expose yourself to impressive gains—as long as prices rebound in a timely manner. This may be a speculative move, but even the most conservative investor may see market declines as buying opportunities, especially if a small amount of capital is at risk.


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