Quick Options Question

From the Collars article:

“Short 1 ABC Jan 45 call @ $3

Long 100 shares of ABC stock @ $40

Long 1 ABC Jan 35 put @ $3”

If Long 1 ABC Jan 35 put @ $3 means you’ve bought the right to sell stock at 35 for $300, what does Short 1 ABC Jan 45 call @ $3 mean?

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Another way to think about it is:

  • long = bought
  • short = sold

So if we look at those three legs from our perspective as the investor:

Short 1 ABC Jan 45 call @ $3

  • We sold a call option and received a $3 * 100 = $300 premium
  • The counterparty has the right to buy 100 shares from us at $45 each (if they exercise)
  • We have the obligation to sell 100 shares them at $45 each (if they exercise)

Long 100 shares of ABC stock @ $40

  • We own 100 shares that we previously bought at $40 each

Long 1 ABC Jan 35 put @ $3

  • We bought a put option and paid a $3 x 100 = $300 premium
  • We have the right to sell 100 shares at $35 each (if we exercise)
  • The counterparty has the obligation to buy 100 shares at $35 each (if we exercise)
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