Non options trades (futures, stocks, currencies, etc.) are profitable if the market moves in the direction of the trade, and lose money if the market moves against the trade. Options trades however, have different profit and loss potentials depending upon how the trades are constructed (i.e. the exact combination of long and short, and calls and puts), and can make or lose money in more than one way. Understanding the ways that different options trade make and lose money is vital to trading options successfully.
The following options trades explain each of the possible profit and loss outcomes based upon whether money is paid or received for the option, and the movement of the underlying market.
Long Call
Pay/Receive Money - Pay money for the option Market Moves Up - Profitable Market Moves Sideways - Unprofitable Market Moves Down - Unprofitable Long Put
Pay/Receive Money - Pay money for the option Market Moves Up - Unprofitable Market Moves Sideways - Unprofitable Market Moves Down - Profitable Short Call
Pay/Receive Money - Receive money for the option Market Moves Up - Unprofitable Market Moves Sideways - Profitable Market Moves Down - Profitable Short Put
Pay/Receive Money - Receive money for the option Market Moves Up - Profitable Market Moves Sideways - Profitable Market Moves Down - Unprofitable As shown above, long options trades have one way of making a profit, but two ways of making a loss. Short options trades have two ways of making a profit, and only one way of making a loss. This means that short options trades are more likely to be profitable, which is why professional options traders always make short options trades.
