What are the Difference Between Short Call and Short Put?

There are two styles in carrying out traditional options, the European and the American styles. The option in the European style may be exercised only on the expiry date while American style allows for the option to be exercised on or before the expiry date. The American style is more commonly used in Forex options trading and employs four basic types of trades. Two of these trading types are the “short call” and the “short put”. Call in trading lingo means buy and put means sell.

A short call is when an investor foresees that the value of the currency pair may go down and thus sells short the currency pair or “writes” or “grants” a call. An investor who decides to sell a call is obliged to sell the currency pair to the call buyer at the latter’s option. If the currency value indeed decreases, the call position earns a profit via the premium. If it however increases more than the exercise price and the premium amount, the short loses an unlimited amount.

The short put in currency options trading, on the other hand, is when the trader predicts an increase in the currency pair’s value and buys the pair or sells a put. He becomes obliged to sell the pair if the buyer exercises his option to buy. Upon the expiry date and the value of the currency is greater than the exercise value, the short put makes money through the premium. If however the currency value upon the expiry date is less than the exercise value by more than the premium amount, the traders loses an unlimited sum of money.

Timothy Stevens is a Forex Options Trader who owns http://www.NonDirectionTrading.com – He has helped hundreds of people on Trading Forex with Options

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