What makes an option strategy long or short? I got the impression that if it is a net debit (you pay to open the strategy) it is classified 'long' (strangle, straddle) Then I learned about the call butterfly which is short (when debited to open) and long (when credited to open) and got confused. What became further confusing is that the long iron butterfly http://www.optionseducation.org/con..._concepts/strategies/long_iron_butterfly.html has the same PL characteristics as the short call butterfly http://www.optionseducation.org/strategies_advanced_concepts/strategies/short_call_butterfly.html Is there some generalized rule that would apply to all strategies and provide explanation as to why a strategy is classified long or short?
Option strategies are more complicated then equity strategies. In equities you are always referring to your delta where as options have many Greeks. With options a strategy can be referred to as long/short with regard to the Greek you are not hedging. An example would be a short term long ATM straddle that is delta neutral. I would say that position is long gamma. If I had the same straddle but with options that are 9 months out, I would say that position is long Vega and long gamma. One more....Long front month ATM options and short 9 month ATM options. I'm now short Vega and long gamma. After you have the position on, you look at all the Greeks and the ones that are not near neutral are the ones where your risk is concentrated and the description of how it's long or short. Does that help?
Yes! Thank you, it helps. You explained that a short term long ATM straddle that is delta neutral would be long gamma. I assume the same would apply to a **long** strangle. The position wants higher volatility. That would not apply for a **long** butterfly because the position benefits from low volatility (it is short gamma). Is that reasoning correct? Why is the butterfly labeled long in that case? With respect to which greek?
A verticle spread, butterfly, calendar spread etc, are described by if it's a debit or credit, not from the Greeks. If you pay money your long, if it's a credit, your short. Like I said it's complicated.
Long and Short refer to ownership, and being short means that you are committed to security that you don't own, hence you are "short" this security even though you have an open position on it. If you do a naked call, you are short because you do not actually own the underlying stock. If you do a covered call where you buy the underlying stock and then sell call options against it, you are long because you own the stock you're writing options against.