Question

1. Summarize the differences between long call, long put, short put, short call

Insurance company is exposed to which option position?

Answer 1

Summarize the differences between long call, long put, short put, short call

A long call option gives the holder of the option the right to purchase the underlying at a specified price (strike price) by a specified date (the expiry date). A short call option has an obligation to sell the underlying if the underlying price moves above the strike price by expiry.

Theoretically, a long call option has unlimited profits, while short call option has unlimited losses.

A long put option gives the holder of the option the right to sell the underlying at a specified price (strike price) by a specified date (the expiry date). A short put option holder has an obligation to buy the underlying if the underlying price moves above the strike price by expiry.

Theoretically, a long put option has unlimited profits, while short put option has unlimited losses.

Insurance company is exposed to which option position?

The insuramce company is exposed to short put option position. If the buyer of the insurance happens to lose value of the underlying, the insurance company makes good for it. Similar to put seller makes good for the drop in price of the underlying.