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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/content/oic/en/strategies_advanced_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?

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there are standard market-accepted option structures and the definition of a long or short structure is well-understood. You can't create a custom structure and assume anyone understands the exact structure by just communicating it is long or short. You need to show the side of each leg that makes up your custom structure. Please see a recently raised question that is very similar to yours. –  Matt Wolf Oct 24 '13 at 6:31

1 Answer 1

All complex multi leg options strategies involve being both long and short options. In other words to enter into a multileg position one is both buys options and sells other options. Therefore it is confusing to think of spreads (2 legs), butterflies (3 legs) and condors(4 legs) as buying them or selling them. Step back and reason what you want to accomplish. All options strategies (not just multileg) can be divided into 3 categories by primary goals of the strategy:

  1. Portfolio protection
  2. Income generation
  3. Leveraged speculation

Now to your question about short vs long. Here is how I think about. With my goal in mind, I pick a few strategies that can accomplish what I want. Then I consider maximum loss, principal required (debit) and/or margin requirements (credit). I pick those that fit my risk tolerance and provide acceptable risk/reward ratio. Note, that at no point I agonize whether it is net long or short or if it is called a broken-wings-butterfly or iron-chicken. All i care is finding a simplest possible strategy fitting my goal.

With my options trading related questions i use http://optionsforum.net

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Hi VladT, welcome to Quant.SE! Are you affiliated with optionsforum.net? We would appreciate it if you disclose this. –  Bob Jansen Sep 27 at 7:01
    
Bob, yes I am. The site is listed on my profile. Thought that is disclosure. --thanks –  baerrus Oct 17 at 20:05

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