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When I short a stock, it is because I have a suspicion that the market will fall and I can therefore capitalise by selling high and buying low.

In contrast, if I go long on a stock, it is because I have a suspicion that the market will increase.

But what if I go long or short on a call or put option? Can I always relate that to the market falling or increasing like I did for the stock above?

Here are the different situations and my thoughts:

  • Long call: This is useful when the market is expected to increase as it allows me to buy low
  • Long put: This is useful when the market is expected to fall as it allows me to sell high
  • Short put: This is useful (for me) when the market is expected to increase as the option will not be exercised by the counterpart
  • Short call: This is useful (for me) when the market is expected to fall as the option will not be exercised by the counterpart

Is the above correct?

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    $\begingroup$ Correct. In addition, Options are mainly traded to trade the volatility of the underlying instrument, as I discuss in this post here $\endgroup$ – Jan Stuller Feb 16 at 10:57

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