Portfolio Mgmt question number, exercise, long, correct, question

Beatnik

Pierre just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have teh same exercise price, expiration date, and number of shares underlying. Considering both positions, Pierre’s exposure to the risk of the stock of the Michelin Group is:
long, short or neutral?
I thought it was neutral since he is long call and short put but the correct answer is long. I read the explanation at the back and am now even more confused. Can someone please exlpain the logic behind this? Thanks

YAhmed

Or just draw the graphs. :-)

pennyless

Remember this:
Type of option………………Option position…………….Exposure to underline Risk
        Call………………………………..Long……………………………..Long
        Call………………………………..Short…………………………….Short
         Put………………………………….Long……………………………Short
         Put………………………………….Short……………………………Long

Windjammer

ahh now i get it. thanks!

ayaz_mahmud369

When you go long a call you are long : You expect the stock to go up so that you can buy it at a lower price (the exercise)
When you go short a put you again are long : You are giving somebody else the option to sell you the stock at a higher price (a.k.a he is expecting the stock to fall). If you think that the price is going UP then you are going to short (write) a put because you expect the put to expire out of the money hence gaining the premium.