A long position is what you take when you expect security to rise in value. Someone who has taken a long position in a given security has purchased that security, or take a long position with a call option. It’s the opposite of a short position, in which a trader bets against a stock. Here are the basic facts about a long position, its pros and cons and how it differs from a short position.
What Is a Long Position?
A long position can have many meanings depending on where it’s used. Commonly, it’s used by buy-and-hold investors who intend to retain stocks for a long time.
Concerning options and futures, a long position has a similar, though distinct, meaning. An investor purchases a long position when anticipating that a stock, commodity, bond or currency will increase in value. Long positions can be exercised when purchasing an options contract. Such a trader holds a long call option. This will depend on the outlook of the underlying investment selection.
Example of a Long Position
Here’s an example of how a long position may work out for an investor in the options market. Let’s say an individual investor purchases (goes long) one Target (TGT) call option from a call writer for a premium of $17.18 (writer shorts the call). The option’s strike price is $108, and TGT is trading for $125.18. While the writer gets to keep the premium of $17.18, they must sell TGT at $108 if the investor who is purchasing the call option decides to execute the trade before the option expires.
The long-call buyer has the right to purchase shares at $108 when the option expires from the writer if TGT has a market value greater than $108 plus the $17.18 premium, or $125.18. So if TGT rises to $130, for example, then the long call buyer’s profit is $130 minus $125.18, or $4.82.
Short Positions vs. Long Positions
The opposite of a long position is a short position. A short position is an investment strategy that exploits overvalued securities. In this case, an investor borrows shares from an investment firm and then turns around and sells them to another investor. At some agreed-upon point, the investor must return the borrowed shares. The point of a short sale is to sell the borrowed shares at a set price and then – after a designated period of time – purchase new shares of the same security at a now-lower price and return those purchased shares to the firm. Investors are able to keep the money they made when they initially sold the borrowed shares minus the now-lower cost of the same number of shares that are returned to the investment firm.
To summarize, investors will take a short position when they think security is going to go down. Investors take a long position when they think security will go up. It’s easier to exercise a long position than a short position. This is because the investors must borrow, for a fee, a willing investment firm’s shares to execute the transaction. With a long position, you simply purchase market shares from a broker and add it to your portfolio.
Risks of a Long Position
The biggest risk of excising a long position is that the investor can lose everything if the security loses its value entirely. Essentially, the risk of a long position lies in the asset’s value. In the example above with TGT, the risk is only $108 because the investor only purchased one share. Since the price cannot drop below zero, the investor’s loss would be capped at $108.
Whereas with a short position, the investor has an unlimited risk because the investor may agree to purchase a stock at $108, and if the price continues to rise, they may be obligated to purchase the security at a much higher price than they originally expected to since they must deliver it to the buyer. For instance, if stock ABC, trading at $100, increases to $400 by the time it must be delivered to the buyer, the investor who took a short position faces a $300 loss. Theoretically, the stock could rise indefinitely, meaning the risk is unlimited.
As with any investment decision, it’s important to do your research and think hard about taking a long position. If the price drops, you can hold it in hopes that the price goes back up over what you paid. But if the price keeps falling, investors are well-advised not to “fight the tape” and just bail out to cut their losses.
The Bottom Line
Long positions are considered bullish because the investor expects the security price to rise and purchases a call with a lower security price. Essentially, investors buy shares and expect the share price to go up. The risk is that the stock price may drop, which would cause those investors to lose their initial investment. Before you decide to purchase a long position, make sure to do your research and understand the consequences if the trade doesn’t go as planned.
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