Long Position vs. Short Position: An Overview
When speaking of securities such as stocks and options, analysts, market makers, and investors often refer to a long position orshort position.
While long and short in financial matters can refer to different things, in this context, rather than to length, long positions and short positions refer to the securities an investor owns or securities an investor needs to own.
Key Takeaways
- With stocks, a long position means an investor hasbought and owns shares ofstock.
- An investor with a short position has sold shares but does not possess them yet.
- With options, buying or holding a call or put option is a long position; the investor owns the right to buy from or sell to the writing investor at a certain price.
- Conversely, selling (or writing) a call or put option is a short position; the writer must sell to or buy from the long position holder or buyer of the option.
Long Position
If an investor has a long position,it means thattheinvestor hasbought and owns securities, such as shares ofstocks. For instance, an investor who owns 100 shares of Tesla stock in their portfolio is said to be long 100 shares.
This investor has paid for the shares in full. They will make money if the shares rise in value and they sell them for more than they paid.
Short Position
Ifthe investor has ashort position, it means that theinvestor sold shares of a stock (and thus,owes them tosome other investor who buys them), but does not actually own them yet. For instance, an investor who has sold 100 shares of Tesla without owning them is said to be short 100 shares.
When the trade settles, the investor with the short position must fulfill their transaction obligation by purchasing the shares in the market so that they may deliver them.
Oftentimes, the short investor will borrow the shares from a brokerage firm through a margin account to make the delivery. The goal is for the stock price to fall. Then, the investor will buy the shares at a lower price than they sold at, to pay back the dealer who loaned them.
If the price doesn't fall but instead keeps rising, the short seller may be subject to a margin call from their broker. A margin call occurs when the value of an account of an investor who borrows on margin falls below the broker's required minimum value. Once a call is issued, the investor must deposit additional money or securities so that the value of the margin account rises to or above the minimummaintenance margin level.
FINRA has a 25% minimum maintenance requirement—the value that a margin account can lose before a margin call for funds occurs.
Options: Long and Short
Long and short positions have slightly different meanings with regard to options contracts. An investor has a long position when they buy or hold a call or put option. That is, they own the right to buy or sell the security at a specified price.
An investor has a short position when they sell (or write) a call or put option. They are obligated to sell or buy the shares.
Example
Say that an individual goes long one Tesla call option from a call writer for $28.70, which means the writer is short the call. The strike price on the option is $275.00. If Tesla trades above $303.70 on the market, there is value in exercising the option.
The writer gets to keep the premium payment of $28.70, but is obligated to sell Tesla shares at $275.00 should the buyer decide to exercise the contract before it expires.
The call buyer (who is long) has the right to buy the shares at $275.00 prior to expiration, and will do so if the market value of Tesla is greater than $303.70. That's $275.00 + the amount they paid for the call option, $28.70.
Combining Long and Short Positions
Investors use long and short positions to achieve different results. Oftentimes, an investor may establish long and short positions simultaneously to leverage or produce income from a transaction. They can also use both positions to hedge against possible portfolio losses.
Long call option positions are bullish. An investor expects the stock price to rise and buys calls with a lower strike price. An investor can hedge their long stock position by creating a long put option position, which gives them the right to sell their stock at a guaranteed price.
Short call option positions offer a similar strategy to short selling but without the need to borrow the stock. This position allows the investor to collect the option premium as income with the possibility of delivering their long stock position at a guaranteed, usually higher, price.
Conversely, a short put position allows the investor to collect the premium and gives them the potential to buy the stock at a specified price.
A simple long stock position reflects a bullish outlook. The buyer anticipates that the stock will rise in price. A short stock position is bearish in that the seller believes the price will decline.
Short Positions Are Riskier
It is important to remember that short positions come with higher risks than long positions. They may be limited in IRAs and other cash accounts. Margin accounts are generally needed for most short positions, and your brokerage firm needs to agree that these more risky positions are suitable for you.
Is a Long or Short Position in Financial Assets Better?
That depends on the asset and the terms of the transaction. It also depends on what your investing objective is. Generally speaking, going short is riskier than going long as there is no limit to how much you could lose. Furthermore, in most cases, short positions require borrowing from a broker and paying interest for the privilege. Ultimately, if a margin call is made and you don’t deposit more cash or securities in time, your losing position may be closed out by your broker.
What Is an Example of a Long Position?
Going long generally means buying shares in a company with the expectation that they will rise in value and can be sold for a profit (buy low, sell high). With options, a long position constitutes being the buyer in a trade. For example, if you buy a call option, you'll be long that option.
What Is an Example of a Short Position?
A short position reflects the idea that you can profit as prices decline (sell high, buy low). Usually, it is achieved by borrowing shares of stock that you think will fall in value, selling them to another investor, and then buying them back at a lower price to cover the position. You can hedge a short stock position by buying a call option.
Why Do You Choose Short Positions?
An investor would short a stock or other security if they believed it was set to decrease in value. Conversely, with options, they would go short to earn income by collecting the premium.
The Bottom Line
Long and short positions relate to the position an investor or trader takes in the market. Being or going long means buying a stock with the intention of profiting from its rising value.
On the other hand, being or going short means betting that you'll make money from the stock falling in value. The mechanics of going short involve borrowing a security from a broker, selling it, and then eventually buying it at a lower price, giving it back to the broker, and hopefully pocketing the difference.
With options, long and short take on different meanings. You can buy a call or put option or sell a call or put option.Buyers are said to hold long positions, while sellers are said to be short.
