Long & Short Positions
Long
Definition of Long: The buying of a security such as stock or options, with the expectation that the asset will rise in value.
Most investors or traders relate easily to the concept of going long. This means you first enter a position by purchasing it, and close the position later by selling it. If you buy 100 shares of IBM, you are long 100 shares of IBM. If you sell your 100 shares of IBM, you are no longer long IBM. If you buy 10 contracts of IBM Call Options, you are long 10 Call contracts of IBM. The bottom line is, if you buy a stock or option because you feel the stock or option will increase in value, you are long that stock or option.
Short
Definition of Short: The selling of a borrowed stock, with the expectation that the asset will fall in value. In the context of an option, it is the sale of an options contract.
When you short a stock it’s a little more complex then when you short an option. With stock, you first have to borrow the stock from your broker and sell it. And to close out the position you have to buy the stock. That might sound a little complicated but it’s really not. If you want to short 100 shares of IBM. You go to your brokerage account program, you put 100 in the “Quantity” box. There will be 3 choices in the “Action” box, buy, sell or short. You hit short and you are done (see graphic). Your broker will automatically borrow the 100 shares and sell it. You will now be short 100 shares of IBM. Going long seems so much more natural. If you go long a stock, you buy the stock and when it goes up, you sell the stock. That is the natural way of buying and selling most things in life. You buy a stock at $5 a share, you are now long the stock, then you sell is at $7 a share and you made $2 in profit, buy low, sell high, natural! If you Short a stock, you first borrow the stock from your broker, you sell the stock, you are now short that stock. When the stock goes down, you buy it to close out the position. Example: You borrow a stock, you sell the stock at $10 a share, when the stock goes down you buy the stock at $8 a share. You did not buy at $8 and sell at $10 to make $2 profit. You went the opposite way. You sold at $10 and bought at $8 and made a $2 profit. Same result, but when you buy first, you want the stock to go up and when you sell first, you want the stock to go down. When you buy first, you are long, when you sell first you are short. Very important to understand this. When you short a stock, there is much more risk! If you short a stock and it takes off upward, at some point you have to buy the stock back to close your position. It might not come down for a long time, if ever!
The process of going short in options is much less involved because you do not need to borrow an option from your brokerage firm. The act of selling an option is creating the option. The rest is pretty similar to the stock example. If you buy an option on IBM, you are long the option and you want IBM to go up so your option increases in value. Then you can sell the option at a higher price. When you short an option, you sell the option and received a premium. If the underlying stock goes down, you can “Buy to Close” the option at a lower price to make money. If you sold an option for a $1.50 premium, you are short that option, and if the underlying stock goes down and the premium goes down to $.50. You can buy back the option, you are no longer short the option and you made a profit of $1.00. This is a very important concept to grab. It’s very important to completely understand the concept of being long and the concept of being short.
For beginners studying with “Main Street beats Wall Street”, I explained shorting stock for explanation only. I will not be shorting stock as a trade. It’s not one of my strategies. I will be shorting options a few times a week. Selling options is my top options strategy. I will not short stock and I will not be long options. My strategies are explained in “Philosophy, Strategy and Risk.” If you have trouble understanding the concept of being short a stock or short an option you must find more material to read or send me an email before you trade options. Coachsjc@gmail.com
What is the difference between a Long and Short position in the market?
According to Investopedia
Essentially, when speaking of stocks, long positions are those that are bought and owned, and short positions are those that are owed. An investor who owns 100 shares of Tesla (TSLA) stock in his portfolio is said to be long 100 shares. This investor has paid in full the cost of owning the shares. An investor who has sold 100 shares of TSLA without currently owning those shares is said to be short 100 shares. The short investor owes 100 shares at settlement and must fulfill the obligation by purchasing the shares in the market to deliver. Oftentimes, the short investor borrows the shares from a brokerage firm in a margin account to make the delivery. Then, with hopes the stock price will fall, the investor buys the shares at a lower price to pay back the dealer who loaned them. If the price doesn’t fall and keeps going up, the short seller may be subject to a margin call from his broker.
When an investor uses options contracts in an account, long and short positions have slightly different meanings. Buying or holding a call or put option is a long position because the investor owns the right to buy or sell the security to the writing investor at a specified price. Selling or writing a call or put option is just the opposite and is a short position because the writer is obligated to buy the shares from or sell the shares to the long position holder or buyer of the option. For example, an individual buys (goes long) one Tesla (TSLA) call option from a call writer for $28.70 (the writer is short the call). The strike price on the option is $275 and TSLA currently trades for $303.70 on the market. The writer gets to keep the premium payment of $28.70 but is obligated to sell TSLA at $275 if the buyer decides to exercise the contract at anytime before it expires. The call buyer who is long has the right to buy the shares at $275 at expiration from the writer if the market value of TSLA is greater than $275 + $28.70 = $303.70.
Long and short positions are used by investors to achieve different results, and oftentimes both long and short positions are established simultaneously by an investor to leverage or produce income on a security. A simple long stock position is bullish and anticipates growth, while a short stock position is bearish. Long call option positions are bullish, as the investor expects the stock price to rise and buys calls with a lower strike price. An investor can hedge his long stock position by creating a long put option position, giving him the right to sell his stock at a guaranteed price. Short call option positions offer a similar strategy to short selling without the need to borrow the stock. This position allows the investor to collect the option premium as income with the possibility of delivering his long stock position at a guaranteed, usually higher, price. Conversely, a short put position gives the investor the possibility of buying the stock at a specified price and he collects the premium while waiting.
These are just a few examples of how combining long and short positions with different securities can create leverage and hedge against losses in a portfolio. It is important to remember that short positions come with higher risks and, due to the nature of certain positions, 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 more risky positions are suitable for you.