What Is a Long Position?

What Is a Long Position?

Let me explain what a long position really means in investing. When you buy an asset expecting its price to climb, you're taking a long position—essentially betting on future growth and profit potential. This reflects confidence in the asset's future performance and is a common strategy in both everyday investing and professional trading.

Understanding a Long Position

You can establish long positions in securities such as stocks, mutual funds, or currencies, or even in derivatives like options and futures. Holding a long position shows a bullish view. Remember, a long position is the opposite of a short position, also known simply as 'short'.

The term long position often comes up in the context of buying an options contract. As a trader, you can hold either a long call or a long put option, depending on your outlook for the underlying asset of the option contract.

For instance, if you hope to benefit from an upward price movement in an asset, you'll 'go long' on a call option. This gives you the option to buy the underlying asset at a certain price. Conversely, if you expect an asset’s price to fall, you'll be long on a put option and maintain the right to sell the asset at a certain price.

Types of Long Positions

In reality, 'long' is an investing term that can have multiple meanings depending on how it's used. The most common meaning refers to the length of time an investment is held. However, the term has a different meaning when used in options and futures contracts.

Going long on a stock or bond is the more conventional investing practice in the capital markets, especially for retail investors like you. With a long-position investment, you purchase an asset and own it with the expectation that the price will rise. You normally have no plan to sell the security in the near future. In reference to holding equities, which have an inherent bias to rise, long can refer to a measurement of time as well as bullish intent.

An expectation that assets will appreciate in value in the long run—the buy-and-hold strategy—spares you the need for constant market-watching or market-timing, and allows time to weather the inevitable ups and downs. Plus, history is on your side, as the stock market inevitably appreciates over time.

Of course, that doesn't mean there can't be sharp, portfolio-decimating drops along the way, which can be disastrous if one occurs right before you plan to retire or need to liquidate holdings for some reason. A prolonged bear market can also be troublesome, as it often favors short-sellers and those betting on declines. Finally, going long in the outright-ownership sense means a good amount of your capital is tied up, which could result in missing out on other opportunities.

In terms of options contracts, a long position is one that benefits from a rise in the price of the underlying security. These include being long calls or short puts. When you buy or hold a call options contract from an options writer, you are long, due to the power you hold in being able to buy the asset. If you're long a call option, you buy it with the expectation that the underlying security will increase in value. You believe the asset's value is rising and may decide to exercise your option to buy it by the expiration date.

But not every trader who holds a long position believes the asset's value will increase. If you own the underlying asset in your portfolio and believe the value will fall, you can buy a put option contract. You still have a long position because you have the ability to sell the underlying asset you hold. The holder of a long put option believes the price of an asset will fall and holds the option with the hope of selling the underlying asset at an advantageous price by the expiry.

So, as you can see, the long position on an options contract can express either a bullish or bearish sentiment depending on whether the long contract is a put or a call. In contrast, the short position on an options contract does not own the stock or other underlying asset but borrows it with the expectation of selling it and then repurchasing it at a lower price.

Investors and businesses can also enter into a long forward or futures contract to hedge against adverse price movements. A company can employ a long hedge to lock in a purchase price for a commodity needed in the future. Futures differ from options in that you, as the holder, are obligated to buy or sell the underlying asset—you do not get to choose but must complete these actions.

Suppose a jewelry manufacturer believes the price of gold is poised to turn upwards in the short term. The firm can enter into a long futures contract with its gold supplier to purchase gold in three months at $1,300. In three months, whether the price is above or below $1,300, the business with the long position on gold futures is obligated to purchase the gold at the agreed price. The supplier must deliver the physical commodity when the contract expires.

Speculators also go long on futures when they believe prices will go up. They don’t necessarily want the physical commodity, as they're only interested in capitalizing on the price movement. Before expiry, if you're a speculator holding a long futures contract, you can sell the contract in the market.

Pros and Cons of a Long Position

Taking a long position has its advantages and drawbacks. On the positive side, it locks in a price, limits losses, and dovetails with historic market performance. However, it suffers in abrupt price changes or short-term moves, and may expire before any advantage is realized.

Example of a Long Position

Let's say you expect Microsoft Corporation (MSFT) to increase in price and purchase 100 shares for your portfolio. You're therefore said to 'be long' 100 shares of MSFT.

Now, consider a Nov. 17 call option on Microsoft (MSFT) with a $75 strike price and $1.30 premium. If you're still bullish on the stock, you may decide to purchase or go long one MSFT call option—one option equates to 100 shares—instead of buying the shares outright.

At expiry, if MSFT is trading above the strike price plus the premium paid ($75 + $1.30), you'll exercise your right to buy on your long option to purchase 100 shares at $75. The writer of the options contract—the short position—must sell you the 100 shares at the $75 price.

Taking a long position doesn't always mean you expect to gain from an upward movement. In the case of a put option, a downward trajectory in the price is profitable. Say another investor currently has a long position in MSFT for 100 shares but is now bearish. She takes a long position on one put option trading for $2.15 with a strike price of $75 set to expire on Nov. 17.

At expiry, if MSFT drops below the strike price minus the premium paid ($75 - $2.15), she'll exercise the long put option to sell her 100 shares for $75. The option writer must buy her shares at the agreed-upon $75 price, even if they're trading lower on the open market.

Where Can a Long Position Be Used?

You can establish long positions in securities such as stocks, mutual funds, or any other asset or security. In reality, long is an investing term that can have multiple meanings depending on how it is used. Holding a long position is a bullish view in most instances, except for put options.

How Is a Long Different From a Short?

A short position is the opposite of a long position, in that it profits when the prices of securities go down.