In the world of investing, the word “long” means a lot. Going long, or taking a long position, means that an investor owns an asset, like a stock, because they think it will go up in value. They are keeping it for a long time, which is why it is called “going long.”
But in the world of options trading, a “long position” can also mean something else. It’s a strategy that lets you make a bet based on whether you think the price of a stock (or another asset) will go up or down—usually up. When an options trader says, “I am long Tesla,” it usually means they are bullish or optimistic about the company’s future.
Long vs. short stock
On the other hand, when you sell a stock you don’t own, this is called a “short” position. When investors sell short, they bet that the price of the stock will go down. If the price goes down, you can buy the stock for less money and make money. If the price of the stock goes up and you buy it back at a higher price later, you will lose money. Only investors with a lot of experience should try to sell short.
Let’s look at all the ways that long vs short stock or option positions can be set up.
A long position in stocks
Taking a long position in investing means you buy a security (usually a stock) that you think will go up in value over time. Most of the time, it fits into a type of investing called “passive” or “buy and hold,” because all you do is buy and hold.
When most people think of investing, they think of going long or staying long. In fact, most people who invest on their own choose to take a long position. Once you have chosen and bought the stock, it does take less work to manage.
Pros and cons of long position in stocks
In the long run, the stock market and stocks have always gone up. So, taking long positions makes money on average. In fact, a passive way of investing often does better over decades than an active way of investing. Also, buying and holding is usually less risky than other strategies. When you look at the market over a long period of time, the ups and downs are averaged out. If you buy a stock and keep it for at least a year, you pay less tax on any profits you make when you sell it.
One of the flaws of long position in stocks is that your money is locked up, probably for a long time. The longer you hold, the more likely it is that something bad will happen, like the company being sold or going out of business. You could, as well, lose a lot of money if you sell when a bear market is going strong.
A long position in options
A way to trade options is also called a “long position.” A long position in options gives you the right to buy (call) or sell (put) shares of a certain stock at a set price on or before a future date.
A quick reminder: An option is a contract that gives you the right, but not the obligation, to buy or sell an asset (usually a stock) at a certain price before a certain date.
Long options come in two forms: a long call and a long put
• A long call option gives you the right to call, or buy, shares of a certain stock at a certain price at a later date. If you think the price of the stock will go up in the next few days, weeks, or months, you can buy a long call option that gives you the right to buy that stock at today’s price at some point in the future. You can then sell it on the stock market at a higher price and make a profit.
• A long put option gives you the right to put, or sell, shares of that stock at a set price in the future. If you think a company’s stock will lose value in the future, you could buy a long put option contract that gives you the right to sell shares of that stock in the future at today’s (higher) price.
Most call options are long call options. Most of the time, a long put is used as a hedge with a long call. Basically, the person who has long call options is optimistic and thinks the stock price will go up. But just in case it doesn’t, the person who has long put options has a chance to sell the stock if the price goes down.
Pros and cons of long position in options
Buying stock outright is more expensive and risky than buying long options instead. When you buy an option, the only thing you pay for up front is the premium, or fee. And if the stock doesn’t do as well as you thought it would, you can just let the option run out.
A long option is, of course, a little more work than a general long position, which you can just set and forget. You have to keep an eye on the price of the stock and decide what to do when the end of the contract is getting close. This is called “exercising the option.”
You can find more about long positions in stocks and options in our blog post What is a long position in stock investing
What does it mean to be short?
The inverse of a long position is a short position. It shows a gloomy point of view.
When you own a long position, you buy a stock (or an option to buy a stock) that you think will go up in value in the future. When you take a short position, also called “short selling” or “shorting a stock,” you sell a stock you don’t own that you think will drop in price in the future.
Instead of buying the stock, you borrow it (and pay interest on the loan), sell it, and put the money aside. After the price has gone down, you buy the stock back and give it back to the original owner. The difference in price is your profit.
Pros and cons of selling short
If the seller is wrong about how the price will move, selling short can be expensive. If a stock goes to zero, a trader can “only” lose all of the money they put into it.
A trader who has shorted stock, on the other hand, can lose a lot more than 100% of the money they put in. The risk comes from the fact that the price of a stock can go up “to infinity and beyond.” Also, the trader had to put money into the margin account while the stocks were being held. Even if everything goes well, traders have to take into account the cost of the margin interest when figuring out how much money they made.
When it’s time to close a position, it might be hard for a short-seller to find enough shares to buy. It could happen especially if a lot of other traders are shorting the same stock or if the stock isn’t traded much. On the other hand, if the market or a certain stock starts to skyrocket, sellers can get stuck in a short squeeze loop.
Only for experienced investors
On the other hand, strategies with a lot of risk also have a lot of payoff. Not even short selling is different. If the seller is right about how the price will move, they can make a nice return on investment (ROI). This is especially the case if they start the trade with margin. Using margin gives the trader leverage, which means that they didn’t have to put up as much of their own money at first. When done carefully, short selling can be a cheap way to protect against risk and balance out other investments in a portfolio.
Investors who are just starting out should usually avoid short selling until they have more trading experience. However, short selling through ETFs is a bit safer because the risk of a short squeeze is lower.
