A long position is created when an investor purchases a securities or derivative with the assumption that its value will increase.
Long positions can be established in assets like stocks, mutual funds, and currencies, as well as derivatives like options and futures. A bullish viewpoint is one that favors long positions. The opposite of a long position is a short position (also known simply as “short”) and there is a big difference between these two.
Long position is frequently used to describe the purchase of an options contract. Depending on the forecast for the underlying asset of the option contract, the trader can hold either a long call or a long put option.
For instance, an investor who anticipates a price increase in an asset may “go long” on a call option. The call option grants the holder the right to purchase the underlying asset at a specified price. In contrast, an investor who anticipates that the price of an asset will decline will go long on a put option and retain the right to sell the asset at a certain price.
Various Long Positions
In practice, long is an investment word with numerous connotations depending on the context. The most frequent definition of long relates to the holding period of an investment. In options and futures contracts, however, the term long has a distinct connotation.
Long position in an investment holding
Longing a stock or bond is the more common capital market investment strategy, particularly for individual investors. In a long-position investment, the investor acquires and holds an asset with the idea that its value will increase. Typically, this investor does not intend to sell the investment in the near future. In the context of keeping equities, which have an intrinsic tendency to advance, “long” can refer to both time and positive purpose.
The buy-and-hold approach, which is predicated on the belief that assets would rise in value over time, frees the investor from the necessity for daily market monitoring or market timing, and gives them time to weather the inevitable market fluctuations. In addition, history is on one’s side, as the stock market will invariably rise with time.
Of course, this does not rule out the possibility of sudden, portfolio-depleting dips along the road, which may be devastating if they occur just before an investor retires or needs to liquidate assets.
A protracted bear market is particularly problematic since it frequently benefits short-sellers and those who gamble on falls.
Lastly, going long in the sense of outright ownership ties up a substantial quantity of cash, which may result in the loss of other chances.
Contracts for options on long positions
A long position in terms of options contracts is one that profits from an increase in the price of the underlying securities. These consist of long calls and short puts.
When a trader purchases or retains a call options contract from an options writer, they are long because they have the ability to purchase the underlying asset. A long call investor is one who purchases a call option with the idea that the underlying investment would appreciate. The holder of a long call position feels the asset’s value is increasing and may elect to execute their option to purchase the asset before to expiration.
However, not all traders who maintain a long position believe that the asset’s price will rise. A put option contract can be purchased by a trader who holds the underlying asset in their portfolio and believes its value will decline. They continue to keep a long position since they are able to sell the underlying asset in their portfolio. The owner of a long put option anticipates that the asset’s price will decline. They hold the option in the hopes of selling the underlying asset at a favorable price before to the option’s expiration.
Based on whether the long contract is a put or a call, the long position on an options contract can convey either bullish or bearish emotion.
In contrast, the short position on an options contract does not own the underlying stock or asset. It rather borrows it with the intention of selling it and repurchasing it at a reduced price.
Contracts on long futures
Investors and corporations can also hedge against adverse price swings by entering into a long forward or futures contract. A corporation can use a long hedge to lock in a purchase price for a future-required commodity. Futures are distinct from options in that the holder must purchase or sell the underlying asset. They have no choice and must perform these activities.
Suppose a producer of chocolate anticipates a short-term increase in the price of cocoa. The company can put into a long futures contract with its cocoa supplier to acquire cocoa from the provider for $5,000 in three months. In three months, the firm with a long position on cocoa futures is compelled to acquire cocoa from the supplier at the agreed-upon contract price of $5,000, regardless of whether the price is above or below $5,000. When the contract ends, the supplier is bound to deliver the physical commodity.
Speculators also purchase futures when they anticipate that prices will rise. They are solely interested in profiting on the price movement and do not necessarily require the physical item. A speculator owning a long futures contract may sell it on the market prior to expiration.
Positives and negatives of a long position
Pros
- It secures a price
- Losses are limited
- Complements previous market performance
Cons
• Suffers from sudden price changes/short-term fluctuations
• May expire prior to benefit realization
Example of a long position
Here is an illustration of how a long position in the options market may perform for an investor. Suppose a private investor purchases (goes long) one Apple (AAPL) call option for $10 from a call writer. The strike price of the option is $140, while AAPL is now trading at $150. While the writer retains the $10 premium, they must sell AAPL for $140 if the buyer of the call option decides to execute the transaction prior to the option’s expiration.
The buyer of a long call option has the right to acquire shares from the writer for $140 per share when the option expires if AAPL’s market price is more than $140 plus the $10 premium, or $150. For example, if AAPL climbs to $170, the long call buyer’s profit would be $170 minus $150, or $20.
Bottom line
Long positions are deemed bullish since the investor anticipates an increase in the security’s price and purchases a call with a lower strike price. Investors purchase shares with the expectation that the share price will rise. The danger is that the stock price might decline, resulting in investors losing their initial investment.
Before deciding to acquire a long position, you should conduct research and comprehend the ramifications if the deal does not go as anticipated.
