A long position is a trading strategy that can help you profit from a stock, whether its price rises or falls
long positioninvolves using options, which let you lock in a stock's price for a future transaction.
call optionsand long put optionsgive you the right to buy or sell a stock, respectively.
- Long positions hedge risk: If the stock doesn't move as hoped, the option expires at little cost.
In the investing world, "long" is a word loaded with meaning.
But a long position also has a specialized meaning, having to do with options trading. It's a strategy that lets you make a bet, based on whether you believe a stock (or another asset) will rise or fall in value - generally, rise. If an options trader says "I am long Microsoft," it often means they have a bullish, or optimistic, view of Microsoft's performance.
Let's examine all the permutations of long positions in options.
Fast facts about options
- An option is a contract giving you the right - but not the obligation - to buy or sell an asset (usually a stock) at a specific price before a specific date.
- Options come in two basic varieties. An option to buy is a call. An option to sell is a put.
- Options contracts are usually for 100 shares.
- You don't put up any money for the stock shares, but you do pay a fee, or premium, for the option. The premium is based partly on the price at which the option-holder might buy or sell the asset - the strike price - and partly on the length of the contract. Generally, the shorter the contract and the more the strike price has to move (from the asset's current price), the lower the premium.
- Options contracts usually run anywhere from one to nine months.
What is a long position?
A long position in options conveys the right to buy or put sell shares for a preset price on or before a future date.
There are two types of long options, a long call and a long put.
A long call option gives you the right to call, or buy, shares of a named stock for a preset price at a later date.
A long put option does the opposite: It gives you the right to put, or sell, shares of that stock in the future for a preset price.
Purchasing a long call option
If you believe a certain stock is going to go up in price in the coming days, weeks, or months, you can purchase a long call option to buy that stock for today's price sometime in the future and make a profit by selling it on the stock market at the then- higher price.
Example: You believe ABC stock, selling today for $100 a share is going to be worth more in a couple of months. You purchase a long call option contract for 100 shares, set to expire in three months, with a contract (strike) price of $100 per share, and a fee (premium) of $3 per share.
ABC does as you expect and in two months shares are worth $150 apiece. You exercise your option, buy 100 shares at $100 each, sell them for $150 each, and you've made a tidy profit of $4,700.
Here's the math:
$15,000 from the sale of 100 shares @ $150 on the stock market
- $10,000 cost to buy those shares at the strike price
- $300 cost of the original contract premium
= $4,700 profit
Purchasing a long put option
If you believe a company's stock will lose value in the future, you would purchase a long put option contract giving you the right to sell shares of that stock in the future for today's (higher) price.
Example: You believe ABC's stock is going to be lower in a couple of months. You purchase a long put (sell) option contract for 100 shares, set to expire in three months, with a strike price of $100 per share, and a premium of $3 per share.
ABC does as you expected and in two months shares are selling for $50. You buy 100 shares at $50 each, exercise your option, and sell them for $100 each, and you've made a tidy profit of $4,700.
Here's the math:
$10,000 from the sale of 100 shares @ $100 strike price
- $5,000 cost to buy those shares at the lower market price
- $300 cost of the original contract premium
= $4,700 profit
Exercising your option
You can't make money buying either a long call or long put option unless you exercise your option. Exercising your option means to buy or sell before the expiration date set in the option contract.
Naturally, you'd exercise the option if things go the way you expect - the stock moves in the way you thought it would, hitting the strike price.
Why would you let the option expire without exercising it? Simple: The price of the stock goes against your prediction, moving in an opposite direction from the strike price. If that happens, the option becomes worthless. You let it expire, and you lose the premium you paid.
The good news is, that's all you lose.
Why take a long position?
For those who like to trade, going long lets you take chances with less risk. Both long calls and long puts limit your loss to the cost of the options contract. When buying or short-selling a stock outright, you stand to lose much more money (see below).
Long options also include an unlimited profit potential to the upside in the case of a long call option or the downside with a long put option.
Best of all, long option positions require less of an investment or cash down. Instead of spending thousands on a stock, you just spend a few hundred on the option, giving you more leverage for less money.
What is a short position?
A short position is the opposite of a long position. While a long position involves buying a stock (or an option to buy) that you expect to be worth more in the future, taking a short position - aka selling short or shorting a stock - involves selling a stock you don't actually own that you expect to drop in price later.
Instead of buying the stock, you borrow it (and pay interest on the loan, a process called buying on margin), sell it, and put the money aside. After the price has dropped, you buy the stock back and return it to the original owner, keeping the difference as profit.
Quick lingo lesson: A long put is a way of shorting a stock.
Regular short-selling can be dangerous: You must buy the stock back to repay the lender, and if its price rises instead of falls, you may be out of pocket in a big way. But when you do it as an option (long put) you only risk the premium - the cost of the option.
The financial takeaway
With options, a long position refers to either:
- a long call option, meaning the buyer expects an underlying asset to increase in price, which increases the value of the option.
- a long put option, meaning the buyer expects the underlying asset to decline in price, which also increases the value of the put option.
Overall, long options are a bullish (optimistic) strategy in which a long call bets the underlying stock will rise and a long put serves as insurance in case it doesn't.
Of the two, the long call is more common. But both are bullish strategies, in the sense that you are buying the option in the hope it'll prove valuable - and help you make more of a profit on a stock than you would by buying outright.
Related Coverage in Investing:
'Buy the dip' means purchasing a promising stock when its price drops, assuming a fast rebound and future profits
A margin call means your broker is asking you to repay the money it lent you to buy stocks - and if you don't, it could mean big losses for your portfolio
Trading and investing are two approaches to playing the stock market that bring their own benefits and risks
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