What is a Long Position?

A long position is when an investor buys a security or derivative with the expectation that its value will increase. An investor establishes a long position by purchasing securities such as stocks, mutual funds, or currencies, or derivatives such as options and futures, with the expectation that the value will rise. This is a bullish view, and the opposite of a short position.

An investor can take a bullish view by establishing a long position in stocks, mutual funds, currencies, options, or futures. A long position is the opposite of a short position.

Stockbrokers act as intermediaries between the stock exchanges and investors, by facilitating the buying and selling of stocks. Portfolio managers are professionals who manage collections of securities on behalf of clients. Investment bankers act as representatives for companies in various capacities, such as private companies seeking to go public through an IPO or companies involved in mergers and acquisitions.

An investor who anticipates an increase in the price of an asset will "go long" on a call option, which allows them to purchase the underlying asset at a specific price. On the other hand, an investor who expects the price of an asset to decrease will be long on a put option, giving them the right to sell the asset at a certain price.

Types of Long Positions

The term "long" is used in investing and can have different meanings depending on the context. The most common meaning of long is the duration of time an investment is held. However, in options and futures contracts, it refers to a different type of position.

Long Position Holding an Investment

A long position in stocks or bonds is a common practice among retail investors in the capital markets. This type of investment involves purchasing an asset with the expectation that its price will increase, and typically not planning to sell it in the near future. In the context of equities, which generally have a tendency to increase in value, "long" can refer to both a measurement of time and a bullish outlook.

The buy and hold strategy, which is based on the belief that assets will increase in value over time, allows investors to avoid the need for constant monitoring of the market or timing it. Additionally, by holding assets over a longer period, investors have the ability to weather market fluctuations and benefit from the historical trend of stock markets to appreciate over time.

It's important to note that while the buy and hold strategy may be successful over the long run, it doesn't mean that there won't be significant drops in the value of an investment along the way. These sharp declines can have a detrimental effect on a portfolio, particularly if they occur right before an investor's planned retirement or when they need to liquidate their holdings for other reasons.

Holding a long position for a prolonged period during a bear market can be challenging as it can benefit short sellers and those who are betting on declines. Additionally, when an investor goes long in the traditional sense, it means tying up a significant amount of capital, which could result in missing out on other investment opportunities.

Long Position Options Contracts

A long position in options contracts is one that profits from an increase in the price of the underlying security. This can include holding long calls or short puts.

Being long on a call option means that the trader has bought or holds a call options contract from an options writer. This gives them the power to buy the underlying asset. An investor who is long a call option is one who purchases the call with the expectation that the underlying security will increase in value. The holder of a long position call believes that the value of the asset will rise, and may choose to exercise their option to buy it before the expiration date.

A trader who owns the underlying asset in their portfolio and believes the value will fall can also take a long position by buying a put option contract. This is because they have the ability to sell the underlying asset they hold in their portfolio. The holder of a long put option believes that the price of the underlying asset will decrease, They hold the option with the expectation that they will be able to sell the underlying asset at a favorable price by the expiration date.

It's worth noting that whether a long position on an options contract expresses a bullish or bearish sentiment depends on whether it's a put or a call. In contrast, a short position on an options contract doesn't involve owning the underlying asset, but rather borrowing it with the expectation of selling it and then buying it back at a lower price.

Long Futures Contracts

Investors and businesses can also use long forward or futures contracts to protect against negative price movements. A company can use a long hedge to secure a purchase price for a commodity that they will need in the future. Unlike options, holders of futures contracts are obligated to buy or sell the underlying asset and they do not have the choice of not completing the transaction.

For example, if a jewelry manufacturer believes that the price of gold will increase in the short term, the company can enter into a long futures contract with its gold supplier to buy gold in three months at $1,300. When the three months are up, whether the price of gold is above or below $1,300, the business that holds a long position on gold futures is obligated to buy the gold from the supplier at the contracted price of $1,300. Similarly, the supplier is obligated to deliver the physical commodity at the expiration of the contract.

Speculators may also take a long position on futures contracts when they anticipate an increase in prices. They do not necessarily require the physical commodity, as they are only looking to profit from the price movement. Prior to expiration, a speculator holding a long futures contract can sell the contract in the market.

Pros and Cons of a Long Position

Pros:

• Locks in a price
• Limits losses
• Aligns with historical market performance

Cons:

• Can be negatively impacted by sudden price changes or short-term movements
• May expire before the advantage is realized.

Example of a Long Position

For instance, let's say Jim anticipates that the price of Microsoft Corporation (MSFT) will rise and decides to purchase 100 shares for his portfolio. In this case, Jim is said to "hold a long position" of 100 shares of MSFT.

Now, let's consider a Nov. 17 call option on Microsoft (MSFT) with a $75 strike price and $1.30 premium. If Jim still has a bullish outlook on the stock, he may choose to purchase or go long on one MSFT call option. This is an alternative to buying the shares outright as in the previous example, where one option contract represents 100 shares.

At expiration, if MSFT is trading above the strike price plus the premium paid ($75 + $1.30), Jim will exercise his right to buy on his long option, by purchasing 100 shares of MSFT at $75. The writer of the options contract, who holds the short position, that Jim bought must sell him the 100 shares at the $75 price.

Taking a long position does not always imply that an investor anticipates a profit from an upward movement in the price of the asset or security. In the case of a put option, an investor holding a long position profits from a downward movement in the price of the security.

Let's say another investor, Jane, currently holds a long position of 100 shares of MSFT in her portfolio but has a bearish outlook on it. In this case, she takes a long position on one put option. The put option is trading at $2.15 and has 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), Jane will exercise her long put option to sell her 100 MSFT shares for the strike price of $75. In this case, the option writer is obligated to purchase Jane's shares at the agreed-upon $75 price, even if the shares are trading at a lower price on the open market.

Where Can a Long Position Be Used?

Investors can take a long position in various securities such as stocks, mutual funds, or other assets. The term "long" can have different interpretations in investing, depending on the context. Generally, holding a long position reflects a bullish outlook, with the exception of put options where a downward movement in the price of the security is profitable for the investor.

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.