Terms

Long Position Definition Types Example Pros and Cons

Long Position Definition Types Example Pros and Cons

Long Position: Definition, Types, Example, Pros and Cons

What Is a Long Position?

A long position refers to purchasing a security or derivative with the expectation that its value will rise.

Key Takeaways

  • A long position refers to buying an asset with a bullish attitude.
  • Long position in options contracts indicates ownership of the underlying asset.
  • A long position is the opposite of a short position.
  • Being long in options can mean owning an asset or holding an option on the asset.
  • Being long on a stock or bond investment measures time.

Understanding a Long Position

Investors establish long positions in securities like stocks, mutual funds, currencies, and derivatives such as options and futures. A long position is the opposite of a short position.

The term long position is often used in the context of options contracts. Traders can have a long call or a long put option, depending on the outlook for the underlying asset.

For example, an investor who expects an upward price movement in an asset will "go long" on a call option, giving them the option to buy the underlying asset. Conversely, an investor who predicts a price fall will be long on a put option, giving them the right to sell the asset.

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Types of Long Positions

The term long can have different meanings, depending on the context. In options and futures contracts, a long position benefits from a rise in the underlying security’s price.

Long Position Holding an Investment

Going long on a stock or bond is a conventional investing practice. The investor purchases an asset with the expectation that its price will rise. This investor usually intends to hold the security without selling it in the near future.

An expectation that assets will appreciate in the long run—buy and hold strategy—spares the investor from constant market-watching, weathering inevitable ups and downs. However, sharp drops or prolonged bear markets can present challenges.

Additionally, going long in the outright-ownership sense ties up capital, potentially resulting in missed opportunities.

Long Position Options Contracts

In options contracts, a long position benefits from a rise in the underlying security’s price. Traders can buy long call options or long put options.

A long call option is bought by an investor expecting an increase in the underlying security’s value. A long put option is held by an investor predicting a price fall. The long contract can express either a bullish or bearish sentiment.

A short position does not own the underlying asset but borrows it, expecting to sell it at a lower price.

Long Futures Contracts

Investors and businesses enter into long futures contracts to hedge against price movements. A long hedge locks in a purchase price for a needed commodity.

Speculators also go long on futures when they expect prices to rise, capitalizing on price movements. These contracts obligate the holder to buy or sell the underlying asset and do not allow choice.

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Pros and Cons of a Long Position

  • Locks in a price
  • Limits losses
  • Dovetails with historic market performance
  • Suffers from abrupt price changes
  • May expire before advantage is realized

Example of a Long Position

For example, if an investor expects Microsoft Corporation (MSFT) to increase in price, they may purchase 100 shares, creating a long position in MSFT.

Alternatively, the investor can buy a call option on MSFT. At expiry, if MSFT is trading above the strike price plus the premium paid, the investor will exercise their right to buy the shares.

Taking a long position does not always mean expecting an upward movement in price. A put option allows an investor to profit from a downward trajectory in the price of the security.

Where Can a Long Position Be Used?

Investors can establish long positions in securities like stocks, mutual funds, or any other asset or security. Holding a long position is generally bullish, except with put options.

How is a Long Different from a Short?

A short position profits when security prices go down.

A short position profits when security prices go down.

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