A long position or “long” is the purchase of a stock, product or cryptocurrency with the expectation that its value will increase over time. Standard tactics for a “bullish” way of doing things.
This tactic is very often used during work with options. Moreover, both on the basis of further growth and decrease. It all depends on the basic prospects of a particular contract.
- If there is a calculation for an uptrend, then it makes sense to use a “call option”, which will allow the holder of the underlying asset to purchase it in the future at the current price.
- If the calculation is for a downtrend, then you should use the “put option”, which will make it possible to sell the asset in the future at the current price.
Anyway, the “long” is considered as a tactic opposite to the “short” - a short position. Because the trader always either has a specific asset that he is going to apply or an option on it.
What is it exactly
The fact is that the term “long position” may mean several different phenomena. Most often, however, we are talking specifically about time - the long-term ownership of certain assets. However, in the context of option and futures contracts, the meaning of the term may change.
Long as an element of holding tactic
Continuous ownership of stocks, resources, and cryptocurrencies in the expectation that their price will increase in the future is the simplest investment tactic. Typically, a trader does not expect to sell his assets in the near future, regardless of possible fluctuations. Because the general market trend always goes in the direction of increasing value. This tactic is simple, reliable and stable. The main thing is that the costs of ownership and storage have to be lower than the planned income.
However, this tactic also has disadvantages - it is less resistant to the long-term “bear market” and speculation by short-sellers. Plus, when the majority of assets are tied with “long-term obligations”, the trader can miss many profitable opportunities.
Long as an element of option contracts
In this situation, the definition has nothing to do with the terms. “Long position” - real possession of goods, cryptocurrency or other assets with which the trader works. There could happen following situations.
The owner of the asset puts it up for sale. The investor acquires the opportunity to buy this asset in the future at the current price. Depending on whether the game is going up or down, you can arrange either a “call option” or a “put option”, respectively. An important point - the purchase of an option does not mean its mandatory implementation. An investor can refuse this if the price increase does not meet his expectations. In this case, he will lose only the funds allocated for the purchase of the option, and not for its implementation.
Long as part of futures contracts
The main objective of forward and futures contracts is hedging (protection) against adverse price changes. Long positions in this regard are ideal - the company acquires an obligation to purchase goods in the future at the price at a given time. At the end of the futures period, the supplier, in any case, transfers ownership to the company - buyer. What will it do next with the acquired asset is its choice. It can both realize and put up for sale again (speculation). But as long as she has ownership rights - all issues relating to payment for storage also on her.
Pros and Cons
Pros:
- A well-defined cost, which will not change over time.
- Strict limitation of possible losses and predictability of costs.
- Work within a stable long-term historical trend.
Cons:
- Long-term course changes cannot be circumvented. Early closure of a long position is a rather complicated thing and not always possible.
- A position may close in time before price changes become significant.
- Short-term fluctuations in the rate at the time of closing "long" can nullify all expectations of profit.
Specific example
There is a trader who expects the stock price of Microsoft Corporation (MSFT) to rise. He gets 100 pieces and prepares to hold a long position. This is the simplest situation.
There is an option of November 17 for 100 shares of MSFT with a strike price of $ 75 and a premium of $ 1.30. If a trader is set to grow, he can make an “MSFT call” - to acquire one such option, equal to 100 shares of MSFT. But not immediately, only after the expiration date. If by that time the shares will be sold at a price exceeding $ 75, the trader will redeem them at the price set at the time of November 17th. The author of the option has to sell them to him at that price.
At the same time, the trader himself may not conclude this deal, since it is a question of an option, not futures. Net profit - the difference between the value at the time of the transaction and the value at the time of sale, minus the premium and storage costs.
The situation is similar to a bearish trend. In any case, the author receives the amount indicated at the time of the announcement, and how traders will proceed will depend on their preferences in work.
A long position guarantees a stable and predictable profit, and also helps to almost completely avoid loss of resources due to random events and short-term fluctuations.