Long Position vs. Short Position: What’s the Difference?

Long Position vs. Short Position: An Overview

Analysts, market makers, and investors often refer to a long position or short position when speaking of securities such as stocks and options. “Long” and “short” in financial matters can refer to different things but they refer to the securities an investor owns or securities they need to own in the context of investing.

Long Position

An investor has bought and owns securities such as shares of stocks if they have a long position. An investor who owns 100 shares of Tesla stock in their portfolio is said to be long 100 shares.

This investor has paid for the shares in full. They’ll make money if the shares rise in value and they sell them for more than they paid.

Short Position

The investor sold shares of a stock and therefore owes them to another investor who buys them but doesn’t own them yet if they have a short position. An investor who’s sold 100 shares of Tesla without owning them is said to be short 100 shares.

The investor with the short position must fulfill their transaction obligation when the trade settles by purchasing the shares in the market so that they can deliver them. The short investor will often borrow the shares from a brokerage firm through a margin account to make the delivery. The goal is for the stock price to fall. The investor will then buy the shares at a lower price than they sold at to pay back the dealer who loaned them.

The short seller may be subject to a margin call from their broker if the price doesn’t fall but instead keeps rising. A margin call occurs when the value of an account of an investor who borrows on margin falls below the broker’s required minimum value. The investor must deposit additional money or securities when a call is issued so the value of the margin account rises to or above the minimum maintenance margin level.

Options: Long and Short

Long and short positions have slightly different meanings with options contracts. An investor has a long position when they buy or hold a call or put option. They own the right to buy or sell the security at a specified price.

They have a short position when they sell (or write) a call or put option. They’re obligated to sell or buy the shares.

An example

Let’s say that an individual goes long on a Tesla call option from a call writer for $28.70. The writer is short on the call. The strike price on the option is $275.00. There’s value in exercising the option if Tesla trades above $303.70 on the market.

The writer gets to keep the premium payment of $28.70 but is obligated to sell Tesla shares at $275.00 should the buyer decide to exercise the contract before it expires.

The call buyer who is long has the right to buy the shares at $275.00 before expiration and will do so if the market value of Tesla is greater than $303.70. That’s $275.00 plus the amount they paid for the call option: $28.70.

Combining Long and Short Positions

Investors use long and short positions to achieve various results. An investor may establish long and short positions simultaneously to leverage or produce income from a transaction. They can also use both positions to hedge against possible portfolio losses.

Long call option positions are bullish. An investor expects the stock price to rise and buys calls with a lower strike price. An investor can hedge their long stock position by creating a long put option position which gives them the right to sell their stock at a guaranteed price.

Short call option positions offer a similar strategy to short selling but without the need to borrow the stock. This position allows the investor to collect the option premium as income with the possibility of delivering their long stock position at a guaranteed and usually higher price.

A short put position allows the investor to collect the premium and gives them the potential to buy the stock at a specified price.

Use This in Real Life

Being or going short means betting that you’ll make money from the stock falling in value. You’re effectively rolling the dice that this will happen. Short positions come with higher risks than long positions. The mechanics of going short involve borrowing a security from a broker and paying interest for the privilege then selling it and eventually buying it at a lower price. You then give it back to the broker and hopefully pocket the difference.

All this requires a high risk tolerance, nerves of steel, and the financial ability to withstand losses. There’s no limit as to how much you could lose. Your losing position may ultimately be closed out by your broker if a margin call is made and you don’t deposit more cash or securities in time. Margin accounts are generally needed for most short positions and your brokerage firm would have to agree that these riskier positions are suitable for you.

The Bottom Line

Long and short positions relate to the position an investor or trader takes in the market. Being or going long means buying a stock to profit from its rising value. Long and short take on different meanings with options. You can buy a call or put option or sell a call or put option. Buyers are said to hold long positions while sellers are said to be short.

Short positions may be limited in IRAs and other cash accounts.