Long Position

A long position is the holding of an asset or contract by its owner or buyer, as opposed to a short position, which is created by selling something not owned. In the SEC's investor education material, a long position in a security "means that you own the security," and investors hold long positions "in the expectation that the stock will rise in value in the future." The term is used across markets: an investor is long a stock, a bond or a fund by owning it, and long an option or a futures contract by having bought it. Being long is the ordinary state of an investment portfolio; most people who own stocks, bonds or funds are long without ever using the word.

Long in derivatives is about the contract, not the market. The buyer of an options contract is long the option. A long call gives the right to buy the underlying shares at the strike price, so it gains when the price rises. A long put gives the right to sell at the strike, so it gains when the price falls. Holding a put is therefore a bearish bet even though the holder is "long": the word describes owning the contract, and the contract pays off on a decline. For either option the most the buyer can lose is the premium paid. In futures, the long side is the party obligated to buy at the contract price, so it gains as the price rises and loses as it falls, and because futures settle gains and losses daily the long side can lose far more than the money first put up.

"Net long" and the short-sale rules. Regulation SHO, the SEC's short-sale regulation, decides whether a sale is "long" or "short" by asking whether the seller owns the security, and it says a person "shall be deemed to own securities only to the extent that he has a net long position in such securities." A person who owns 500 shares and has sold 200 short in the same stock is net long 300. The rule also treats some positions as ownership before the shares arrive, such as a binding, unconditional purchase contract not yet settled, an exercised option, or a convertible security already tendered for conversion.

Long is not long-term. The words sound alike and mean different things. A long position can be opened in the morning and closed by lunch. Whether a gain on it is long-term or short-term for tax depends only on how long the asset was held: generally more than one year for long-term treatment, one year or less for short-term.

The risk profile. A long stock position bought with cash can fall to zero and no further, which is the mirror image of a short sale's unlimited loss. Bought with borrowed money in a margin account, a long position can lose more than the investor's own cash, because the loan has to be repaid whatever the shares are worth.

A long position makes money when the asset's price rises (or, for a put option, when the underlying price falls) and loses money in the opposite case. The maximum loss depends on what is held.

Take an example comparing two long positions with a $40 stock. Bettina buys 100 shares for $4,000. If the price rises to $46 she is up $600 (100 times $6); if the company fails and the shares go to zero she loses the full $4,000, and no more. Her brother Anton instead buys one put option with a $40 strike for a premium of $2 a share, or $200 for a contract covering 100 shares. He is long the put and, in effect, betting on a decline. If the stock falls to $32 the put is worth at least $800 ($40 minus $32, times 100), a profit of $600 after the $200 premium. If the stock instead stays at or above $40 through expiration, the put expires worthless and he loses the $200. Both are long positions; they profit in opposite markets.

Pros

• A long stock position bought with cash has a known maximum loss: the money paid for it.
• A long stock position collects any dividends the company pays.
• Holding long for more than a year can qualify gains for long-term capital gains rates.

Cons

• A long position loses whenever the price falls, and a concentrated one can lose a large share of a portfolio.
• Long options lose value with time and can expire worthless.
• Long futures and long positions bought on margin can lose more than the cash put up.