LONG / SHORT POSITION

LONG / SHORT POSITION

LONG / SHORT POSITION

Long Position - Long

What Is a Long Position?

A long-term position, also known as “going long,” occurs when an investor purchases an asset, holds it for a certain period and then sells it later.

Contrast this with the opposite is true. A Short position, often referred to as short, occurs when an investor sells assets and later repurchases them.

Both investors are hoping to earn a profit but shorting is a bet that the value of the investment will increase, and shorting is a chance to bet that the price will decrease. The risks associated with each type of investment are different.

Risques of taking a risk by going long vs Short

When he can sell the stock, he’s exited the extended position. His XYZ account is referred to as “flat.” The cost of the investment determines the risk of a long position.

If he decides to sell the stock, it is a sign that he has resigned from the extended position. The XYZ holding is known as “flat.” The value of the purchased asset governs the risk of a long-term position.

In the above example, the risk of the long-term position is $100 since only one share was bought. Since the price cannot fall below zero, the buyer will only lose $100.

A short-term position is, however, risk-free because investors who sell the shares at $100 before purchasing or owning it, and the price goes up, and they’ll be required to purchase it at a significantly higher price to get it to their purchaser.

For instance, if the price of stock XYZ increases to $500 when they are required to deliver, they’ll lose $400. In theory, the value of stock XYZ could rise indefinitely, which makes the risk indefinite.

Going Long via Short ETFs, Derivatives, Put Options

While a long position generally implies that the investor anticipates that an asset will appreciate, short ETFs and derivatives, such as put options, depend on the fundamental value of the security that falls for the position to be profitable.

Imagine an investor buying put options with a strike at $100 for bond ABC trading at $100. The buyer has purchased the option but not the obligation to buy the bond for $100.

The investor is a long put option, which requires the price for bonds ABC to drop below $100 before they can earn. If the price is $90 when it expires, then the investor could purchase bond ABC in the market for $90 and then promptly sell it back to the buyer who bought the put option at the stipulated price of $100, which will result in the investor making a profit of 10 dollars.

Imagine the negative ETF that is created to increase in value when the index of stock MNO decreases and then depreciates as MNO’s stock index increases. If an investor purchases one part in this ETF at $100 and expects the price for the ETF to increase to $110, he’s in the long-term position of the ETF in the hope that the index of stock MNO will decrease.

 

Short Position - Short

What Is a Short Position

 

 

A short position, also known as a short, is employed by some investors when they expect prices to fall, and it’s regarded as bearish.

 

 

An investor with short positions sells an asset to another person without having it in their possession and hopes to purchase it in the future when costs are less. The return on the investment can be defined as the distinction between the amount it sold and the price it was bought back.

 

 

Contrarily the other, a long position is also referred to as a “long”, which occurs when an investor purchases an asset, holds it the asset for a certain period of time and then sells it at a later date.

 

 

If the cost of the investment increases and the investor decides to withdraw at a higher cost and the position is closed, it will result in a loss. The risk associated with the short position can be essentially unlimited since prices can increase indefinitely. However, the profit of a short investment is only limited by the sale price.

 

 

Mechanics of a Short Position

 

 

The specifics of a short sale for an asset that requires immediate delivery, such as stock, require that the seller of the short position borrow the asset in order to deliver it to the buyers. In the case of selling stocks, short brokers usually lend shares to margin accounts authorized by the government for short sales. Margin accounts require collateral, and charges and interest could be assessed.

 

 

Brokers can loan shares of their own to short-sellers. However, typically, brokers have agreements with third-party lenders of stock, like pension funds, mutual funds and other large stockholders.

 

 

If the short seller decides that the broker offers shares, the short seller may sell the shares to a buyer who can receive stock from the broker. The buyer leaves the deal with the stock they bought. However, the short seller must purchase the borrowed shares back by buying them from the market.

 

 

The short seller hopes to be able to buy shares at a lower price shortly; however, regardless of the direction in which the prices go, he will eventually purchase shares to replace the ones that he borrowed from the broker. If the short seller decides to close the position – whether, at either a higher or lower price, the shares that were loaned are replaced, and the seller can realize the gains and losses of his short position less any interest or fees due to the broker in exchange for the loan.

 

 

Shorting in Practice

 

 

For instance, the stock XYZ has a $100, and the investor AAA believes that it will drop to $90. Investor AAA takes a part of XYZ from his broker and then sells it to the investor BBB. In the following week, the cost of XYZ drops to $90, and AAA purchases it with a profit of 10. The XYZ shares purchased by AAA are given to the broker to replace the share that was loaned, and AAA is responsible for the interest or fees on loan.

 

 

The procedures for a short position in a contract for a futures option contract are not as complicated since the contract is a contract for the delivery of an asset at a future date. Therefore, a short-seller doesn’t need to take out a loan before selling it if the position is not kept up to when the contract expires. If an investor has a short position after expiration, they must purchase the asset from the spot market to take immediate delivery.

 

 

In July, for instance, the contract that expires in September of the commodity MNO trades at the cost of $100. An investor is convinced that the value of the contract will drop to $90 by the time it expires in September. The contract is sold short. However, she is not required to issue commodities MNO till September. Then, in August purchased one contract for $90 to protect her short position, which yielded an additional profit of 10 dollars. Her position has now become unaffected, and not short or long, and she’s not bound by contract to deliver or receive delivery of MNO commodities.

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