While investing in stocks and options, you would have heard about long positions or short positions. Contrary to what their name suggests, the long and short position refers to the things that the investor owns and what they need to own. While a long position in terms of stock means that an investor has purchased stocks and owns his share. The investors are said to be in a short position if they owe stock to some other person and do not buy the stocks.

In the case of options, purchasing and owning a call or put option means a long position. The investor has the right to buy or sell to another investor at a fixed price. While in the case of a short position, when it comes to selling or writing a call as well as a put option, the writer needs to sell or buy from the investor holding a long position option.

If you are curious to know more about it, then here we explain them one by one before you begin Options Trading.

Long Position

As mentioned earlier, when there are investors in long positions, then they have purchased and own their stocks. To cite an example, if the investor has 100 shares of a specific company in their investment portfolio, then they hold long 100 shares. Also, this investor has purchased these stocks by making the full payment.

Short Position

The investor in the short position owes the stocks to some other investor. These investors have not bought the stocks. In the same example mentioned above, the investor who sells 100 shares of that specific company does not own the shares and hence belongs to the short 100 shares position. This investor owes these shares at the time of settlement. The investors need to fulfill the obligation by buying the shares.

It is observed by Options Strategy Builder many times, the short investor borrows the shares from a broking company. In this scenario, the stock price may go down. The investor can purchase the shares at a lesser price and pay the amount back to the company that has lent them the shares. There are scenarios when the price point does not come down and rather rises. In this condition, the short seller is subjected to a margin call which happens when the investor’s account value goes down compared to the broker firm’s needed minimal value.

What are the differences between a long position and a short position?

If you need to do an investment in options contracts, you need to know about the long and short positions clearly with their distinct meanings. As we know, purchasing or owning a call or put is known as a long position as the investor has the right to buy or sell the stocks to another investor at a definite price. While in the case of a short position, selling or writing the contract whether it is a call or put, has a different implication. Here, the writer needs to sell the shares and purchase the shares from the long-position investor. So, in the short position, when there is a price drop, the investors can buy the stock by leveraging the lower price and recording a gain. But in case the price of the stock goes up and you buy the same at a higher price, you will record a loss.

Long and short positions have different applications for investors. They use both to achieve different goals. Sometimes the investors use both long and short positions at the same time to leverage gains and income. It is also important to know that a long call option is bullish because the investor hopes for a rise in the price of the stock. They purchase calls at a low strike price. An investor can also do hedging by going for a long put option and using the right to sell their stock at a certain price.

The short call option also uses almost the same strategy but there is no borrowing of the stock. While a long stock position is bullish and hopes for growth, a short stock position is bearish. As per this position, the investors make income through option premiums. They use the opportunity of delivering their long position at a higher price point. In the short put position, the investors use the probability of purchasing the asset at a certain price while earning the premium. Backtesting Engine can help you know more. 

The investors at times need to combine long and short positions, use different securities, and end up hedging against losses. It is important to realize that short positions entail the risk that is more centered around IRAs and cash accounts. Margin accounts are required for short positions.

Wrapping up

A long position means you own the security and also hope for growth in the stock price, a short position is the sale of a stock that you don’t own and consider the dropping price of the stock. Short selling is best suited for the experienced investor. Now that you know about both, you can take your call for Algo trading as per your investment goals.