What is a long position, and is it a wise decision when investing?

What is a long position?

People make investments and buy securities or derivatives to make a profit. Hence, they would not do so if they do not feel optimistic about the value that they will have. Therefore, they make long positions in these situations. A long position describes an investor’s security or derivative purchase when they feel like there will be a rise in value. This position applies to stocks, mutual funds, currencies, and derivatives like options and futures. And since we mentioned that an investor wouldn’t do so if he does not see that the value will rise, a long position is a bullish view.

Where can we encounter long positions?

When a person purchases an option contract, there is a huge possibility that he used a long position. The option can either be a long call or a long put. The trader will come up with a decision that he sees fit with the underlying asset’s output. For instance, if an asset seems to have an upward movement, the investor can have a call option. The investor can buy the underlying asset at a specific price. An investor can also take advantage of downward movements and place a long position on a put option to sell the asset at a particular price. Here are other situations with long positions:

Long positions and holding investments

If we say long positions and investments, investors, especially retailers, apply this to stocks and bonds in capital markets. They do this when they think that the value will rise. The investor will hold and has no plans on selling for a while. This also gives the investor no reason to watch the market for ups and downs. Hence, we can also refer to a long time frame and a bullish view when we say long.

Long positions and options contracts

Options contracts will always be relative to derivatives. So, if we include long positions in the picture, we are not pertaining to any time frames. Instead, it refers to owning an underlying asset.

The long position holder is the one that holds the underlying asset in his portfolio. A trader who buys and holds a call options contract from the option’s writer is long because he can hold and buy the asset. An investor who has a long call option buys the call because he thinks that the underlying asset’s value will increase. He can also exercise their option to buy it as it expires.

We mentioned that a long position is a bullish view. However, a person who owns an underlying asset that he thinks will decline soon even when he is long can buy a put option contract. They hold the option and hoping they can sell it as it expires. In a nutshell, a long position on an options contract can be bullish or bearish depending on the long contract if it is put or call.

Long positions and futures contract

Long futures contracts usually enter the picture when an entity wants to hedge against sudden price movements. They can make a long hedge to lock in a purchase price that they will need in the future for a commodity. We can set apart futures from options because the holder needs to buy or sell the underlying asset no matter what.

Should I go long?

Going long means you can lock in a price, avoid losses, and have an idea about the previous market performance. However, you should also consider that going long also means that you should face sudden price changes and short-term moves. Long positions can also expire even before getting profits.

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