In finance, a position is the amount of a particular security or commodity held by a party. In terms of options, futures and other derivatives, one can have either a long or short position. A long position is when an investor has bought something in anticipation that they will profit from its future value, while shorting an investment means to benefit from its depreciation. With futures contracts, the contract holder must buy (or sell) at expiry. At the same time, with options, they are obliged not only to deliver or accept but to pay any difference between contracted strike prices if exercisable.
When you buy shares for your portfolio, you make what’s known as a long-term investment because you believe their value will increase over time; this could be true if the company you invested in is flourishing or perhaps their price has just become very low. When you buy shares on margin, i.e., using borrowed money to take advantage of increased value, your investment is short-term because, at some point, you’ll need to repay the loan.
When traders talk about long positions, they mean ‘hold’ rather than ‘buy’. If a trader goes long, he expects the asset’s price to increase, which means its time value (i.e. how much it can change before expiry) decreases; therefore, buyers want as little time remaining until expiry as possible. The opposite is true if one holds a short position; sellers want more time until expiry to make profits due to price changes.
For example, an index futures contract has three months until expiry; therefore, the last month, which experiences the most price fluctuations, is known as month ‘U’ (the average settlement price at expiration of futures contracts is the spot index value at contract maturity) and it’s priced much higher than other months. Therefore, if you hold a short position in this contract, you’ll make more money by selling near month U because the time value is high.
When somebody says they are ‘long gamma,’ they mean the rate their volatility rises or falls with an increase or decrease in underlying stock prices. If somebody holds a long call option, they will benefit from rising volatility because it increases the chances that their option will become valuable. Still, falling volatility would be bad for them because it decreases the chances of their call option becoming valuable. The same applies for somebody holding a long-put option; they would make money when volatility rose but be in trouble if it fell.
Short gamma traders are the opposite; they benefit from an inverted market which means lower volatility is better because that increases the chance that their options will expire worthless, meaning they keep the entire premium paid. This usually makes them sell options near month U with low time left to expiry. At this point, volatility is highest and therefore lowers the chances of their option being exercised.
The definition of ‘long’ is to have something you don’t currently have in your possession while shorting something is to own it, but to avoid any form of confusion in finance ‘, sell ‘ is often used instead of ‘short’.
Investors utilize long and short bets to obtain various outcomes, and frequently both long and short bets are established simultaneously by an investor to leverage or make money on security.
Long call options are bullish because the investor expects the stock price to rise and purchases call with a lower strike price. An investor may use a long-put option strategy to hedge their long stock position by establishing a long put option position, which gives him the right to sell his stock at a specific price. A short call option position is like short selling without the need to borrow the underlying asset.
The trader has the option to receive a premium for selling an option early to use that money to buy the underlying stock at a predetermined, usually higher, price. A put purchase is similar: while waiting for the stock’s value to decline or expire.