Though having a long or short position on a stock, option, or exchange-traded fund (ETF) may sound like it has to do with how long an investor has held the shares, in fact it has nothing to do with time and everything to do with whether they own or owe.
Going long is often considered a bullish strategy, while selling short is a bearish strategy. But there are always exceptions to those rules of thumb, and ultimately it can depend on the securities being traded.
Here’s a look at short positions, long positions, and the benefits and drawbacks of each.
What Is a Short Position?
An investor in a short position benefits from a decline in the price of an asset. When you go short, your goal is to sell high then buy back low. Executing a short stock strategy is more complicated than putting on a long trade.
Short Selling a Stock
Short selling a stock is done by borrowing shares from your stock broker, then selling them in the open market. In doing this, you owe interest on the amount borrowed and face potentially unlimited losses since the stock price could hypothetically rise to infinity. You also must continue to meet margin requirements when keeping short trades active.
You must close your short position in the future by repurchasing them in the market (hopefully at a lower price than that at which you sold them) and then return the shares to the broker. A short squeeze is a danger short sellers face since intense short-covering leads to a rapidly appreciating share price.
Short Selling Options
Short and long positions also exist in the world of options trading. You can sell short options by writing contracts. An options seller simply enters a sell-to-open order to initiate a short sale.
The goal is the same as when selling shares short — you want to see the option price drop. That could be a bearish or bullish strategy depending on the options used. Whether you short call vs. put options makes a difference: If you short call options, you are bearish on the underlying security. Shorting puts is considered a bullish strategy.
With options, you can short implied volatility and benefit from the passage of time. These are plays on the options Greeks: vega and theta. Entering a short position on calls and puts is done in the hope of seeing the option premium decline in value — that can come from changes in the underlying asset’s price, but it can also come from a decline in implied volatility and as expiration approaches.
Short Selling ETFs
You can also sell shares of an exchange-traded fund (ETF) short. This play works much like shorting shares of stock in that you are borrowing from your broker, selling shares in the market, then buying them back. But the process of selling an ETF short can also be like selling options in that it may be either a bullish or bearish strategy. If you short an inverse ETF, for example, that would be a bullish strategy.
What Is a Long Position?
A long position vs. short position is simple to grasp. When you go long an asset, you are bullish on its price. Your potential downside is limited to the purchase price and your upside is unlimited. That is a key difference in a long vs. short position, since short positions can feature an unlimited risk of loss with a capped upside potential.
Long Positions and Stocks
To take a long position on shares, you must execute a buy order on a stock in hopes of profiting as the stock price rises. This is basically the way a typical stock purchase works.
Long Position and Options
In options trading, going long means entering a buy-to-open order on either calls or puts. A long options position can be bullish or bearish depending on the type of option traded. For example, in a long call position, you hope that the underlying asset price will appreciate so that your call value increases. In a long put position, you want to see the underlying asset price drop since a put offers the holder the right but not the obligation to sell a security at a prespecified price within a specified time frame.
With options, you can also take a long position on volatility, meaning you hope a stock price becomes more erratic, thus making the options more valuable. A long straddle strategy is one of several strategies for options trading that bets on higher volatility.
Long Position and ETFs
With ETFs, you can go long with a leveraged fund that offers multiples of market exposure. You can also enter a long position on an inverse ETF, which is a bearish play since the fund price rises when the market falls. Be careful, though, market mechanics can make taking a long position with these specialty ETFs for an extended period risky.
Comparing Long Positions vs Short Positions
There are both similarities and differences in a long position vs. short.
Both exposures require a market outlook or a prediction of where a single asset price will go. If you are bullish, you would go long a stock or buy call options. If you are bearish, you look to short shares or sell call options. Buying put options in which you take a long position is a bearish strategy, as is taking a short position on call options.
A short vs. long position has several differences, and the ease at which you execute the trade is among them. For example, typically when taking a long position you’ll be required to pay interest to a broker. Additionally, long positions have unlimited gains and capped losses, whereas short positions have unlimited losses and capped gains.
|Similarities in a Long Position vs. Short Position||Differences in a Long Position vs. Short Position|
|You can go long or short an underlying stock via calls and puts||Taking a long position on shares is bullish while going short is bearish|
|Both long and short positions offer exposure to the market or individual assets||Short positions can have potential losses that are unlimited with capped upside — that is the opposite of some long positions|
|You can take a long or short position with shares of an ETF||A long position does not require paying interest to a broker but a short position often does|
Pros and Cons of Short Positions
When considering a short position, it can be helpful to look at both the pros and cons.
|Pros of Short Positions||Cons of Short Positions|
|You benefit when the share price drops||You owe interest on the amount borrowed|
|You can short shares and options||There’s unlimited risk in selling shares short|
|Shorting can be a bearish or bullish play||There are limited gains since the stock can only drop to zero|
Pros and Cons of Long Positions
Likewise, when considering a short position, assessing the benefits and drawbacks can be helpful.
|Pros of Long Positions||Cons of Long Positions|
|You own shares and benefit when the stock rises and can profit from puts when the underlying asset drops in value||You face losses on a long stock position and on call options when the share price drops|
|You can take a long position on calls or puts||Taking a long position on inverse ETFs for a long period is risky|
|There’s unlimited potential upside with calls and shares of stock||A long options position is hurt from time decay|
Stock traders either go long or short when it comes to securities. Buying shares and selling short are two ways to profit from changes in an asset’s price. By going long, you purchase a security with the goal of seeing it rise in value. Selling short is a bearish strategy in which you borrow an asset, sell it out to other traders, then buy it back — hopefully at a lower price — so you can return it profitably to the broker.
If you’re ready to enter the options market, you might consider SoFi’s options trading platform. This intuitive and approachable platform lets you trade options from the web platform or mobile app. There’s also a stacked library of educational resources about options, so you can answer any questions that may arise.
Are short positions riskier than long positions?
Yes, short positions can be riskier than long positions. That goes for selling shares of a stock short and when you write options. Speculators often face more risk with their short positions while hedgers might have another position that offsets losses from the short sale.
What makes short positions risky?
You face unlimited potential losses when you are in a short position with stocks and call options. Selling shares short involves borrowing stock, selling it out to the market, then buying it back. There’s a chance that the price at which you buy it back will be much higher than what you initially sold it at.
How long can you hold a short position?
You can hold a short position indefinitely. The major variable to consider is how long the broker allows you to short the stock. The broker must be able to lend shares in order for you to short a stock. There are times when shares cannot be borrowed and when borrowing interest rates turn very high. As the trader, you must also continue to meet margin requirements when selling short.
Photo credit: iStock/Charday Penn
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