Short Position vs Long Position: What’s the Difference?
Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
When you own shares of a security, that’s a long position. When you borrow shares in order to sell them, that’s a short position (since you’re literally “short” of the shares).
Going long is considered a bullish strategy, whereas selling short is a bearish strategy because you’re banking on the share price declining. But there are exceptions to these conventions, and ultimately your strategy can depend on the securities being traded.
Key Points
• Long positions in stocks involve buying shares with the expectation of potential price increases, that may come with unlimited upside and limited downside risk.
• Short positions in stocks involve borrowing shares to sell, hoping for price drops, with unlimited risk and interest costs.
• Long options positions can be bullish or bearish, influenced by time decay and volatility.
• Short options positions involve selling contracts, aiming for price drops, with strategies based on market projections.
• Long positions are typically used when bullish, while short positions are typically used for bearish outlooks or hedging.
Long vs. Short Position in Stocks
An investor in a short position aims to benefit from a decline in the price of the asset. When you go short, your goal is to borrow shares at one price, sell them on the open market and then — assuming the price drops — return them to the broker at a lower price so you can keep the profit. Executing a short stock strategy is more complicated than putting on a long trade, and is for experienced traders.
When you go long on an asset, you are bullish on its price. Your potential downside is limited to the total purchase price, and your upside is unlimited. That’s a key difference in a long vs short position, since short positions can feature an unlimited risk of loss (if the price rises instead of dropping), with a capped upside potential (because the price can only drop to zero).
Long Positions and Stocks
To take a long position on shares, you execute a buy order through your brokerage account. This involves purchasing the stock with the expectation that its price will increase over time, allowing you to sell it later at a profit. In essence, a long position represents traditional stock ownership — buying low and selling high.
Short Selling a Stock
Short selling a stock is done by borrowing shares from your stock broker, typically using a margin account, then selling them on the open market. This is known as “sell to open” because you’re opening a short position by selling the shares first.
By using a margin account (a.k.a. leverage), you would owe interest on the amount borrowed, and you face potentially unlimited losses since the stock price could hypothetically rise to infinity. Investors must meet specific criteria in order to trade using margin, given its potential for significant losses as well as gains.
You must close your short position in the future by repurchasing the shares in the market (hopefully at a lower price than that at which you sold them), and then return the shares to the broker, keeping the profit. Remember: you’re paying interest on the money borrowed to open the position, which may influence when you decide to close.
A short squeeze is a danger short sellers face since intense short-covering — a rush to buy stock to cover short positions — leads to a rapidly appreciating share price (when traders rush to buy back stock, causing prices to increase quickly). It can also create opportunities for market participants who anticipate the squeeze, however.
💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
Long vs. Short Position in Options
Long and short positions also exist in the world of options trading.
Long Position in 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. The maximum potential gain for buying a long call is unlimited, while the maximum loss is limited to the premium paid.
• In a long put position, you want to see the underlying asset price drop below the strike price, since buying a put offers the holder the right, but not the obligation, to sell a security at a specified price within a specified time frame. The maximum potential gain for buying a long put is the difference between the strike price and the asset price, minus the premium paid, while the maximum loss is the premium paid.
Investors may employ options strategies designed to seek returns from volatility, though these also tend to be higher risk. These strategies for options trading rely on the expectation that a stock price may become more erratic, thus making the options potentially more valuable.
A long straddle strategy, for example, is one of several strategies that bets on higher volatility by taking bullish and bearish positions of different financial values, anticipating upside or downside while still hedging against one or the other. These strategies may under perform if volatility decreases or remains stable. In that case, the maximum potential loss is limited to the total premiums paid for both options.
Short Selling Options
You can sell short options by writing (a.k.a. selling) contracts. The goal is the same as when selling shares short: you are expecting the option price to drop. Unlike shorting shares, which always reflects a bearish expectation, shorting options can involve either a bearish or bullish outlook, depending on whether you short calls or puts. An options seller enters a sell-to-open order to initiate a short sale.
You can take 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. 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.These are plays on two of the options Greeks: vega and theta.
Examples of Long Positions
Long positions come in different forms: going long on a stock – where you purchase shares outright, and going long on calls and puts – where you anticipate fluctuation on the price an investor pays to purchase the stock.
Going Long on a Stock
When you go long on shares of stock, you actually own shares in the company. Typically, you would go long on shares if you believe the price will rise, and would look to eventually sell them to potentially realize a gain. Here, you have unlimited upside potential (if the price continues to rise), and the downside is limited to what you paid for the shares ($1,000).
Going long on options, however, works a bit differently.
Going Long on Calls and Puts
Consider this example of going long on a call option. Say, for example, that you believe stock XYZ is poised to increase in value. You can purchase a call option on XYZ with an expiration date of three months, and wait to see if the stock increases within the contract window. If it does, you can exercise the option and purchase the stock at the agreed-upon strike price, with the likelihood of making a profit. If the price doesn’t move or declines, your option expires worthless, and you would lose the premium per share that you paid for the option.
Let’s say on the other hand that you believe stock XYZ’s will decline in a few months. You may then wish to go long on a put option. You would buy a put option for XYZ with an expiration date of three months. If the stock price falls below the strike price before the expiration date, you can exercise the option to sell the stock at its lower price, likely generating a profit (minus the premium). If you believe the stock price will stay flat or rise, your option would expire and be rendered useless – and you would only be out the premium you paid.
Examples of Short Positions
Like long positions, short positions come in various forms as well. Shorting a stock is when you borrow shares in order to sell them and (hopefully) repurchase them at a lower price, while shorting an option is when you sell an option contract with the expectation that the underlying stock will rise to a certain price.
Shorting a Stock
If you wanted to short shares of XYZ, currently selling at $10 per share, this is a bearish strategy as you’re essentially betting on a price decline.
Let’s say you want to short stock XYZ. You would borrow shares from a stock broker and sell them on the open market. If the price falls, you buy back the shares at a lower price and return them to the broker, thus pocketing the difference as profit. Bear in mind that if the stock price rises, instead of falling, your losses are theoretically unlimited. This makes shorting stocks potentially riskier.
Going Short on an Option
If you think that stock XYZ is overvalued, and that its price will remain flat or decline, you might sell a call option with an expiration date of three months. Should the stock price stay below the strike price by the contract’s expiration, the option will expire worthless, and you’ll keep the premium paid by the buyer. If the stock price rises above the strike price, however, the buyer may exercise their right to purchase the stock at the strike price. This would leave you responsible for delivering the shares, which could result in losses.
If you believe stock XYZ is undervalued and its price will rise, you might sell a put option with the same three-month expiration. Should the stock price stay above the strike price, the option will expire worthless and you keep the premium. But if the price falls below the strike price, the buyer may exercise their right to sell the stock to you, and you’d be obligated to buy it, potentially incurring losses if the market price of the stock drops.
Comparing Long Positions vs Short Positions
Although long and short positions have different aims, these strategies do share some similarities.
Similarities
Both exposures require a market outlook or a prediction of which direction a single asset price will go.
If you’re bullish on a stock, you could consider going long by buying shares directly or buying call options. Both may profit from a rising stock price. Alternatively, if you’re bearish, you may opt to short the stock or sell call options. Both depend on a view of a share, or of the markets in general.
Differences
Short vs. long positions have several differences, and the ease with which you execute the trade is among them. For example, when taking a short position you’ll typically be required to pay interest to a broker. With a long position, you do not usually pay interest.
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 on 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. |
| Both rely on predicting price movements within a specific timeframe. | Long positions require paying the upfront cost in full; short positions often require having a margin account. |
💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.
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, and a risk of complete loss if the share price continues to rise. |
Pros and Cons of Long Positions
Likewise, when considering a long position, assessing the benefits and drawbacks can be helpful.
| Pros of Long Positions | Cons of Long Positions |
|---|---|
| You can own shares and potentially benefit when the stock rises and may also profit from puts when the underlying asset drops in value. | You face potential 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. | You must fully pay for the asset upfront, or finance through a margin account. |
| There’s unlimited potential upside with calls and shares of stock. | A long options position may be hurt from time decay (loss of value near expiration date). |
The Takeaway
Buying shares and selling short are two different strategies to potentially profit from changes in an asset’s price. By going long, you can 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 to other traders, then buy it back — hopefully at a lower price — so you can return it profitably to the broker.
Shorting options can also be a bullish strategy, depending on whether you’re shorting call or put options. Shorting calls is considered bearish, while shorting puts reflects a more bullish sentiment since you profit if the asset’s price rises or remains stable.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
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 potential 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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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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