Position or Long , Short are all basic terms that an investor, a trader needs to understand when participating in any financial market. Although they are not too important and not too difficult to grasp, if you do not understand them correctly and methodically, you will not master the essence of a buying and selling transaction in the market.
All 3 concepts Position or Long , Short always go together and they are related to other basic concepts like Buy, Sell or Order.
If you already understand these concepts thoroughly then you can skip the following article, but if you simply understand them the way you absorb a new definition the old way: it is what, where does it appear in transactions… or if you are a new trader, have never approached those concepts, do not ignore this article.
What is Position?
Position means “position”, the definition that you will come across in many places about this term is “the state of holding and ownership of an investor in one or more securities in the following conditions: certain market conditions, often related to stock price movements”.
This definition is of course not wrong, it is both comprehensive and detailed. It is detailed in that it clearly identifies the concept of Position in the stock market, in general, it defines a certain condition of the market (how a condition is, related to other factors). any…?).
Because of the above definition, many people mistakenly believe that the term Position is only applied on the stock market and because it does not analyze further certain conditions of the market, the term cannot be understood. to the destination.
Position is understood as the position or status of holding, owning, using a certain type of asset of the parties to a financial contract and their interests related to the price movement of that asset class. on the market.
- Certain assets : if it is the stock market, it will be stocks, bonds, derivatives…, if it is the forex market, it will be currency pairs, indices, commodities, stocks… The cryptocurrency market will be coins / tokens, if it is the real estate market, it will be houses, land …
- Status of holding, owning, using : if it is the stock market, it will be held or owned, if it is the forex market, it will be “not really owned”, if it is the real estate market for lease will mean holding, owning, using (depending on the interests of each party).
- The parties involved : understood as the buyer, the seller.
- Financial contract : on the stock market or forex, when you place an order to buy or sell an asset, you are entering into a financial contract, this contract is standardized according to regulations and has factors such as asset price, date of purchase and sale, quantity of purchase and sale, etc.
- Price volatility: the law of finding profit on financial markets depends on the price movement (increase or decrease) of the asset in the market.
Examples of Positions on financial markets:
- Stock market
On the stock market or forex, the way for you to buy and sell assets is to place orders or Orders. There are 2 orders to Buy (Buy) or Sell (Sell).
When you place an order to Buy 1000 shares of ABC at the price of 123,000 VND, then your position is the position of the buyer or the buy position. When the order is filled or activated, it means that you have officially entered into a contract to buy and sell shares with the seller (person in a short position) who is a certain investor in the market, this person has agreed. sell those 1000 shares of ABC to you at your asking price.
Once the transaction is completed, the stock from the seller will be transferred to your account and your funds will be transferred back to the seller’s account. This means you officially become the new owner of 1000 shares of ABC and you are actually holding it in your account.
- In the forex market
When you place an order to Buy 1 lot of the XAU/USD (Gold) pair at the rate of 1880.34, your position is a buy position. When the order is filled, you have officially entered into a contract for difference (CFD) with a counter-sell position as a certain investor in the market. But the difference of forex compared to stocks is the relativity of the concepts of buying and selling. When placing a Buy XAU/USD order, it means that you are buying gold in USD, the person with the short position agrees to sell it to you, but here, the seller does not actually own the gold to transfer to the buyer’s account. 2 people are betting on the price movement of gold. You are predicting the price of gold will increase while the person in a short position is predicting the opposite, if anyone guesses correctly the money will be transferred from the loser’s account to the winner’s account.
What is Long, Short?
What is Long Position?
Long or Long Position is a long position. In a financial contract, you are the buyer, but because the concept of buying is different in different markets (as analyzed in the examples above), people rely on investor motivation to define this concept.
A long position is a market participant’s position in the expectation that the price of an asset will increase.
The person in a long position thinks that the price of the stock will increase in the future, so he decides to buy the stock now at a low price, then sell it at a higher price as expected. The price difference between buying and selling (excluding transaction costs) is their profit.
Or in the forex market, people who open a long position expect the price of a currency to increase in the future, they place a buy order (open an order) on the market as a bet for their prediction. When the price actually goes up, they close the order, which means they are selling the currency at a higher price to take profit, but there is no real buying and selling like the stock market.
What is Short Position?
Short or Short Position is a position of a market participant in the expectation that the price of an asset will fall.
Short position in the stock market is a person who actually owns shares in the account, but they think that the price of this stock will decrease in the future. account balance goes down, so they decide to sell the stock. If then the stock price drops as expected, they will buy back those shares, at this time, they also own the same amount of shares as the original, but their account has an excess of cash, which is the difference. Between the stock price when sold before and bought back later, Short Position has brought them a profit.
Relationship between Long Position and Short Position
Two opposing positions in a financial contract.
In the stock market, when person A places a Buy order, a trading contract is opened, A is now in a Long position, when the order is filled, the counterpart is B in a Short position. When the price increases as expected of A, to lock in profit, A sells the stock by placing a Sell order, A now becomes a Short Position, for A may still be B but may also be an investor. other private.
In the forex market, when A wants to take profits, A has to close the order. A’s closing action is the same as opening a Sell order, ie selling but the counterpart is still B.
Long Position and Short Position for options contract
When investors use options contracts to exercise their rights to buy and sell the underlying asset, the concept of meaning of Long Position and Short Position will be different. The profit or loss of using options contracts is also based on the price movement of the underlying asset, but investors’ expectations about their prices on 2 long and short positions are more complex, not simple. Long Position is the expectation that the price will increase and Short Position is the expectation that the price will decrease again.
When you Buy Call Option (call option) or Put Option (sell option), you are in a Long Position position. But the price expectation of the underlying asset when deciding to hold Call Option and Put Option is different. A Call Option Long position is the expectation that the underlying asset price will increase because you will have the right to buy the underlying asset from the holder of the Short position at a predetermined price, but the Long position of the Put Option is currently in progress. expect the price of the underlying asset to fall because you have the right to sell the asset to a short holder at a predetermined price.
Conversely, when Sell Call Option or Put Option, you are in a Short Position. The Call Option Short position is expecting the underlying asset price to fall because they are obligated to sell the asset to the long holder at a predetermined price, but the Put Option Short position is expecting the price of the underlying asset increases because they are obligated to buy back the underlying asset from the holder of the long position at a predetermined price.
Strategies using Long and Short Positions at the same time
In financial markets, investors and traders often use both long positions and short positions simultaneously to achieve different purposes such as hedging, speculating on price differences, increasing profits…. And the most common purpose is risk prevention. Speculating on arbitrage or increasing profits requires a lot of trading techniques and a high level of understanding of the market.
In the forex market, the main purpose for traders to simultaneously open 2 buy and sell positions on the same asset is to hedge risk, that is, to place Buy and Sell orders on the same currency pair. Once the price has moved in a clear direction, they will close an order and keep one.
Most forex brokers today allow traders to hedging on MT4 or MT5 platforms.
In the stock market, this combination has many different purposes, in which, hedging and arbitrage are the two most commonly performed purposes by investors. Combining two long and short positions at the same time is much more complicated, and the most used tool by investors is the option contract.
Long Position on the stock is hedged by Short Position on Call Option
This is one of the popular hedging strategies of professional investors. While this strategy won’t eliminate risk entirely, it will lessen the loss of holding stocks during a bear market.
The strategy is implemented as follows: buy stock and sell stock call options, with the number of options sold must be equal to the number of shares purchased.
Call:
- S 0 : is the stock price purchased
- X: Call Option strike price
- S T : stock price at expiration
- c: option premium
Profit from holding Long Position on stock: P = S T – S 0
Profit from holding Short Position on Call Option: P = Max (c, S T – X)
At Call Option expiration, if:
The stock price at expiration is lower than the exercise price (S T <= X), the holder of a Long Position position or an option buyer will not exercise the right, at this time, you will have a profit from selling. Call Option, is the option fee. Total profit from both Long and Short positions: P = S T – S 0 + c.
- If the stock’s price at expiration is greater than the purchase price (S T > S 0 ), the profit will increase for each unit that S T > S 0 .
- If S T < S 0 , then the Long Position on the stock is at a loss, but the profit from the Short position on the Call Option (c) will partially offset that loss.
The stock price is higher than the strike price (S T > X), you will have to sell the stock as committed in the contract, at this time, the Long position on the stock will definitely make a profit, but this profit will be lost. decrease because of the loss from a Short position on Call Option. The yield will not be affected by the stock price at maturity. P = S T – S 0 – (S T – X) + c = X – S 0 + c
The chart illustrates the profits for this strategy:
Long Position combined with Short Position on Call Option
This is an arbitrage strategy using options contracts.
This strategy is divided into 2 types: arbitrage up and arbitrage down.
The bull arbitrage strategy is implemented when the speculator expects the price to rise moderately in the future: open a Long Position on Call Option 1 (buy Call Option 1), and open a Short Position on it at the same time. Call Option 2 (sell Call Option 2). These 2 Call Option have the same underlying asset, the same expiration date, but the strike price of Call Option 2 is higher than the strike price of Call Option 1.
With this strategy, the speculator will only spend a small amount of initial capital (c1 – c2). If the price rises as expected, the speculator will make a profit, otherwise, the loss is the original capital.
A bearish arbitrage strategy , implemented when the speculator expects the price to drop moderately in the future: open a Long Position on Call Option 1, and simultaneously open a Short Position on Call Option 2 with Same underlying asset, same expiration date but Call Option 2 strike price is lower than Call Option 1 strike price.
Speculators will get a profit from the very beginning, which is (c2 – c1). If the price falls as expected, the speculator will get the main profit equal to that initial profit, otherwise a limited loss.
Both of these strategies, the speculator will not need to actually own the shares in the account and still be able to make a profit from some of the initial capital if the market trend is correctly predicted.
Conclusion
If you don’t delve into it, you will see that the concepts of Position or Long, Short are very simple, but it is not easy to understand the essence and meaning of it. Having mastered the essence, you will be able to understand and apply them on any type of market, on any asset class. This makes your investment and business activities more efficient.
Not only Position or Long, Short but all other terms on the stock and forex markets, you need to learn deeply to see them most accurately, yes. You will discover many interesting things from these seemingly simple things.
GOOD LUCK.
