A tradable financial asset
Examples:
Positions
Long
held by the holder (=buyer) of an option.
If you are long on a stock, you have an optimistic view on the underlying
You believe the stock will appreciate in value, optimistic about it, so you want to own it to sell later, or have the right to buy at a later date for a strike price you believe will be under the price at that time.
Lending (depositing) money to the bank BUYING a bond form the bank (Long)
Short
The writer (seller) of an option holds the short position.
“Short sell it” = “Bet against it”
Payout:
When a rational agent shorts a stock, he hopes to sell high first and then buy low, ie .
- If the stock drops to zero, your profit is 100% of the selling price.
- However, if the stock rises indefinitely, your potential loss is unbounded.
Technicalities
Shorting a stock requires upfront capital—you can’t simply promise to return it later and take the money out of thin air.
- You borrow the shares of a stock today from someone who owns it, a financial intermediary/broker lets you do this without even notifying the true owner.
- You sell the stock at todays price:
- At maturity, you must buy the stock to repay it to the owner at current price: .