How to go Long

What does "going long" mean?

Going "long" means betting that a stock is going up, the simplest form of investing. It's generally what investors do when they "buy" a stock or an asset, or "invest" into the market. However, going long doesn't have to be as simple as buying stocks, although this will be the first way to go long we'll cover.

Ways to go long

Buying stocks

Buying stocks is the simplest and best-known way to go long. An investor opens an account at a bank or brokerage firm, deposits funds, and then buys an asset like a stock. If the stock goes up in value, the investor gains—if the price goes down, the investor loses. Gains are theoretically unlimited if the stock keeps rising. Potential losses are capped at 100% of the investment if the stock goes to zero, e.g., because the company goes bankrupt.

To give a simple example, an investor has an investment amount of $10K. They buy 100 shares for $100 each. If the shares rise by 20% to $120, the investor made $2K profit. If the shares drop 20% to $80, the investor has lost $2K.

Buying with margin

Buying with margin is similar to buying the stock outright, except for the fact that the investor doesn't bring up the full capital amount to buy shares but in effect takes out a loan to lever the investment ("margin loan" or just "margin" for short). Due to the added leverage, the investor participates more if the stock goes up. This benefit doesn't come for free though: First, the investor is required to pay interest. Second, the risk for the investor is now much higher: If the stock goes down and consumes the "equity" portion of the investor, they will receive a margin call by their broker and lose the entire investment.

To expand on the example above, let's say the investor levers up the initial investment 5:1. So instead of buying 100 shares for $100, they are buying 500 shares, effectively taking out a loan of $40K subject to interest (although this part usually isn't as clear in the brokerage account). If the share price goes up 20% to $120, the 500 shares are then worth $60K. The investor's profit before interest and fees is $10K—$20 per share times 500, or also calculated as $60K final amount minus $40K loan amount and $10K initial investment. So the investor managed to double his investment from $10K to $20K with the share price only advancing 20%.

However, there is a catch. If the price dropped instead by 20% from $100 to $80, the loss to the investor would be $20x500=$10,000 which is their entire investment! The broker would issue a margin call, clear out the position, and the investor would have been wiped out or "wrecked" (some say "rekt"). But not only that, there is even the possibility of things being worse: Let's assume there is some catastrophic overnight news about the company and the opening share price in the morning when trading starts is $50. The bank would margin call immediately and liquidate the position at the open. The investor has now lost $50x500 or $25,000 with only $10,000 equity, so the account balance would show -$15,000. Even if the investor is unwilling or unable to pay up, the broker is still able to enforce their claim legally.

While brokers do everything to make sure they never have to run after client's money—in the end, it's neither a nice exercise for the broker or the client—these things have happened time and time again. Most recently when the oil price future went to -$40 in May of 2020. Who would have guessed that to happen?

Going long with ETFs

"ETF" is an acronym for "Exchange Traded Fund". ETFs are mutual funds that are traded on exchanges, so you can buy and sell them exactly like stocks through your broker. ETFs are typically passive funds, meaning that they invest in a certain index (like the S&P 500 or the Nasdaq 100), or a certain theme (airline stocks). Some ETFs add 3x leverage for you out of the box. But beware, the margin section above applies for ETFs as well. There are even funds that let you go short by buying them. Compare How to go short for other ways to go short.

Going long with options

Options describe the right to buy a certain asset (the underlying) by a specific point in time (expiry date) at a predetermined price (the strike price). A right to do something always has a positive value (the option price or premium). Let's go through all components quickly.

First, like ETFs or other investment funds, options can have almost any financial asset as the underlying. A stock, a bond, any index, commodities, currencies, even other derivatives like futures—if the asset exists, somebody probably has created an option for it. The expiry date is fixed for any option and one of the key factors for the option's price. The longer out the expiry date is, the higher the premium. (The rate by which the option loses value per day just because of time decay is called theta.) This makes intuitive sense: If you own the right to buy or sell something within the next year, this right is more valuable then the same right over just one month. The strike price or exercise price denotes the price at which you may buy (calls) or sell (puts) the underlying. Finally, the option premium is the value of the option. Key components are the price difference between the assets current price and the strike price, the time to expiry, and the volatility of the underlying asset.

Buying calls

The simplest way to go long with options is to just buy call options. Let's say your favorite stock trades at $100, and you expect it to go to $120 in one year. For each asset, there is a variety of call and put options with different maturities and strike prices available. Call options where the current stock price is above the option's strike price are called "in-the-money". To continue the example, an in-the-money call option with a strike price of $80 for a stock trading at $100 with an expiration date one year out may trade at $35. It is in-the-money if you exercise the option you would be paid $20 ($100-$80), which is called the intrinsic value. The remaining value of the option is called the time value, namely $35-$20=$15. It usually doesn't make sense to execute the option before expiration, you would rather choose to sell it at market value.

So let's say you are right and the stock goes up to $120 within nine months. Congratulations! Your option is now worth $46, $40 of intrinsic value and $6 of remaining time value until expiration. If you sell your option now, you have made $46/$35-1=31.4% compared to a 20% return of the underlying asset. But beware—if the stock had dropped, in the worst base below the strike price by expiration, your call option would expire worthlessly. And worthless expire they do. In fact, the majority of all options become worthless by the time they expire.

Usually, the biggest gains can be made with out-of-the-money options that get into the money in a short period of time. Nevertheless, these are also the riskiest options, and more often than not you will lose your entire investment into the option by employing this strategy. Timing is crucial with options as you can't wait it out until the situation improves. Buying options is a very risky strategy and should only be used by experienced traders and investors.

Buying call spreads

Another way to go long with call options is to buy call (bull) spreads. A call spread is a combination of two options with different strike prices. The idea is to buy a lower strike call option, and sell a higher price call option. The higher strike option that is sold limits the upside potential, but also lowers the overall purchase price of the option strategy.

Call spreads involve selling of options "to open", or shorting options. This contains a significant risk and should only be considered by experienced investors with a deep understanding of options.

Selling put spreads

Selling put spreads is the reverse strategy to buying call spreads. This is even riskier than call spreads and also requires deep prior knowledge about option strategies.

Selling puts

While selling puts outright is the riskiest strategy of all, it can be quite interesting if done instead of buying a stock. The seller of the put collects the option premium. If the stock is below the strike price at expiry, the seller of the put will get the stock assigned (the holder of the put will assign the stock to the put seller). However, as the seller wanted to buy the stock in the first place, he got it at a discount, namely by collecting the put premium.

Still, it is a highly risky strategy especially at scale and only reserved for experienced investors and option traders.

Going long with CFDs

Buying or going long via CFDs (Contract For Difference) is very similar to buying stocks outright. The difference is how the broker operates. Instead of routing your buy order to an exchange, a CFD broker lets you enter a bet between yourself and the broker. If the price goes up, you make money; if it goes down, you lose.

With CFD brokers you have counterparty risk. If the broker goes out of business or for whatever reason cannot or will not honor your position, you are worse off as your investment is not protected. However, for regulated and profitable CFD brokers with a long history, this risk should be small. As a precaution, it may make sense to trade with multiple CFD brokers.