Net Long: What it is, How it Works, Example

What Is Net Long?

Net long refers to a condition in which an investor has more long positions than short positions in a given asset, market, portfolio, or trading strategy. This can be contrasted with net short, where comparably more short positions are held than longs.

Net long is a term used broadly across the investment industry. It can be a calculation of a single position or it can refer to an entire portfolio comprehensively. It may also generally refer to a market view.

Understanding Net Long

Investors and market traders can take either a long or short position on an investment. Long positions are typically taken by bullish investors and short positions are associated with bearish investors.

Speculators often view market traders’ positioning in an asset as a signal of the market’s expectation for the asset’s future price. For example, crude oil and euro versus dollar contracts are two assets highly followed in the investment markets. Both saw significant net long positions in the second half of 2017 as bullish bets were more favorable than short positions, signaling an uptrend for the assets overall.

Investors take a net long position when they buy and hold securities for the long term. A net long position can also occur from multiple investments.

Mutual funds often have the option to take both long and short positions to achieve the targeted objective of the portfolio. The net long position would typically be calculated by subtracting the market value of short positions from the market value of long positions. In a net long portfolio, the market value of long positions is greater than short positions.

Example of Net Long

Assume that an investor owns 100 shares of XYZ stock, which by itself is a long position. At the same time, worried about a downside move, the investor also purchases a protective put with a delta of 20 (representing 100 shares of XYZ stock).

The puts by themselves would be a short position. Since the shares have a delta of 100 and the puts a delta of 20, the net position is 100 - 20 = +80, so it remains a net long position.

Special Considerations

Individually, retail investors are not typically known for taking deep short positions, making the net long portfolio a common and usually expected investing situation for individuals. In larger portfolios such as institutional and high net worth accounts, short positions may be more common.

Some portfolio investment strategies may focus entirely on short positions for achieving the investment objective. An example is the ProShares UltraPro Short S&P 500 ETF (SPXU). The majority of this exchange-traded fund's (ETF) portfolio is comprised of short positions on the S&P 500 Index, resulting in a net short position.