Trading Orders and Strategies

Most retail investors buy stock, hoping its value will increase. An investor who buys 500 shares of SBUX establishes a long position. A long stock position is called a bullish position, meaning the investor expects the market price to rise.

Not many investors know they can also bet against a stock. To profit from a stock losing market value, they establish a short stock position within a margin account.
If the investor believes SBUX will drop, he is bearish on the stock. The broker-dealer borrows 500 shares and sells them in the customer's account. This is known as a short sale or "selling short." These short sales occur only in margin accounts, never in cash accounts.

Within a margin account, the customer entering a short sale makes a cash deposit of 50% of the market value. When he is ready to purchase the stock, and return it to the broker-dealer, his order is entered as a buy-to-cover. If the stock's price has dropped since he sold it short, the investor profits. If not, he loses.

Because a sale order could be a short sale or the liquidation of a long position, sell orders are marked as either "long" or "short."

For options, the buyer of a call is bullish on the underlying security, while the buyer of a put is bearish. The seller of a call is both bearish and neutral on the underlying security, while the seller of a put is both bullish and neutral.

When selling call options, the writer either holds the underlying shares, or he doesn't. If he does, the calls are covered. If not, he is writing naked calls.

Writing naked calls and selling stock short are both bearish positions that present unlimited risk to the investor. Therefore, customers are only allowed to engage in such transactions if the broker-dealer determines they understand and can handle the risk.


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