Understanding What Is Open Position In Trading: Trading is a dynamic and exciting world that attracts individuals from all walks of life with the promise of financial independence and the thrill of the market.
Individuals create a buy or sell position in the security with the expectation of making a profit from changes in the market price. When creating these positions in the market, individuals come across a term known as an “Open Position”.
In this article, we will discuss what is open position in trading and the various types of open positions.
What Is Open Position In Trading?
Open positions in trading refer to the trades that are active and that have not been closed or settled. These positions can refer to different financial instruments including stocks, futures contracts, options, or currencies.
An open position is created when an individual enters a long position or short position in any type of security and is closed when the individuals take a reversal position of the trade.
Let us go through an example that will help us get a better understanding of what is open position in trading. Suppose an individual purchases 500 shares of a certain company and holds it in anticipation of its increase.
This means the individual now has an open position in his/her portfolio. This position will be closed once the individual takes an opposing position in the stock of equal quantity.
Different Types Of Open Positions In Different Segments
Now that we understood what is open position in trading is, let us look now look at the types of open positions created in different segments.
1. In The Cash Market
When an individual chooses to trade on an intraday basis, they can create an open position by going long or short depending on whether they are bullish or bearish on the security.
When individuals decide to go for positional trades, they can only create an open position by going long on the security. Positional trades can only be entered when there is the bullish sentiment on the security, as shorting is not allowed for delivery positions.
2. In The Futures Segment
When it comes to trading in the futures segment, individuals can create an open position by going long when they are bullish and by going short when they are bearish.
3. In The Options Segment
In the Options segment, individuals can have an open position in four types. Individuals can create an open position by buying a call option when they are bullish and by selling call option when they are bearish.
They can also create an open position by buying put option when they are bearish and selling put option when they are bullish.
The Timespan Of An Open Position
Here are the timespans for open positions in the cash and derivates segment:
1. Timespan Of An Open Position In An Equity Or Cash Segment
An open position of an individual in intraday trades can be held only for a single day between 9:15 AM to 3:20 PM after which the position will automatically be closed by the brokers.
An open position of an individual in positional trades can be held for any period of time. It can be closed on any day during market hours as per the preference of the individuals.
2. Square Off Time In Equity Derivative Segment
In the case of the weekly options, the open position can be held until 3:25 PM on Thursday after which the position will be closed automatically.
When a future or options contract is taken up on a monthly expiry, the open positions can be held until the last Thursday of the month after which it will be auto-squared off.
The expiry of the monthly options will be moved to the previous day In case of a holiday on Thursday during the week.
Open Positions And Risk
An open position represents the individual’s exposure to the market. The risk exists for the individuals until the position is closed. Open positions can be held for minutes or years, depending on the individuals’ style and objectives.
The type of risk entailed with an open position depends on the type of trade, holding period, and size of the position.
For instance, intraday trades are exposed to a large amount of volatility due to the leverage taken, option holders are exposed to time decay and positional traders are exposed to unexpected events in the market.
Intraday traders can limit their exposure to risk by placing stop losses, option holders can use various options strategies to mitigate their margin exposure and positional traders can reduce their risks by diversifying their investments.
In this article, we discussed what is open position in trading, open positions in different segments, their time span and its risk.
The first step towards becoming a trader is to understand the dynamics and technicalities of even simple concepts like open position. Mastering the fundamentals of basic concepts can make your progress in advanced techniques and strategies smoother.
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