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What is a short position in options trading?

What is a short position in options trading?

Taking a short position is selling a security that you don’t own because you anticipate that its value is set to fall. In simple terms, an investor that takes a short position is betting against it.

“Shorting” is the opposite of being “long” in a security, where being “long” means to actually own it and to wait for it to appreciate. When you contact your broker or custodian to take a short position on a security, you essentially sell shares you don’t own, and then after a period, you have to return those shares to the custodian.

Your hope is that when that time comes, the security will be trading at a lower price, meaning you can use the proceeds of your short sale to repurchase the shares and then keep whatever is left over as profit. In a security that you short goes up in price, it means you have to come up with your own cash to repurchase the shares, which is called “covering the short.”

Short selling can be used for equities, all combinations of options, and so on. You can “cover” your short position by borrowing the security from your broker (e.g. on margin).

Keywords: hedging, margin, shorting, long and short positions, options,