Short position
Family VII · Market & styles
Not to be confused with long position, position trading, going short.
Short position is a directional market exposure whose value rises when the price of the underlying asset declines. It is established by borrowing and selling an asset, or by using derivatives such as futures, options, or contracts for difference. The position remains open until it is closed by buying back the asset or offsetting the contract.
Mechanics and profit and loss
A short position is opened by selling an asset that the seller does not own. In a cash equity short sale, the seller borrows shares from a broker and sells them in the market, receiving the sale proceeds. The position is closed by purchasing the same number of shares and returning them to the lender. Profit or loss is the difference between the opening sale price and the closing purchase price, multiplied by the number of shares, less any borrowing fees, commissions, and dividends paid to the lender.
In derivative markets, a short position is created by selling a futures contract, writing an option, or entering a short contract for difference. The profit and loss profile depends on the contract specification, but the directional exposure is the same: gains accrue when the underlying price falls, and losses accrue when it rises.
Worked example
Risks and constraints
The maximum loss on a short position is theoretically unlimited because the asset price can rise without a ceiling. In practice, brokers and regulators impose margin requirements, and a short seller may be forced to close the position if the price rises enough to trigger a margin call. Short selling is also subject to rules that vary by country and market, including uptick rules, borrow availability, and restrictions during periods of market stress. Borrow fees and dividend obligations further reduce returns.
Often confused with
- long position
- A long position profits when the asset price rises, whereas a short position profits when it falls; the visible sign is the direction of the opening trade: buying to open versus selling to open.
- position trading
- Position trading is a holding-period style that can be applied to either long or short exposures, while a short position is a directional exposure; the visible sign is that position trading is defined by the duration of the hold, not by the sign of the exposure.
- going short
- Going short is the act of opening a short position, whereas the short position itself is the resulting exposure; the visible sign is that going short is an action, while a short position is a state that persists until closed.