What is a Short Option Position?
by Michael Shulman 09/09/08
A short position is an investment that generates a profit if the market, a market segment or a company's stock goes down. There are many ways to "go short:"
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Shorting a Stock
On Wall Street, the expression "short" has historically meant shorting the stock. This happens as follows: You learn that the ChangeWave Alliance has survey results showing that Dell (DELL) will soon lose market share to Hewlett-Packard (HPQ).
Suppose Dell is selling at $40. You call your broker and "borrow" 500 shares of Dell and immediately sell them. Yes, sell them. The money from the sale is placed in a margin account by your broker.
Seven weeks later, the company announces it is losing market share and the price of the stock goes to $30. You buy 500 shares at that lower price, re-pay your broker, and keep the $10 difference between the price of the stock when you borrowed it and the price of the stock when you re-paid the loan.
You have a 25% profit in seven weeks, minus interest costs on the loan of borrowed stock.
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