“Shorts” is a broad term that’s frequently used in all types of trading, but the meanings may change depending on the context. However, there are a few examples where the meaning remains the same, irrespective of the trade. Let’s go through some of the most important examples next.
A typical and frequently used term in options is short put. To explain it, we need to understand what put options are to begin with. In direct contrast to call options, put options are tradeable options where the buyers are expected to sell pre-decided quantities of prespecified assets that are connected to the options contract. They are, however, obligated to do so within the prespecified expiry date.
The key term to note here is that the buyers are expected to, rather than being obligated, to maintain those conditions. Whenever put options are sold, it’s called a short put and that’s pretty much what it means. In that respect, a short put position is where the buyer now holds the right to sell back the prespecified portions of the concerned option short, at a predetermined strike price before the contract expires.
Short selling is a strategic move where the options trader will sell certain assets before buying them, with both the intention and expectation of being able to buy them later at a much lower price. It’s an indication of the fact that the trader expects (or even initiates) the price of the presold assets to go down soon.
The seller’s current status in respect to that trade is short as they are technically in debt. They will remain in debt or short, until the time they are able to fulfill their obligation to buy those assets back. Therefore, the position they are in is called being in a short position. The chance of a short strategy succeeding is highly reliant on the seller’s ability to accurately calculate and predict market trends.
Without the help of a professional, short options is a risky strategy. Besides there are plenty of other option selling techniques that you can learn to balance out those risks. Just give yourself the time you need to learn more about your options in trading strategies, before committing to anything right away.
There are two short options, namely the naked short and the covered short. When traders manage to sell securities or stocks with the intention to short it without ever actually buying/borrowing them previously, it’s called a naked short. Despite certain loopholes, naked short techniques are mostly illegal in most financial markets across the world.
A covered short position is a short with a few added stipulations. In order to create a covered short position, the trader must borrow the security from an established investment bank or any other applicable financial institution. They must pay the lender a fee to cover the short for as long as the position is active. Also, note that covered short positions are frequently utilized across most markets, including stocks, forex, options, and more.
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