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Short position

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Definition of Short position

Short Position Image 1

Short position

Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed,
before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought to close out the
transaction. This technique is used when an investor believes the stock price will go down.


short position

The sale of an investment, particularly by someone who does not yet own it.



Related Terms:

Short sale, short position

The sale of a security or financial instrument not
owned, in anticipation of a price decline and making a profit by purchasing the
instrument later at a lower price, and then delivering the instrument to
complete the sale. See Long position.


Buy in

To cover, offset or close out a short position. Related: evening up, liquidation.


Clear a position

To eliminate a long or short position, leaving no ownership or obligation.


Closing purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in
a stock, or in a given series of options.



Cover

The purchase of a contract to offset a previously established short position.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Short Position Image 2

Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.


Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related:
buy in, evening up, offsetliquidity.


Long position

An options position where a person has executed one or more option trades where the net
result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the
number of contracts sold).
Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "Long the stock."
Related: short position


Offset

Elimination of a long or short position by making an opposite transaction. Related: liquidation.


Open position

A net long or short position whose value will change with a change in prices.


Opening sale

A transaction in which the seller's intention is to create or increase a short position in a given
series of options.


Position

A market commitment; the number of contracts bought or sold for which no offsetting transaction
has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity
is said to have a short position . Related: open contracts


Round-turn

Procedure by which the Long or short position of an individual is offset by an opposite
transaction or by accepting or making delivery of the actual financial instrument or physical commodity.


Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.


Composition

Voluntary arrangement to restructure a firm's debt, under which payment is reduced.


Deemed Disposition

Under certain circumstances, taxation rules assume that a transfer of property has occurred, even though there has not been an actual purchase or sale. This could happen upon death or transfer of ownership.



Fallacy of Composition

The incorrect conclusion that something that is true for an individual is necessarily true for the economy as a whole.


Financial Position

Status of a firm's assets, liabilities, and equity accounts as of a certain time, as shown in its financial statement.


Limitation on asset dispositions

A bond covenant that restricts in some way a firm's ability to sell major assets.


Long position

Outright ownership of a security or financial instrument. The
owner expects the price to rise in order to make a profit on some future sale.


long position

Purchase of an investment.


MM dividend-irrelevance proposition

Theory that under ideal conditions, the value of the firm is unaffected by dividend policy.


MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.


MM's proposition II

The required rate of return on equity increases as the firm’s debt-equity ratio increases.


Modigliani and Miller Proposition I

A proposition by Modigliani and Miller which states that a firm cannot
change the total value of its outstanding securities by changing its capital structure proportions. Also called
the irrelevance proposition.


Modigliani and Miller Proposition II

A proposition by Modigliani and Miller which states that the cost of
equity is a linear function of the firm's debt-equity-ratio.



Policy-Ineffectiveness Proposition

Theory that anticipated policy has no effect on output.


Position diagram

Diagram showing the possible payoffs from a derivative investment.


Selling short

If an investor thinks the price of a stock is going down, the investor could borrow the stock from
a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you
borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares
of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.


Short

One who has sold a contract to establish a market position and who has not yet closed out this position
through an offsetting purchase; the opposite of a long position. Related: Long.


Short bonds

Bonds with short current maturities.


Short book

See: unmatched book.


Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.


Short interest

This is the total number of shares of a security that investors have borrowed, then sold in the
hope that the security will fall in value. An investor then buys back the shares and pockets the difference as profit.


Short rate

The annualized one-period interest rate.


Short-run operating activities

Events and decisions concerning the short-term finance of a firm, such as
how much inventory to order and whether to offer cash terms or credit terms to customers.


Short sale

Selling a security that the seller does not own but is committed to repurchasing eventually. It is
used to capitalize on an expected decline in the security's price.


Short selling

Establishing a market position by selling a security one does not own in anticipation of the price
of that security falling.


Short squeeze

A situation in which a lack of supply tends to force prices upward.


Short straddle

A straddle in which one put and one call are sold.


Short-term financial plan

A financial plan that covers the coming fiscal year.


Short-term investment services

Services that assist firms in making short-term investments.


Short-term solvency ratios

Ratios used to judge the adequacy of liquid assets for meeting short-term
obligations as they come due, including
1) the current ratio,
2) the acid-test ratio,
3) the inventory turnover ratio, and
4) the accounts receivable turnover ratio.


Short-term tax exempts

short-term securities issued by states, municipalities, local housing agencies, and
urban renewal agencies.


Shortage cost

Costs that fall with increases in the level of investment in current assets.


shortage costs

Costs incurred from shortages in current assets.


Shortfall risk

The risk of falling short of any investment target.


Take a position

To buy or sell short; that is, to have some amount that is owned or owed on an asset or
derivative security.


Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.


Covered Put

A put option position in which the option writer also is short the corresponding stock or has
deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the
option writer's risk because money or stock is already set aside. In the event that the holder of the put option
decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put
option.


Delivery notice

The written notice given by the seller of his intention to make delivery against an open, short
futures position on a particular date. Related: notice day


Flat price risk

Taking a position either long or short that does not involve spreading.


Long

One who has bought a contract(s) to establish a market position and who has not yet closed out this
position through an offsetting sale; the opposite of short.


Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.


Performance attribution analysis

The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?


Switching

Liquidating an existing position and simultaneously reinstating a position in another futures
contract of the same type. Symmetric cash matching An extension of cash flow matching that allows for the
short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the
cost of funding liabilities.


Technical condition of a market

Demand and supply factors affecting price, in particular the net position,
either long or short, of the dealer community.


Uncovered call

A short call option position in which the writer does not own shares of underlying stock
represented by his option contracts. Also called a "naked" call, it is much riskier for the writer than a covered
call, where the writer owns the underlying stock. If the buyer of a call exercises the option to call, the writer
would be forced to buy the stock at market price.


Uncovered put

A short put option position in which the writer does not have a corresponding short stock
position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the
put. Also called "naked" puts, the writer has pledged to buy the stock at a certain price if the buyer of the
options chooses to exercise it. The nature of uncovered options means the writer's risk is unlimited.



 

 

 

 

 

 

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