Short (or Short Position)

See: Shorting a Put.

The act of betting that a stock will trade at a lower price in the future than the price at which it's currently trading. The process of shorting a stock requires that the shorter borrows shares from the brokerage, paying an interest cost on “the borrow,” with all kinds of covenants in place, so that if the stock goes up instead of the betted-upon down, then the brokerage, at some point, usually has the right to “cover the short,” or buy those shares in the open market, unwinding the borrow.

You sell a footballer short when you mumble something about them never making it to the NFL. Think about that, all you recruiters who picked Chad Pennington and Marc Bulger ahead of Tom Brady in the draft. Tom made it. He’s done, uh…pretty well. And eventually you had to “buy him long” when it was clear he’d be an icon. You’d have to recognize his real value to the game.

Well, the same gist hits stocks. You sell Facebook short because you think the stock is overpriced. You don't like Zuck’s politics, and the government will regulate the company because of it…or because you just think that kids who “made facebook” have migrated to competitors, or just…like the outdoors.

The process? You call your broker, explain what you want to do. She quotes you the borrow, or price at which she will loan you shares, so that you can then sell them. Like...say it’s 1 percent a month. The borrow is way more expensive than normal margin rates. And then you just go ahead and virtually sell, say, 1,000 shares of Facebook at $400 a share. If the stock goes up 30 bucks, well, guess what...you’re 30 grand in the hole. And that shows up structurally as margin encroachment. Yeah...we like the football terms. And the ticker is “FB,” after all. So if your entire account only has 100 grand in it, you’re kind of getting into the red zone soon with only 20 grand of room between you and that 50 percent margin maximum as it normally applies to retail investors.

On the other hand, if it turns out the Zuck was actually an Al Qaeda rep trying to mess with America via making its politics extreme, and all of this is discovered and he’s indicted, and half the population angrily turns away from Facebook, and the stock drops a hundred bucks…well, then you’ve notionally made a hundred grand. A thousand shares times a hundred bucks.

Why just notionally? Because a) you still have the short position. Yes, you’re in-the-money with it, but you still hold it short...and b) because you’re still paying 1 percent a month interest on the borrow to hold that short.

So how do you remove the “notionally” tag? You buy the shares. That’s called “unwinding the short.” Yep, you just go into the market and buy 1,000 shares at the 300 bucks a share it’s trading at, deliver those shares to the brokerage that loaned them to you, and close out your position to book a tidy hundred grand in profits on your short. And you celebrate...until you stop. Why stop? Because you remember that all gains from the shorting of stock are taxed at the usurious, ordinary income tax rates…meaning you don’t keep anywhere near the 100 grand of gain. If you live in a blue state, you probably keep something closer to half that amount.

And you know the old saying: buy low, sell high? Well, this one is just: sell high, buy low. And that’s the long and the, uh, short of it.