Opening a short position is when a trader bets against the stock and buys a contract, expecting the price of the asset (crypto or stock) to decrease. Going short might seem counterintuitive, but it’s a trading strategy offering investors opportunities to profit even during bearish periods.
- Going short means buying an asset with borrowed funds and selling at a profit when the price depreciates
- A short position is not the same as a sell, as selling is done to close a position
- “Shorting” “short selling” or ”going short” all mean the same thing
What is a short position
When a short position is opened, a trader sells an asset (crypto or security) that they don’t own. It’s a strategy used by traders to benefit from market downturns and generate profits during both market movements.
Traders take profit from a short position only when the stock is repurchased (or sold to the borrower). This means traders are pocketing the difference between the initial price and the current price.
Short positions require margin accounts, as exchanges or brokers need users to provide a form of warranty (or collateral) to provide capital. In this case, a short is the opposite of a long position, where traders expect the price to decrease rather than increase.
Is short and sell the same?
Shorting is when traders use borrowed funds to enter a trade and expect the stock or crypto to decrease in price. In contrast, a sell occurs when a position is closed. This can be a long or a short position. The result of a sell is closing a position in profit or at a loss.
How a short position works
Borrowing funds to bet on the price of an asset to decrease and then closing the position once the price has increased or decreased is the basic principle of shorting. In contrast to longing, where traders can use borrowed funds or spot (buying, holding, and selling), shorting requires margin accounts.
When a short is opened, a user owes the shares to the broker. If the price falls, a trader can sell the shares back to the broker at the lower price and retain the difference as a profit.
Shorting is time-sensitive, as traders must pay borrowing costs or lose their position if the price exceeds the margin price, even if the price increases instead of decreases.
Examples of a short position in trading
Consider shorting Netflix stock at $400 per share, borrowing 100 shares for a total sale value of $40,000. If the stock drops to $350, you can buy back the shares for $35,000, returning them to your broker and keeping a $5,000 profit (minus fees and borrowing costs).
However, if Netflix rises to $450, you’d face a $5,000 loss when covering your position.
The GameStop short squeeze of early 2021 provides a dramatic example of shorting gone wrong. Hedge funds heavily shorted the stock, but a coordinated buying campaign drove prices from $20 to over $400.
Is a short position bullish or bearish?
Opening a short position occurs in bearish scenarios when indicators, such as Open Interest and volume, signal a downward price trend. Shorting means expecting the price to go down, positioning yourself to profit from downward price movements.
Markets trend upward over long periods, making shorting a strategy best suited for specific situations rather than buy-and-hold approaches. At the same time, going short can occur during long-term bullish scenarios.
What is a short position in crypto
A short position in crypto is the same as opening a short in any market where traders expect the price of Bitcoin or other altcoins to decrease rather than rally. AS we’ve seen, crypto traders use futures contracts to open shorts.
In our experience, crypto’s extreme volatility makes it particularly attractive for short selling. For example, the price of BTC can swing 10-20% in a single day, creating substantial profit opportunities for skilled traders or quantitative trading companies.
Short position vs long position cryptocurrency
A short and a long position are strategies that expect contradicting results. While shorting expects the price of an asset (crypto or stocks) to decrease, a long position expects the market to rally upwards.
The fundamental difference between long and short crypto positions lies in your market outlook and risk profile. Longing can be achieved through spot buying, whereas shorting requires borrowed funds to sell shares and assets to brokers.
Can you hold a short position overnight?
Short positions can be held overnight and even for extended periods, especially if macroeconomic scenarios point to a bearish reversal. Holding a position, however, does incur additional borrowing fees and can result in lower profits if a high-value position is opened.
In crypto markets that never close, overnight positions face continuous price risk. A sudden price spike during off-hours can trigger margin calls or forced liquidations, especially with leveraged positions.
Many crypto exchanges charge funding fees for overnight positions, which can erode profits over time.
What happens when you close a short position
Closing a short position means purchasing the shares from the initial borrower who initially borrowed them. It is also referred to as “covering” as you cover your exposure, which then determines your final profit or loss.
For example, if you shorted Bitcoin at $120,000 and cover at $100,000, you profit $20,000 per coin (minus fees). The $20,000 difference between your selling and buying prices becomes your realized gain.
As we’ve also experienced, if Bitcoin rose to $125,000 when you cover, you’d realize a $5,000 loss per coin. The price increase means you’re paying more to buy back the coins than you received when selling them.
Closing positions also releases margin requirements and stops daily borrowing costs.
Mastering shorting in a volatile market
Shorting the market is one of the two main ways institutional and retail traders profit from price swings. It creates additional avenues to stay involved in the market even when the rally is pointing downwards.
Shorting has a higher risk than longing, and this strategy works best as part of a more diverse approach.
If you don’t want to learn how to read the market and lose capital in borrowing costs or margin calls, Yieldfund, a quantitative trading company, helps users explore the crypto market without having to trade themselves. Yieldfund uses long and short trading strategies to generate up to 60% yearly returns for investors and provide weekly returns.
FAQ
What short position means?
This means traders bought shares from a broker with the expectation that they would decrease, creating an obligation to repurchase them later.
Can you have a long and short position open?
Yes, you can hold both long and short positions simultaneously, either in different assets or in the same asset. Traders also use the hedging strategy to reduce portfolio risks by offsetting potential losses in one position with gains in another.
How does a short position make money?
Short positions generate a profit when the price of an asset falls below the initial price and the shares are repurchased.
