Short Selling
Short selling is an investment strategy where an investor borrows shares of a security, sells them immediately at the current market price, and then later buys back the same number of shares to return to the lender and profit from the decline in share price.
Short calls have a predetermined expiration date specified in the option contract, after which the option becomes void and the lender retains the net return with no further obligations.
Short sellers profit from the price drop from their initial buy-in. The downside to this is that if price increases, investors face unlimited losses.
- To reduce this risk, lenders/brokers engage in margin calls, meaning that they hold some cash/asset collateral while the trade is in-progress.
- The lender can also demand the shares back at any time, known as a stock recall.