How Long Are You Allowed to Hold a Short Position?

How long can you hold a short position?

Technically, you can hold a short position indefinitely with no set time limit, so long as you can honor the margin requirements and take into account the interest and commission or fees. The short position can be held for as long as your capital allows. However, holding a short position for extended periods comes with its own risks.

Risks of holding a short position

• Margin Maintenance: Brokers impose minimum margin maintenance requirements for short positions. The duration of your short position can only be affected by the financial regulations of the margin requirements.

• Margin Calls: If the stock price of your short position rises significantly, your account's margin requirements may increase, leading to a margin call. You may be required to deposit additional funds to cover losses or meet higher margin requirements, which, in turn, could force you to prematurely close the short position.

• Borrowing Fees: When you’re shorting a stock, you typically pay borrowing fees to the broker. These fees can accumulate over time, reducing the profitability of maintaining the short position. You may have no other option but to close short positions to avoid excessive costs.

Short Squeeze: A short squeeze occurs when a heavily shorted stock's price rises rapidly, forcing short sellers to cover their positions by buying back shares, which further drives up the stock’s price, triggering a cascade of short covering. In the event of a short squeeze, you may be forced to cover your position prematurely to limit losses. This can impact how long you hold a short position and requires closely monitoring short interest and market sentiment to assess the likelihood of a short squeeze.

Best stock brokers

1

9.4/10

Go to broker

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Minimum deposit:

From $100

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA.

Pros/Cons

•High level of reliability ensured by the licenses of respected regulatory authorities and participation in the compensation funds.

•Wide selection of assets quoted at stock exchanges in the UK, U.S., Australia and Asia.

•An opportunity to combine active trading with social trading and passive investing.

•Zero-fee trading of a number of stocks.

•Access to ready-made diversified asset portfolios with various risk levels.

•Provision of leverage, educational materials on various markets and user-friendly trading platforms that can run on any device.

•Zero fees for portfolio management, depositing funds and account maintenance.

•High minimum deposit for users of a number of countries.

•No live chat on the website for quick connection to customer support.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.
Via eOption's secure website.

Minimum deposit:

$1

Review

The eOption broker (eoption.com) is an American stockbroker headquartered in Glenview, Illinois. It has been operating since 2007 and is a member of FINRA (CRD#: 7297/SEC#: 8-21765) and SIPC. It specializes in options trading and also acts as an intermediary in trades involving the popular securities classes. The company offers low trading commissions, super-fast execution of orders, and modern platforms with an advanced set of analytical tools. In 2020-2021, eOption was recognized as the best options broker by several resources such as Investopedia, The Tokenist, Benzinga, Investormint, and NerdWallet.

Pros/Cons

•Low commissions for options trading — $0.10 per contract plus $1.99 per trade.

•No minimum deposit requirements for cash trading accounts opened by US residents.

•FINRA membership and the protection of clients’ funds are available through Securities Investor Protection Corporation (SIPC).

•Access to professional trading platforms such as DAS and Sterling Trader Pro are developed by third-party software developers for the proprietary eOption terminal.

•An affiliate program with high rewards.

•Compensation for commissions for funds or assets from other brokerage firms and institutions transfer.

•Prompt support by phone and online chat in the trading platform during company business hours.

•The narrow range of choice of investment solutions to generate passive income.

•You cannot trade Pink Sheet and Bulletin Board stocks.

•There is no online chat on the company's website.

Study Review

3

9.1/10

Study Review

Minimum deposit:

$250

Review

The Ally Bank broker is part of Ally Financial Inc., which is an American holding company. The original company was created in 1919 by the General Motors automobile corporation to conduct activities with its auto parts suppliers and associated automobile dealerships. In 2014, Ally started offering banking products, and since 2017, it has also offered brokerage services. Currently, it operates solely as an online bank and brokerage firm and has no physical branches. It does, however, offer favorable terms of cooperation at consistently competitive rates with professional round-the-clock support. The company's services are used by more than 8.1 million customers globally.

Pros/Cons

•It has official licenses for banking, dealer, and brokerage activities from reputable US regulators.

•A wide range of assets is available such as currency pairs, metals, securities, and options.

•There is an opportunity to invest in diversified portfolios for passive profit.

•The company works only with US tax-paying residents.

•On the broker's website, there is no training on trading in various financial markets, nor is there a Forex glossary of terms.

•There are high commissions for withdrawing funds and the company does not compensate customers in any way.

•Only registered users can ask a question in the online chat.

•There is a time-consuming procedure for opening an account, which in some cases takes up to two weeks.

Study Review

When should you close a short position?

When you’re considering how long you should keep a short position open, compare it to how you’d make the same determination on a long position. When looked at simply, shorting an asset is essentially the same as going long in many ways, just expecting the price to go down instead of up. That means your decision of how long to hold a short position will vary depending on your own trading strategy, the market conditions, and factors related to the specific stock.

• Market Conditions: When you open a short position, you may be doing so because the broader market is in a downturn, or because you expect a market decline soon. In a bearish market, short positions may be held for longer times as downward pressure persists. In a downtrend, you might hold a short position until it reverses. In a highly volatile market, you might hold a position for shorter times, to avoid incurring losses as the price fluctuates.

• Stock-Specific Events: News or events related to the company, such as product launches, regulatory actions, or management changes, can influence the timing of closing a short position. For example, if you expected Uber (NYSE: UBER) to fall short of revenue expectations for the previous quarter in their earnings call, you could short the stock and only hold the position until after the earnings call or the official publication of the report..

• Your Strategy: If you’re a short-term or day trader, you might use technical indicators like moving averages, trend lines, or momentum oscillators to time your exits from short positions based on market signals. If you’re swing trading or long-term investing, you’d more than likely need to hold your short positions for longer periods.

What is short selling?

Short selling is an investment strategy where an investor “borrows” assets (such as stocks, commodities, or currencies) from a broker and sells them on the market with the intention of buying them back later at a lower price. The goal of short selling is to profit from a decline in the borrowed asset’s price. Therefore, short selling is most often linked to an overall bearish sentiment on any particular asset or the market it’s in.

Example. In 2022, META's share price was in a downtrend as investors were dissatisfied with the drop in the number of active users and excessive questionable investments in developments related to virtual reality.

As a result, META's share price declined not only in absolute terms, but also relative to the index. Thus, by mid-August, the price of the S&P-500 had risen (1) relative to early summer, while the META price had fallen (2), as shown in the chart below.

META stock price vs S&P-500 in 2022

You would hardly want to buy such a stock (at that time), would you? The more rational idea was to open a short position.

How does short selling work?

In stock markets, a short seller borrows shares from a broker and sells them on the open market. The short seller hopes to buy back the shares once their price decreases and return them to the broker, pocketing the difference as profit.

In Forex, short selling involves selling a currency pair with the expectation that the base currency will depreciate relative to the quote currency. The short seller aims to buy back the currency pair at a lower price to profit from the exchange rate difference.

Certain practices in short selling are illegal, such as naked short selling. Naked short selling involves selling shares of an asset without borrowing them or ensuring they could be borrowed first, to profit from the price decline by later buying them at a lower price. This practice has largely been banned in the US and Europe since the 2008 financial crisis.

You may have heard of some notorious cases of short selling, including:

• Tesla: Tesla (TSLA) is one of the most shorted stocks out there. Investors who took short positions on Tesla made $11.5 billion in profit in 2022 when Tesla shares lost half their value. However, in 2021, short sellers lost a combined $10.3 billion when Tesla shares rose 50%. That was following a Tesla 743% gain in 2020, which caused short-sell position holders to lose a whopping $40.7 billion total.

• British Pound: In 1992, George Soros famously shorted the British pound, betting that the currency would depreciate against other major currencies. Soros' short position led to significant profits during the "Black Wednesday" crisis when the UK withdrew from the European Exchange Rate Mechanism.

What is short selling GameStop?

During the infamous GameStop short squeeze in early 2021, retail investors coordinated on Reddit to drive up GME’s stock price, squeezing hedge funds with large short positions. GameStop's stock surged from around $20 to a peak of over $500 in pre-market value, causing substantial losses for short sellers.

Up 9000% in half a year, GameStop (NASDAQ:GME) stock has become legendary

This fiasco exposed problems in short selling, such as how retail investors can coordinate to manipulate the market. It also caused liquidity problems for short sellers, as rising prices forced them to buy back shares at much higher prices, amplifying losses.

Short selling tends to be more complicated and riskier than regular investing.

Is short selling a good strategy?

This really is up to you and how you prefer to trade. Consider the advantages and disadvantages before deciding if it’s right for you.

How do I start short-selling?

If you’ve decided to go ahead with short selling, then follow these simple step-by-step instructions to get started on your short seller journey:

1. Open a Margin Account: Choose a reputable brokerage that offers margin accounts for short-selling. Traders Union recommends brokers such as eToro, CapTrader, Charles Schwab, Interactive Brokers, and Ninjatrader, which provide robust trading platforms and margin capabilities.

2. Identify Opportunities: Conduct thorough research and analysis to identify potential short-selling opportunities. Look for overvalued stocks, deteriorating fundamentals, or bearish market trends that could lead to price declines. Use technical and fundamental analysis to assist you.

3. Select Stocks to Short: Choose stocks with high short interest, weak technical indicators, or negative catalysts. Consider liquidity, borrowing costs, and market conditions when making your selection.

4. Place Short Sell Order: Use your brokerage platform to enter a short sell order for the chosen stock. Specify the quantity of shares to short and execute the order.

5. Implement Risk Management: Set stop-loss orders to limit potential losses. Determine your risk tolerance and establish predefined exit points based on technical levels or percentage declines.

6. Monitor Regularly: Continuously monitor market conditions, news, and technical indicators affecting your short positions. Be prepared to adjust your strategies or exit positions based on evolving circumstances.

What is a short-selling ratio

The short interest ratio (often referred to as the days to cover ratio) is a measure used to indicate the bearish sentiment towards a stock. It represents the ratio of the number of shares that have been sold short but not yet covered or closed out, to the average daily volume of shares traded.

Typically, a short interest ratio above 5 is considered high. This means it would take five or more days for all short positions to be covered, given the average daily trading volume. High ratios suggest significant bearish sentiment, as many investors are betting that the stock's price will decline.

Source: marketwatch.com/tools/screener/short-interest

Ratios of 10 or higher are particularly noteworthy and suggest very strong bearish sentiment, often leading to close monitoring for potential short squeezes. At the time of writing, SunPower Corporation's (NASDAQ:SPWR) stock had the highest short selling ratio.

In 1 year, from May 1, 2023 to May 1, 2024, the share price decreased by more than 83%.

SunPower Corp. has been experiencing significant stock price declines due to several factors impacting the solar energy sector as a whole, as well as specific concerns related to the company itself. There are rumors that the company may default on its debts and go bankrupt, which attracts traders to open short positions on the SPWR stock.