Short/Short Cover/Short Position/Short Sale

An open position resulting from a sale is known as a short position. It is created because the trader or speculator believes the price will fall and he/she can cover later at a lower price and make a profit. For example, he/she may sell gold at $300 an ounce, hoping the price will fall to $280 at which level he/she can buy to cover the position.

The establishing of short positions can depress the price because it implies steady selling. But ‘going short’ can also cause problems both for the individual and the market if, instead, the price rises. If substantial short positions have been built up (and there are examples of speculators being short between 1 and 1½ million oz) a sudden increase in price may force them to cover. Such a run for cover, known as a ‘short squeeze’ or ‘short covering’ only accelerates the rise.

In options the grantor or writer of a call is also potentially short because he/she may be called upon to deliver gold and therefore will normally delta hedge the position.