Short stock question

I seem to recall reading that if you're short stock, you can be forced to buy it back earlier than you wanted to. I'm not talking about being assigned on a short option - just having to give up your short stock position for whatever reason.

Is that true? Why would that be?

 

SEC margin rules appies to long and short positions.

 

DMO, it can happen if the stock is placed on the hard to borrow list. Fortunately, it happens only on rare occasions. That's just one reason to invest in a long call.

 

Do you get a warning? Or do you just wake up one morning, log on, and get a message "Sorry, your short position in XYZ has been closed out. Have a nice day!"

 

I would hope that you would get at least a telephone call. For sure you should ask this question to your broker and receive a written reply.

The situation can get particularly acute if you have a short Put open and you are not cleared for uncovered option writing. That would also require you to buy to close your open Put. For sure, if you have an open long Call in place with some extrinsic value, you would likely not want to have that Call exercised to cover the short position.

Very valid question and concern. Again...write to your broker.

Good luck.

 

When you short a stock you borrow it so if the lender wants it back you have to cover and return. Also be careful about dividends. If you are short the stock into ex-dividend date you'll have to pay the dividend.

 

MTE, you're right with respect to the dividend. Valid point.

 

I would just like to point out that as an alternative you may be able to achieve the same delta postion by taking an alternative path and selling a Single Stock Future on the stock. This would give you the same exposure without the possibility of having the borrowed stock recalled. In addition you will benefit from the built in competitive interest rate that naturally decays to your benefit instead of getting a rebate (if you are in fact getting one at all) of the investment returns the brokerage earns on your credit balances from the sale of the stock.


Best

 

it doesn't work that way.

it's margin calls that is usually why it's liquidated.

market makers can short naked if they want and some brokers increase their margins intra-day an overnight and can change it.

 

I emailed IB and asked their policy about this. Here's what they had to say - not very reassuring.

"You can hold a short position so long as! IB has the stock to lend to you to short. If not you may be subject to an immediate buy in. IB will try it's best to secure shares to short sell but in some conditions we will be unable to do so. "