Short position
An outstanding, unsettled sell position in a derivatives contract — the seller of a futures contract, or the seller (writer) of an option, is said to be short.
In plain language
A short position is the mirror image of a long one. The workbook defines it as an outstanding / unsettled sell position in a contract: if Ms. P sells 5 Sensex futures contracts, she is short 5 contracts.
A trader can be short a futures contract without owning anything, because in futures "sell" is figurative — no money or underlying asset changes hands between buyer and seller when the deal is originated. What the short holds is a commitment to sell at the agreed price, and a position that makes money when prices fall.
In options, the short side is the seller or writer. He receives the premium upfront and takes on the obligation to buy or sell the underlying if the buyer exercises. That obligation is why a short option position pays margin and why its losses can be very large.
How it works
Payoff. Short futures at Rs 100: if the price falls to Rs 60 at expiry, the short buys at 60 and sells at 100 — a profit of Rs 40; if it rises to 150, the loss is Rs 50. A short option position has unlimited downside risk but limited upside, to the extent of the premium received.
Closing. A short futures position is closed by buying back the same contract. For options the workbook calls this a closing purchase, "frequently referred to as covering a short position". An opening sale creates or increases a short position.
Margin. Both sides of a futures contract pay initial margin. On options, only the seller pays margin and daily MTM, because only he has an obligation.
Open interest signals. If the futures price is falling while open interest rises, the workbook reads it as a build-up of short positions — bearish. A rising price with falling open interest indicates short covering.
Delta. Short futures has a delta of −1; a short call has a delta between 0 and −1; a short put between 0 and +1.
At expiry an open short stock futures position becomes a sell (security deliverable) obligation, and an assigned short ITM call requires the writer to deliver shares equal to the lot size.
A worked example
The workbook's sample questions, worked (Chapter 3).
1. You sold one XYZ stock futures contract at Rs 278, lot size 1,200, and bought it back at Rs 265.
Profit = (Sell price − Buy price) × Lot size
= (278 − 265) × 1,200 = 13 × 1,200 = +Rs 15,600
2. You are short one June XYZ futures contract at Rs 3,400, contract multiplier 50, and made a profit of Rs 10,000 on closing. The closing trade must be a buy, and the price must be lower:
10,000 ÷ 50 = 200 points → Buy 1 June XYZ futures at 3,400 − 200 = Rs 3,200
The workbook's short hedge (Chapter 5). You will sell 1,200 shares of PQR Ltd on 10 July. On 10 May the July futures trade at Rs 1,706, contract size 600, so you short 2 lots. By 10 July the share is Rs 1,440 and you buy back the futures at Rs 1,441:
Gain on short futures = (1,706 − 1,441) × 600 × 2 = 265 × 1,200 = Rs 3,18,000
Cash market sale = 1,440 × 1,200 = Rs 17,28,000
Total received = 17,28,000 + 3,18,000 = Rs 20,46,000 → Rs 1,705 per share
The short position has turned a falling market into an effective sale price close to the Rs 1,706 at which it was opened.
Why NISM asks about it
Chapter 3, section 3.4, defines short position alongside long and open positions; section 3.6 draws the short futures payoff. Chapter 4, sections 4.1, 4.5 and 4.6, cover the option writer's short position, its unlimited risk and its margin. Chapter 5 uses short futures for the short hedge and reads short build-up and short covering from open interest. Chapter 7, section 7.4, turns an open short stock futures or assigned short call into a delivery obligation. The profit-or-loss-on-closing question above is a staple of the paper.
Common exam traps
- A short futures position is closed by buying, not by selling again. Selling again doubles the short.
- Profit on a short = (sell price − buy price) × lot size. Reversing the order gives the right number with the wrong sign.
- Short options carry the unlimited risk; long options carry the limited risk. Candidates who equate "short" with "safe because premium is received" lose this mark.
- Only the option seller pays margin; both futures buyer and seller pay it.
- Price falling + open interest rising = short build-up. Price rising + open interest falling = short covering. Do not swap them.
- A short put has a positive delta even though the position is short.
Where this is taught
- Series XVI · Chapter 3: Commodity Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-D · Chapter 19: Interest Rate Derivativesintroduced here
- Series XIX-E · Chapter 10: Investment Strategiesintroduced here
Related terms
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- Open interestThe total number of derivative contracts outstanding and not yet settled in an underlying — counted on one side only, because every long is matched by a short.
- Option writerThe party who sells an option: receives the premium upfront and takes on the obligation to sell (call) or buy (put) the underlying if the buyer exercises. Gain is capped at the premium.
- Short hedgeA hedge made by selling futures to protect an existing holding or a planned sale against a price fall — the futures gain offsets the lower cash price, locking in roughly the futures price.
- Long positionAn outstanding, unsettled buy position in a derivatives contract — the buyer of a futures contract, or the buyer (holder) of an option, is said to be long.
- Naked positionA long or short position in a futures contract held without any position in the underlying asset or an offsetting contract — fully exposed to price moves in one direction.
- Square offClosing an open futures position before expiry by taking the opposite trade — a buyer sells, a seller buys — locking in the profit or loss without waiting for the contract to settle.
- Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.
- Convertible ArbitrageA Category III long-short strategy: buy a company's convertible bond or preference share and short its equity, to profit when the conversion terms and the share price fall out of line.
- Merger ArbitrageAn event-driven Category III strategy: go long the target company and long or short the acquirer, to capture the gap between the target's price and the deal price as a merger completes.