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Zvi Bodie, Alex Kane, Alan J. Marcus's Investments (2018 11 edn). p 659.

A futures contract calls for delivery of an asset (or in some cases, its cash value) at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity. The long position is held by the trader who commits to purchasing the asset on the delivery date. The trader who takes the short position commits to delivering the asset at contract maturity.

p 748.

        Because the futures exchange specifies all the terms of the contract, the traders need bargain only over the futures price. The trader taking the long position commits to purchasing the commodity on the delivery date. The trader who takes the short position commits to delivering the commodity at contract maturity. The trader in the long position is said to “buy” a contract; the short-side trader “sells” a contract. The words buy and sell are figurative only, because a contract is not really bought or sold like a stock or bond; it is entered into by mutual agreement. At the time the contract is entered into, no money changes hands.

I'm not duplicating this question, because that question wrongly alleges that

More generally, one who stands to profit from the decline of an asset is said to have a "short position" on that asset, or to be "short [the asset]". Analogously, a "long position" is one that rises with the underlying asset.

E.g. a LONG put signifies buying a put option, because you hope the underlying asset's price DROPS . In contradistinction to user gooduser's wrong definition, you don't LONG a put, if you think the underlying asset's price rises.

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  • 2
    In what way is the original question different from yours?
    – user 66974
    May 19, 2020 at 7:11
  • 4
    Your question is more about financial technicalities rather than language. If you buy a future contract you are by definition going “long” the underlying asset (equity, index, commodity etc.)
    – user 66974
    May 19, 2020 at 7:14
  • 2
    Goodside is referring to stocks, long/short position on Apple for instance. You are talking about future contracts or options. But the underlying “semantic” notion is the same.
    – user 66974
    May 19, 2020 at 7:18
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    That’s going to be a lesson on how derivatives work. See the link I provided above. In short derivatives allow investors to bet on assets prices without buying or selling those assets directly. That’s how financial bubbles started.
    – user 66974
    May 19, 2020 at 7:26
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    I go into an old "general store", one where the goods aren't displayed in racks throughout the store but rather are kept in a room in the back. I tell the clerk I want to buy 10 cans of baked beans. I pay for them and then he goes into the back room, then comes out carrying only 7 cans. He says "I'm sorry, we're short three cans. You can pick up the three cans next Tuesday."
    – Hot Licks
    May 30, 2020 at 13:20

1 Answer 1

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+50

The OP has several misconceptions, which will complicate the answer.

The title: 'short' to mean 'deliver the underlying asset'

This is not correct; to short means to sell an asset (e.g., dry goods, a stock, a derivative, a commodity contract) without owning the asset. Here, one would sell 100 bales of cotton, 100 shares of IBM, 1 Dec 125 put on IBM, a Jul '20 silver contract; all without owning the cotton, IBM shares, IBM put, or silver contract.

If the other party that bought your short exercises the short, then you are obligated to deliver. But the short is not the delivery. These events happen at different points in time.

Begin edit

Begin edit on differences between "commit to deliver" vs. "deliver"

Since the OP may have some difficulty with the technicalities of a futures short sale, I'd like to underscore the distinction between "commit to deliver" and "deliver."

Let's first consider a the difference between "getting engaged" and "getting married." Let's say that Bob proposes to Alice on bended knee and offers an engagement ring. Alice kisses him, and misting up, she says, "Yes." Are they engaged? Yes. Are they married? No. Engagement is a "commitment to get married."

Suppose that Alice discovers in the next months that Bob has misrepresented himself as the scion of a wealthy family, and instead plays video games in his mom's basement, where he lives.

Crestfallen, Alice breaks off the engagement. Are they engaged? No longer. Did they get married? No. Alice has broken off the "commitment to get married."

(Interrupting the soap opera and returning to short selling.)

Let's say that Farmer F and Trader G separately take positions to short sell 5000 bushels of soybeans, for August delivery, at $8.38 per bushel. They are both committing to deliver, but Trader G has no intention of ever delivering soybeans. (G will unwind the contract on or before First Notice Day, by buying (to cover) an offsetting contract.) When August rolls around, Farmer F receives a notice of exercise. He delivers the 5000 bushels to a registered warehouse of his choosing. His futures account receives a total of $8.38 x 5000. (Actually more complicated than that, but this simplified explanation should suffice.)

In the meantime, Trader G has seen a drop in soybean prices to $8.30. He buys to cover in early July, and his futures account receives (8.38 - 8.30) x 5000. Let me repeat that Trader G had committed to delivery at the short sale but then cancelled his obligation by buying an offsetting August soybean contract.

"Buying to cover" is analogous to "breaking the engagement," but without the emotional turmoil. (I don't know how many engagements are broken off, but I have heard that around ninety percent of the futures contracts are speculative, that is, not delivered.)

Going back to the original OP question: the short sale is not the same as a delivery.

End of edit

Example of a short sale

Quoting from my previous answer: https://english.stackexchange.com/a/528891/3306.

(Short sale example. Typically, Investor A borrows 100 shares of Investor B's XYZ stock. They are at the same brokerage firm, and the stock is borrowed without B's knowledge.

Of course, Investor A must buy those shares back and replace them in B's account, giving rise to the maxim:

"He who sells what isn't his'n, must buy it back or go to pris'n." -Daniel Drew Source

Investor A will initiate his transaction with the instruction "Sell short 100 shares XYZ to open." This short sale instruction is distinct from "Sell 100 shares XYZ" (synonymous with "Sell 100 shares XYZ to close," which signals that Investor A already owns (at least) 100 shares of XYZ.)

End of short sale example.)

not duplicating this question, because that question wrongly alleges...

The fine answer at https://english.stackexchange.com/a/145394/3306 says

the (short) seller does not at the time of sale possess the commodity or stock which is sold. He is in fact, ‘short’ of the good in question...

The portion of the answer that the OP questions:

More generally, one who stands to profit from the decline of an asset is said to have a "short position" on that asset, or to be "short [the asset]". Analogously, a "long position" is one that rises with the underlying asset.

This quoted portion is correct: the short seller profits when the asset declines.

Example of a short sale of cotton

Merchant A wants 100 bales of cotton. Trader B has no cotton, but enters into a contract to sell A the cotton at 65 cents per bale. This is the short sale. Trader B buys 100 bales of cotton from Farmer C for 60 cents per bale, and has it delivered to Merchant A. Merchant A pays Trader B $65. Trader B pays Farmer C $60. Trader B profits $5.

Example of a short sale of IBM put

Here's where the fun begins. The put goes up in price if the underlying asset declines. The put goes down in price over time if the underlying asset stays the same. The put goes down in price if the underlying asset rises. Let's consider a Dec 125 put on IBM. Buying (or going long) the put gives the buyer the right, but not the obligation, to buy 100 shares of IBM at $125, on or before Dec 18, 2020. Selling the put short obligates the seller to deliver 100 shares of IBM at $125 when the buyer exercises the put.

At the time of this writing (May 30, 2020), a Dec 125 IBM put costs $13.20, meaning that a trader (let's call him Trader B) could sell the put short and gain $1320 in his account (minus commissions and neglecting the bid-ask spread). (Quote was from https://bigcharts.marketwatch.com/quickchart/options.asp?symb=IBM; your mileage will vary).

Now let's imagine a possible future, and say that on November 15, 2020, IBM is at exactly the same price it was on May 30 (namely $124.90). And let's say the Dec 125 IBM put costs $1.90 on Nov 15.

Trader B will profit on the short sale of the Dec 125 IBM put by buying to cover, paying $190 (minus commissions and neglecting the bid-ask spread), and pocketing $1130 (=$1320-$190).

The take-away from the story is that Trader B profited from the fall in price of the IBM put, not from the underlying IBM stock.

Conclusion

The definition of a short selling works for stocks, commodities, puts, calls, and houses. Short selling of a put can be confusing, but the OP needs to think about the effect that the seller profits (or loses) from the put's decline (or rise).

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  • 1. "This is not correct; to short means to sell an asset (e.g., dry goods, a stock, a derivative, a commodity contract) without owning the asset.": So you're avouching that the quoted textbook definition is wrong?
    – user50720
    May 30, 2020 at 19:56
  • 2. I'm uncertain how your answer truly answers my question. You repeat your explanations of longing and shorting assets that I already understand.
    – user50720
    May 30, 2020 at 19:57
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    What assets have you sold short? (I have sold stocks, futures, commodities, and stock puts short.) Suffice it to say that I know the topic material.
    – rajah9
    May 30, 2020 at 20:04
  • 1. If Trader A shorts an asset, he might or might not deliver the asset. The short and the delivery are two separate events, and the short doesn't necessarily trigger delivery. 2. I can't answer your question without addressing your misconceptions. Your long put example is meant to be a counter example, but it merely demonstrates an apparent failure to distinguish between the derivative price and the underlying price.
    – rajah9
    May 30, 2020 at 20:12
  • @rajah9 - I think the OP is confused about how derivatives work, so is the question about semantic.
    – user 66974
    Jun 3, 2020 at 20:04

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