After selling a stock short, how long do I have until I have to Buy to Cover?

Question

If I were to short sell 50 shares of GM, how long would it be until I had to place a Buy to Cover trade?

Answer 1

When you sell short a stock, there are two situations that may require you to buy-to-cover:

1) If the stock value goes up, you may be put into a "margin call" where your broker will ask you to send in more money. If you don't the broker will buy-to-cover for you, even if you don't want them to. Your original maintainance requirement depends on your broker but is likely to be 30% or 35% (meaning excluding the amount you receive from the short sell you have to have 30% of the value of the stock in cash that you deposited.) You can ask your broker what the requirement on specific stocks are for their firm.

2) When you short a stock, you are borrowing the long shares from another customer's account or from the broker/dealer themselves. If the customer or the broker/dealer sell their long shares in the market, the broker dealer can close out your position at any time. It's not likely to happen if you invest in a large popular company like GE. But if you start shorting "thinner" stocks with less interest, there is a possiblity this might happen to you.

Other than the above, you have as long as you want.

Answer 2

The other answerers forgot one thing about a long term short. In the case of GM, they pay a significant dividend.

When you short a stock, you are borrowing the stock from someone and then selling it. That someone would have received dividends if you hadn't borrowed the stock. They will demand the cash equivalent of those dividends.

Since you sold the stock, you won't receive the dividends either. So paying the cash equivalent is a pure net loss to you.

Answer 3

There is no time limit but the limit is how much margin your broker will require of you if the trade goes against you.

If the shorted stock goes down to nil, you essentially never have to cover ( when the IRS will notice and ask that you declare your profit is another matter--presumably in the year that the price went to zero )