"Short selling" is the process of selling something you don't have, promising to deliver later, on the basis that you expect the price to go down.
Finance 101: You've just described a naked short, which is illegal in the US. You are required to cover the position.
Re:Tesla Is Facing a Crucible
by ColinWright on Sunday March 18, 2018 @04:24PM
(#16614105)
I stand corrected. Perhaps then you can clarify how one can "sell short" if one doesn't initially own any of the product. Someone else has said that you borrow it. But if you then sell it you are selling something you don't own, so that is also surely illegal. And if not, it amounts to the same thing.
So it seems that when you don't initially own any of the product, the only way to "sell short" is to promise to buy it later which is still selling something you don't have.
Unless it really is a case of persuading someone to "lend" it to you, and then selling that, so you are selling something you don't own, and someone else is trusting that you'll return it.
Is that right?
You must have the funds to borrow. Shorting is risky, even more so going naked. Which is why its been illegal since 2008. In practice, professionals use covered call options to manage their risk.
If the price has indeed gone down then you win. Problem is, the price may have gone up, and now you have to buy at a higher price, so you lose. The worst part of this is that the loses are unbounded, since the price rise could be arbitrarily large.
In practice it's not a problem, some you win, some you lose, and you are effectively betting on price market movements.
You can now deal with options. So when you promise to sell someone something in the future at price X, they have the option in the future of taking you up on that. If the price of X has gone down then obviously they will go and buy it directly, but if the price has gone up then they come to you and demand that you supply at the agreed price. In return for this option, they pay you when the deal is strike. Thus you are selling them the option of buying at a price.
Similarly you can sell them the option to sell you something at a price. These options are derivatives from the original concepts of buying and selling at given prices.
There's more, but I'll stop, not least because that's pretty much all I know.