The Risks of Shorting Series Part I: Price Risk 

In The Risks of Shorting Series, you will take a deep dive with IBKR’s Securities Lending Desk into factors that can negatively impact the returns of short position holders. We will review each component summarized in the Knowledge Base article and use real-world examples to illustrate it.  

Investors employ short positions for a multitude of reasons. Whether they are taking a directional bet on a single stock or hedging out systemic market risk with ETFs, it is important to understand the risks of entering and holding short positions. One of the requirements for shorting equities is having been approved for a Margin account type. 

The first and most simple risk of short selling is “Price Risk.” Traders who take short positions attempt to profit from a decline in the price of an instrument. Investors are able to profit from short positions by repurchasing shares at a lower price than the price at which they sold borrowed shares to open the position. Price risk, in the case of a short position, is the risk of the instrument’s price rising. As there is no limit on how high an instrument’s price can rise, a short seller’s potential losses are unlimited.  

Take for example, Rigetti Computing Inc (NASDAQ: RGTI) which has been popular amongst short sellers as evident by its 98% utilization on May 12th. Over the past month, RGTI’s share price has climbed 37%, closing at $10.31 on May 8^th. If an investor had borrowed shares and sold to open near the $7.55 close price on April 8^th, they would have faced substantial unrealized losses just one day later, when RGTI closed at $9.23. With RGTI only momentarily trading below this hypothetical investor’s entry price in the past month, they would feel the pressure of price risk in the form of large unrealized losses.  

Source: Interactive Brokers Trader Workstation  

Even stocks that have performed poorly, to the benefit of the short seller, may be subjected to price risk in the event of a market-wide increase. For example, Rocket Cos Inc-Class A (NYSE: RKT), closed in the red for seven consecutive days, but the share price climbed May 12^th alongside the rest of the market on positive trade deal news. While short sellers may be correct in their directional view, market wide increases can introduce price risk even for stocks on a downward trend.  

Source: Interactive Brokers Trader Workstation  

Assuming no changes in the investor’s borrow, such as a buy-in or a recall of the shares, which will be explained in greater detail later in this series, they would be faced with two choices in this scenario. If they maintain their conviction, they may continue to hold the position in hopes of a large decrease in the instrument’s price. Alternatively, the investor may buy the shares to close, or “cover”, the short position at a higher price than they sold. That would result in a capital loss. 

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Originally Posted on May 15, 2025