Final answer:
A short position is when a trader sells a security they do not own, hoping to buy it back later at a lower price to make a profit. The correct answer to the question is 'Margin call' as it can occur if the value of a shorted asset increases, forcing the trader to add funds to maintain their position.
Step-by-step explanation:
A short position in trading refers to the selling of a security that the seller does not own at the time of the sale. The seller, in effect, borrows the asset with the intention of selling it, hoping that the price will decline. They must later buy back the same asset in order to return it to the lender, which means they are 'covering' their short position. If the asset's price has decreased, they can purchase it back at a lower price than they sold it for, thereby making a profit from the differential. If the price has increased, however, they have to buy it back at a higher price, taking a loss.
Therefore, the correct answer to the question 'Which of the following describes the short position? Position that owes the stock.' is:
- a) Long position - Incorrect, because a long position implies owning an asset with the expectation that its value will rise.
- b) Call option - Incorrect, as a call option gives the holder the right to buy an asset at a set price, and does not imply owing a stock.
- c) Put option - Incorrect, because a put option grants the holder the right to sell an asset at a predetermined price, but this is not the same as owing the stock through a short position.
- d) Margin call - Correct, because a margin call can occur when the value of the asset held in a short position has risen, and the broker demands additional funds to maintain the position.