How Long Can You Hold a Short Position on TD Ameritrade?

Short selling allows traders to profit from a stock’s decline by borrowing shares and selling them with the intention of buying them back at a lower price. While potentially lucrative, this strategy carries risks and ongoing costs that traders must consider.

A trader’s ability to maintain a short position on TD Ameritrade depends on broker policies, fees, margin requirements, and the risk of a forced closeout. Understanding these factors helps traders manage risk and avoid unexpected losses.

Broker Terms and Share Availability

TD Ameritrade facilitates short selling by borrowing shares from its inventory or external lenders. Availability depends on supply and demand, with heavily shorted stocks often difficult or expensive to borrow. If a stock is classified as “hard-to-borrow,” securing shares may require extra steps, and in some cases, borrowing may not be possible.

Borrowed shares are not guaranteed indefinitely. If the lender recalls them, TD Ameritrade may require the trader to close the position or find an alternative lender. Stocks with high volatility or low float are more prone to recalls, making it essential for traders to monitor availability.

Short selling is also subject to regulatory restrictions. The SEC’s Regulation SHO requires brokers to locate shares before allowing a short sale. If shares cannot be located, the trade cannot proceed. Additionally, if a stock appears on the SEC’s threshold securities list due to excessive settlement failures, borrowing may become even more restricted.

Ongoing Fees for Holding

Maintaining a short position on TD Ameritrade incurs costs that impact profitability. The primary expense is the stock borrow fee, which fluctuates based on supply and demand. Stocks with high short interest or limited availability typically have higher borrow rates, which can change daily.

Short selling requires a margin account, meaning traders may also pay interest on margin loans. TD Ameritrade’s margin rates are tiered, with smaller loan amounts incurring higher interest rates. As of 2024, rates range from around 12% for smaller loans to lower percentages for larger balances. These costs accumulate over time, especially for extended positions.

If the company whose stock is being shorted issues a dividend, the trader must pay that dividend to the lender. High-yield dividend stocks can be costly to short, as the trader covers the full dividend amount. Special dividends or unexpected increases in payouts add further expenses.

Margin Maintenance

Short selling requires traders to meet specific margin requirements to ensure sufficient collateral. Unlike traditional stock purchases, where an investor risks only their initial investment, short positions expose traders to unlimited potential losses if the stock price rises.

The Federal Reserve’s Regulation T sets the initial margin at 150% of the short sale’s value, meaning a trader must have at least 50% of the shorted stock’s value in their account as equity. TD Ameritrade imposes additional maintenance margin requirements, typically ranging from 30% to 100%, depending on the stock’s volatility and liquidity. Highly volatile stocks may require more capital to keep the position open.

If the margin balance falls below the required threshold due to market fluctuations, the trader will receive a margin call, requiring additional funds or liquidation of the position. A sudden price spike can quickly erode equity, triggering an immediate need for more capital.

Forced Closeouts

A forced closeout occurs when TD Ameritrade liquidates a short position without the trader’s consent due to excessive risk exposure. This can happen when a stock experiences a sharp price increase, pushing unrealized losses beyond the trader’s available equity. If losses reach a level where the broker believes the account lacks sufficient funds to cover further price movements, liquidation may be initiated to prevent a negative balance.

Unexpected trading halts or regulatory actions can also lead to forced liquidations. If a heavily shorted stock becomes the target of a short squeeze, as seen with GameStop (GME) in 2021, brokers may close positions preemptively to manage exposure. If a stock is delisted or suspended from trading, covering the position may become impossible, prompting the broker to take action. These events can happen with little warning, leaving traders with no opportunity to exit on their own terms.