Buy to cover

Buy to cover is the order a short seller places to close out a short position. Because a short sale starts by borrowing and selling shares the trader does not own, closing it requires the opposite step, buying the same number of shares back on the open market and returning them to the lender. The buy to cover order is that closing purchase, and it is what actually ends the trader's exposure to the stock.

The difference between the price at which the shares were sold short and the price paid to buy to cover determines the profit or loss on the trade. If the stock fell in between, the short seller buys to cover at a lower price than they sold at and keeps the difference. If the stock rose instead, buying to cover costs more than the original sale brought in, and the trader takes a loss. Unlike closing a long position, which simply requires selling, closing a short always requires this additional buy order, since the shares have to be returned to whoever lent them.

Buy to cover orders can be placed as market, limit, or stop orders like any other purchase. A common use is a stop order set above the current price specifically to buy to cover if the stock rises past a certain level, capping the loss on the short position. When many short sellers rush to buy to cover at the same time, typically because the stock is rising quickly against them, the resulting wave of buying can itself push the price higher, which is the mechanism behind a short squeeze.