When an investor sells short a security, they borrow money from their broker to buy the stock, but instead of selling it right away, they hold onto it with the intention of selling it later at a lower price. A Buy-To-Cover transaction is made when the investor closes out the short position by buying the same number of shares from the market that they originally sold short. In this case, the investor is covering their short position to end up with no exposure on the stock. For example:An investor shorts 1,000 shares of stock XYZ at $100/share. The next day, the stock declines to $90/share, so the investor decides to close their position, and buy-to-cover. So they buy 1,000 shares from the market at $90/share, to cover the short. They then deliver the stock to their broker and pocket a $10,000 profit ($10 * 1000 = $10,000).
This strategy is effective because the investor is able to sell stock they do not own at a price that is higher than the market price. In this case, the investor made a profit by covering their short position on stock that was overvalued.
