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1.
(FINANCE) the situation in which a derivatives trader with a short position is wrong about the behavior of the market. Having sold shares of stock he doesn't own, he is now compelled to buy them at a higher price than he sold them for (in order to reimburse whomever he borrowed the shares from).

If the short position was taken by writing naked options (i.e., issuing call options of stock the trader doesn't happen to have), then the trader has to buy shares of underlying stock in order to honor the options.

It's extremely expensive for traders to have to cover their shorts.
The surprising stock rally came as a shock. Nicholas Leeson had been riding high, but now he was furiously covering shorts, and driving the share prices higher still. By closing bell, he was ruined.
by Abu Yahya May 05, 2010