A short position is the option to sell the stock at a particular price in the future. The value of this option fluctutates in the same way as the underlying stock price. This value can be used as input to the portfolio optimization assuming that the option is part of the portfolio of assets.
Since the variance of asset value accounts for both upside and downside price fluctuations in the past, it does not necessarily predict the probability of long and short positions exercising in the future. The mimimum and maximum constraints on the optimal portfolio can be used to evaluate scenarios for long and short position expiration an/or conversion, however.
