Short Futures Position

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Short Futures Position

The short futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a fall in the price of the underlying.

The short futures position is also used by a producer to lock in a price of a commodity that he is going to sell in the future. See short hedge.

Short Futures Position Construction
Sell 1 Futures Contract

To create a short futures position, the trader must have enough balance in his account to meet the initial margin requirement for each futures contract he wishes to sell.

Unlimited Profit Potential

There is no maximum profit for the short futures position. The futures trader stands to profit as long as the underlying asset price goes down.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Market Price of Futures

Unlimited Risk

Heavy losses can occur for the short futures position if the underlying asset price rises dramatically.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Market Price of Futures > Selling Price of Futures
  • Loss = (Market Price of Futures – Selling Price of Futures) x Contract Size + Commissions Paid

Breakeven Point(s)

The underlier price at which break-even is achieved for the short futures position position can be calculated using the following formula.

  • Breakeven Point = Selling Price of Futures Contract

Example

Suppose June Crude Oil futures is trading at $40 and each futures contract covers 1000 barrels of Crude Oil. A futures trader enters a short futures position by selling 1 contract of June Crude Oil futures at $40 a barrel.

Scenario #1: June Crude Oil futures drops to $30

If June Crude Oil futures is trading at $30 on delivery date, then the short futures position will gain $10 per barrel. Since the contract size for Crude Oil futures is 1000 barrels, the trader will net a profit of $10 x 1000 = $10000.

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Scenario #2: June Crude Oil futures rises to $50

If June Crude Oil futures instead rallies to $50 on delivery date, then the short futures position will suffer a loss of $10 x 1000 barrel = $10000 in value.

Daily Mark-to-Market & Margin Requirement

The value of a short futures position is marked-to-market daily. Gains are credited and losses are debited from the future trader’s account at the end of each trading day.

If the losses result in margin account balance falling below the required maintenance level, a margin call will be issued by the broker to the futures trader to top up his or her account in order for the futures position to remain open.

Synthetic Short Futures

An equivalent position known as a synthetic short futures position can be constructed using only options.

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Short Options Position – Definition

Short Options Position – Introduction

What Does It Mean To Be Short In The Financial Market?

What Does It Mean To Be Short an Options Contract?

When you are “Short” a call option, you give the buyer the rights to buy from you the underlying stock at the strike price anytime prior to expiration and benefit from the premium received if the price of the underlying stock goes downwards instead of upwards.

When you are “Short” a put option, you give the buyer the rights to sell you the underlying stock at the strike price anytime prior to expiration and benefit from the premium recieved if the price of the underlying stock goes upwards.

As you can see above, depending on whether you are short a call option or put option, you could actually be making an upside or downside bet. As such, being “Short” in options trading does not necessarily suggest an downside bet like in stock trading or futures trading.

What Does It Mean To Be Short an Options Position?

In such situations, all the different options making up the options position or options strategy, are treated as a whole, just like how wheels, engine and chassis put together is known as a “Car”. So being “Short” a particular options strategy such as the Bull Call Spread, means that you are selling ownership of a Bull Call Spread which means trading both a short call and a long call. As such, being “Short” an options position doesn’t necessarily mean you are holding only “Short” options contracts but that you are selling ownership of a group of various long and short options contracts working together as a whole.

What Does It Mean To Be Short an Options Greek?

Being “Short” an options greek is to own a position with that specific options greek in its opposite state. For instance, the opposite state of Delta, Gamma, Vega and Rho are negative, as such, to be short delta means to own a position with negative delta, to be short gamma means to own a position with negative gamma, to be short vega means to own a position with negative vega and to be short rho is to own a position with negative rho. However, for Theta where the default state is negative, to be short theta means to own a position with a positive theta.

How to Sell Short Currencies in the Forex Market

In all financial markets, including foreign exchange (forex), you sell short when you believe the value of what you’re trading will fall. With a stock, what you’re doing is selling borrowed shares you don’t actually own and agreeing to return those shares at some time in the future. If the shares fall in value from the time you initiate the short sale until you close it out—by buying the shares later at the lower price—you’ll make a profit equal to the difference in the two values.

Going short in the forex market follows the same general principle—you’re betting that a currency will fall in value, and if it does, you make money—but it’s a bit more complicated. That’s because currencies are always paired: Every forex transaction involves a short position in one currency and a long position (a bet that the value will rise) in the other currency.

Placing a Sell Order

Another difference between shorting in the stock market and the forex market is that in the latter, you don’t have to borrow a certain amount of the currency you want to short. Going short in forex is as simple as placing a sell order.

Parts of the Pair

All currency pairs have a base currency and a quote currency. The base currency comes first in the currency pair, and the quote currency comes second. So for the GBP/USD pairing, the British pound is the base currency and the U.S. dollar is the quote currency.

Pip Values

Changes in price are measured in pips. For every currency but the Japanese yen, a pip is 0.0001 of the value of the quote currency. When the yen is the quote currency, a pip is 0.01 yen. (Brokers will sometimes give values out to one digit past the pip—one-tenth of a pip or a pipette.)

Lot Sizes

Many currency transactions are carried out in the standard lot of 100,000 units of the base currency. They can also be done in mini lots of 10,000 units or micro-lots of 1,000 units.

Let’s say the GBP/USD rate is 1.3452, which means 1 pound is valued at $1.3452. If you expect the value of the pound to fall against the dollar, you would sell the currency pair at that rate. If you bought the pair after the rate went to 1.3441, you would have made 11 pips.

The math to find the value of a pip in the quote currency for a standard lot of the base currency is: 0.0001 (one pip) / 1.3452 (exchange rate of pair) x 100,000 (lot size) = $7.43. That means for your 11-pip gain, you would have made 11 x $7.43 = $81.73, excluding the commission.

Brokers may charge a set commission—perhaps $5—for each currency trade of a standard lot they carry out, or they may keep the difference between the bid price and the ask price for each trade.

Reducing Risk

If you’re thinking about shorting a currency pair, you must keep risk in mind—in particular, the difference in risk between “going long” and “going short.” If you were to go long on a currency, the worst-case scenario would be watching the currency’s value falling to zero. While that bet would be bad for your investment portfolio, your loss would be limited, because the value of currency can’t go lower than zero.

If you’re shorting a currency, on the other hand, you’re betting that it will fall when, in fact, the value could rise and keep rising. Theoretically, there’s no limit to how far the value could rise and, consequently, there’s no limit to how much money you could lose.

One way of curtailing your risk is to put in stop-loss or limit orders on your short. A stop-loss order simply instructs your broker to close out your position if the currency you’re shorting rises to a certain value, protecting you from further loss. A limit order, on the other hand, instructs your broker to close out your short position when the currency you’re shorting falls to a value you designate, thus locking in your profit and eliminating future risk.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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