Going Short
Remember with futures, you are not actually buying the physical commodity. You are entering into an agreement based on what the market thinks that commodity will be worth at some time on the future. Any futures trade is just agreement.
In the example above, by going long you entered into an agreement to but December wheat at 649 cents. Two weeks later you sold that agreement back in the market at 684.5, resulting in an overall profit.
If this is only an agreement, why can you enter an agreement to sell instead of buy - and thereby make money from a fall in the market? You can. This is called going short and in this case it is the opposite of going long.
Let’s use an example of a falling market to illustrate. Suppose you read somewhere that the Gold price is dues for a drop. Perhaps there is talk of a few central banks selling their gold reserves and this creates a negative view.
In this instance, you can sell a futures contract in gold and profit from any fall. This is the point where some people get stuck. How can you sell something you do not own? Remember, futures contracts are just agreement on price. There is no actual ownership of the commodity in question.
So by selling a contract, or “going short” you have entered into a contract to sell at this price. At any time before expiration of the contract, you can buy it back in the open market place by buying one contract at the prevailing price.
The chart below shows the price for October Gold – the last price being $691.10. Suppose you go short here by selling one contract at $691.10.
Gold futures trade on the COMEX division of the New York Mercantile Exchange. Each contract is based on 100 ounces of Gold and therefore every move of $1.00 is worth $100 per contract to the buyer or seller. So if the price of the contract fell by $100, you would make that much in price once closed out (again not considering commission rates).
Moving forward in time, the gold price fell over the following days and in the chart below shows Gold for October delivery trading at $666.20. To close your short position, you would instruct your broker to buy one contract at the prevailing price.
In this transaction, October gold was sold at $691.10 and bought at $666.20. this equates to a profit of $24.90 per ounce or $2490 per contract (24.90 times 100 ounces per contract).
That is “going short”. It’s a little confusing the first time you come across it, but it becomes second nature in no time.
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