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.
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:
Heavy losses can occur for the short futures position if the underlying asset price rises dramatically.
The formula for calculating loss is given below:
The underlier price at which break-even is achieved for the short futures position position can be calculated using the following formula.
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.
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.
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.
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.
An equivalent position known as a synthetic short futures position can be constructed using only options.
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