Introduction To Futures
The Basics of Futures Trading
Long vs. Short
There are two basic positions one can have in the futures markets, a long or short position.
A long position entails the purchase of futures contracts in anticipation of rising prices. A buyer enters into a long position when he/she purchases a futures contract. Long positions are profitable if the underlying futures contract increases in price during the holding period. Selling the same quantity and contract-month that one initially purchased offsets a long position. Long positions are typically used by consumers to hedge against rising prices and initiated by speculators in anticipation of higher prices.
A short position entails the sale of futures contracts in anticipation of lower prices. A short position is entered into by initially selling a futures contract. In the futures market, unlike the stock market, it is just as easy to establish a short position as a long position. Short positions are profitable if the underlying futures contract decreases in price during the holding period. Buying the same quantity and contract month that you initially sold offsets your short positions. If the resulting purchase price is less than the original sale price, a profit is achieved. However, if the resulting purchase price is greater than the original sale price, a loss is incurred. Commodity producers who wish to avoid potentially lower prices (as a short position increases in value and prices decline) usually establish short positions.