When trading Futures, you may open a position by either buying or selling first. These two acts are called going long and going short whereby the act of buying is called going long and selling is called going short. So what’s the difference between short and long positions, how are they used, and what is short-selling?
Buying vs. Selling
Traders usually go long or open a buy position on certain Futures contracts when they believe that the Future’s price is likely to rise in the future. On the flip side, when traders believe that the price will fall, they are more likely to open a short position, or in other words, they may go short. It is important to note, however, that the Futures market offers access to a myriad of financial instruments, and with that access and flexibility also comes the possibility of volatility. As such, opening a buy position will not necessarily end in gains and vice versa.
What Does It Mean to Short a Futures Contract?
Going short or shorting a Futures contract refers to the act of selling to open a position with the intention of hopefully profiting from market downtrends. Accordingly, if the trader opens a short position, he is speculating on the asset's price to decline. Usually, traders sell short in anticipation of eventually buying the contract at a hopefully lower price in the future.
Selling in Futures vs Short Selling in the Stock Market
Shorting in the Futures market differs from short selling in the stock market in that the former does not have as many restrictions as the latter. For example, shorting in the stock market is usually limited to one day and the price swings may not occur on the same day which means that the position can end up being closed with a loss. In addition, selling in the Futures market allows traders to sell stock Indexes, metals, and other commodities whereby in the stock market the selling is usually confined to individual stock symbols. But the biggest difference between the two is perhaps the fact that while in the stock market, short selling requires borrowing shares from the broker and paying a borrowing rate, in the Futures market it does not.
In the stock market, short sellers borrow shares of stocks or other assets they believe will decrease in value. Investors can then sell these borrowed shares at market prices to buyers. As long as the share price continues to decline, the trader can repurchase the shares at a lower price before returning the borrowed shares. In Futures trading, on the other hand, traders do not need to borrow anything from the broker and they can create a short position at any given time.
What Are the Potential Benefits of Short Positions in the Futures Market?
The obvious possible upside of short positions is that traders would (ideally) be able to buy the shorted Futures contract in the future for a lower price. Another advantage of going short in Futures is that the initial deposit required is the same as it is for going long and going short can allow traders to hedge against other positions.
What Are the Potential Risks of Short Positions in Futures?
Short positions can also have their downsides. For example, while it comes with the potential of gaining profits, it can also come with the risk of unlimited losses due to the fact that the Future’s price can rise to a large extent.
Can I Sell Futures Without Buying?
Yes, you can sell Futures without buying. This is because when selling futures, you do not have to make an initial purchase like when shorting stocks. Nonetheless, in order to possibly profit from your short position in Futures trading, you are required to eventually “flatten” your position by buying an equal number of contracts to offset your position.
Conclusion
Traders have the option to buy or sell in the Futures market depending on their goals. With Plus500, traders have the option to go short or long with a few simple steps. Go to your Plus500 Futures account and click on your desired underlying instrument, then choose whether you want to open a buy or sell position based on your goals.
FAQs
In other words, when you take a long position, you buy an asset with the expectation that its value will rise in the future. If the asset's value does increase, you can sell it for a profit. On the other hand, a short position is a bet that an asset's value will decrease over time.
What is the difference between long trading and short trading? ›
While going long involves buying a stock and then selling later, going short reverses this order of events. A short seller borrows stock from a broker and sells that into the market. Later the investor expects to repurchase the stock at a lower price, pocketing the difference between the sell and buy prices.
How do you tell if an option is long or short? ›
With options, buying or holding a call or put option is a long position; the investor owns the right to buy or sell to the writing investor at a certain price. Conversely, selling or writing a call or put option is a short position; the writer must sell to or buy from the long position holder or buyer of the option.
What is the difference between long position and short position derivatives? ›
Being long a derivative means an investor or trader has bought the derivative with the expectation of a price increase, whereas being short a derivative means an investor or trader is a seller of a derivative with the expectation of a price decrease.
What is an example of a long futures? ›
The trader can take a long futures position by buying a crude oil futures contract with a delivery date set for several months in the future. The trader can earn by selling the futures contract at a higher price if crude oil prices rise.
What is long in futures trading? ›
Future. Going long in a future means the holder of the position is obliged to buy the underlying instrument at the contract price at expiry. The holder of the position will profit if the price of the underlying instrument goes up, as the price he will pay will be less than the market price.
What is an example of a long short trade? ›
Long-Short Equity Example: The Pair Trade
If the investor buys 1,000 shares of Microsoft at $33 each, and Intel is trading at $22, the short leg of this paired trade would involve purchasing 1,500 Intel shares so that the dollar amounts of the long and short positions are equal.
How do you explain short trade? ›
Short selling involves borrowing a security whose price you think is going to fall and then selling it on the open market. You then buy the same stock back later, hopefully for a lower price than you initially sold it for, return the borrowed stock to your broker, and pocket the difference.
Why short term trading is better than long term? ›
Short term investment allows you to achieve your financial goals within a short span, with a lower risk. On the other hand, if you have a greater risk appetite, wanting higher returns, you can select long term investment avenues.
What is the 3 30 formula? ›
This rule suggests that a stock's price tends to move in cycles, with the first 3 days after a major event often showing the most significant price change. Then, there's usually a period of around 30 days where the stock's price stabilizes or corrects before potentially starting a new cycle [1].
Long and short refer to two distinct positions. “Long” involves purchasing assets with the goal of profiting from a subsequent rise in their value, while “short” entails selling assets with the intention to repurchase them at a lower price.
What is the risk of a long option? ›
The maximum risk is limited to the cost of the option. The profit potential is unlimited. To break even on the trade at expiration, the stock price must exceed the strike price by the cost of the long call option.
What is a short position in futures? ›
A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price.
What is the difference between a short forward position and a long futures position? ›
Forwards are very similar to futures; however, there are key differences. A forward long position benefits when, on the maturation/expiration date, the underlying asset has risen in price, while a forward short position benefits when the underlying asset has fallen in price.
What does long and short mean in derivatives? ›
In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long) or sell it (going short).
What is the difference between a long futures contract and a short futures contract? ›
The idea of a futures contract is to either buy or sell an asset later on at a specified price. In this paper I will look at both positions. First, wanting to buy an asset in the future is said to be long a futures contract, and to sell an asset in the future is said to be short a futures contract.
What is the difference between a short futures contract and a long futures contract? ›
The party who has a short position in the futures or forward contract has committed to sell the good at the specified price in the future. Having a long position means you are committed to buy the good at the specified price in the future.
What is the difference between long position and short position futures contracts? ›
- Investors “Buy” futures in the market, called long position. Buyers believe that futures price will increase, then buyers get profit and vice versa. - Investors “Sell” futures in the market, called short position: Investors believe that futures price will decrease, then investors get profit and vice versa.
