A short futures position gains when the futures price falls and loses when it moves the other way. It can express a view on a fall in price or hedge a matching business exposure. Profit and loss bounds depend on the particular contract’s possible price range; initial margin does not limit loss.
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.
Profit potential
The position’s gain before costs equals the entry price minus the exit or settlement price, multiplied by contract size. A price bound must come from the actual product; do not impose a stock-like zero floor on every future.
The formula for calculating profit is given below:
- Maximum profit depends on the contract’s possible price range
- Profit Achieved When Market Price of Futures < Selling Price of Futures
- Profit = (Selling Price of Futures - Market Price of Futures) x Contract Size
Loss potential
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 depends on the contract’s possible price range
- 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.
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
Futures positions are marked to market, with gains and losses reflected in account equity. Brokers can demand additional collateral or liquidate positions when account requirements are not met, including under intraday or higher house requirements. Do not assume a guaranteed grace period after a margin call.
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.
Example scope and settlement
The $40, $30 and $50 crude-oil prices and 1,000-barrel contract above are historical teaching inputs. The $10-per-barrel change produces a $10,000 gain or loss before costs. This is independent of the initial margin deposit. Some futures, including certain crude-oil contracts, have traded below zero. An offset before applicable deadlines differs from carrying a position into physical delivery or final cash settlement; check the exact contract and broker procedures.
Content reviewed:
References: OIC options basics; OIC assignment; OCC contract adjustments. Editorial standards.