Selling (Going Short) Cotton Futures to Profit from a Fall in Cotton Prices

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Contents

Selling (Going Short) Cotton Futures to Profit from a Fall in Cotton Prices

If you are bearish on cotton, you can profit from a fall in cotton price by taking up a short position in the cotton futures market. You can do so by selling (shorting) one or more cotton futures contracts at a futures exchange.

Example: Short Cotton Futures Trade

You decide to go short one near-month NYMEX Cotton Futures contract at the price of USD 0.4600/lb. Since each Cotton futures contract represents 50000 pounds of cotton, the value of the contract is USD 23,000. To enter the short futures position, you have to put up an initial margin of USD 3,375.

A week later, the price of cotton falls and correspondingly, the price of NYMEX Cotton futures drops to USD 0.4140 per pound. Each contract is now worth only USD 20,700. So by closing out your futures position now, you can exit your short position in Cotton Futures with a profit of USD 2,300.

Short Cotton Futures Strategy: Sell HIGH, Buy LOW
SELL 50000 pounds of cotton at USD 0.4600/lb USD 23,000
BUY 50000 pounds of cotton at USD 0.4140/lb USD 20,700
Profit USD 2,300
Investment (Initial Margin) USD 3,375
Return on Investment 68.1481%

Margin Requirements & Leverage

In the examples shown above, although cotton prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 14.6739%) required to control a large amount of cotton represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

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Buying Straddles into Earnings

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

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Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Selling (Going Short) Rubber Futures to Profit from a Fall in Rubber Prices

If you are bearish on rubber, you can profit from a fall in rubber price by taking up a short position in the rubber futures market. You can do so by selling (shorting) one or more rubber futures contracts at a futures exchange.

Example: Short Rubber Futures Trade

You decide to go short one near-month TOCOM Rubber Futures contract at the price of JPY 133.00/kg. Since each Rubber futures contract represents 5000 kilograms of rubber, the value of the contract is JPY 665,000. To enter the short futures position, you have to put up an initial margin of JPY 75,000.

A week later, the price of rubber falls and correspondingly, the price of TOCOM Rubber futures drops to JPY 119.70 per kilogram. Each contract is now worth only JPY 598,500. So by closing out your futures position now, you can exit your short position in Rubber Futures with a profit of JPY 66,500.

Short Rubber Futures Strategy: Sell HIGH, Buy LOW
SELL 5000 kilograms of rubber at JPY 133.00/kg JPY 665,000
BUY 5000 kilograms of rubber at JPY 119.70/kg JPY 598,500
Profit JPY 66,500
Investment (Initial Margin) JPY 75,000
Return on Investment 89%

Margin Requirements & Leverage

In the examples shown above, although rubber prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of rubber represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Rubber Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

The Short Side of Commodities – How to Sell Commodities

wsfurlan / Getty Images

For those who first dip their toes in the commodities markets, it is always easier to go long or buy than to initiate a position from the short side, betting that the price of raw material will decline. For some reason, human nature makes buying first a more natural and comfortable motivation. However, one doubles the number of trading opportunities in the markets with a willingness to bet that prices also go lower.

The Commodity Market

The commodity market is an excellent vehicle for traders that use highly leveraged futures contracts to make profits from just a relatively small move in price. Markets move higher, and they move lower. The beauty of futures markets is that there are profitable opportunities when markets appreciate and when they depreciate.

In fact, it is just as easy to bet that a commodity will drop in price as it is betting it will go up in price. When calling a broker to place an order to short a market, just them you want to sell (insert commodity, contract month, price, and all other specifications of the order) as an opening position. A short position will make money as the price of the commodity declines. To close a short position, instruct the broker to buy that same contract, closing and you’re out.

When trading futures online, hit the sell button to open a short position. When ready to exit the position, hit the buy button.

Selling a commodity that you don’t own may seem strange at first, but it will become second nature over time. Professional commodity traders typically do not have a bias toward buying or selling. They will sell if they feel a market will move lower and buy if they feel it will move higher. The procedures to buy and sell are both easy, so looking for opportunities in both directions doubles your chances of success.

There Is More Than One Way to Go Short

For some reason, human nature makes it easier for traders and investors to go long or buying to initiate a trade. However, limiting yourself only to markets you think will appreciate takes away half of the opportunities available to traders and investors. When your analysis tells you that a market will go down or depreciate, it is appropriate to initiate a trade or position by selling first or going short a market.​

Since commodities are highly volatile assets, professional trades often initiate trades or positions from the short side. In fact, because human nature drives most people to buy or go long, markets tend to take the stairs up and the elevator down. Many markets tend to appreciate price slowly and methodically, but they tend to go down quickly and furiously.

Going short in the futures market is as risky as going long. With either position, you can make or lose on a dollar-for-dollar basis when the market moves in your direction or against you. The holder of a short position will make money when the price goes down and lose when it goes up. To limit risk, many market professionals will use limited risk instruments or put options to short markets.

The purchase of a put option gives the owner the right, but not the obligation to sell a specified amount of a commodity at a specified price (the strike price) for a specified period (until the expiration date). The buyer of a put option pays the seller a premium for the right to sell. Put options are less risky than outright short positions in futures markets for important reasons.

There is no margin on a long put option as the buyer pays the premium at the beginning of the trade. Additionally, the buyer of the put option can never lose more than the premium paid for the option, which is why there is no margin requirement on any long option.

There are times when it is appropriate to be long or initiate positions with a buy, and there are times to be short and sell first. Commodities are volatile assets; they go up and down a lot. When a trader or investor limits their activity to only buying, they can miss out on many profitable opportunities.

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