Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 87

is being "long" or "short" and it refers to the trader's position relative to a trade, in this case futures.When you buy futures contracts you are said to be long on the contracts. Being long means that you have purchased the contracts.When you sell futures contracts you are said to be short on the contracts. Being short means that you have sold the contracts. Regardless of your position, there comes a time when you have to close your position, and in terms of futures contracts that can happen in one of two ways. You can either wait until the delivery date and make good on the delivery, or you can close your position by making an opposite and equal trade of your original position.

Let's take a look at an example. Suppose you are long ten gold contracts due for delivery in three months. That means that you have purchased ten gold contracts (worth 1,000 ounces of gold) in the market (perhaps the COMEX market). You can wait until the delivery date of the contracts (the full three months), and at that time you will receive 1,000 ounces of gold (you have already paid for them by buying the contracts). If you are lucky the price of gold has since increased, which means you can then, if you wish, sell your gold at the going market (spot) price and pocket the difference. If gold prices have decreased, well that is your loss. You are either going to be stuck with 1,000 ounces of gold or you can sell it at a loss.

Another method of settling your contracts obligation is to offset your contracts prior to the delivery date. This, by the way, is the most common way (if not the only way for all intents and purposes) used to close contract positions. In our example you can close your gold futures position by selling the ten gold contracts prior to the maturity (delivery) date of your contracts. In other words to go short ten gold contracts. In this case the long and short positions cancel each other out and you then close your position. Now if at the time of your sale gold futures prices have moved high enough beyond the price you paid, your


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