Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
sale of ten gold contracts will probably fetch more money than you originally paid for your contracts and you end up with a profit; otherwise, the net result will be loss (or a wash at best).
Why would you decide to take a loss by offsetting your contracts prior to the delivery date? The answer is that you may believe that gold prices are headed lower and the longer you wait, the less your ten contracts may be worth. So you may decide to cut your losses and close your position. Of course, you may be wrong and gold prices may rebound. That is one of the risks you must be willing to accept when you trade any financial instrument. No one can accurately predict the market all the time.
Now here comes the complicated part of futures - and it's really not so complicated if you think about it logically. The same way you can buy contracts and close your position by selling them, you can sell contracts and close your position by buying them. Just like a short position cancels a long, a long position cancels a short. It is the same concept, only in reverse (think of it as a loan repayment).
Using our example of gold contracts, when you are short ten gold futures contracts, you are obligated to deliver 1,000 ounces of gold at the maturity date of the contracts. You can instead close (offset) your position by buying ten gold contracts (with the same specs) prior to the delivery date of your original contracts. Thus you would have no obligation to deliver any gold as your position is now closed. Virtually all futures contracts are settled prior to the delivery date so normally you would not have to worry about obtaining 1,000 ounces of gold to deliver come maturity date. But let's say you decide to wait until the delivery date of the ten gold contracts. At that time if the price of gold has moved lower, you buy and deliver 1,000 ounces of gold at the going price and therefore realize a profit by keeping a portion of your original …
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