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 90

Personally I prefer to be long rather than short. It is my personal opinion that most things have a tendency to go up in price over time, and based on that outlook I cannot justify going short. There is yet another danger of going short. Getting back to our gold example, if you are long gold contracts (that means you have bought gold contracts) the most you can theoretically lose is if the gold price plunges to $0 (an unlikely event but hypothetically possible). Let's say that you had purchased ten gold (100 oz.) contracts, three months out at $300 per ounce. That would mean:

1,000 ounces x $300 or $300,000

Suddenly the price of gold drops to $0. That would mean that you would receive 1,000 ounces of worthless gold come delivery date. You will not be able to offset your position either, since no one will be crazy enough to buy your contracts (at any price) for a worthless commodity, unless they believe it would jump right back up in price. Your loss would be limited to the purchase price of ten gold contracts ($300,000).

Now let's say you are short 10 gold contracts (sold at $300/oz.) and gold prices suddenly pick up. Again hypothetically, gold prices could continue to rise to any amount, $1,000, $2,000 per ounce or more (actually there some restrictions on daily price fluctuations of futures- and thus the commodities themselves - so such a case would be unlikely but just indulge me here). In order to fulfill your contract obligation at delivery date you must purchase 1,000 ounces of gold at the going price (let's say $1,000/oz.) to make your delivery. (If you happen to have 1,000 ounces of certified gold stashed away, you would be in luck, but who does?) That means a loss of $700,000 ($1,000,000 to purchase the gold minus $300,000 received for the sale of ten gold contracts). The point is that your potential for loss is theoretically infinite.

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Copyright and Disclaimer
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Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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