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 91

You can see why I shun being short. But then again that is my personal approach.Many people have made enormous profits by being short. You may notice that in the example given, I used the term "theoretical" a lot. That is because in virtually all cases prices do not rise and fall that severely. In the world of futures many contract prices are allowed to fluctuate within a limited range per trading day, as determined by the futures exchange. But even given this protection there are no guarantees that you would find buyers or sellers to settle your contracts. Moreover, it is quite improbable that commodities will experience unrealistic price hikes or drops in a given day. For example, it is unlikely that gold prices will go to $0 overnight. At least historically that has not happened. Still, the possibility exists that prices would slowly move in an unfavorable direction and end up costing you a lot of money over a period of time. For example, gold contracts could lose $100/oz. over a two-month period. But even then, you can be assured that your broker (by law or by policy) will force you to close your positions (at least partially) before the potential loss moves beyond your means to cover it.

Besides going long or short on futures, an investor could play the spreads. One form of a spread strategy involves the simultaneous buying and selling futures contracts of the same underlying commodity expiring at different times. The spread itself refers to the price difference between those futures. Suppose the price difference between the January and the June futures contracts of gold is $20 and analysis predicts that the difference will widen to $40 in one month. A trader can then take a short position on the January contracts and a long position on the June contracts and when the spread reaches $40 (if the analysis proves worthy), he can then settle his positions and take a profit of $20 per ounce. Now if the spread narrows to $10, our trader will be looking at a loss of $10 per ounce. Spreads are popular among futures traders for three reasons:

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

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