In the previous article we started to examine the futures contracts.
In futures contracts we could take short positions as well. If we expect a decrease in the price of the underlying asset, we may sell the contract at the current prices and to buy it back in the future at a lower level, and thus to make a profit.
This example is similar – we sell June contract for oil at $ 60 a barrel, or 60 thousand dollars all. After a month the price decreases to 57 dollars, so we buy it back and close our position by realizing a profit of three thousand dollars.
More conservative way to trade is the so-called spreads. In this case, the investor benefits from price differences of any contracts with different maturities of one and the same asset or of different markets, as well as between futures interdependent assets.
The biggest part of futures contracts are not fulfilled in practice, there is no physical delivery of the products, goods, assets, etc. This is due to the fact that most market participants trade to hedge the risk or to extract speculative gains. Futures are used as a financial instrument not only by manufacturers and retailers, but also by speculators.
As a conclusion, we could add that, because of the power that gives the margin trading, both realization of profits and incurring unacceptable losses are possible. Futures market is not for everyone, considerable knowledge, experience and willingness to succeed are necessary here.