Blog | StoneX Futures

Selling a Futures Contract: Objectives and Benefits | StoneX

Written by StoneX | May 4, 2018 5:00:00 AM

Perhaps the single largest advantage to trading standardized futures is flexibility. In contrast to more traditional forms of capital investment, futures give an investor an opportunity to profit from either rising or falling markets. A trader is not just limited to gains realized from buying low and selling high — selling high and buying low is also often an effective way of boosting market share.

From WTI Crude Oil (CL) to Chicago SRW Wheat (ZW) futures, a wide variety of asset classes are readily available for trade. In addition to a diversity of offerings, futures give traders the ability to profit from being long or short the market.

Reasons for Selling a Futures Contract

Depending upon your chosen market, strategy, or product, there are many reasons for selling a futures contract. Motives range from actively managing risk to providing liquidity in exchange for a chance at financial reward. If a trader has a strong opinion on the coming behavior of a specific market or markets, then selling may provide both opportunity and reassurance.

In practice, three primary modes of logic lie behind selling a futures contract. Each has a unique objective and is executed in a specific manner.

Any trades are educational examples only. They do not include commissions and fees.

Short selling

This is the practice of taking a bearish view of a market and acting accordingly. This is accomplished by selling the contract of a given product at market or opening a short position.

For instance, let’s say that Alex is a veteran metals trader who views the technicals and fundamentals of the gold market to be exceedingly bearish. Taking a short position in Gold futures (GC) will enable the Alex to realize a gain from falling gold prices.

To accomplish this goal, a sell market or sell limit order for two lots of GC is sent to the exchange for execution. Once the order is filled, Alex is net short two lots of GC and gains $20 for every $0.10 price falls.

Trade management

This frequently includes selling a contract (or contracts) in order to exit an existing long position. In the event that price has moved favorably or negatively in relation to the trade’s entry, a trader may use a sell order to close out an open long position. Sell orders are commonly used as stop losses or profit targets in adherence with a predetermined strategy.

As an example, trader Alex is bullish on energies and buys one lot of WTI crude oil (CL) at $60.01. The price jumps to $60.15 rapidly, producing a desirable $140 profit. Alex wastes no time and sends a sell market order to the exchange. The sell order is filled, effectively closing out the long position and realizing the profit.

Risk management

This often encompasses selling a futures contract. Proactively hedging or limiting risk may include taking a short position in related futures products. For producers, the capital resources involved in delivering a commodity to market can be extensive, and opening an offsetting position in a related futures contract is one way of mitigating pricing risk at delivery.

Ag producers frequently sell futures contracts to achieve this goal. For instance, Alex the corn farmer is hesitant about lagging crop prices come harvest time. In order to mitigate the negative impacts of depressed corn pricing, Alex sells several contracts of December corn futures (ZC) shortly after planting.

If the price of corn falls at delivery, gains realized by the short ZC position will offset losses incurred by sales. In effect, selling December ZC locked in a profit for that year’s crop.

Any trades are educational examples only. They do not include commissions and fees.

How Futures Can Work for You

Whether you’re an active trader looking to gain market share or a producer addressing risk, selling a futures contract may be a viable way of achieving your goals.

For more information on the ins and outs of the futures markets, contact the team at StoneX. From agriculture to energies, StoneX has the experience and resources to help you incorporate futures into your approach to the marketplace.