Short Selling

Each Futures contract need two parties involved, one party which buys the contract (typically an industrial producer) and one party who sells the contract (typically a farmer). At the moment the farmer sells the contract he does not have the commodity - he is selling a Future contract with a delivery date in the Future with the intention to seed and harvest a commodity and deliver it against the contract in the Future. In fact most farmers close the contract (or buy the contract back) without delivery just keeping the money from the financial transaction and sell or deliver it in their local region without the official delivery through the terms or the exchange. Basically the same is done on short sales.

pricetime

The graph shows a movement of a Futures contract over time. In the example the Futures contract is sold at a price of 20 at the Time 1 (Note: As each seller needs a buyer somebody else has bought the contract at Time 1). We are short 1 contract at 20. The Futures price has fallen and at Time 2 the contract is bought back at 5 (Note: As each buyer needs a seller somebody has sold us his contract) and we are flat (we have sold 1 in Time 1 and bought 1 in Time 2 means no position or flat). The profit of this transaction is +15 for us as we have sold for 20 and bought for 5 (20-5=15 profit).

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