We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Shorting requires us to sell first and buy later.
- The short trade is profitable only when the closing price is lower than the entry price.
- There would be a loss when the price goes higher than the price at which one has shorted.
- The stop loss in a short trade is always higher than the price at which one has shorted.
- One can only short on an intraday basis in the spot market.
- The short positions cannot be carried overnight in the spot market.
- The short position in the futures market can be carried forward overnight.
- The margins requirement for both short and long trades are similar.
- The M2M computation is also similar for both short and long trades.
This was so helpful. Thanks a lot
Happy learning!
Hi Karthik and Prateek.
Quick Question – What if I short the futures of a company by using the overnight function because my initial intention was to hold my position for a few days; however, towards the end of the trading day (the same day I placed my short position) I decided to exit my position since I notice a significant profit/loss. Is there a way I would be able to exit my position on the same day even though I placed an overnight position and not intraday?
Yes, of course. You can buy and sell futures at any frequency during the day.
Hi Prakeek/Kartik,
Why are futures some companies not available? Is there an option to short a stock that you know will fall in a few months time (for which the future contract is not available)?
can i sell the future stock first and then buy the stock after one week
Yeah, you can. No problem with that.
Lets say I short a futures contract trading $120 (spot trading at $100) when the futures is in contango and I exit it on expiry when futures’ price approaches spot and lets say at the time of expiry spot is still at $100.
1. Will I be at a profit of $20 now? because futures’ price approaches spot on expiry be it in contango or backwardation
2. Does this mean futures’ sellers have an edge over buyers when in contango? (which is usually the case)
1) Yes, thats right.
2) Hmm, not really. If the spot is not priced in correctly, then the spot can also catch up with the futures right?