Go short to go long?

[HurricaneH]

Simple question, apoligies if already answered - searched, but to no avail..

To go short (ie. sell commodities futures) to I have to already be long (ie. have purchased some commodity futures and therefore have something to sell)?

I thought this would be the case, but have recently found out that you can actually short without having a position at all...

Can someone explain this to me in relation to, lets say, copper futures on the LME? I have a basic understanding but really would like to get a more in depth idea of why this is the case.

Thanks!

 

[Shakone]

Yes you can short something you don't have (you are 'short' of the commodity) but there are conditions and you will have to buy it back at some point so that it balances out.

For example you enter into a contract to sell something by a particular date. That doesn't mean you have it right now. It means before a particular date you will have it.

Don't think this is so unusual. You could order something from Amazon, and they might not have it actually in stock. But as long as you get your product by the time agreed, you don't care whether they actually had the thing or not in stock at the time you ordered.

 

[arabianights]

You obviously don't understand anything about futures at all, so please don't trade them until you do more research.

Futures are just a contract... there has to a buyer and a seller... there are the same number of longs and shorts

P.S. Wouldn't trade on LME, it's more complex than most futures...

 

[Waterfield]

...

 

[MarketMoverTrader]

Simple question, apoligies if already answered - searched, but to no avail..

To go short (ie. sell commodities futures) to I have to already be long (ie. have purchased some commodity futures and therefore have something to sell)?

I thought this would be the case, but have recently found out that you can actually short without having a position at all...

Can someone explain this to me in relation to, lets say, copper futures on the LME? I have a basic understanding but really would like to get a more in depth idea of why this is the case.

Thanks!

You've got some learning to do, but it can be a good journey, so good luck with it. I think trading is a very worthy venture.

The idea of 'going short' was new to me when I started. "How can you sell something before you buy it??" Remember that futures are traded in contracts, which can be sold, even if you don't actually own them.

It's like collecting money from a buyer at a particular price (determined by percieved market value). Now you're 'short' 1 contract, so you need to buy 1 contract from the market to close your trade, which you can do at a later time, hopefully at a lower price than you sold it at. Then you pocket the difference.

 

[MarketMoverTrader]

Don't think this is so unusual. You could order something from Amazon, and they might not have it actually in stock. But as long as you get your product by the time agreed, you don't care whether they actually had the thing or not in stock at the time you ordered.

Exactly - great analogy. To explain it to people I use the example of a builder that is paid upfront by the client, and then uses the money to go source materials to build the house, and try make a profit.

 

[Rhody Trader]

Exactly - great analogy. To explain it to people I use the example of a builder that is paid upfront by the client, and then uses the money to go source materials to build the house, and try make a profit.

That's not a bad Joe Public analogy - but only when talking about something like shorting stocks where you actually buy/sell. In futures and forex you never buy or sell anything, unless you go through delivery. You are dealing in agreements to do future exchanges, mostly exchanges which never happen. Going short means you've agreed to sell something to someone at a future date at a price determined today. You close out a futures/forex short by offsetting it through entering an agreement to buy the same thing you've shorted.

It's like agreeing to sell a new Ferrari to Joe on May 1st for $400k, then turning around and agreeing to buy a new Ferrari from Max on May 1st for $350k and telling Max to deliver the car to Joe. You get $400k from Joe on May 1st and give $350k to Max the same day, booking your $50k profit. It's just that in the futures market all that stuff is dealt with by the clearinghouse and you're account is credited with the profits as soon as you making the offsetting arrangement, not when the exchange actually was to take place.

 

[MarketMoverTrader]

Someone first explained it to me with a similar example, using BMW's. Ferrari is a classier example maybe!