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Basic Basics
If a trader is a buyer, he has taken a long position. A long position involves purchase of a futures contracts in hope that price of contract will increase in future. Let’s say our friend Trader Bob contracts in March to buy a widget (a long position) in June for $10. June rolls around, and price of a widget is now $13. That means Bob now has right to buy widget for $10 even though going rate is $13. Bob goes ahead and buys widget for $10, then turns around and immediately sells it for $13, pocketing difference.
A trader who is a seller takes a short position, which involves sale of futures contracts in anticipation of prices falling in future. Trader Bob in this case contracts in June to sell a widget in September for $13. Fall comes around, and going rate for widget in September turns out to be $9. Trader Bob buys a widget for that going rate of $9, then immediately turns around and exercises his right sell widget for $13, profiting from difference. At first, it might seem odd that Trader Bob is contracting to sell something he does not yet own. But look at situation this way instead: in June, Bob makes a commitment to sell a widget to Sam in September for a guaranteed price of $13. If Bob can buy widget for less than that sometime before September, he will make a profit.
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Copyright © Jeff Schweitzer
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Jeff Schweitzer received his Ph.D. from UCSD in 1985. Jeff was appointed as a science advisor at the White House under the Bush and Clinton Administrations for three years before devoting attention to generating wealth through trading futures. He has published more than 60 articles in diverse areas, including neurobiology, marine science, international development, environmental protection and aviation.