Selling (Going Short) Coal Futures to Profit from a Fall in Coal Prices

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Selling (Going Short) Coal Futures to Profit from a Fall in Coal Prices

If you are bearish on coal, you can profit from a fall in coal price by taking up a short position in the coal futures market. You can do so by selling (shorting) one or more coal futures contracts at a futures exchange.

Example: Short Coal Futures Trade

You decide to go short one near-month NYMEX Coal Futures contract at the price of USD 74.45/ton. Since each Coal futures contract represents 1550 tons of coal, the value of the contract is USD 115,398. To enter the short futures position, you have to put up an initial margin of USD 18,900.

A week later, the price of coal falls and correspondingly, the price of NYMEX Coal futures drops to USD 67.01 per ton. Each contract is now worth only USD 103,858. So by closing out your futures position now, you can exit your short position in Coal Futures with a profit of USD 11,540.

Short Coal Futures Strategy: Sell HIGH, Buy LOW
SELL 1550 tons of coal at USD 74.45/ton USD 115,398
BUY 1550 tons of coal at USD 67.01/ton USD 103,858
Profit USD 11,540
Investment (Initial Margin) USD 18,900
Return on Investment 61.06%

Margin Requirements & Leverage

In the examples shown above, although coal prices have moved by only 10%, the ROI generated is 0.00%. This leverage is made possible by the relatively low margin (approximately 16.38%) required to control a large amount of coal represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Coal Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How Does an Investor Make Money Short Selling?

One way to make money on stocks for which the price is falling is called short selling (or going short). Short selling is a fairly simple concept: an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.

Short sellers are betting that the stock they sell will drop in price. If the stock does drop after selling, the short seller buys it back at a lower price and returns it to the lender.

Short selling is risky. Going long on stock means that the investor can only lose their initial investment. If an investor shorts a stock, there is technically no limit to the amount that they could lose because the stock can continue to go up in value.

For example, if an investor thinks that Tesla (TSLA) stock is overvalued at $315 per share, and is going to drop in price, the investor may borrow 10 shares of TSLA from their broker and sells it for the current market price of $315. If the stock goes down to $300, the investor could buy the 10 shares back at this price, return the shares to her broker, and net a profit of $315 (selling price) – $300 (buying price) = $15 per share.

However, if the TSLA price rises to $355, the investor could net $315 – $355 = – $40 loss per share.

What Are the Risks?

Short selling comes involves amplified risk. When an investor buys a stock (or goes long), they stand to lose only the money that they have invested. Thus, if the investor bought one TSLA share at $315, the maximum they could lose is $315 because the stock cannot drop to less than $0. In other words, the minimum value that any stock can fall to is $0.

However, when an investor short sells, they can theoretically lose an infinite amount of money because a stock’s price can keep rising forever. As in the example above, if an investor had a short position in TSLA (or short sold it), and the price rose to $355 before the investor exited, the investor would lose $40 per share.

Key Takeaways

  • Short sellers are betting that a stock will drop in price.
  • Short selling is riskier than going long on a stock.
  • Speculators short sell to capitalize on a decline while hedgers go short to protect gains or minimize losses.
  • Short selling is worthwhile if an investor is sure that a stock’s value will drop in the short term.

Why Do Investors Go Short?

Short selling can be used for speculation or hedging. Speculators use short selling to capitalize on a potential decline in a specific security or the broad market. Hedgers use the strategy to protect gains or mitigate losses in a security or portfolio.

Note that institutional investors and savvy individuals frequently engage in short-selling strategies simultaneously for both speculation and hedging. Hedge funds are among the most active short-sellers and often use short positions in select stocks or sectors to hedge their long positions in other stocks.

While short selling does present investors with an opportunity to make profits in a declining or neutral market, it should only be attempted by sophisticated investors and advanced traders due to its risk of infinite losses.

When Does Short Selling Make Sense?

Short selling is not a strategy used by many investors largely because the expectation is that stocks will rise in value. The stock market, in the long run, tends to go up although it certainly has its periods where stocks go down. Particularly for investors who are looking at the long horizon, buying stocks is less risky than short-selling the market. Short selling does make sense, however, if an investor is sure that a stock is likely to drop in the short term. For example, if a company is experiencing difficulties.

Short (Short Position)

What is a Short (or Short Position)

A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. A naked short is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. A covered short is when a trader borrows the shares from a stock loan department; in return, the trader pays a borrow-rate during the time the short position is in place.

In the futures or foreign exchange markets, short positions can be created at any time.

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Like this post? Please share to your friends:
Binary Options Trading Education
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: