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

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Contents

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

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

Example: Short Rubber Futures Trade

You decide to go short one near-month TOCOM Rubber Futures contract at the price of JPY 133.00/kg. Since each Rubber futures contract represents 5000 kilograms of rubber, the value of the contract is JPY 665,000. To enter the short futures position, you have to put up an initial margin of JPY 75,000.

A week later, the price of rubber falls and correspondingly, the price of TOCOM Rubber futures drops to JPY 119.70 per kilogram. Each contract is now worth only JPY 598,500. So by closing out your futures position now, you can exit your short position in Rubber Futures with a profit of JPY 66,500.

Short Rubber Futures Strategy: Sell HIGH, Buy LOW
SELL 5000 kilograms of rubber at JPY 133.00/kg JPY 665,000
BUY 5000 kilograms of rubber at JPY 119.70/kg JPY 598,500
Profit JPY 66,500
Investment (Initial Margin) JPY 75,000
Return on Investment 89%

Margin Requirements & Leverage

In the examples shown above, although rubber prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of rubber 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 Rubber Futures & Options Trading

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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. ]

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. ]

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  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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. ]

Buying (Going Long) Rubber Futures to Profit from a Rise in Rubber Prices

If you are bullish on rubber, you can profit from a rise in rubber price by taking up a long position in the rubber futures market. You can do so by buying (going long) one or more rubber futures contracts at a futures exchange.

Example: Long Rubber Futures Trade

You decide to go long one near-month TOCOM Rubber Futures contract at the price of JPY 133.00 per kilogram. Since each TOCOM Rubber Futures contract represents 5000 kilograms of rubber, the value of the futures contract is JPY 665,000. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of JPY 75,000 to open the long futures position.

Assuming that a week later, the price of rubber rises and correspondingly, the price of rubber futures jumps to JPY 146.30 per kilogram. Each contract is now worth JPY 731,500. So by selling your futures contract now, you can exit your long position in rubber futures with a profit of JPY 66,500.

Long Rubber Futures Strategy: Buy LOW, Sell HIGH
BUY 5000 kilograms of rubber at JPY 133.00/kg JPY 665,000
SELL 5000 kilograms of rubber at JPY 146.30/kg JPY 731,500
Profit JPY 66,500
Investment (Initial Margin) JPY 75,000
Return on Investment 89%

Margin Requirements & Leverage

In the examples shown above, although rubber prices have moved by only 10%, the ROI generated is 89%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of rubber 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 Rubber 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. ]

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. ]

Short Futures Position

The short futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a fall in the price of the underlying.

The short futures position is also used by a producer to lock in a price of a commodity that he is going to sell in the future. See short hedge.

Short Futures Position Construction
Sell 1 Futures Contract

To create a short futures position, the trader must have enough balance in his account to meet the initial margin requirement for each futures contract he wishes to sell.

Unlimited Profit Potential

There is no maximum profit for the short futures position. The futures trader stands to profit as long as the underlying asset price goes down.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Market Price of Futures

Unlimited Risk

Heavy losses can occur for the short futures position if the underlying asset price rises dramatically.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Market Price of Futures > Selling Price of Futures
  • Loss = (Market Price of Futures – Selling Price of Futures) x Contract Size + Commissions Paid

Breakeven Point(s)

The underlier price at which break-even is achieved for the short futures position position can be calculated using the following formula.

  • Breakeven Point = Selling Price of Futures Contract

Example

Suppose June Crude Oil futures is trading at $40 and each futures contract covers 1000 barrels of Crude Oil. A futures trader enters a short futures position by selling 1 contract of June Crude Oil futures at $40 a barrel.

Scenario #1: June Crude Oil futures drops to $30

If June Crude Oil futures is trading at $30 on delivery date, then the short futures position will gain $10 per barrel. Since the contract size for Crude Oil futures is 1000 barrels, the trader will net a profit of $10 x 1000 = $10000.

Scenario #2: June Crude Oil futures rises to $50

If June Crude Oil futures instead rallies to $50 on delivery date, then the short futures position will suffer a loss of $10 x 1000 barrel = $10000 in value.

Daily Mark-to-Market & Margin Requirement

The value of a short futures position is marked-to-market daily. Gains are credited and losses are debited from the future trader’s account at the end of each trading day.

If the losses result in margin account balance falling below the required maintenance level, a margin call will be issued by the broker to the futures trader to top up his or her account in order for the futures position to remain open.

Synthetic Short Futures

An equivalent position known as a synthetic short futures position can be constructed using only options.

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. ]

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. ]

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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