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.
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.
Unlimited
Profit achieved when: Market Price of Futures < Selling Price of Futures
Profit = (Selling Price of Futures - Market Price of Futures) x Contract Size
Unlimited Risk
Heavy losses can occur for the short futures position if the underlying asset price rises dramatically.
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
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.