The sale of any personal asset often carries with it a negative connotation. Selling is sometimes associated with unwanted property liquidations, bankruptcy proceedings, or the precursor for physical relocation. For many, it’s viewed as being a necessary financial evil ― for others, it’s an essential part of everyday business.
Depending on a variety of factors, selling a futures contract may be either beneficial or excruciating. However, there are three specific times when selling a futures contract is a good thing. Let’s break down each of these situations and examine how a sudden sale can sound a lot like the ringing of a cash register.
Limiting Risk Exposure
Active hedging is a practice as old as the futures markets themselves. From corn growers to copper miners, a broad spectrum of industries implement strategic hedging plans via the flexibility of futures.
In practice, selling a futures contract is the quintessential commodity producer’s hedge. For instance, if you’re growing winter wheat, opening a short position in June Chicago SRW wheat futures insulates your risk of lagging spot prices come harvest time. Losses stemming from an untimely market downturn may be largely mitigated by selling a correlated futures contract.
Short positions are also frequently used to limit risk exposure to equities market volatility. Investors long on stocks frequently view the futures markets as a means of taking out an insurance policy on their holdings. The equities hedge works in a similar fashion as in ag commodities: The investor chooses to sell a related futures contract to realize gains from a broader market meltdown. Contracts such as the E-mini S&P 500, E-mini DOW, or E-mini NASDAQ are often sold as portfolio insurance against a Wall Street catastrophe.
Liquidating a Long Position
If you’re taking a long position in a futures market, then you’re buying a contract in anticipation that its value will rise. Accordingly, selling a futures contract is the mechanism by which an open long position is closed out at market.
If you execute a buy order within the framework of a comprehensive trading plan, then a subsequent sell means two things:
- The open long position is partially or fully closed out
- A profit or loss is realized from the sale
Unfortunately, all trades do not end up winners. In fact, the old saying “it’s not what you make, it’s what you don’t lose” is commonly taken as gospel in trading circles. Selling a futures contract can help limit losses by quickly exiting a bullish misread or locking in profits from an uptick in pricing. In both cases, the sale positively impacts your trading account balance.
Active Shorting
One of the strongest attributes of futures products is their inherent flexibility. Traders are able to profit from being either long or short a market simply by buying or selling a contract. In practice, it’s possible to make money from selling high and buying low, not just buying low and selling high.
When you sell a futures contract, you’re opening a short position in the market. Profits are realized from falling asset prices in relation to the bearish entry point. If you have a strong opinion that an asset is in for a dramatic sell-off or correction, then selling a related futures contract may be a good, and potentially lucrative, idea.
Selling a Futures Contract Isn’t a Bad Thing
As we mentioned earlier, selling is often viewed as being a product of financial weakness. In futures, this assertion could not be farther from the truth. Whether you’re hedging risk, bailing out of a fizzled rally, or getting in on a market correction, selling futures contracts are a great way of building market share.
For more information on the many opportunities available in the futures markets, schedule a free no-obligation consultation with an industry pro at Daniels Trading today.
