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

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

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

Example: Short Wheat Futures Trade

You decide to go short one near-month CBOT Wheat Futures contract at the price of USD 5.7000/bu. Since each Wheat futures contract represents 5000 bushels of wheat, the value of the contract is USD 28,500. To enter the short futures position, you have to put up an initial margin of USD 3,375.

A week later, the price of wheat falls and correspondingly, the price of CBOT Wheat futures drops to USD 5.1300 per bushel. Each contract is now worth only USD 25,650. So by closing out your futures position now, you can exit your short position in Wheat Futures with a profit of USD 2,850.

Short Wheat Futures Strategy: Sell HIGH, Buy LOW
SELL 5000 bushels of wheat at USD 5.7000/bu USD 28,500
BUY 5000 bushels of wheat at USD 5.1300/bu USD 25,650
Profit USD 2,850
Investment (Initial Margin) USD 3,375
Return on Investment 84.4444%

Margin Requirements & Leverage

In the examples shown above, although wheat prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 11.8421%) required to control a large amount of wheat 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.

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

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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. ]

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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. ]

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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. ]

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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. ]

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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. ]

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Best Binary Options Brokers 2020:
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