Futures

[Nate]

I'm trying to get my head around the way this works, someone I know used to work with these all the time and can't explain it to me very well. It's confusing the hell out of me.

So if I decide to buy a Futures contract it has until the next day to settle? Or I suppose that comes down to when I set the delivery date?

If I decided to buy a contract for delivery tomorrow it would have to go up for me to make money, right?

This is the bit I don't get though, I sell a contract I'd bought previously for £1000(the same price I bought it for) the next day it's worth £750. I then buy it back at £750. How did I make a profit? The £250 was already mine before I even started this. I can only see a way of making that profit if it went back up to £1000?

Cheers!

 

[Chilly]

You didnt make a profit, that's why.

 

[Nate]

I think it's short selling I'm trying to understand. You don't buy the contract. You sell it before you buy.

 

[Chilly]

Short selling is entirely different.

so:

You think future X is overpriced. You ask to borrow £10,000 of contracts I own for X and PROMISE to give them back in four days.

You then sell them for £10,000 on the market and pocket the money. You now do the hard bit and decide when to buy them back and return them to me.

Tomorrow: your guess was correct, they were overpriced and the price has now dropped to £8,000. You then buy the same number back from the market for £8,000, return them to the original owner and pocket £2,000. The owner now still has the same quantity of future X, but you've done your trades so you are £2k up.

There's a version of this called naked short selling where you simply dont bother to borrow the security, you just put a massive sell order into the market with no stock to back it up and then you have to hope like a moherfucker that theres enough liquidity in the market to buy enough back to cover your settlement when it eventually happens.

 

[Chilly]

BTW: since you clearly have no idea how this all works, I really hope you are not actually doing it. You are gambling if you are.

 

[Nate]

No, I'm just trying to figure it out A friend tried to explain it to me and I couldn't understand how you make money when the stock goes down.

 

[Nate]

What happens if the company goes bust btw?

 

[Chilly]

This is what happens when you play with the big boys, btw: http://news.bbc.co.uk/1/hi/business/7697082.stm

Germany has no laws forcing you to declare all your positions, so no one knew how many VW shares were available on the market. all the hedge funds just assumed there were enough. When it came to returning the borrowed shares to the owners, there were only a few guys selling shares (and porsche) so they put their prices up 300% to give the hedge funds a good, solid raping.

 

[Chilly]

What happens if the company goes bust btw?

Between the start and end of your short? You win, massively. You've borrowed and sold shares worth >0 and then have to return shares worth nothing to the owner. There might be complications around administration. And in fact trading will be suspended on those shares so you may not be able to return the shares, but the original company wont lose out because they've lost all their money anyway

 

[Nate]

This is what happens when you play with the big boys, btw: http://news.bbc.co.uk/1/hi/business/7697082.stm

Germany has no laws forcing you to declare all your positions, so no one knew how many VW shares were available on the market. all the hedge funds just assumed there were enough. When it came to returning the borrowed shares to the owners, there were only a few guys selling shares (and porsche) so they put their prices up 300% to give the hedge funds a good, solid raping.

Ouch! No wonder the hedgefunds are kicking up a fuss! It's funny how the article quotes someone saying that he'd like it to be more transparent but downplays the idea of being transparent himself.

Between the start and end of your short? You win, massively. You've borrowed and sold shares worth >0 and then have to return shares worth nothing to the owner. There might be complications around administration. And in fact trading will be suspended on those shares so you may not be able to return the shares, but the original company wont lose out because they've lost all their money anyway

That's pretty cool I wonder how many times that happens.

Thanks for your help Chilly. I won't be putting any money down on the market but I might play a game with it, seeing if I'm good at predicting the future!

 

[Access Denied]

Are you describing a hedge fund?

EDIT: Haha yup!