Before we can learn how to short a stock in the futures market, we must first learn how to short a stock in the spot market. Consider the following hypothetical scenario:
- A trader examines HCL Technologies Limited’s daily chart and notices the formation of a bearish Marubuzo.
- Other checklist items (as stated in the TA module) comply with the bearish Marubuzo.
- The trader believes that HCL Technologies will fall by at least 2.0% the next day, based on the study.
Given this scenario, the trader wishes to profit on the anticipated price drop. As a result, he chooses to sell the stock short. Let’s have a better understanding of this by defining the trade
As we all know, when one shorts a stock or a stock futures contract, the idea is that the stock price will decrease, allowing one to profit from the decline. So, based on the table above, the stock should be shorted at Rs.1990.
When you need to short a stock (or a futures contract) on your trading platform, simply highlight the stock (or futures contract) and press F2 on your trading platform. By doing so, you’ll be taken to the sell order form, where you may fill in the quantity and other data before hitting Submit. When you submit your order, it is sent to the exchange, and if it is filled, you will have created a short open position.
Anyway, consider this: When you enter a trading position, under what conditions would you lose money? Obviously, you will lose money if the stock price moves in the opposite direction of your expectations. So,
- The stock price is expected to fall, hence the directional view is to the downside.
- This means that if the stock price rises instead than falling, you will begin to lose money.
As a result, anytime you short a stock, the stoploss price is always greater than the stock’s current price. As can be seen in the table above, the short trade entry price is Rs.1990/-, while the stoploss price is Rs.2000/-, which is Rs.10/- higher than the entrance price.
Let us now hypothetically envisage two scenarios after commencing the short trade at Rs.1990/-.
In this situation, the stock has moved in the direction predicted. The stock price has dropped from Rs.1990 to Rs.1950. The trader is anticipated to close the position now that the aim has been met. As we all know, in a short position, the trader must
The merchant would have gained a profit equivalent to the difference between the selling and buying prices in this case, Rs.40/- (1990 1950).
If you look at it from a different perspective (i.e. the traditional purchase first, sell later approach), this is equivalent to buying at Rs.1950 and selling at Rs.1990. The trader has simply reversed the transaction order, selling first and then purchasing later.
The stock has risen above the short price of Rs.1990/- in this situation. Remember that when you short a stock, the price must fall in order for you to profit. There would be a loss if the stock price rose instead. In this situation, the stock has increased in value, resulting in a loss
- The stock reaches Rs.2000/- and the stoploss is triggered. To avoid future losses, the trader must finish the position by repurchasing the shares.
During the entire procedure, the trader would have lost Rs.10/- (20001990). If we look at it from a traditional buy first, sell later perspective, this transaction is equivalent to buying at Rs.2000/- and selling at Rs.1990/, and if we reverse the order, it is equivalent to selling first and buying later.
Hopefully, the past two instances have persuaded you that when you short something, you win money when the price goes down and lose money when the price goes up.
Is it possible to short the futures market?
In the futures market, going short is just as dangerous as going long. When the market moves in your favor or against you, you can make or lose money on a dollar-for-dollar basis with either position. When the price falls, the holder of a short position makes money; when the price rises, they lose money.
Is it possible to short sell in Zerodha?
Short selling is only permitted in a list of scripts (DOC) generated at the discretion of Zerodha’s Risk Management Team (RMS) based on liquidity, volatility, and other variables.
Is it possible to short sell F&O?
This was done to prevent short selling in both the F&O market and the cash market. Short selling is a market activity in which a trader or fund manager sells a stock with the intention of repurchasing it at a lower price.
Is it possible to short futures in India?
Short selling has a really ominous undertone. Short selling is usually associated with highly dark and covert dealers attempting to break the stock or market. Short selling is nothing like that in reality. It’s merely a market point of view. You buy the stock when you expect it to rise, and you sell it when you expect it to fall. It’s nothing more than a directional view of the stock. Let’s imagine you own 2000 shares of Tata Motors and expect the stock to fall sharply as a result of JLR’s poor performance. What would you do in this situation? You would obviously sell the stock and wait for a better price to buy it again at a later time. What if you didn’t have the stock on hand? The answer is that you can still short sell the stock even if you don’t have it yet.
However, the most important question is when to short sell a stock. You have two choices in front of you. You can either short sell in the spot market or short sell in the futures market. Here’s a quick rundown of everything you need to know about short selling.
You can sell a stock without owning it in two ways. To begin with, you can short sell in the cash market. You must be aware that you can only short sell intraday in this case. That is, if you sell a stock in the morning but are unable to deliver it, you must cover your position (purchase it back) by the conclusion of the trading day. Keep in mind that Indian markets use T+2 rolling settlements. That is, if you do not square up your holdings on the same day, these stocks will be delivered automatically. If you sell anything in the morning and don’t buy it again by the evening, you must deliver the stock. When short selling in the spot market, keep this key point in mind.
Another choice is to sell the stock as a futures contract. If you do not have delivery of shares in Tata Motors but still wish to sell the stock, you can sell Tata Motors Futures. You are not under any obligation to cover the post by the evening. You can choose from 1-month, 2-month, and 3-month futures. Of course, liquidity is usually limited to the first two months’ contracts, so you may need to roll over your bets. However, because spot and futures prices are so closely related, your reward will be identical to selling the stock when the price falls.
While short selling appears to be a straightforward strategy, selling futures may be a superior option if you have a negative outlook on a stock. Here are five of them.
When selling on the spot market, your selling window is only one day. Price movement, on the other hand, may not occur on the same day, forcing you to close the trade at a loss. Selling futures is a superior alternative in this case.
Short delivery is a danger when selling in the cash market. What exactly do we mean when we say “short delivery”? Assume you sold Tata Motors first thing in the morning. Intraday trading positions are usually closed out by the broker, but you are still responsible. It’s possible that if you forget to close out your short position on the same day, you’ll get a late delivery. Short delivery goes to auction under exchange rules, and the losses can be as high as 10-15%, which you will have to bear.
Selling futures has the advantage of allowing you to sell not only stocks but other indexes such as the Nifty and Bank Nifty. As a result, you can take a long-term view on a sector or the market as a whole and use indices to play this trend. In the spot market, that facility is not available for short selling.
You can use options to hedge your short position. Your call could go awry if you sell futures or spot. So, what exactly do you do? You can use options to hedge your position while selling futures. So, if you’re selling Tata Motors futures, you can protect yourself by purchasing a greater call option. Short selling on the spot market does not allow for this.
When selling futures, you must pay a margin. In reality, whether you’re long or short on futures, the margins are the same. This allows you to take a futures short position while just paying a half margin of roughly 15-20%. This saves you money.
While you have the option of selling on the spot market, it comes with a number of drawbacks. Stock financing has exploded in other nations, making short selling in the spot market a more viable option. Selling futures is a better alternative until that happens in India as well!
In Zerodha, can I carry forward futures?
Any futures or options you buy will have an expiration date (last day until which you can trade that contract). So, for example, until May 27, 2021, you can only trade the Nifty 27 May future. What if you wish to hold on to a profitable futures contract until the end of June?
In this case, you’ll need to exit the Nifty May future and enter a new one in the June future, which will be good until June 24, 2021. The act of moving your position from one month to the next is known as rolling over. This rollover can be performed at any time until May 27, 2021, when the market closes.
Is it possible to short sell CNC Zerodha?
No, unless you have the shares in your Demat account, you cannot short sell using the CNC product code in Zerodha.
CNC stands for Cash and Carry, which is a term used in equity delivery-based trading. STBT is not available on Zerodha (Sell Today Buy Tomorrow). As a result, if you use CNC code to make a sell order in Zerodha without having the shares in your Demat account, the order will be refused.
Without holding stock in a Demat account, you can short sell utilizing the MIS (Margin Intraday Square Off) product code. If you do not close the intraday position within the specified timescales, the MIS code initiates auto square-off by the system. When you use the CNC code, however, the system does not activate auto-square off, thus you can’t place a sell order before holding the stock.
Is it permissible to sell short in India?
- Short selling is when you sell a borrowed security with the purpose of buying it back at a cheaper price later.
- Between 2001 and 2008, the Securities and Exchange Board of India outlawed the practice after insider trading suspicions caused stock values to plummet.
- Short sales must be identified at the time of the order, according to financial authorities.
- In India, naked short selling is still prohibited, as is day trading by institutional investors.
- Because of the economic volatility that year, Indian regulators imposed a temporary ban on short selling from March to October 2020.
How do you go about selling short?
Contact your broker and ask to borrow shares of the stock you believe will fall in value. The broker then finds another investor who has the shares and borrows them with the agreement to repay them at a later date. The shares are yours. But don’t imagine you’ll be able to borrow the shares for free. For the privilege, you’ll have to pay the broker fees or interest.
You wait for the stock to drop in price before repurchasing the shares at the new, lower price.
You return the borrowed shares to the brokerage firm and keep the difference.
You should be aware of these additional fees when shorting a stock. For example, most brokerages charge fees or interest to borrow shares. Furthermore, if the company pays a dividend between the time you borrowed the stock and the time you return it, you must pay the dividend out of pocket. Even if you sold the stock and didn’t receive the dividend, you’re still liable for the payment.
Is it possible to sell futures on the same day?
The method of buying and selling a futures contract on the same day without maintaining open long or short positions overnight is referred to as day trading. The duration of day transactions varies. They can last a few minutes or the entirety of a trading session.