It basically implies borrowing money from third parties to sell high and buy low. The profit is the difference in price between the sell and rebuy marks. On Binance, short selling is a five-step process. The procedure itself is rather simple.
What is the best way to short futures?
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 go short in spot trading?
Shorting in the futures market is not limited in the same way that it is in the spot market. One of the reasons why futures trading is becoming more popular is because of this.
In terms of margin requirements, taking a short position in the futures market is comparable to taking a long position in a futures contract. Let’s look at an example to see how much money may be made by shorting futures.
Take TCS, which has a short price of Rs. 3350 and a target price of Rs. 3316.5, respectively. Assume the lot size is 300 square feet.
Shorting a futures contract is quite identical to buying one, with the exception that you benefit when the price falls. Apart from that, the margin requirements and the computations that go with them are the same.
Is it possible to short without a margin?
- Because a short sale involves selling stock that is borrowed rather than owned, it necessitates the use of margin.
- The initial margin is the amount of margin required when the trade is started, whereas the maintenance margin is the amount of margin required throughout the short sale’s duration.
- If the position’s value falls below the required maintenance margin, the short seller will receive a margin call and will be requested to either liquidate the trade or increase cash in the margin account.
Is it possible to short Crypto?
If you believe that you can only make money in crypto while the market is rising, you may be mistaken. This indicates that you are unfamiliar with the notion of shorting. When the market falls, you can profit by shorting it.
So, if you think Bitcoin or another cryptocurrency will fail in the near future, shorting it could be a good option.
Is it, however, that simple? So, before you make your first cryptocurrency shorting trade, let’s go through how it works and the logic behind it.
Shorting is the practice of purchasing Bitcoin or another cryptocurrency at a high price and then selling it at a lower price.
Most traders prefer to purchase cryptocurrency at a lower price and sell it at a higher price. When it comes to short, however, you just must do the opposite.
To enter a short position, you’ll need to borrow cryptocurrency and sell them at the current market price on an exchange. Then you’ll have to go back and buy the cryptocurrency and repay the money you borrowed.
You benefit on the difference between the selling and buying prices if the price reduces when it’s time to repay your funds.
- We’re going to short 10 Bitcoins in this scenario. Each Bitcoin is currently worth $60,000 on the market, totaling $6,000,000.
- We’ll need to borrow 10 Bitcoins from our broker at the present market price to complete this trade.
- The market has now moved in the direction we predicted, with the price of a single Bitcoin falling to $50,000, resulting in a total of $5,000,000.
- Let’s get down to business, shall we? Profit ($1,00,000) = Previous Market Price ($6,00,000) Current Market Price ($5,00,000). This is the amount you’ll record as a profit.
In a nutshell, shorting is the polar opposite of going long. When you foresee a currency’s value to fall, the shorting notion comes in useful. When you know the market price will rise, on the other side, you should go long.
However, you should be aware that shorting carries dangers. As a result, if the market does not behave as planned, you may be forced to purchase a currency at a higher price in order to repay your broker.
Numerous methods of shorting Bitcoin or different types of short trading strategies are now available. The following are a few well-known examples:
The simplest option is supposed to be margin trading. Margin trading is supported by a number of crypto exchanges, including Binance Futures, FTX, and Phemex. In this style of trading, you borrow crypto from a broker to execute a trade.
You should also be aware that margin entails borrowing or leveraging funds. This means that it will not only boost your profits, but will also raise your losses.
Typically, the broker will provide you a proportion of the money that you can borrow from the exchange and use for trading. You’ll also have to refund the money you borrowed and settle the transaction after a certain number of days.
Bitcoin, like any other asset, has a future market. You buy securities using a contract in a futures trading. The contract stipulates when the security will be sold and at what price. When you buy a futures contract, you’re betting that the security’s price will rise. As a result, you can expect a solid return on your investment.
If, on the other hand, you believe that the value of Bitcoin will fall in the near future. Following that, you’ll need to buy contracts that bet on a lower cryptocurrency price.
Is it possible to short tether?
It’s really simple to short tether, and it only costs about 4% every year. You can either do it on FTX directly or on ethereum by borrowing tether on aave against, say, USDC and then selling it for USDC. You can do this in a big way, like 8 figures or more.
Is it possible to short micro futures?
There are no short-selling limits with futures, so you may go short as readily as you can go long. E-mini futures’ full fungibility gives you more options when it comes to trading positions.
Can we condense our options?
If Nifty were to expire today at 6200, the total options that would expire worthless would be: 39295000 (15102150 + 3150000 + 4235750 + 16807100), which is around 83 percent of total call and put OI.
Yes, an option buyer can earn from quick intraday trades, or be on the right side of the market and profit indefinitely, but the odds of winning are always in favor of the option writer, who gains from the bulk of options expiring worthless.
The time value component of the option premium (Premium = Intrinsic Value + Time Value) is the underlying explanation behind this. A buyer of an option is constantly battling time because if the trade does not go in his favor right away, the time to expiry (time value) and thus the premium itself will continue to decrease. On the other hand, an option writer has time on his side; once in a transaction, as long as the market (intrinsic value) does not move against him, the time value continues to decrease, boosting his chances of beating an option buyer.
Option Writing Risks
If 1 lot of 6300 Nifty call was acquired for Rs 100, the maximum loss on this transaction would be Rs 5000 (Rs 100 x 50), and if Nifty went to 7300, the call would yield a profit of Rs 45,000.
When you write an option, say 1 lot of 6300 calls at Rs 100, the premium paid by the buyer is credited to your trading account in the amount of Rs 5000 (Rs 100 x 50), and this Rs 100 on the premium is your maximum profit potential. If you decide to make this trade,
- On expiry, the Nifty is 6200, the value of the 6300 calls is 0, and you keep the entire Rs 5000.
- On expiry, the Nifty stands at 6300, the value of the 6300 calls is still zero, and you keep the entire Rs 5000.
- On expiry, the Nifty is 6350, and the value of 6300 calls is 50, therefore you’ll have to give up Rs 2500 (Rs 50 x 50) but still make a profit of Rs 2500.
- On expiry, the Nifty is at 6400, the value of 6300 calls is 100, and you must give the entire Rs 5000, no profit, no loss.
- On expiry, the Nifty stands at 6500, the value of 6300 calls is 200, and you must return Rs 10,000 despite receiving only Rs 5000, resulting in a net loss of Rs 5000.
- On expiry, the Nifty would be at 7500, the value of the 6300 calls would be 1200, and you would have to return Rs 60,000, but you had only earned Rs 5000, resulting in a net loss of Rs 55000.
Because the potential losses are limitless, it is better to start off as a rookie option writer by being cautious and allocating only a tiny amount of your trading capital.
Option Writing Margins
Because an option writer’s risk is unlimited, the exchange limits margin and, like futures, marks to market at the end of each day. So, to buy an option at Rs 100, you just need Rs 5000 (Rs 100 x 50), but to write an option, you’ll need roughly Rs 25,000, which is marked to market daily, which means that if you lose money, you’ll have to return it back to your trading account by the end of the day.
Option writing margin requirements vary by contract, and Zerodha is currently the only brokerage in India to provide a web-based SPAN tool for calculating this.
Example
You’re bearish on the market, and the Nifty is currently at 6172. You plan to write/short 6200 Jan 2014 calls at 90, anticipating a profit if the premium value falls below 90.