Commodities Trading

Selling High. Then Buying Low Commodities Trading why many traders find them irresistible and profitable.

How to reverse the typical transaction process and make money when prices of commodities or stocks fall and make money with Commodities Trading.

Some of you are familiar with this other may not know much or anything at all about it. One of the opportunities a trader has when Commodities Trading  is to sell short. This is one method to make money from the markets when prices of stocks are falling.

How does this work? Say for example you were at a company whose stock prices had risen very sharply in a very short period of time.You thought that this was not going to last. In Commodities Trading you can take advantage of this.

The company was also at risk due to mismanagement and was going to be the possible subject of a Government inquiry. The company’s shares were at $120 and they would most likely drop dramatically.

As a trader you could make money from this situation of the most probable falling stock price by selling short”. How does the trader do this?, how does the trader get involved in this Commodities Trading to make a profit from the situation?.

This is the beauty of the Commodities Trading system. What the trader usually does is go to his broker and “borrows” the shares and sells them out in the market. You sell them and collect the $120 for the share.

To do that you first borrow the shares, usually from your broker. You then sell the shares you borrowed in the open market, in this case at $80. Remember, whenever you sell something, you collect money. In this case, you collect $80. At this point, we need to ask a simple question in order to understand how we make money with Commodities Trading.

That question is, what is our risk with this type of Commodities Trading?

The answer is, if we’ve borrowed the shares, the person who loaned the shares to us may ask for them back. And that’s how we make or lose money.

Think of it this way: if the price of ACME and Co drops to $50 and the brokerage firm that loaned us the stock asks for it to be returned, we’ve got to give it back to them. Since we already sold it at $80, then to return the stock, we’ve got to buy it in the open market. We buy it back for $50.

But remember, we’ve already collected $80. So our net profit is $30! Let’s go through this one more time. It may help to visualize a checking account to better understand this for of Commodities Trading.

1. First, you borrow the shares. This shows up as neither a debit or a credit.

2. Next, you sell the shares in the open market and collect the money. Whenever you sell anything, you receive money. Money given to you shows up as a credit on your checking account statement and your brokerage statement.

3. Later, you buy back the shares that you borrowed. Whenever you buy anything, money comes out of your pocket. This shows up as a debit to your account.

4. Finally, you return the shares to the person from whom you borrowed the stock.

Here’s how the arithmetic of a typical short sale transaction looks, using a round-lot of 100 shares:

Transaction Result Borrow 100 shares of ACME and Co (price 80) 0.00 Sell 100 shares of ACME and Co at 80 +8,000.00 Buy 100 shares of ACME and Co at 50 -5,000.00 Return the 100 shares of ACME and Co you borrowed 0.00 Net Profit or Loss +3,000.00 That’s what it looks like if things go right and the stock drops.

But what if the stock price rises. Let’s say you borrowed the stock, sold it at $80, thus collecting $80, which shows up as a credit to your account. At some point, the person who loaned you the stock VM 11 rail and say, “I want my stock back.” You then have to buy the shares in the open market, and return the stock to the person who loaned you the stock.

If the ACME and Co went up to $100, you will have to pay $100. The purchase shows up as a debit. So your account has a credit of $80 and a debit of $100.

The net result is that you have a total net debit of $20, which means $20 has been debited from your account.

In other words, the stock went up and you lost. Here’s how the arithmetic looks, using a round-lot of 100 shares:

Transaction Result Borrow 100 shares of ABC Tech (price 80) 0.00 Sell 100 shares of ABC Tech at 80 +8,000.00 Buy 100 shares of ACME and Co at 100 -10,000.00 Return the 100 shares of ACME and Co you borrowed 0.00 Net Profit or Loss -2,000.00 Let’s look at a couple of more examples.

Let’s say you are looking at a toy company. You hear that the Christmas selling season is going to be a disaster.

You also hear that video games are stealing thunder from traditional toy makers. Plus, this particular toy company, Broken Handles Toys, makes toys your kids don’t like.

You think that the stock is going to go down. Broken Handles Toys is currently trading at 25. You sell short 200 shares.

A few weeks later, the market proves you right. Broken Handles Toys is now trading at 15. You take profits of $2,000. Here’s the arithmetic:

Transaction Result Borrow 200 shares of Broken Handles Toys (price 25) 0.00 Sell 200 shares of Broken Handles Toys at 25 +5,000.00 Buy 200 shares of Broken Handles Toys at 15 -3,000.00 Return the 200 shares of Broken Handles Toys you borrowed 0.00 Net Profit or Loss +2,000.00 Let’s say you suspect that inflation will be benign for the next several months.

Let us look at another situation in Commodities Trading.

You think that gold, being an inflation hedge, will decline in price. You also think that the weakness in gold will spill over into gold stocks. Right now Barrick Gold, one of the biggest gold producers, is trading at $30. You decide to sell short 500 shares.

A few weeks later, the latest inflation data is released. It shows that inflation is virtually non-existent, and the price of gold drops, taking most gold stocks with it.

Barrick Gold is now trading at $20. You decide to exit your “short” position, at a tidy profit of $5,000. Here’s the arithmetic:

Transaction Result Borrow 500 shares of GoldMeister (price 30) 0.00 Sell 500 shares of GoldMeisterat 30 +15,000.00 Buy 500 shares of ABX at 20 -10,000.00 Return the 500 shares of GoldMeister you borrowed Q.QQ Net Profit or Loss +5,000.00 One final example — this one will show us why short selling is so dangerous in Commodities Trading. Let’s say there is an airline, HalfWay Air Lines Ltd. HalfWay Air Lines Ltd is experiencing some problems.

There are safety concerns, their planes are old, they’re deep in debt, all of which is causing a public relations nightmare and near-empty planes.

You think that the company is headed for bankruptcy, so you sell 500 shares short. HalfWay Air Lines Ltd shares are trading for $10. One evening, a few weeks later, Sure Thing Airways announces that they want to buy the company. Sure Thing Airways needs the gate space desperately.

Sure Thing Airways has agreed to sell the older airplanes to an air-freight shipper once the purchase of HalfWay Air Lines Ltd is finalized. Sure Thing Airways doesn’t want any other airline to get in the way, and they don’t want Next Best Airlines Directors to reject the bid, so they offer an extremely high price: $30. The next day, before the market opens for trading, Swift Air announces that they don’t want to see their arch-rival, Sure Thing Airways, succeed in acquiring those gates.

The market suspects that Sure Thing Airways  will make a competing offer for HalfWay Air Lines Ltd. Later that morning, HalfWay Air Lines Ltd shares open for trading at $35.

Your brokerage firm, the one from whom you borrowed the shares, calls you to tell you that they want the shares back (or more money). Can you figure out what just happened to your investment? Here’s the arithmetic:

Transaction Result Borrow 500 shares of HalfWay Air Lines Ltd (price 10) 0.00 Sell 500 shares of HalfWay Air Lines Ltd at 10 +5,000.00 Buy 500 shares of LM at 35 -17,500.00 Return the 500 shares of LM you borrowed 0.00 Net Profit or Loss -12,500.00 You just lost $12,500 on an investment that had a maximum profit potential of $5,000.

The fact that you can lose substantially more than you can gain, that your loss potential is unlimited, is why short selling is best left to experienced commodities trading traders. One thing to note about short selling — the borrowing and returning of shares is “transparent”. That is, the person selling short doesn’t ever see the borrowing and selling aspects of the transaction on their statement (although they will see the impact of it when they look at the margin interest section of their statement).

All the short seller sees is that they sell something at the inception of the trade, and that they buy it back at a later date to close out the trade. Review Before we go any further, let’s take a quick opportunity to review what we’ve covered so far:

1. In Commodities Trading, Options give you the right to buy or sell an asset at a predetermined price during a specified time period.

2. There are five factors that impact an option’s value.

3. Selling short is a method by which you can make money from falling prices.

4. By using a particular type of option strategy, you can construct a trade that automatically puts the probabilities in your favor.

5. Exchange-traded options give you the benefit of instant liquidity and eliminate counter-party risk. calculating the profits and losses from buying and selling options.

Commodities Trading