A short futures position is a legal agreement to sell an asset at a set price on a specified future date, taken by a trader who expects the market to fall rather than rise. This guide walks through what shorting futures involves, including how a position opens and closes, how margin and leverage work, how futures shorting differs from shorting stocks and what the risks are.
A short futures contract is a futures position in which a trader agrees to sell the underlying asset at a specified price on a future date. In simple terms, going short means taking the selling side of the contract.
Opening a short futures position doesn’t usually require owning the underlying asset first. That’s because futures involve a contract for a future transaction rather than an immediate sale of something you already hold.
Short futures positions can be used for different purposes. Producers, miners and businesses may use them to hedge against falling prices. For example, a farmer expecting to sell a crop later may use futures to lock in a price. Other traders may simply take a short position when they expect the market price of a specific asset to fall.
The key difference between a long futures position and a short futures position is the direction of the trade. With a long futures position, the trader takes the buying side of the contract and profits if the market price rises. With a short futures position, the trader takes the selling side and profits if the market price falls.
Despite that difference, both positions work similarly when they’re opened. Traders usually post initial margin rather than paying the full value of the futures contract upfront. The required amount is set by the exchange, clearing house or broker and applies to both long and short positions.
Because only a portion of the contract’s full value is posted as margin, both long and short futures positions involve leverage. This magnifies gains, but it also magnifies losses when the market moves against the position.
Long futures | Short futures | |
Directional view | Expects price to rise | Expects price to fall |
Profits when | Market moves up | Market moves down |
Loses when | Market moves down | Market moves up |
Upfront payment | Initial margin, not full value | Initial margin, not full value |
Position opened by | Buying to open | Selling to open |
A futures payoff diagram shows how gains and losses change as the underlying price moves. For a long futures position, the payoff rises as the market price rises. For a short futures position, the relationship is reversed: The payoff improves as the market price falls and declines as the market price rises.
In the diagram below, K represents the futures price agreed when the contract is entered, while the horizontal axis shows the underlying price at maturity. When the price at maturity equals K, the payoff is zero. Above K, the long position has a positive payoff and the short position has a negative payoff; below K, the reverse is true.
The mechanics of shorting differ between futures and stocks (equities). As explained earlier, short-selling a futures contract doesn’t require owning the underlying asset beforehand. With stocks, you have to borrow available shares before you can execute a short sale order – you can’t simply sell shares you don't hold.
That borrowing step doesn’t apply to futures in the same way. US stock short sales are subject to SEC rules that require brokers to locate shares that can be borrowed before the trade is executed. Because futures are derivative contracts rather than shares of stock, this requirement doesn’t apply. Further, because stock futures are often cash settled, traders don’t have to deliver the underlying shares.
Shorting futures | Shorting stocks | |
Need to own the asset first | No prior ownership needed | No, but shares must be located to borrow |
Locate requirement | Regulation doesn’t extend to futures | Required before the sale is effected |
Definition of the trade | Selling with intent to offset or deliver later | Selling borrowed equity securities |
Upfront capital | Initial margin, not full value | Margin account |
Here's the general lifecycle of a short futures trade, from opening to closing. Note that the exact details will vary by platform.
Margin in futures trading comes in two forms: Initial margin and maintenance margin. Initial margin is the capital you need to open a position. Maintenance margin is the minimum balance you must keep to hold that position open. The exact amounts will be set by the exchange or clearinghouse.
Leverage is where the amplification of potential profits and losses comes from. Leverage in futures trading is often expressed as the ratio of a contract's notional value to the initial margin posted. That means any given price move has an amplified effect on your margin balance – it magnifies both gains and losses.
When losses stack up, the account can fall short. If the money in your futures margin account falls below the maintenance margin level because of this, you have to put down more money to bring it up to the required level. If you don’t, your broker may close your position.
When you hold a futures position beyond its expiration, you may need to ‘roll’ the position by closing the expiring contract and opening a later-dated one. At that point, the relationship between futures prices across different expiration dates becomes important.
Two common market structures that become important in this case are ‘contango’ and ‘backwardation’. Contango occurs when later-dated futures contracts are priced higher than contracts with nearer expiration dates. Backwardation is the opposite, with later-dated contracts priced lower than nearer-dated contracts.
These market structures can affect ‘roll yield’, which is the gain or loss that can develop as a futures contract moves toward expiration and its price converges with the spot price.
For a trader holding a short futures position across multiple expirations, contango or backwardation can affect returns as contracts are rolled forward. The size and direction of that effect depend on the changing market conditions, so roll yield isn’t fixed or predictable.
When you go long, your loss is limited, because an asset’s price can only fall to zero. But when you go short, the asset's price can keep rising with no fixed ceiling. So, the potential loss on a short position isn’t capped in the same way. Here are some common risk controls used with short futures positions.
Can you short futures without owning the underlying asset?
Yes, opening a short futures position doesn’t require owning the underlying asset beforehand, because the contract represents a future obligation rather than an immediate purchase of the underlying.
What happens if a short futures contract reaches expiration?
An open futures position that runs to expiration is settled according to the contract's terms, which will differ by product and venue. Some contracts settle in cash and others by delivery. The specific settlement method depends on the contract specifications set by the exchange, so check those before holding into expiration.
Can a short futures trader lose more than their initial deposit?
Yes, leverage creates an amplified effect on the margin balance relative to the full contract size. If losses push your equity below the maintenance level, you need to add more money to restore the account. If a margin call isn't met, your broker may close the position and shortfalls can be debited against your account.
What's the difference between a short future and a put option?
A short futures position carries an obligation on the sell side, while an option typically conveys a right rather than an obligation.
How does daily mark-to-market affect account balances?
Every day, your futures margin account will be adjusted to reflect the day’s price movements. This daily settlement may help protect buyers and sellers against the possibility of contract default.
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