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Futuresbeginner

Long vs Short Futures

Going long a futures contract means committing to buy the underlying at the agreed futures price F0F_0 on the delivery date. Going short means committing to sell at F0F_0. The long profits when the eventual settlement price STS_T rises above F0F_0, while the short profits when STS_T falls below F0F_0. Both sides face symmetric, theoretically unbounded payoffs because a futures contract has no premium and no embedded optionality.

Why it matters

A futures market is a zero-sum price agreement between two counterparties matched anonymously through an exchange. The long acquires the right and obligation to receive the asset at F0F_0, so a higher market price at delivery is good news. The short has the mirror promise, so a lower price is good. The marketplace creates short positions out of nothing because no one needs to borrow the underlying first, unlike short-selling equities. Long = up bet, short = down bet, but the same contract can be either depending on which side you take.

Formulas

Long futures payoff per unit
Πlong=ST−F0\Pi_{\text{long}} = S_T - F_0
Short futures payoff per unit
Πshort=F0−ST\Pi_{\text{short}} = F_0 - S_T
Total profit equals payoff ×\times contract size ×\times number of contracts. Hull (2022) §1.3 gives this with worked examples.

Worked examples

Scenario

A trader goes long one CME WTI crude oil futures contract at F0=78.00F_0 = 78.00 US/bbl.Contractsizeis1,000barrels.Atexpiry,thesettlementpriceis/bbl. Contract size is 1,000 barrels. At expiry, the settlement price is S_T = 82.50$.

Solution

Long payoff per barrel =82.50−78.00=4.50= 82.50 - 78.00 = 4.50 US/bbl.Totalprofit/bbl. Total profit = 4.50 \times 1{,}000 =$ US$4,500 credited to the long's margin account, which is exactly the amount debited from the short's account. Zero-sum.

Scenario

An Australian super fund manager already holds A$200 million in S&P/ASX 200 stocks. To hedge a short-term market view, the manager sells 100 ASX SPI 200 futures at 7,400 with multiplier A$25.

Solution

Short notional =100×7,400×25== 100 \times 7{,}400 \times 25 = A$18.5 million. If the SPI 200 settles at 7,200 at the chosen close-out date, short payoff =(7,400−7,200)×25×100== (7{,}400 - 7{,}200) \times 25 \times 100 = A$500,000 gain on the futures, which offsets some of the loss on the physical equity portfolio. The futures leg is bearish even though the fund as a whole is still long equities.

Common mistakes

  • ✗You need to own the underlying to go short. Futures permit naked short positions because no asset borrowing is required. The clearing house, not the asset itself, guarantees performance.
  • ✗Long positions are safer than short positions. They are not. A long futures position loses if the underlying falls to zero, while a short loses if the underlying rises without bound. Both face symmetric tail risk scaled by the contract multiplier.
  • ✗The long is always the buyer of the asset. The long is the buyer at the agreed price. Most positions are closed by an offsetting trade before delivery, so no asset changes hands.

Revision bullets

  • •Long profits when ST>F0S_T > F_0, payoff =ST−F0= S_T - F_0
  • •Short profits when ST<F0S_T < F_0, payoff =F0−ST= F_0 - S_T
  • •Payoffs are symmetric and linear in the underlying
  • •Short positions need no asset borrowing, unlike equity shorts
  • •Total system payoff is zero-sum between long and short

Quick check

A short futures position profits when:

Why can a trader hold a short futures position without first borrowing the underlying asset?

Connected topics

PayoffShort HedgeLong Hedge

In learning paths

Futures Path

Sources

  1. Hull (2022), §1.3 and §2.4
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Sections 1.3 and 2.4 cover long and short positions, payoff formulas, and the symmetric zero-sum structure of futures contracts.
  2. CME Group, Going Long or Short
    CME Group. Long and Short Positions in Futures. CME Group Education, 2024.
    Exchange-side explainer for the mechanics of taking a long or short and why naked short positions are routine in futures.
  3. ASX Index Futures Specs
    Australian Securities Exchange. ASX Index Futures Contract Specifications. ASX, 2024.
    Specifies the A$25 multiplier and quarterly cycle for the SPI 200 contract used in the hedging example.
How to cite this page
Dr. Phil's Quant Lab. (2026). Long vs Short Futures. Derivatives Atlas. https://phucnguyenvan.com/concept/long-vs-short-futures
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