Calculating Profit/Loss

Determining the profit or loss associated with a position is the same, whether you hold a long or short position. The profit or loss from a futures position is calculated as follows:

Profit or Loss = Sell Price - Buy Price x Contract Size x Number of Contracts

Example
Assume a speculator thinks that Corn prices will go down in the coming weeks. He sells 2 March Corn contracts at 235 cents per bushel ($2.35) initiating a short position.

Having studied the behavior of Corn using his Track ‘n Trade 5.0, our speculator was correct, and Corn prices fell from 235 to 220 over the next two weeks. Given the -15 cent drop in Corn prices, our speculator has a $1,500.00 open position profit and decides to "cash in" his winning by buying 2 March Corn futures at 220.

Profit or Loss = Sell Price - Buy Price x Contract Size x Number of Contracts

= 235 - 220 = +15 cents

= $0.15 x 5,000 bushel contract size = $750.00 per contract

= $750.00 per contract x 2 contracts = $1,500.00 (before commissions

and fees)

Now assume that another speculator buys 2 March Corn at 235 initiating a long position. After two weeks, prices drop by -.15 cents to 220, and he offsets the long position by selling 2 March Corn at 220. His loss from the transaction would be -$1,500.00 before commissions and fees.

Profit or Loss = Sell Price - Buy Price x Contract Size x Number of Contracts

= 220 - 235 = -15 cents

= -$0.15 x 5,000 bushel contract size = -$750.00 per contract

= -$750.00 per contract x 2 contracts = -$1,500.00 (before commissions

and fees)

As you can see, whether you are long or short, the basic idea of speculating in the futures market is to "buy low" and "sell high." In the futures market this can be done in any order. You can initiate a long position by buying the futures first and offsetting by selling at a later time. If the sale price (exit price) is higher than the purchase price (entry price), you profit. Or, you can initiate a short position by selling the futures first and then offsetting the contract(s) at a later time by buying them. A profit will always occur if the sale price is higher than the purchase price.