How to short commodities

If you have a keen interest in trading commodities, you’ll know that markets are easily affected by unpredictable events. That’s when many traders look for short-selling opportunities. Read on to learn about shorting commodities.

What does it mean to ‘short’ a commodity?

To ‘short’ (sell, or short-sell) a commodity means that you’re betting against the price of a raw material, such as oil or gold. In other words, you think that the market price will fall. If you’re right, you will make a profit, but if the market price rises, you’ll make a loss.

For example, if you think that a natural disaster will have a negative impact on the price of wheat, you can open a short position and profit from falling prices.

So, how do you short a commodity? The good news is that you don’t have to own any physical materials to do this. Commodity shorting can easily be done via derivatives such as CFDs and spread bets, which enable you to speculate on price movements. One of the benefits of CFD trading and spread betting is that you can trade using leverage. This means you only need a small deposit to open a position, while still getting exposure to the full value of the trade. However, your profit and loss will be based on the full position size.

How to short commodities

If you want to short commodities, you can do so through CFD trading or spread betting. Both methods enable you to sell the market without owning any underlying assets. Follow these steps to short commodities:

  1. Create an IG trading account or log in to your existing account
  2. Open the platform and search for the commodity you want to short
  3. Choose your position size
  4. Select ‘sell’ in the deal ticket and confirm the trade

Reasons to short a commodity

The biggest reason why you may want to short a commodity is to take advantage of a market that is declining in value. This means more trading opportunities in volatile market conditions. However, there are other advantages to shorting, such as hedging. You can use short-selling to hedge open positions and protect against losses on a long position.

For example, if you owned gold and were worried about it falling in value, you could use a short position to offset the risk. This short position would turn to profit if your physical holdings fell in value, and make a loss if the price of gold increased. Hedging a position may not necessarily prevent a loss entirely, but it can lessen the impact.

Gold shorting example: how to sell gold with CFDs

Consider this example: gold is trading at 1494.05 with a sell price of 1493.90 and a buy price of 1494.20. Because you think the price of gold is going down, you want to short the market using a CFD. So, you short ten contracts at the sell price of 1493.90.

In this case, the contract size is £1 per point so your position value is £14,939.00 (10 x £1 x 1493.90). The margin for commodities is 5%, so you have to put down £746.95 to open your position.

The gold price falls to 1479.60 and you decide to close your trade and take your profit. To do this, you reverse the trade by buying ten contracts at the new buy price of 1479.75. These contracts are valued at £14,797.50, which means you will pocket the difference of £141.50 (£14,939.00 - £14,797.50).

If your prediction was wrong and the gold price goes up, you can still reverse your trade to close it, but you will make a loss.

Oil shorting example: how to sell oil with a spread bet

Assume that Brent crude oil is trading at 6056.3 with a sell price of 6055.6 and a buy price of 6057.0. You think the price of oil is going to fall, so you decide to short the market using a spread bet. You bet £5 per point of movement, selling the market at 6055.6.

Your total exposure would be £30,278.00 (6055.6 x £5 per point) and, because you’re trading using leverage, your margin would be £1513.90 (5% of the value of the trade).

The oil price falls and you decide it’s time to close your position and take your profit when the buy price is 6016.6. To do this, you place the opposite trade – in other words, buy at £5 per point. Because the oil price fell by 39 points, your profit will be £195 (39 x £5). If the oil price went up instead, you would have made a loss.

Risks when shorting commodities

Short-selling does come with some risks, which is why it is so important to set up a thorough risk management strategy. One of the main risks when shorting commodities is that the commodity price can theoretically increase indefinitely. If this happens, short sellers all try to cover their positions at once. This causes a ‘short squeeze’, which pushes the price of the stock up even further and magnifies losses.

To limit your risk, make sure you have a good trading plan and appropriate risk management steps in place. You can use tools like guaranteed stops to limit your losses, if the market price goes up.

Shorting commodities summed up

To short a commodity means that you’re betting against the price of a raw material. You can short commodities through CFD trading or spread betting, enabling you to sell the market without owning any underlying assets.

Follow these steps to short commodities:

  1. Create a trading account or log in to your existing account
  2. Open the platform and search for the commodity you want to short
  3. Enter your position size
  4. Choose ‘sell’ in the deal ticket and confirm the trade

You can read more about short-selling in this comprehensive guide

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Publication date : 2019-11-12T16:29:18+0000

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