Long and short
Lesson 3 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
Long: a bet on a rise
A long is when you buy a futures because you think the price will rise. Nika bought a contract at $100. The price reached $110, she closed the trade and earned $10 on each unit. Had the price dropped to $90, she’d have lost $10. Just like a normal purchase, only you never get the thing itself.
Short: a bet on a fall
A short is the opposite: you sell a futures you don’t own because you think the price will fall. Sounds odd, but futures are a contract, not a thing, so you can sell first. Nika sold at $100, the price fell to $90, she bought the contract back and earned $10. Had it risen to $110, she’d have lost $10. That’s how futures let you earn on a fall too.
A mirror: the same move
Long and short are mirrors. The same price move gives one a plus and the other the same minus. That’s why futures aren’t only about picking a direction but about asking “what if I’m wrong”. Shorts have a catch: a price can only fall to zero but can rise without limit. So without a stop-loss, a short’s loss has no cap.
A short as insurance
Shorts aren’t only for guessing falls. Remember the farmer: futures were invented for protection. Same today: someone holds 0.1 BTC, doesn’t want to sell, but rough news is ahead. They can short the same 0.1 BTC with no leverage. If the price falls, the coin loses and the short earns about the same. That’s hedging. Just remember funding and fees: insurance isn’t free.
Check yourself
- Nika thinks the gold price will fall. Which trade does she open?
Correct answer: Short. A short earns when the price falls. On futures it’s just the “Sell” button. - Why is a short without a stop-loss especially dangerous?
Correct answer: The price can rise without limit, and so can the loss. A fall stops at zero, a rise doesn’t. A stop-loss puts a ceiling on the loss. - Someone holds bitcoin and opened a short of the same size with no leverage. Why?
Correct answer: To insure against a fall without selling the coin. It’s a hedge: the short’s profit covers the coin’s loss on a fall. The price of this insurance is funding and fees.