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> (They followed the basic prototype for selling short. That just means you sell high before you buy low. How? First you borrow and sell. Then you wait for mar

> (They followed the basic prototype for selling short. That just means you sell high before you buy low. How? First you borrow and sell. Then you wait for markets to drop, buy, and return what you borrowed.) Minor nitpick here, but with futures you aren't shorting in that you never borrow. You are simply writing a futures contract which makes you the seller. So when you write the contract you are obligated to sell/deliver at that price on the futures delivery date. this is a bit different from options in that a futures contract buyer has to take delivery and the seller has to deliver. Where as for an options contract the buyer has the right but not the obligation to exercise it. You then cancel your obligation out by later buying a contract that obligates you to take delivery on the delivery date. In this case since you bought the contract later when the market crashed you are buying delivery at a lower price, thus fulfilling your delivery obligations and locking in a profit. No shorting or borrowing happens in this instance. A few random fun facts about futures. 1) there aren't insider trading rules like there are for equities. This makes sense when you consider that McDonalds can move the market if they chose to create a new product. Not allowing McDonalds to trade in the futures market would mean they can't hedge their input needs. Similarly oil companies use futures to hedge their selling prices for oil. If you had insider trading laws like we do with equities they couldn't trade as they have insider knowledge of their market moving needs. 2) A few years ago oil traded negatively for a month, this meant you actually got paid to take delivery of oil. This happened not because oil was worthless( it was still worth the market rate) but because you need to take delivery of the oil on the delivery date. And oil can't just be stored in the your garage. You need to have pre arrange storage in Cushing, Oklahoma or arrange for a rail car to ship your oil out on that exact date. As you would expect oil storage being heavily regulated is finite and rail cars are expensive and booked months in advance so once the storage and rail delivery options were full you'd have to pay someone else for their prearranged storage or rail delivery. And the holders of these storage and shipping options were able to charge a ransom for them as contract buyers had to take delivery and thus had to arrange storage or shipping. More than a few retail investors got hosed on this buy buying futures when the price dropped to half of what a barrel was worth not fully realizing that a) they'd need to pay for storage and b) not fully realizing that the price of oil didn't have a floor at zero, it could infact go negative.

stonemetal12 3y ago
When you say "there aren't insider trading rules like there are for equities" Do you mean there aren't any at all or that they are different? I could see there being different rules like "primary" players are allowed but "secondary" players aren't allowed. That way McDonalds could buy pork futures before the McRib comes back, but the CEO can't use insider info to front run pork futures before the McRib comes back.
- JumpCrisscross 3y ago
  > When you say "there aren't insider trading rules like there are for equities" Do you mean there aren't any at all or that they are different? Closer to non-existent. Same for foreign exchange. > different rules like "primary" players are allowed but "secondary" players aren't allowed Trying to delineate markets this way is how Enron became a quasi hedge fund while many banks busy themselves running warehouses. One set of rules is simpler and more efficient, particularly for something as utilitarian as commodities, where you're concerned with efficiency more than fairness. > the CEO can't use insider info to front run pork futures before the McRib comes back I don't think there would be a commodities violation in this. There could be a securities violation, in that the CEO is misappropriating gains that belong to the shareholders they have a fiduciary obligation to.
RichardCA 3y ago
It's not a minor nitpick. The author mis-explains what futures contracts are in a very fundamental way. There's an NPR article about this same topic: https://www.npr.org/sections/money/2013/07/19/201430727/what-actually-happens-at-the-end-of-trading-places https://www.npr.org/sections/money/2013/07/19/201430727/what... "Winthorpe and Valentine have contracts allowing them to buy millions of pounds of orange juice in April for 29 cents a pound, and to sell it for $1.42 a pound. They sold high and bought low. They're rich. The Dukes made the opposite bet and went broke."

stonemetal12 3y ago

When you say "there aren't insider trading rules like there are for equities" Do you mean there aren't any at all or that they are different? I could see there being different rules like "primary" players are allowed but "secondary" players aren't allowed. That way McDonalds could buy pork futures before the McRib comes back, but the CEO can't use insider info to front run pork futures before the McRib comes back.

JumpCrisscross 3y ago
> When you say "there aren't insider trading rules like there are for equities" Do you mean there aren't any at all or that they are different? Closer to non-existent. Same for foreign exchange. > different rules like "primary" players are allowed but "secondary" players aren't allowed Trying to delineate markets this way is how Enron became a quasi hedge fund while many banks busy themselves running warehouses. One set of rules is simpler and more efficient, particularly for something as utilitarian as commodities, where you're concerned with efficiency more than fairness. > the CEO can't use insider info to front run pork futures before the McRib comes back I don't think there would be a commodities violation in this. There could be a securities violation, in that the CEO is misappropriating gains that belong to the shareholders they have a fiduciary obligation to.

RichardCA 3y ago

It's not a minor nitpick. The author mis-explains what futures contracts are in a very fundamental way. There's an NPR article about this same topic: https://www.npr.org/sections/money/2013/07/19/201430727/what-actually-happens-at-the-end-of-trading-places https://www.npr.org/sections/money/2013/07/19/201430727/what... "Winthorpe and Valentine have contracts allowing them to buy millions of pounds of orange juice in April for 29 cents a pound, and to sell it for $1.42 a pound. They sold high and bought low. They're rich. The Dukes made the opposite bet and went broke."