It is now January 1. You expect the price of XYZ stock to drop over a given period of time – in this case 6 months – and wish to profit from this decrease. There is a futures contract on XYZ stock expiring in June that fits your bearish (180-day) time frame, and which covers 100 shares of XYZ stock. At the moment, the market price of XYZ stock is $90.00 per share. This June XYZ future is currently trading for $91.80, so you sell one contract at that price. If XYZ and the futures contract decline in price, you can buy (close out) your contract at a profit. If XYZ and the futures contract increase in price, you can buy (close out) your contract, but at a loss.

Four months after you sell your June XYZ contract the price of XYZ stock has declined, and you buy (close out) your short futures contract for $80.00. Your profit* would be $11.80 per share ($91.80 sale price - $80 purchase price), or $1,180 net ($11.80 x 100 underlying shares) for the contract.

Three months after you sell your June XYZ contract the price of XYZ stock has increased, and you buy (close out) your short futures contract for $98.00. Your loss* would be $7.20 per share ($98.00 purchase price - $91.80 sale price), or $720 net ($7.20 x 100 underlying shares) for the contract.

* Exclusive of commissions and other transaction costs, margin requirements, and taxes.

Note: Security futures products are not suitable for all investors. Futures trading involves substantial risk of financial loss and should be considered carefully before making any trades.