Buying (Going Long) Cotton Futures to Profit from a Rise in Cotton Prices

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Long and Short Positions

Long and Short Positions

In the trading of assets, an investor Equity Trader An equity trader is someone who participates in the buying and selling of company shares on the equity market. Similar to someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets and exchanges their money for company stocks instead of bonds. Bank careers are high-paying can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). Long and short positions are further complicated by the two types of options Stock Option A stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stock option buyer. , the call and put. An investor may enter into a long put, a long call, a short put, or a short call. Furthermore, an investor can combine long and short positions into complex trading and hedging strategies.

Long Positions

In a long (buy) position, the investor is hoping for the price to rise. An investor in a long position will profit from a rise in price. The typical stock purchase Stock Acquisition In a stock acquisition, the individual shareholder(s) sell their interest in the company to a buyer. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping into the shoes of the previous owner is a long stock asset purchase.

A long call position is one where an investor purchases a call option. Thus, a long call also benefits from a rise in the underlying assets price.

A long put position involves the purchase of a put option. The logic behind the “long” aspect of the put follows the same logic of the long call. A put option rises in value when the underlying asset drops in value. A long put rises in value with a drop in the underlying asset.

Long Position Profits

In a long asset purchase, the potential downside/loss is the purchase price. The upside is unlimited.

In long calls and puts, the potential downsides are more complicated. These are explored further in our options case study Options Case Study – Long Call This options case study demonstrates the complex interactions of options. Both put and call options have different payouts. To study the complex nature and interactions between options and the underlying asset, we present an options case study. .

Short Positions

A short position is the exact opposite of a long position. The investor hopes for and benefits from a drop in the price of the security. Executing or entering a short position is a bit more complicated than purchasing the asset.

In the case of a short stock position, the investor hopes to profit from a drop in the stock price. This is done by borrowing X number of shares Stock What is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms “stock”, “shares”, and “equity” are used interchangeably. of the company from a stockbroker, and then selling the stock at the current market price. The investor then has an open position for X number of shares with the broker, that has to be closed in the future. If the price drops, the investor can purchase X amount of stock shares for less than the total price they sold the same number of shares for earlier. The excess cash Cash Equivalents Cash and cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, Bankers Acceptances, Treasury bills, commercial paper, and other money market instruments. is her profit.

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The concept of short selling is often difficult for many investors to grasp, but it’s actually a relatively simple process. Let’s look at an example that will hopefully help clarify things for you. Assume that stock “A” is currently $50 per share. For one reason or another, you expect the stock price to decline, and so you decide to sell short to profit from the anticipated fall in price. Your short sale would work as follows:
– You put up a margin deposit as collateral for your brokerage firm to loan you 100 shares of the stock, which they already own.
– When you receive the 100 shares loaned to you by your broker, you sell them at the current market price of $50 per share. Now you no longer have any shares of the stock, but you do have the $5,000 in your account that you received from the buyer of your 100 shares ($50 x 100 = $5,000). You are said to be “short” the stock because you owe your broker 100 shares. (Think of it as if you said to someone, “I’m 100 shares short of what I need to pay back my broker.”)
– Now assume that, as you anticipated, the stock’s price begins to fall. A few weeks later, the price of the stock has dropped all the way down to $30 a share. You don’t expect it to go much, if any, lower than that, so you decide to close out your short sale.
– You now buy 100 shares of the stock for $3,000 ($30 x 100 = $3,000). You give those 100 shares of stock to your broker to pay him back for, replace, the 100 shares he loaned you. Having paid back the 100 share loan, you are no longer “short” the stock.
– You have made a $2,000 profit on your short sell trade. You received $5,000 when you sold the 100 shares your broker loaned you, but you were later able to buy 100 shares to pay him back with for only $3,000. Thus, your profit is figured as follows: $5,000 (received) – $3,000 (paid) = $2,000 (profit).

Short stock positions are typically only given to accredited investors, as it requires a great deal of trust between the investor and broker to lend shares to execute the short sale. In fact, even if the short is executed, the investor is usually required to place a margin deposit or collateral with the broker in exchange for the loaned shares.

Other Short Positions

Short call positions are entered into when the investor sells, or “writes”, a call option. A short call position is the counter-party to a long call. The writer will profit from the short call position if the value of the call drops, or the value of the underlying drops.

Short put positions are entered into when the investor writes a put option. The writer will profit from the position if the value of the put drops, or when the value of the underlying exceeds the strike price of the option.

Short positions for other assets can be executed through a derivative known as swaps. A credit default swap, for example, is a contract where the issuer will pay out a sum to the buyer if an underlying asset fails or defaults.

The Bottom Line

There is a wide variety of long and short positions that traders may adopt. A knowledgeable investor will have grasped the many advantages and disadvantages of each individual type of long and short positions before attempting to incorporate using them in his or her trading strategy.

Cotton Clothing Price Tags to Rise

Synthetic linings. Smaller buttons. Less Italian fabric. And yes, even more polyester. Unusually high cotton prices have apparel makers scrambling to keep down costs, but consumers be warned: cotton clothing will be getting more expensive.

“It’s really a no-choice situation,” said Wesley R. Card, president and chief executive of the Jones Group, the company behind Anne Klein, Nine West and other brands. “Prices have to come up.”

The Bon-Ton chain is raising prices on its private-label fashion items by as much as a dollar this spring, and prices will go up further next fall. And it is switching from 100 percent cotton in items like sweaters to more acrylic blends. Levi’s says it has already increased prices and may push them further north next year. And Hanesbrands, the maker of Champion, Hanes and Playtex, says price increases will be in place by February, and prices could go up further if cotton prices remain where they are.

Other apparel makers say they have held the line on prices this year, but next year will be different. The V. F. Corporation, the maker of 7 for All Mankind and The North Face, says most brands will probably cost more next year, and its cotton-heavy jeans lines are particularly susceptible to increases. Jones says its increases could be in the high single digits or more.

The problem is a classic supply and demand imbalance, with the price of cotton rising almost 80 percent since July and prices expected to remain high. “World cotton production is unlikely to catch up with consumption for at least two years,” said Sharon Johnson, senior cotton analyst with the First Capital Group, in an e-mail.

Cotton inventories had been low because of weak demand during the recession. This summer, new cotton crops were also depleted because of flooding in Pakistan and bad weather in China and India, all major cotton producers.

But demand from China, in particular, was rising. And as the economic recovery in the United States began, apparel makers and retailers placed orders for more inventory, spurring even more demand. As prices rose, speculators entered the market, driving prices even higher.

“So far, it has shocked even the most veteran traders,” said Mike Stevens, an independent cotton analyst in Mandeville, La., in an e-mail. “It has resulted in panic buying by mills worldwide in order to ensure that they can keep their doors open.”

As of Tuesday morning, the price of cotton (measured by cotton futures for December delivery) had hit a record high on worries that cold weather in China might have damaged some crops.

Cotton’s swooping increase has some apparel companies switching production to countries with lower labor costs or milder customs charges. Lululemon Athletica, the sportswear company, is moving some manufacturing from China to Vietnam, Cambodia and Bangladesh, where wages are lower, and Bon-Ton is benefiting from reduced-duty production in Egypt and Nicaragua.

Manufacturers are also thinking smaller, examining whether a button or a thread can be replaced with a cheaper one, or whether the overall material mix can be changed so it is not so cotton heavy.

“They are taking purchase orders from the retailer and having this conversation with them, saying, ‘Look, I can’t deliver this garment for a dollar this year when it cost me a dollar twenty-five to make it up,’ ” said Andrew Tananbaum, the chief executive of Capital Business Credit, which finances apparel makers and other importers. “ ‘So would you take this garment if it had not cotton but acrylic?’ ”

Mr. Card, of the Jones Group, said the company had “whole teams” looking for more cost-effective materials that did not reduce quality. “That’s all they do,” Mr. Card said.

Liz Claiborne, which makes brands like Juicy Couture and Kate Spade, said it is also playing with some of the materials it uses. One example, said Jane Randel, a spokeswoman, would be shifting from some imported Italian fabrics to “suppliers who produce their own raw materials or yarns.” The company may also reassess its contracts for so-called component materials — like buttons and trims — she said in an e-mail.

At Bon-Ton, retail prices for the private-label clothes have increased about 5 to 8 percent so far this year, said Steve Villa, senior vice president of private brand at the company. Bon-Ton has been turning to different formulations, including sweaters blended with different rayons and synthetic fibers, to avoid further increases.

“At some point, you adopt a different process that maybe will yield some cost savings or you are faced with passing that through,” Mr. Villa said.

Of course, as apparel makers increase the price of cotton goods and also try to reduce their reliance on cotton, there are some risks.

For starters, neither the apparel makers nor the retailers are certain that shoppers will be willing to pay more for cotton goods. “It’s an unanswered question at this point,” said Robert K. Shearer, chief financial officer of the V. F. Corporation.

And — to the disfavor of many fashion purists — with prices unlikely to fall for some time, there could be wider popular acceptance of fabrics like polyester.

“We may be training a new generation to be far more accepting of synthetic fibers, which is likely to hurt cotton’s market share in the long run,” said Ms. Johnson, the analyst with the First Capital Group.

Long Position (Long)

What Is Long Position (Long)?

A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view. A long position is the opposite of a short position (short).

Long position and long are often used In the context of buying an options contract. The trader can hold either a long call or a long put option, depending on the outlook for the underlying asset of the option contract.

  • An investor who hopes to benefit from an upward price movement in an asset will “go long” on a call option. The call gives the holder the option to buy the underlying asset at a certain price.
  • Conversely, an investor who expects an asset’s price to fall will be long on a put option—and maintain the right to sell the asset at a certain price.

Long Position

The Many Faces of Long

Long is one of those investing terms that can have multiple meanings, depending on where it is used. The most common meaning of long is in the length of time an investment is held. However, the term long has a different meaning when used in options and futures contracts.

Key Takeaways

  • A long—long position—refers to the purchase of an asset with the expectation it will increase in value—a bullish attitude.
  • A long position in options contracts indicates the holder owns the underlying asset.
  • A long position is the opposite of a short position.
  • In options, being long can refer either to outright ownership of an asset or being the holder of an option on the asset.
  • Being long on a stock or bond investment is a measurement of time.

Long Holding Investment

Going long on a stock or bond is the more conventional investing practice in the capital markets. With a long-position investment, the investor purchases an asset and owns it with the expectation that the price is going to rise. This investor normally has no plan to sell the security in the near future. In reference to holding equities, which have an inherent bias to rise, long can refer to a measurement of time as well as bullish intent.

Going long on a stock or bond is the more conventional investing practice in the capital markets, especially for retail investors. An expectation that assets will appreciate in value in the long run—the buy and hold strategy—spares the investor the need for constant market-watching or market-timing, and allows time to weather the inevitable ups and downs. Plus, history is on one’s side, as the stock market inevitably appreciates, over time.

Of course, that doesn’t mean there can’t be sharp, portfolio-decimating drops along the way (the COVID-19 inspired fall in global equity markets that began in February 2020 is a prime example), which can be disastrous if one occurs right before an investor was planning to retire—or needed to liquidate holdings for some reason. A prolonged bear market can also be troublesome, as it often favors short-sellers and those betting on declines.

Finally, going long in the outright-ownership sense means a good amount of capital is tied up, which could result in missing out on other opportunities.

Long Position Options Contracts

In the world of options contracts, the term long has nothing to do with the measurement of time but instead speaks to the owning of an underlying asset. The long position holder is one who currently holds the underlying asset in their portfolio.

When a trader buys or holds a call options contract from an options writer they are long, due to the power they hold in being able to buy the asset. An investor who is long a call option is one who buys a call with the expectation that the underlying security will increase in value. The long position call holder believes the asset’s value is rising and may decide to exercise their option to buy it by the expiration date.

But not every trader who holds a long position believes the asset’s value will increase. The trader who owns the underlying asset in their portfolio and believes the value will fall can buy a put option contract. They still have a long position because they have the ability to sell the underlying asset they hold in their portfolio. The holder of a long put option believes the price of an asset will fall. They hold the option with the hope that they will be able to sell the underlying asset at an advantageous price by the expiry.

So, as you see, the long position on an options contract can express either a bullish or bearish sentiment depending on whether the long contract is a put or a call.

In contrast, the short position on an options contract does not own the stock or other underlying asset but borrows it with the expectation of selling it and then repurchasing it at a lower price.

Long Futures Contracts

Investors and businesses can also enter into a long forward or futures contract to hedge against adverse price movements. A company can employ a long hedge to lock in a purchase price for a commodity that is needed in the future. Futures differ from options in that the holder is obligated to buy or sell the underlying asset. They do not get to choose but must complete these actions.

Suppose a jewelry manufacturer believes the price of gold is poised to turn upwards in the short term. The firm can enter into a long futures contract with its gold supplier to purchase gold in three months from the supplier at $1,300. In three months, whether the price is above or below $1,300, the business that has a long position on gold futures is obligated to purchase the gold from the supplier at the agreed contract price of $1,300. The supplier, in turn, is obligated to deliver the physical commodity when the contract expires.

Speculators also go long on futures when they believe the prices will go up. They don’t necessarily want the physical commodity, as they are only interested in capitalizing on the price movement. Before expiry, a speculator holding a long futures contract can sell the contract in the market.

New Threat to Retail: Rising Commodity Prices

Prices of commodities have been increasing across the board. Can the apparel industry take another hit when it is already down?

LONDON, United Kingdom — Apparel companies already grappling with a difficult retail environment face a new challenge: steep increases in the prices for the raw materials they need to make their clothes.

Wool prices have soared to record highs this year on booming demand, while a drought in Texas and rising Chinese imports have sent cotton futures to a nearly six-year peak in the US. The price of oil, used to make synthetic fabrics like polyester and rayon, is up over 50 percent from a year ago.

Retailers, including Abercrombie & Fitch and Ralph Lauren , have already flagged rising supply chain costs as a potential threat. But they have limited options beyond passing along prices to customers, an unappealing prospect for retailers facing declining mall traffic and increased competition from low-price competitors online. Some, including H&M, are planning steep discounts in the coming months to reduce inventories, and could now see rising prices for cotton and polyester squeeze already slim profits.

“The margins within the supply chain are incredibly tight,” said Adam Mansell, chief executive of not-for-profit organisation UK Fashion & Textile Association. “Unless you are supplying top-end luxury goods, it is a very difficult world to be in at the moment.”

The apparel industry can’t do much to control commodities prices when they rise.

Cotton is rising because bad weather is reducing global supplies. Cotlook, an independent analysis firm, forecasts a decline in the world’s stock of cotton by the end of this year.

Meanwhile, Chinese textile manufacturers have also begun drawing down massive government stockpiles, raising expectations they will need to import more of the fibre later this year. On the ICE Futures US exchange, prices hit about 95 cents a pound last month, their highest since early 2020.

Oil prices have risen steadily over the last year, as the Organisation of the Petroleum Exporting Countries as well as Russia have reduced production, and countries like Libya and Venezuela have seen supply outages. Brent crude, an international benchmark, traded at about $78 a barrel on Wednesday, compared to about $50 a barrel a year ago.

Unless you are supplying top-end luxury goods, it is a very difficult world to be in at the moment.

Analysts see wool prices taking the longest to come back down. The fashion industry’s demand for wool — which is being incorporated into everything from Allbirds shoes to Lululemon pants — is rising faster than farmers can handle. And while OPEC members can turn their wells back on in a day, and cotton farmers can increase next year’s plantings, breeding sheep is a slower process. Prices on the Australian Wool Exchange topped $15 per kilogram, higher than the previous spike in 2020.

“You have to have the breeds of sheep, and it takes 2-3 years to have any impact on the market,” said Wayne Gordon, commodities analyst at UBS Global Wealth Management Chief Investment Office. “It will put a pressure onto the fashion industry.”

Apparel companies have other ways to cope with higher commodities prices beyond raising prices, but some of those fail-safes aren’t as effective this year. For instance, they can respond to rising prices for one material by switching to another. When cotton prices spiked in 2020, many brands started selling more apparel made from rayon and other synthetic fabrics. But with raw materials prices rising across the board, changing the mix of fabrics won’t provide much relief.

In May, Ralph Lauren said increased commodities prices, along with higher wages and freight costs, would cut gross margins by up to half a percentage point (though the same factors worked in the company’s favour by about the same amount last year). The company is responding by leveraging its scale to negotiate lower prices with suppliers, and to raise prices, chief financial officer Jane Nielsen said in an earnings call.

Retailers face an inevitable choice: raise prices and lose customers, or keep the customers and accept lower profits.

At Abercrombie & Fitch, commodities are pushing expenses higher, though the company said transportation costs are a bigger threat right now.

“We’re keeping our eyes on commodities,” said chief financial officer Scott Lipesky in a June earnings call. “So our sourcing teams are on top of that and doing whatever they can to offset any potential inflation we see in commodities in the back half.”

If commodities prices don’t fall back, retailers face an inevitable choice: raise prices and lose customers or keep the customers and accept lower profits. That’s a tough pill to swallow at a time when 700 clothing stores shut down in the UK alone last year, according to data compiled by the Local Data Company for PwC.

“Things are going to get tougher, they are going to raise prices to offset [cost inflation],” said John Kernan, an analyst at Cowen. “It will be difficult. I think certain brands will struggle.”

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