RE: Crude oil for idiots - continued
There are really intriguing factors that affect delivery process as you've stated. As for the short selling process, I think there is a very high risk involved most especially if the broker side if he or she isn't really experienced, there are high chances of the broker running at a greater loss than the seller.
I have closed all my buy positions, I'm going to take the sell positions now starting from $18. You see, short is a very risk move, because my profit region is only $18 down to 0
I love your smart decision there since you will start selling at the rate of $18 which sounds cool but I still don't get why it can be reduced to 0. Does this means that there can also be negative value (value below 0) during loss?
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Aha. Imagine, if you wanted to sell a contract(CFD, without physical product delivery), I buy from you now at $17. If the price really go down to $1, me as a broker will have to sell it back to you at $1, so I loss $16. What a shame. That's me, as a broker with downside.
On the other hand, at the same time when you sold me $17, someone wanted to buy. So I sold the contract for $18 to that someone. By the time it dropped to $1, that someone who owns the oil couldn't take it anymore, so they decided to sell it back to me. I offer them, ok I will only take it back at $0.50. Now I have a profit of $18-$0.50=$17.50
My total revenue for this entire transaction is:
Sales contract between you and me -$16
Buy contract between me and someone +$17.50
Total profit $1.50
Now do you see why broker will never go broke?
CFD means, contract for difference. I'm selling a contract, that contract does not take delivery. It's like a gambling between the broker and me. Selling a contract, will have to buy back later.
On spot market, the price is following the market consensus. It has nothing to do with my contract. This means, when you gamble, you look at real price. Because when oil fall below a reasonable value, nobody will ever trade their oil anymore. Gas station will close. The government will rather GIVE away petrol/gasoline for free rather than selling, because the operator who operate the gas station would cost more than the petrol itself. So the answer is, oil price will never go negative, the bi-product may be.