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        Offset Futures

        Offset Futures - What is Offsetting?

        Offsetting is one of three actions futures traders take to close out their existing futures position. The other actions being to "Roll Forward" and "Reverse".

        In futures trading, when you close out a futures position, you do so by "offsetting" the futures position. To Offset a futures position is to close out the futures position by taking an opposite and equal transaction in the futures market in order to neutralize the original futures position that you owned. Neutralizing a futures position bring the net position to zero and will no longer be obligated for delivery.

        This is the same effect as selling stocks that you own or buying back stocks that you have previously shorted. Offsetting is a process that is largely invisible to you as a futures trader because all you have to do to close out your futures position is simply select "Offset" from your trading account interface and the actual process of offsetting will be performed in the futures market by your futures broker for you.

        OppiE's Note There are some futures traders who use the term "Reversing Trade" to mean "Offset". Even though it is not wrong, it is ambiguous as it can be mistaken to be a reverse order which is totally different from an offset.

        Example of Offsetting Futures Contracts

        John was long 1 contract of Nikkei225 Futures expiring in April. After holding the position for a few days, John decided to close out the position as he has already made some good profit over those few days from daily settlement. John gave the order to offset the position to his futures broker. His broker then goes into the futures market and offers to go short 1 contract of April Nikkei225 futures contract. Once the order fills, John would in effect be long 1 contract and short 1 contract of Nikkei225 futures which the clearinghouse would consider as having no further exposure in the position.

        The opposite is the same for offsetting a short futures contract.

        Assuming John was short 1 contract of Nikkei225 Futures expiring in April. Giving the order to offset the futures position would make his futures broker go into the future market to make an offer to go long 1 contract of Nikkei225 futures expiring in April. Once filled, John would once again have both a long and a short contract of Nikkei225 which is regarded as no further exposure.

        Of course, the above process is carried out automatically by your broker and is invisible to you. To the futures trader, choosing to offset a futures position would simply see the futures position disappear from the trading account just like selling a stock or buying back a short stock position.

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