Trader Resources : Origination and Settlement of Contracts
Origination occurs when a new position is established. The buyer of a contract is considered to have a long position. The seller is considered to have a short position. Every contract will have both a buyer and a seller. Each contract is a promise to deliver a certain amount of goods on a certain date. For example, each September corn contract promises 5,000 bushels of corn be delivered before September 17th (the specific date will vary by year).

There are three ways to settle a contract. The most common is offsetting. Offsetting settles a contract with a transaction of the exact same contract from the opposite position. For example, someone who had a long position (buyer) would then establish a short position (sell) for the same contract. Someone who had a short position (seller) would then establish a long position (buy). In this settlement, the trader does not deliver any goods, nor does he/she take delivery of any goods. They simply make or lose the profit gained by the change in value of the contract, less any trading fees. This is the most common method of contract settlement. Offsetting is type of settlement used in FACTSim. Another way to settle a contract is delivery. In the case of the corn contract, the 5,000 bushels would actually change hands. The third way to settle a contract is cash settlement. In this scenario, in place of the 5,000 bushels changing hands, the buyer instead receives the cash value for the corn. Many contracts have now specified cash settlement as the only form of delivery.

As with any type of trading, the principle of "buy low, sell high" holds here as well. A trader may long a position in the hopes that they can later sell it at a higher price. Similarly, a speculator may short a position, in anticipation of the price being lower later on.

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