Why Futures Have One Quoted Price for Both Sides

# 60864


# Why are futures contracts on the secondary market described as having 1 price, instead of 1 price for contract buyers and a 2nd price for sellers?












I'm first going to describe how I believe the futures contract mechanics work, and please correct me where I'm wrong:

A contract seller (in a short position because usually they don't actually physically own the commodity yet) writes up a contract that stipulates that a certain amount of a certain commodity will be given over to the contract buyer at today's current market price, which is the contract price, on a certain expiration date. The contract seller then finds a contract buyer who agrees to the terms, putting this buyer in a long position because they now own the future right to the commodity.

In a theoretical world, the contract seller would then wait until right before the expiration date, buy the amount of the commodity needed for the contract transaction, at the new current market price. They then complete the transaction with the contract buyer.

The incentive for the contract seller for this deal is they are betting that the commodity prices will be lower in the future than they were when the contract was written. They can therefore buy the commodity at a lower future price, and turn around and sell it at a higher previously agreed-upon price, making a profit. If the market behaves oppositely however, this would create a loss for the contract seller.

The incentive for the contract buyer is essentially the opposite. They are betting that the market prices when the contract expires will be higher than the amount stipulated in the contract that they must pay. If this is the case, when the contract is fulfilled and they receive their shipment of the commodity in exchange for the previously agreed-upon lower price, they can instantly go sell it at a higher price on the market. Opposite market behavior results in a lose.

Therefore, I understand that the value of the short position of whoever is in the contract seller role and the value of the long position of whoever is in the contract buyer role are each completely dependent on market behavior (and to me, they behave independently and inversely, but more on that later). Also, only theoretically are contracts actually held until completion. In reality, the contract seller and buyer almost always sell their respective positions to another entity before the expiration date. Their true goal in this deal is for the market to act like they predict, thereby increasing the value of their respective position, and liquidating their position for a profit.

Here my question:

So what I don't understand is why would this futures contract be described as having 1 single price? For argument's sake, I'll say that when the contract is initially signed, both the contract seller and buyer value the contract the same. I won't get into the specifics of how to calculate that exact value, because what's actually important here is simply the resultant change in contract value from market behavior. But as far as contract details go, 500 barrels of oil are due to be handed over in 9 months in exchange for 10,000 USD. It's therefore implied the current market price per oil barrel is 20 USD (to make numbers easier).

So let's say that 6 months have gone by and the price of oil has increased to 30 USD. The contract seller has an incentive, but not an obligation if he believes the market will reverse, at this point to sell his short position as soon as possible, to cover his losses; because even if price only stops rising but never comes down, he'll still end up paying 15,000 USD and then only receiving 10,000 USD. Whoever he sells this short position to, by agreeing to take his place in the contract, they now become the contract seller, and are still obligated to hand over 500 barrels in 3 months, because although the individuals executing the contract have changed, its details haven't. Therefore, from a contract seller's perspective, whatever this contract's initial value was, it has clearly fallen. It's not worth nearly as much now for an investor to take on this role with an even higher risk that the price will never drop to at least the contract amount. So the new investor is going to pay less than the original contract price/value in order to have the opportunity to become the new contract seller. So the contract price has fallen for the contract seller.

I've already overexplained and rambled, so I'll summarize the next part and say that from the contract buyer's perspective, the value of his long position has increased, because there is an inverse relationship. So since a new investor who would like to take his place in the contract would be willing to pay more than what the original contract buyer valued the contract at, from the buyer contract's perspective the contract price has gone up.

So how could there possibly be 1 contract price publicated for every futures deal? Why isn't there a demarcation where on one side it essentially communicates "Do you want to be the contract buyer on 10 year gold? Here's the current market price to get on that contract." And then obviously the respective information for those wanting to join on the contract seller side. Since each side of every futures contract profits from the market acting opposite to what the other side desires, how could both sides end up valuing their contract responsibilities at the same amount on the secondary market?

I know I am wrong somewhere, because clearly there is a reason only 1 price is listed. I just hope I explained my understanding and my confusion well enough to provide you with material with which to correct my thinking.

I really appreciate any help on this, thank you!