• Long and short at the same time

    Strictly speaking, long or short represents the net difference between purchases and sales. But this assumes trading is in one type or quality of coffee only. What happens if stocks consist of one quality and sales are of another? For example, an exporter might believe that having at least some coffee in stock will act as a hedge against the shorts and limit exposure to price risk, even if stocks and shorts are of different qualities.

    Or the expectation might be that the 'spread' (price difference) between the two types of coffee will change in the exporter's favour. In both cases the simple statement 'we are X tons long or short' hides the fact that there are not one but two positions. The qualities are not substitutional: the trader is long in quality A and short in quality B. If the market for B rises then the shorts must be covered: if funds must be liberated to do this then the longs must be sold.

    But if others are short of B as well then covering in may produce substantial losses and at the same time A may have to be sold at a loss simply to release the funds necessary to pay for B. Incidentally, this does not change if the short sales were made basis PTBF. Shortage or surplus in a particular type of physical coffee immediately forces the differential for that coffee up or down, often independently of the market as a whole.

    Spread trading is the forecasting or anticipating of changes in price differences between two qualities or markets, for example New York arabicas and London robustas. Arbitrage, on the other hand, is making use of (small) differences or distortions between different markets or positions, for the same commodity.
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