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Like conventional stock, futures contracts can be sold even when the seller does not yet own any of the commodity. A contract to sell, say, 15,000 pounds of FCOJ at $1.50 per pound in February merely indicates the seller's obligation to provide and the buyer's obligation to purchase the product at the specified price and time. It does not matter how or where the seller gets the product, as long as, one way or another, he is able to deliver it at that price at that time, even if it results in a sale at a loss to him. This type of sale is called a short or short selling.

Six Steps

In this case, Winthorpe and Valentine short or sell IOUs FCOJ futures at $1.42 per pound, a price inflated by the Dukes themselves.  When the price falls — first as a result of Winthorpe and Valentine's eager selling, then to a much greater degree upon the release of the real crop report indicating a good harvest — Winthorpe and Valentine cover or buy back futures for prices between $0.46 and $0.29 per pound. Thus, for every futures contract they had previously sold at about $1.42, they buy back for only $0.46 to $0.29, resulting in a profit of $0.96 to $1.13 per pound, or about $14,000 to $17,000 per contract (15,000 lbs. per contract).

Short Selling in the FCOJ Market

In the futures market, the value of the contracts you can purchase is limited by the balance of your margin account. With a typical requirement of 4%, you can purchase roughly 25 times the balance of your margin account. Though it is not stated in the movie exactly how much they make, if they invested roughly $500,000 from a combination of Winthorpe/Valentine's investment, the Dukes' money from buying the "fake" report from a fake Clarence Beeks, and Coleman's and Ophelia's savings, they would have turned it into over $10 million. It is strongly implied that they purchased additional futures on margin and made dozens (or hundreds) of millions more, since a lesser amount would not bankrupt the Dukes.

When it turns out that the leaked report they were given was fraudulent and the true report is revealed, the price begins to plummet before the Dukes are able to sell off their contracts. This leaves them with an obligation to buy millions of pounds of FCOJ at a price more than a dollar per pound higher than they can sell them for, bankrupting them. The Dukes are also trading on margin, in order to magnify their profits (or losses, as it turns out). The first words that the exchange representative says to them after their disastrous trading session are "Margin call, gentlemen," requiring them to deposit more money with the exchange to cover their open loss-making position. Randolph whines, "You know perfectly well that we don't have $394 million in cash!" Since their open position is hundreds of millions of dollars in the red, leaving no further margin to deposit, they are effectively ruined.