If you are bullish on coal, you can profit from a rise in coal price by taking up a long position in the coal futures market. You can do so by buying (going long) one or more coal futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Coal Futures contract at the price of USD 74.45 per ton. Since each NYMEX Coal Futures contract represents 1550 tons of coal, the value of the futures contract is USD 115,398. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 18,900 to open the long futures position.
Assuming that a week later, the price of coal rises and correspondingly, the price of coal futures jumps to USD 81.90 per ton. Each contract is now worth USD 126,937. So by selling your futures contract now, you can exit your long position in coal futures with a profit of USD 11,540.
|Long Coal Futures Strategy: Buy LOW, Sell HIGH|
|BUY 1550 tons of coal at USD 74.45/ton||USD 115,398|
|SELL 1550 tons of coal at USD 81.90/ton||USD 126,937|
|Investment (Initial Margin)||USD 18,900|
|Return on Investment||61.06%|
In the examples shown above, although coal prices have moved by only 10%, the ROI generated is 61.06%. This leverage is made possible by the relatively low margin (approximately 16.38%) required to control a large amount of coal represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
To buy or sell futures, you need a broker that can handle futures trades.
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