If you are bearish on coal, you can profit from a fall in coal price by taking up a short position in the coal futures market. You can do so by selling (shorting) one or more coal futures contracts at a futures exchange.
You decide to go short one near-month NYMEX Coal Futures contract at the price of USD 74.45/ton. Since each Coal futures contract represents 1550 tons of coal, the value of the contract is USD 115,398. To enter the short futures position, you have to put up an initial margin of USD 18,900.
A week later, the price of coal falls and correspondingly, the price of NYMEX Coal futures drops to USD 67.01 per ton. Each contract is now worth only USD 103,858. So by closing out your futures position now, you can exit your short position in Coal Futures with a profit of USD 11,540.
|Short Coal Futures Strategy: Sell HIGH, Buy LOW|
|SELL 1550 tons of coal at USD 74.45/ton||USD 115,398|
|BUY 1550 tons of coal at USD 67.01/ton||USD 103,858|
|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 0.00%. 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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