If you are bullish on corn, you can profit from a rise in corn price by taking up a long position in the corn futures market. You can do so by buying (going long) one or more corn futures contracts at a futures exchange.
You decide to go long one near-month Euronext Corn Futures contract at the price of EUR 129.25 per tonne. Since each Euronext Corn Futures contract represents 50 tonnes of corn, the value of the futures contract is EUR 6,463. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of EUR 700.00 to open the long futures position.
Assuming that a week later, the price of corn rises and correspondingly, the price of corn futures jumps to EUR 142.18 per tonne. Each contract is now worth EUR 7,109. So by selling your futures contract now, you can exit your long position in corn futures with a profit of EUR 646.25.
|Long Corn Futures Strategy: Buy LOW, Sell HIGH|
|BUY 50 tonnes of corn at EUR 129.25/ton||EUR 6,463|
|SELL 50 tonnes of corn at EUR 142.18/ton||EUR 7,109|
|Investment (Initial Margin)||EUR 700.00|
|Return on Investment||92%|
In the examples shown above, although corn prices have moved by only 10%, the ROI generated is 92%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of corn 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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