Buying (Going Long) Crude Oil Futures to Profit from a Rise in Crude Oil Prices

If you are bullish on crude oil, you can profit from a rise in crude oil price by taking up a long position in the crude oil futures market. You can do so by buying (going long) one or more crude oil futures contracts at a futures exchange.

Example: Long Crude Oil Futures Trade

You decide to go long one near-month NYMEX Brent Crude Oil Futures contract at the price of USD 44.20 per barrel. Since each NYMEX Brent Crude Oil Futures contract represents 1000 barrels of crude oil, the value of the futures contract is USD 44,200. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 12,825 to open the long futures position.

Assuming that a week later, the price of crude oil rises and correspondingly, the price of crude oil futures jumps to USD 48.62 per barrel. Each contract is now worth USD 48,620. So by selling your futures contract now, you can exit your long position in crude oil futures with a profit of USD 4,420.

Long Crude Oil Futures Strategy: Buy LOW, Sell HIGH
BUY 1000 barrels of crude oil at USD 44.20/barrelUSD 44,200
SELL 1000 barrels of crude oil at USD 48.62/barrelUSD 48,620
ProfitUSD 4,420
Investment (Initial Margin)USD 12,825
Return on Investment34.46%

Margin Requirements & Leverage

In the examples shown above, although crude oil prices have moved by only 10%, the ROI generated is 34.46%. This leverage is made possible by the relatively low margin (approximately 29.02%) required to control a large amount of crude oil 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.

Learn More About Crude Oil Futures & Options Trading

tda_general_value_general_superiorityclaim_1online
Bookmark and Share
Browse Glossary: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z