If you are bullish on feeder cattle, you can profit from a rise in feeder cattle price by taking up a long position in the feeder cattle futures market. You can do so by buying (going long) one or more feeder cattle futures contracts at a futures exchange.
You decide to go long one near-month CME Feeder Cattle Futures contract at the price of USD 0.9520 per pound. Since each CME Feeder Cattle Futures contract represents 50000 pounds of feeder cattle, the value of the futures contract is USD 47,600. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 2,025 to open the long futures position.
Assuming that a week later, the price of feeder cattle rises and correspondingly, the price of feeder cattle futures jumps to USD 1.0472 per pound. Each contract is now worth USD 52,360. So by selling your futures contract now, you can exit your long position in feeder cattle futures with a profit of USD 4,760.
|Long Feeder Cattle Futures Strategy: Buy LOW, Sell HIGH|
|BUY 50000 pounds of feeder cattle at USD 0.9520/lb||USD 47,600|
|SELL 50000 pounds of feeder cattle at USD 1.0472/lb||USD 52,360|
|Investment (Initial Margin)||USD 2,025|
|Return on Investment||235.0617%|
In the examples shown above, although feeder cattle prices have moved by only 10%, the ROI generated is 235.0617%. This leverage is made possible by the relatively low margin (approximately 4.2542%) required to control a large amount of feeder cattle 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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