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

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

Example: Long Gasoline Futures Trade

You decide to go long one near-month TOCOM Gasoline Futures contract at the price of JPY 31,820 per kiloliter. Since each TOCOM Gasoline Futures contract represents 50 kiloliters of gasoline, the value of the futures contract is JPY 1,591,000. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of JPY 210,000 to open the long futures position.

Assuming that a week later, the price of gasoline rises and correspondingly, the price of gasoline futures jumps to JPY 35,002 per kiloliter. Each contract is now worth JPY 1,750,100. So by selling your futures contract now, you can exit your long position in gasoline futures with a profit of JPY 159,100.

Long Gasoline Futures Strategy: Buy LOW, Sell HIGH
BUY 50 kiloliters of gasoline at JPY 31,820/klJPY 1,591,000
SELL 50 kiloliters of gasoline at JPY 35,002/klJPY 1,750,100
ProfitJPY 159,100
Investment (Initial Margin)JPY 210,000
Return on Investment76%

Margin Requirements & Leverage

In the examples shown above, although gasoline prices have moved by only 10%, the ROI generated is 76%. This leverage is made possible by the relatively low margin (approximately 13%) required to control a large amount of gasoline 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.

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