If you are bullish on heating oil, you can profit from a rise in heating oil price by taking up a long position in the heating oil futures market. You can do so by buying (going long) one or more heating oil futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Heating Oil Futures contract at the price of USD 1.4777 per gallon. Since each NYMEX Heating Oil Futures contract represents 42000 gallons of heating oil, the value of the futures contract is USD 62,063. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 10,125 to open the long futures position.
Assuming that a week later, the price of heating oil rises and correspondingly, the price of heating oil futures jumps to USD 1.6255 per gallon. Each contract is now worth USD 68,270. So by selling your futures contract now, you can exit your long position in heating oil futures with a profit of USD 6,206.
|Long Heating Oil Futures Strategy: Buy LOW, Sell HIGH|
|BUY 42000 gallons of heating oil at USD 1.4777/gal||USD 62,063|
|SELL 42000 gallons of heating oil at USD 1.6255/gal||USD 68,270|
|Investment (Initial Margin)||USD 10,125|
|Return on Investment||61.2972%|
In the examples shown above, although heating oil prices have moved by only 10%, the ROI generated is 61.2972%. This leverage is made possible by the relatively low margin (approximately 16.3140%) required to control a large amount of heating 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.
To buy or sell futures, you need a broker that can handle futures trades.
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