If you are bullish on lead, you can profit from a rise in lead price by taking up a long position in the lead futures market. You can do so by buying (going long) one or more lead futures contracts at a futures exchange.
You decide to go long one near-month LME Lead Futures contract at the price of USD 1,145 per tonne. Since each LME Lead Futures contract represents 25 tonnes of lead, the value of the futures contract is USD 28,625. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 5,500 to open the long futures position.
Assuming that a week later, the price of lead rises and correspondingly, the price of lead futures jumps to USD 1,260 per tonne. Each contract is now worth USD 31,488. So by selling your futures contract now, you can exit your long position in lead futures with a profit of USD 2,863.
|Long Lead Futures Strategy: Buy LOW, Sell HIGH|
|BUY 25 tonnes of lead at USD 1,145/ton||USD 28,625|
|SELL 25 tonnes of lead at USD 1,260/ton||USD 31,488|
|Investment (Initial Margin)||USD 5,500|
|Return on Investment||52%|
In the examples shown above, although lead prices have moved by only 10%, the ROI generated is 52%. This leverage is made possible by the relatively low margin (approximately 19%) required to control a large amount of lead 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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