If you are bullish on lean hogs, you can profit from a rise in lean hogs price by taking up a long position in the lean hogs futures market. You can do so by buying (going long) one or more lean hogs futures contracts at a futures exchange.
You decide to go long one near-month CME Lean Hogs Futures contract at the price of USD 0.6015 per pound. Since each CME Lean Hogs Futures contract represents 40000 pounds of lean hogs, the value of the futures contract is USD 24,060. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,350 to open the long futures position.
Assuming that a week later, the price of lean hogs rises and correspondingly, the price of lean hogs futures jumps to USD 0.6617 per pound. Each contract is now worth USD 26,466. So by selling your futures contract now, you can exit your long position in lean hogs futures with a profit of USD 2,406.
|Long Lean Hogs Futures Strategy: Buy LOW, Sell HIGH|
|BUY 40000 pounds of lean hogs at USD 0.6015/lb||USD 24,060|
|SELL 40000 pounds of lean hogs at USD 0.6617/lb||USD 26,466|
|Investment (Initial Margin)||USD 1,350|
|Return on Investment||178.2222%|
In the examples shown above, although lean hogs prices have moved by only 10%, the ROI generated is 178.2222%. This leverage is made possible by the relatively low margin (approximately 5.6110%) required to control a large amount of lean hogs 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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