If you are bullish on live cattle, you can profit from a rise in live cattle price by taking up a long position in the live cattle futures market. You can do so by buying (going long) one or more live cattle futures contracts at a futures exchange.
You decide to go long one near-month CME Live Cattle Futures contract at the price of USD 0.8445 per pound. Since each CME Live Cattle Futures contract represents 40000 pounds of live cattle, the value of the futures contract is USD 33,780. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,620 to open the long futures position.
Assuming that a week later, the price of live cattle rises and correspondingly, the price of live cattle futures jumps to USD 0.9290 per pound. Each contract is now worth USD 37,158. So by selling your futures contract now, you can exit your long position in live cattle futures with a profit of USD 3,378.
|Long Live Cattle Futures Strategy: Buy LOW, Sell HIGH|
|BUY 40000 pounds of live cattle at USD 0.8445/lb||USD 33,780|
|SELL 40000 pounds of live cattle at USD 0.9290/lb||USD 37,158|
|Investment (Initial Margin)||USD 1,620|
|Return on Investment||208.5185%|
In the examples shown above, although live cattle prices have moved by only 10%, the ROI generated is 208.5185%. This leverage is made possible by the relatively low margin (approximately 4.7957%) required to control a large amount of live 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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