If you are bullish on natural gas, you can profit from a rise in natural gas price by taking up a long position in the natural gas futures market. You can do so by buying (going long) one or more natural gas futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Natural Gas Futures contract at the price of USD 5.5150 per mmbtu. Since each NYMEX Natural Gas Futures contract represents 10000 mmBtus of natural gas, the value of the futures contract is USD 55,150. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 8,775 to open the long futures position.
Assuming that a week later, the price of natural gas rises and correspondingly, the price of natural gas futures jumps to USD 6.0665 per mmbtu. Each contract is now worth USD 60,665. So by selling your futures contract now, you can exit your long position in natural gas futures with a profit of USD 5,515.
|Long Natural Gas Futures Strategy: Buy LOW, Sell HIGH|
|BUY 10000 mmBtus of natural gas at USD 5.5150/mmbtu||USD 55,150|
|SELL 10000 mmbtus of natural gas at USD 6.0665/mmbtu||USD 60,665|
|Investment (Initial Margin)||USD 8,775|
|Return on Investment||62.8490%|
In the examples shown above, although natural gas prices have moved by only 10%, the ROI generated is 62.8490%. This leverage is made possible by the relatively low margin (approximately 15.9112%) required to control a large amount of natural gas 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.