If you are bearish on natural gas, you can profit from a fall in natural gas price by taking up a short position in the natural gas futures market. You can do so by selling (shorting) one or more natural gas futures contracts at a futures exchange.
You decide to go short one near-month NYMEX Natural Gas Futures contract at the price of USD 5.5150/mmbtu. Since each Natural Gas futures contract represents 10000 mmBtus of natural gas, the value of the contract is USD 55,150. To enter the short futures position, you have to put up an initial margin of USD 8,775.
A week later, the price of natural gas falls and correspondingly, the price of NYMEX Natural Gas futures drops to USD 4.9635 per mmbtu. Each contract is now worth only USD 49,635. So by closing out your futures position now, you can exit your short position in Natural Gas Futures with a profit of USD 5,515.
|Short Natural Gas Futures Strategy: Sell HIGH, Buy LOW|
|SELL 10000 mmBtus of natural gas at USD 5.5150/mmbtu||USD 55,150|
|BUY 10000 mmbtus of natural gas at USD 4.9635/mmbtu||USD 49,635|
|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 0.0000%. 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.
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