If you are bullish on nickel, you can profit from a rise in nickel price by taking up a long position in the nickel futures market. You can do so by buying (going long) one or more nickel futures contracts at a futures exchange.
You decide to go long one near-month LME Nickel Futures contract at the price of USD 10,100 per tonne. Since each LME Nickel Futures contract represents 6 tonnes of nickel, the value of the futures contract is USD 60,600. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 14,400 to open the long futures position.
Assuming that a week later, the price of nickel rises and correspondingly, the price of nickel futures jumps to USD 11,110 per tonne. Each contract is now worth USD 66,660. So by selling your futures contract now, you can exit your long position in nickel futures with a profit of USD 6,060.
|Long Nickel Futures Strategy: Buy LOW, Sell HIGH|
|BUY 6 tonnes of nickel at USD 10,100/ton||USD 60,600|
|SELL 6 tonnes of nickel at USD 11,110/ton||USD 66,660|
|Investment (Initial Margin)||USD 14,400|
|Return on Investment||42%|
In the examples shown above, although nickel prices have moved by only 10%, the ROI generated is 42%. This leverage is made possible by the relatively low margin (approximately 24%) required to control a large amount of nickel 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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