If you are bearish on nickel, you can profit from a fall in nickel price by taking up a short position in the nickel futures market. You can do so by selling (shorting) one or more nickel futures contracts at a futures exchange.
You decide to go short one near-month LME Nickel Futures contract at the price of USD 10,100/ton. Since each Nickel futures contract represents 6 tonnes of nickel, the value of the contract is USD 60,600. To enter the short futures position, you have to put up an initial margin of USD 14,400.
A week later, the price of nickel falls and correspondingly, the price of LME Nickel futures drops to USD 9,090 per tonne. Each contract is now worth only USD 54,540. So by closing out your futures position now, you can exit your short position in Nickel Futures with a profit of USD 6,060.
|Short Nickel Futures Strategy: Sell HIGH, Buy LOW|
|SELL 6 tonnes of nickel at USD 10,100/ton||USD 60,600|
|BUY 6 tonnes of nickel at USD 9,090/ton||USD 54,540|
|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 0%. 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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