If you are bullish on oats, you can profit from a rise in oats price by taking up a long position in the oats futures market. You can do so by buying (going long) one or more oats futures contracts at a futures exchange.
You decide to go long one near-month CBOT Oats Futures contract at the price of USD 2.0900 per bushel. Since each CBOT Oats Futures contract represents 5000 bushels of oats, the value of the futures contract is USD 10,450. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,350 to open the long futures position.
Assuming that a week later, the price of oats rises and correspondingly, the price of oats futures jumps to USD 2.2990 per bushel. Each contract is now worth USD 11,495. So by selling your futures contract now, you can exit your long position in oats futures with a profit of USD 1,045.
|Long Oats Futures Strategy: Buy LOW, Sell HIGH|
|BUY 5000 bushels of oats at USD 2.0900/bu||USD 10,450|
|SELL 5000 bushels of oats at USD 2.2990/bu||USD 11,495|
|Investment (Initial Margin)||USD 1,350|
|Return on Investment||77.4074%|
In the examples shown above, although oats prices have moved by only 10%, the ROI generated is 77.4074%. This leverage is made possible by the relatively low margin (approximately 12.9187%) required to control a large amount of oats 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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