If you are bearish on oats, you can profit from a fall in oats price by taking up a short position in the oats futures market. You can do so by selling (shorting) one or more oats futures contracts at a futures exchange.
You decide to go short one near-month CBOT Oats Futures contract at the price of USD 2.0900/bu. Since each Oats futures contract represents 5000 bushels of oats, the value of the contract is USD 10,450. To enter the short futures position, you have to put up an initial margin of USD 1,350.
A week later, the price of oats falls and correspondingly, the price of CBOT Oats futures drops to USD 1.8810 per bushel. Each contract is now worth only USD 9,405. So by closing out your futures position now, you can exit your short position in Oats Futures with a profit of USD 1,045.
|Short Oats Futures Strategy: Sell HIGH, Buy LOW|
|SELL 5000 bushels of oats at USD 2.0900/bu||USD 10,450|
|BUY 5000 bushels of oats at USD 1.8810/bu||USD 9,405|
|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 0.0000%. 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.
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