If you are bullish on palladium, you can profit from a rise in palladium price by taking up a long position in the palladium futures market. You can do so by buying (going long) one or more palladium futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Palladium Futures contract at the price of USD 185.40 per troy ounce. Since each NYMEX Palladium Futures contract represents 100 troy ounces of palladium, the value of the futures contract is USD 18,540. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 2,750 to open the long futures position.
Assuming that a week later, the price of palladium rises and correspondingly, the price of palladium futures jumps to USD 203.94 per troy ounce. Each contract is now worth USD 20,394. So by selling your futures contract now, you can exit your long position in palladium futures with a profit of USD 1,854.
|Long Palladium Futures Strategy: Buy LOW, Sell HIGH|
|BUY 100 troy ounces of palladium at USD 185.40/oz||USD 18,540|
|SELL 100 troy ounces of palladium at USD 203.94/oz||USD 20,394|
|Investment (Initial Margin)||USD 2,750|
|Return on Investment||67%|
In the examples shown above, although palladium prices have moved by only 10%, the ROI generated is 67%. This leverage is made possible by the relatively low margin (approximately 15%) required to control a large amount of palladium 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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