If you are bearish on palladium, you can profit from a fall in palladium price by taking up a short position in the palladium futures market. You can do so by selling (shorting) one or more palladium futures contracts at a futures exchange.
You decide to go short one near-month NYMEX Palladium Futures contract at the price of USD 185.40/oz. Since each Palladium futures contract represents 100 troy ounces of palladium, the value of the contract is USD 18,540. To enter the short futures position, you have to put up an initial margin of USD 2,750.
A week later, the price of palladium falls and correspondingly, the price of NYMEX Palladium futures drops to USD 166.86 per troy ounce. Each contract is now worth only USD 16,686. So by closing out your futures position now, you can exit your short position in Palladium Futures with a profit of USD 1,854.
|Short Palladium Futures Strategy: Sell HIGH, Buy LOW|
|SELL 100 troy ounces of palladium at USD 185.40/oz||USD 18,540|
|BUY 100 troy ounces of palladium at USD 166.86/oz||USD 16,686|
|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 0%. 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.
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