If you are bearish on platinum, you can profit from a fall in platinum price by taking up a short position in the platinum futures market. You can do so by selling (shorting) one or more platinum futures contracts at a futures exchange.
You decide to go short one near-month NYMEX Platinum Futures contract at the price of USD 964.00/oz. Since each Platinum futures contract represents 50 troy ounces of platinum, the value of the contract is USD 48,200. To enter the short futures position, you have to put up an initial margin of USD 8,100.
A week later, the price of platinum falls and correspondingly, the price of NYMEX Platinum futures drops to USD 867.60 per troy ounce. Each contract is now worth only USD 43,380. So by closing out your futures position now, you can exit your short position in Platinum Futures with a profit of USD 4,820.
|Short Platinum Futures Strategy: Sell HIGH, Buy LOW|
|SELL 50 troy ounces of platinum at USD 964.00/oz||USD 48,200|
|BUY 50 troy ounces of platinum at USD 867.60/oz||USD 43,380|
|Investment (Initial Margin)||USD 8,100|
|Return on Investment||60%|
In the examples shown above, although platinum prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 17%) required to control a large amount of platinum 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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