If you are bullish on pork bellies, you can profit from a rise in pork bellies price by taking up a long position in the pork bellies futures market. You can do so by buying (going long) one or more pork bellies futures contracts at a futures exchange.
You decide to go long one near-month CME Frozen Pork Bellies Futures contract at the price of USD 0.8470 per pound. Since each CME Frozen Pork Bellies Futures contract represents 40000 pounds of pork bellies, the value of the futures contract is USD 33,880. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,890 to open the long futures position.
Assuming that a week later, the price of pork bellies rises and correspondingly, the price of pork bellies futures jumps to USD 0.9317 per pound. Each contract is now worth USD 37,268. So by selling your futures contract now, you can exit your long position in pork bellies futures with a profit of USD 3,388.
|Long Pork Bellies Futures Strategy: Buy LOW, Sell HIGH|
|BUY 40000 pounds of pork bellies at USD 0.8470/lb||USD 33,880|
|SELL 40000 pounds of pork bellies at USD 0.9317/lb||USD 37,268|
|Investment (Initial Margin)||USD 1,890|
|Return on Investment||179.2593%|
In the examples shown above, although pork bellies prices have moved by only 10%, the ROI generated is 179.2593%. This leverage is made possible by the relatively low margin (approximately 5.5785%) required to control a large amount of pork bellies 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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