Example assumptions: Prices, premiums, margin deposits, exchange names and contract sizes below are historical teaching inputs. They are not current quotes or an offer of a listed contract. Check the current market resources and the exact option or futures specifications. Examples exclude fees and funding costs.
If you are bearish on pork bellies, you can profit from a fall in pork bellies price by taking up a short position in the pork bellies futures market. You can do so by selling (shorting) one or more pork bellies futures contracts at a futures exchange.
Example: Short Pork Bellies Futures Trade
You decide to go short one near-month CME Frozen Pork Bellies Futures contract at the price of USD 0.8470/lb. Since each Frozen Pork Bellies futures contract represents 40000 pounds of pork bellies, the value of the contract is USD 33,880. To enter the short futures position, you have to put up an initial margin of USD 1,890.
A week later, the price of pork bellies falls and correspondingly, the price of CME Frozen Pork Bellies futures drops to USD 0.7623 per pound. Each contract is now worth only USD 30,492. So by closing out your futures position now, you can exit your short position in Frozen Pork Bellies Futures with a profit of USD 3,388.
| Short Pork Bellies Futures Strategy: Sell HIGH, Buy LOW | |
| SELL 40000 pounds of pork bellies at USD 0.8470/lb | USD 33,880 |
| BUY 40000 pounds of pork bellies at USD 0.7623/lb | USD 30,492 |
| Profit | USD 3,388 |
| Initial margin (assumed collateral) | USD 1,890 |
| Return on assumed initial margin | 179.2593% |
Margin Requirements & Leverage
In the examples shown above, although pork bellies prices have moved by only 10%, the ROI generated is 0.0000%. 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.
Learn More About Pork Bellies Futures & Options Trading
- Pork Bellies Futures Basics
- Buying Pork Bellies Futures to Profit from a Rise in Pork Bellies Prices
- Pork Bellies Options Basics
- Pork Bellies Call Option Trading Basics
- Pork Bellies Put Option Trading Basics
- Hedging Against Rising Pork Bellies Prices with Pork Bellies Futures
- Hedging Against Falling Pork Bellies Prices with Pork Bellies Futures
What the margin return leaves out
The return shown divides the example’s gain by its assumed opening collateral. It is not a return on a fully paid commodity purchase, an expected return, or a loss limit. Brokers can change margin requirements or liquidate positions, and futures losses can exceed the amount initially deposited. Some contracts can trade below zero; do not assume a universal zero price floor.
