If you are bullish on rubber, you can profit from a rise in rubber price by taking up a long position in the rubber futures market. You can do so by buying (going long) one or more rubber futures contracts at a futures exchange.
You decide to go long one near-month TOCOM Rubber Futures contract at the price of JPY 133.00 per kilogram. Since each TOCOM Rubber Futures contract represents 5000 kilograms of rubber, the value of the futures contract is JPY 665,000. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of JPY 75,000 to open the long futures position.
Assuming that a week later, the price of rubber rises and correspondingly, the price of rubber futures jumps to JPY 146.30 per kilogram. Each contract is now worth JPY 731,500. So by selling your futures contract now, you can exit your long position in rubber futures with a profit of JPY 66,500.
|Long Rubber Futures Strategy: Buy LOW, Sell HIGH|
|BUY 5000 kilograms of rubber at JPY 133.00/kg||JPY 665,000|
|SELL 5000 kilograms of rubber at JPY 146.30/kg||JPY 731,500|
|Investment (Initial Margin)||JPY 75,000|
|Return on Investment||89%|
In the examples shown above, although rubber prices have moved by only 10%, the ROI generated is 89%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of rubber 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.
OptionsHouse is a full fledged Futures Commission Merchant that provides a streamlined access to the futures markets at extremely reasonable contract rates.Click here to open a futures trading account at OptionsHouse.com now!