If you are bullish on silver, you can profit from a rise in silver price by taking up a long position in the silver futures market. You can do so by buying (going long) one or more silver futures contracts at a futures exchange.
You decide to go long one near-month TOCOM Silver Futures contract at the price of JPY 30.23 per gram. Since each TOCOM Silver Futures contract represents 30000 grams of silver, the value of the futures contract is JPY 906,900. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of JPY 108,000 to open the long futures position.
Assuming that a week later, the price of silver rises and correspondingly, the price of silver futures jumps to JPY 33.25 per gram. Each contract is now worth JPY 997,590. So by selling your futures contract now, you can exit your long position in silver futures with a profit of JPY 90,690.
|Long Silver Futures Strategy: Buy LOW, Sell HIGH|
|BUY 30000 grams of silver at JPY 30.23/gm||JPY 906,900|
|SELL 30000 grams of silver at JPY 33.25/gm||JPY 997,590|
|Investment (Initial Margin)||JPY 108,000|
|Return on Investment||84%|
In the examples shown above, although silver prices have moved by only 10%, the ROI generated is 84%. This leverage is made possible by the relatively low margin (approximately 12%) required to control a large amount of silver 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!