If you are bearish on silver, you can profit from a fall in silver price by taking up a short position in the silver futures market. You can do so by selling (shorting) one or more silver futures contracts at a futures exchange.
You decide to go short one near-month TOCOM Silver Futures contract at the price of JPY 30.23/gm. Since each Silver futures contract represents 30000 grams of silver, the value of the contract is JPY 906,900. To enter the short futures position, you have to put up an initial margin of JPY 108,000.
A week later, the price of silver falls and correspondingly, the price of TOCOM Silver futures drops to JPY 27.21 per gram. Each contract is now worth only JPY 816,210. So by closing out your futures position now, you can exit your short position in Silver Futures with a profit of JPY 90,690.
|Short Silver Futures Strategy: Sell HIGH, Buy LOW|
|SELL 30000 grams of silver at JPY 30.23/gm||JPY 906,900|
|BUY 30000 grams of silver at JPY 27.21/gm||JPY 816,210|
|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 0%. 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.
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