If you are bullish on sugar, you can profit from a rise in sugar price by taking up a long position in the sugar futures market. You can do so by buying (going long) one or more sugar futures contracts at a futures exchange.
You decide to go long one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111 per pound. Since each Euronext Raw Sugar (No. 408) Futures contract represents 112000 pounds of sugar, the value of the futures contract is USD 12,443. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,456 to open the long futures position.
Assuming that a week later, the price of sugar rises and correspondingly, the price of sugar futures jumps to USD 0.1222 per pound. Each contract is now worth USD 13,688. So by selling your futures contract now, you can exit your long position in sugar futures with a profit of USD 1,244.
|Long Sugar Futures Strategy: Buy LOW, Sell HIGH|
|BUY 112000 pounds of sugar at USD 0.1111/lb||USD 12,443|
|SELL 112000 pounds of sugar at USD 0.1222/lb||USD 13,688|
|Investment (Initial Margin)||USD 1,456|
|Return on Investment||85.4615%|
In the examples shown above, although sugar prices have moved by only 10%, the ROI generated is 85.4615%. This leverage is made possible by the relatively low margin (approximately 11.7012%) required to control a large amount of sugar 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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