If you are bearish on sugar, you can profit from a fall in sugar price by taking up a short position in the sugar futures market. You can do so by selling (shorting) one or more sugar futures contracts at a futures exchange.
You decide to go short one near-month Euronext Raw Sugar (No. 408) Futures contract at the price of USD 0.1111/lb. Since each Raw Sugar (No. 408) futures contract represents 112000 pounds of sugar, the value of the contract is USD 12,443. To enter the short futures position, you have to put up an initial margin of USD 1,456.
A week later, the price of sugar falls and correspondingly, the price of Euronext Raw Sugar (No. 408) futures drops to USD 0.1000 per pound. Each contract is now worth only USD 11,199. So by closing out your futures position now, you can exit your short position in Raw Sugar (No. 408) Futures with a profit of USD 1,244.
|Short Sugar Futures Strategy: Sell HIGH, Buy LOW|
|SELL 112000 pounds of sugar at USD 0.1111/lb||USD 12,443|
|BUY 112000 pounds of sugar at USD 0.1000/lb||USD 11,199|
|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 0.0000%. 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.
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