If you are bearish on tin, you can profit from a fall in tin price by taking up a short position in the tin futures market. You can do so by selling (shorting) one or more tin futures contracts at a futures exchange.
You decide to go short one near-month LME Tin Futures contract at the price of USD 11,550/ton. Since each Tin futures contract represents 5 tonnes of tin, the value of the contract is USD 57,750. To enter the short futures position, you have to put up an initial margin of USD 11,700.
A week later, the price of tin falls and correspondingly, the price of LME Tin futures drops to USD 10,395 per tonne. Each contract is now worth only USD 51,975. So by closing out your futures position now, you can exit your short position in Tin Futures with a profit of USD 5,775.
|Short Tin Futures Strategy: Sell HIGH, Buy LOW|
|SELL 5 tonnes of tin at USD 11,550/ton||USD 57,750|
|BUY 5 tonnes of tin at USD 10,395/ton||USD 51,975|
|Investment (Initial Margin)||USD 11,700|
|Return on Investment||49%|
In the examples shown above, although tin prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 20%) required to control a large amount of tin 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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