If you are bullish on uranium, you can profit from a rise in uranium price by taking up a long position in the uranium futures market. You can do so by buying (going long) one or more uranium futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Uranium Futures contract at the price of USD 53.00 per pound. Since each NYMEX Uranium Futures contract represents 250 pounds of uranium, the value of the futures contract is USD 13,250. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,620 to open the long futures position.
Assuming that a week later, the price of uranium rises and correspondingly, the price of uranium futures jumps to USD 58.30 per pound. Each contract is now worth USD 14,575. So by selling your futures contract now, you can exit your long position in uranium futures with a profit of USD 1,325.
|Long Uranium Futures Strategy: Buy LOW, Sell HIGH|
|BUY 250 pounds of uranium at USD 53.00/lb||USD 13,250|
|SELL 250 pounds of uranium at USD 58.30/lb||USD 14,575|
|Investment (Initial Margin)||USD 1,620|
|Return on Investment||81.79%|
In the examples shown above, although uranium prices have moved by only 10%, the ROI generated is 81.79%. This leverage is made possible by the relatively low margin (approximately 12.23%) required to control a large amount of uranium 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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