If you are bearish on uranium, you can profit from a fall in uranium price by taking up a short position in the uranium futures market. You can do so by selling (shorting) one or more uranium futures contracts at a futures exchange.
You decide to go short one near-month NYMEX Uranium Futures contract at the price of USD 53.00/lb. Since each Uranium futures contract represents 250 pounds of uranium, the value of the contract is USD 13,250. To enter the short futures position, you have to put up an initial margin of USD 1,620.
A week later, the price of uranium falls and correspondingly, the price of NYMEX Uranium futures drops to USD 47.70 per pound. Each contract is now worth only USD 11,925. So by closing out your futures position now, you can exit your short position in Uranium Futures with a profit of USD 1,325.
|Short Uranium Futures Strategy: Sell HIGH, Buy LOW|
|SELL 250 pounds of uranium at USD 53.00/lb||USD 13,250|
|BUY 250 pounds of uranium at USD 47.70/lb||USD 11,925|
|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 0.00%. 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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