Buying (Going Long) Wheat Futures to Profit from a Rise in Wheat Prices

If you are bullish on wheat, you can profit from a rise in wheat price by taking up a long position in the wheat futures market. You can do so by buying (going long) one or more wheat futures contracts at a futures exchange.

Example: Long Wheat Futures Trade

You decide to go long one near-month CBOT Wheat Futures contract at the price of USD 5.7000 per bushel. Since each CBOT Wheat Futures contract represents 5000 bushels of wheat, the value of the futures contract is USD 28,500. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 3,375 to open the long futures position.

Assuming that a week later, the price of wheat rises and correspondingly, the price of wheat futures jumps to USD 6.2700 per bushel. Each contract is now worth USD 31,350. So by selling your futures contract now, you can exit your long position in wheat futures with a profit of USD 2,850.

Long Wheat Futures Strategy: Buy LOW, Sell HIGH
BUY 5000 bushels of wheat at USD 5.7000/buUSD 28,500
SELL 5000 bushels of wheat at USD 6.2700/buUSD 31,350
ProfitUSD 2,850
Investment (Initial Margin)USD 3,375
Return on Investment84.4444%

Margin Requirements & Leverage

In the examples shown above, although wheat prices have moved by only 10%, the ROI generated is 84.4444%. This leverage is made possible by the relatively low margin (approximately 11.8421%) required to control a large amount of wheat 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.

Learn More About Wheat Futures & Options Trading

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