If you are bearish on wheat, you can profit from a fall in wheat price by taking up a short position in the wheat futures market. You can do so by selling (shorting) one or more wheat futures contracts at a futures exchange.
You decide to go short one near-month CBOT Wheat Futures contract at the price of USD 5.7000/bu. Since each Wheat futures contract represents 5000 bushels of wheat, the value of the contract is USD 28,500. To enter the short futures position, you have to put up an initial margin of USD 3,375.
A week later, the price of wheat falls and correspondingly, the price of CBOT Wheat futures drops to USD 5.1300 per bushel. Each contract is now worth only USD 25,650. So by closing out your futures position now, you can exit your short position in Wheat Futures with a profit of USD 2,850.
|Short Wheat Futures Strategy: Sell HIGH, Buy LOW|
|SELL 5000 bushels of wheat at USD 5.7000/bu||USD 28,500|
|BUY 5000 bushels of wheat at USD 5.1300/bu||USD 25,650|
|Investment (Initial Margin)||USD 3,375|
|Return on Investment||84.4444%|
In the examples shown above, although wheat prices have moved by only 10%, the ROI generated is 0.0000%. 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.
To buy or sell futures, you need a broker that can handle futures trades.
OptionsHouse is a full fledged Futures Commission Merchant that provides a streamlined access to the futures markets at extremely reasonable contract rates.Click here to open a futures trading account at OptionsHouse.com now!