If you are bearish on zinc, you can profit from a fall in zinc price by taking up a short position in the zinc futures market. You can do so by selling (shorting) one or more zinc futures contracts at a futures exchange.
You decide to go short one near-month LME Zinc Futures contract at the price of USD 1,212/ton. Since each Zinc futures contract represents 25 tonnes of zinc, the value of the contract is USD 30,300. To enter the short futures position, you have to put up an initial margin of USD 5,000.
A week later, the price of zinc falls and correspondingly, the price of LME Zinc futures drops to USD 1,091 per tonne. Each contract is now worth only USD 27,270. So by closing out your futures position now, you can exit your short position in Zinc Futures with a profit of USD 3,030.
|Short Zinc Futures Strategy: Sell HIGH, Buy LOW|
|SELL 25 tonnes of zinc at USD 1,212/ton||USD 30,300|
|BUY 25 tonnes of zinc at USD 1,091/ton||USD 27,270|
|Investment (Initial Margin)||USD 5,000|
|Return on Investment||61%|
In the examples shown above, although zinc prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 17%) required to control a large amount of zinc 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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