Selling (Going Short) Tin Futures to Profit from a Fall in Tin Prices

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Contents

Selling (Going Short) Aluminum Futures to Profit from a Fall in Aluminum Prices

If you are bearish on aluminum, you can profit from a fall in aluminum price by taking up a short position in the aluminum futures market. You can do so by selling (shorting) one or more aluminum futures contracts at a futures exchange.

Example: Short Aluminum Futures Trade

You decide to go short one near-month LME Aluminum Futures contract at the price of USD 1,470/ton. Since each Aluminum futures contract represents 25 tonnes of aluminum, the value of the contract is USD 36,750. To enter the short futures position, you have to put up an initial margin of USD 4,375.

A week later, the price of aluminum falls and correspondingly, the price of LME Aluminum futures drops to USD 1,323 per tonne. Each contract is now worth only USD 33,075. So by closing out your futures position now, you can exit your short position in Aluminum Futures with a profit of USD 3,675.

Short Aluminum Futures Strategy: Sell HIGH, Buy LOW
SELL 25 tonnes of aluminum at USD 1,470/ton USD 36,750
BUY 25 tonnes of aluminum at USD 1,323/ton USD 33,075
Profit USD 3,675
Investment (Initial Margin) USD 4,375
Return on Investment 84%

Margin Requirements & Leverage

In the examples shown above, although aluminum prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 12%) required to control a large amount of aluminum 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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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

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Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Selling (Going Short) Gold Futures to Profit from a Fall in Gold Prices

If you are bearish on gold, you can profit from a fall in gold price by taking up a short position in the gold futures market. You can do so by selling (shorting) one or more gold futures contracts at a futures exchange.

Example: Short Gold Futures Trade

You decide to go short one near-month NYMEX Gold Futures contract at the price of USD 851.00/oz. Since each Gold futures contract represents 100 troy ounces of gold, the value of the contract is USD 85,100. To enter the short futures position, you have to put up an initial margin of USD 4,302.

A week later, the price of gold falls and correspondingly, the price of NYMEX Gold futures drops to USD 765.90 per troy ounce. Each contract is now worth only USD 76,590. So by closing out your futures position now, you can exit your short position in Gold Futures with a profit of USD 8,510.

Short Gold Futures Strategy: Sell HIGH, Buy LOW
SELL 100 troy ounces of gold at USD 851.00/oz USD 85,100
BUY 100 troy ounces of gold at USD 765.90/oz USD 76,590
Profit USD 8,510
Investment (Initial Margin) USD 4,302
Return on Investment 198%

Margin Requirements & Leverage

In the examples shown above, although gold prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 5%) required to control a large amount of gold 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 Gold Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How to Invest in Oil

Investors have many options for getting involved with oil. These methods come with varying degrees of risk and range from direct investment in oil as a commodity, to indirect exposure in oil through the ownership of energy-related equities. Each of these investment types can be acquired through an online brokerage account.

How Can I Buy Oil As An Investment?

One direct method of owning oil is through the purchase of oil futures or oil futures options. Futures are highly volatile and involve a high degree of risk. Additionally, investing in futures may require the investor to do a lot of homework as well as invest a large amount of capital.

Another direct method of owning oil is through the purchase of commodity-based oil exchange-traded funds (ETFs). ETFs trade on a stock exchange and can be purchased and sold in a manner similar to stocks. For example, buying one share of the U.S. Oil Fund (USO) would give you exposure to roughly one barrel of oil.

In addition, investors can gain indirect exposure to oil through the purchase of energy-sector ETFs, like the iShares Global Energy Sector Index Fund (IXC), and to energy-sector mutual funds, like the the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in the stocks of oil and oil services companies and come with lower risk.

Advisor Insight

Rebecca Dawson
Silber Bennett Financial, Los Angeles, CA

There are many ways that you can invest in oil commodities. You can even buy actual oil by the barrel.

Crude oil trades on the New York Mercantile Exchange as light sweet crude oil futures contracts, as well as other commodities exchanges around the world. Futures contracts are agreements to deliver a quantity of a commodity at a fixed price and date in the future.

Oil options are another way to buy oil. Options contracts give the buyer or seller the option to trade oil on a future date. If you choose to buy futures or options directly in oil, you will need to trade them on a commodities exchange.

The more common way to invest in oil for the average investor is to buy shares of an oil ETF.

Finally, you can also invest in oil through indirect exposure by owning various oil companies.

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    Only For Experienced Traders.

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