Example assumptions: Prices, premiums, margin deposits, exchange names and contract sizes below are historical teaching inputs. They are not current quotes or an offer of a listed contract. Check the current market resources and the exact option or futures specifications. Examples exclude fees and funding costs.
If you are bearish on cotton, you can profit from a fall in cotton price by taking up a short position in the cotton futures market. You can do so by selling (shorting) one or more cotton futures contracts at a futures exchange.
Example: Short Cotton Futures Trade
You decide to go short one near-month NYMEX Cotton Futures contract at the price of USD 0.4600/lb. Since each Cotton futures contract represents 50000 pounds of cotton, the value of the contract is USD 23,000. To enter the short futures position, you have to put up an initial margin of USD 3,375.
A week later, the price of cotton falls and correspondingly, the price of NYMEX Cotton futures drops to USD 0.4140 per pound. Each contract is now worth only USD 20,700. So by closing out your futures position now, you can exit your short position in Cotton Futures with a profit of USD 2,300.
| Short Cotton Futures Strategy: Sell HIGH, Buy LOW | |
| SELL 50000 pounds of cotton at USD 0.4600/lb | USD 23,000 |
| BUY 50000 pounds of cotton at USD 0.4140/lb | USD 20,700 |
| Profit | USD 2,300 |
| Initial margin (assumed collateral) | USD 3,375 |
| Return on assumed initial margin | 68.1481% |
Margin Requirements & Leverage
In the examples shown above, although cotton prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 14.6739%) required to control a large amount of cotton 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 Cotton Futures & Options Trading
What the margin return leaves out
The return shown divides the example’s gain by its assumed opening collateral. It is not a return on a fully paid commodity purchase, an expected return, or a loss limit. Brokers can change margin requirements or liquidate positions, and futures losses can exceed the amount initially deposited. Some contracts can trade below zero; do not assume a universal zero price floor.
