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 bullish on crude oil, you can profit from a rise in crude oil price by taking up a long position in the crude oil futures market. You can do so by buying (going long) one or more crude oil futures contracts at a futures exchange.
Example: Long Crude Oil Futures Trade
You decide to go long one near-month NYMEX Brent Crude Oil Futures contract at the price of USD 44.20 per barrel. Since each NYMEX Brent Crude Oil Futures contract represents 1000 barrels of crude oil, the value of the futures contract is USD 44,200. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 12,825 to open the long futures position.
Assuming that a week later, the price of crude oil rises and correspondingly, the price of crude oil futures jumps to USD 48.62 per barrel. Each contract is now worth USD 48,620. So by selling your futures contract now, you can exit your long position in crude oil futures with a profit of USD 4,420.
| Long Crude Oil Futures Strategy: Buy LOW, Sell HIGH | |
| BUY 1000 barrels of crude oil at USD 44.20/barrel | USD 44,200 |
| SELL 1000 barrels of crude oil at USD 48.62/barrel | USD 48,620 |
| Profit | USD 4,420 |
| Initial margin (assumed collateral) | USD 12,825 |
| Return on assumed initial margin | 34.46% |
Margin Requirements & Leverage
In the examples shown above, although crude oil prices have moved by only 10%, the ROI generated is 34.46%. This leverage is made possible by the relatively low margin (approximately 29.02%) required to control a large amount of crude oil 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 Crude Oil Futures & Options Trading
- Crude Oil Futures Basics
- Selling Crude Oil Futures to Profit from a Fall in Crude Oil Prices
- Crude Oil Options Basics
- Crude Oil Call Option Trading Basics
- Crude Oil Put Option Trading Basics
- Hedging Against Rising Crude Oil Prices with Crude Oil Futures
- Hedging Against Falling Crude Oil Prices with Crude Oil Futures
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.
