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 heating oil, you can profit from a fall in heating oil price by taking up a short position in the heating oil futures market. You can do so by selling (shorting) one or more heating oil futures contracts at a futures exchange.
Example: Short Heating Oil Futures Trade
You decide to go short one near-month NYMEX Heating Oil Futures contract at the price of USD 1.4777/gal. Since each Heating Oil futures contract represents 42000 gallons of heating oil, the value of the contract is USD 62,063. To enter the short futures position, you have to put up an initial margin of USD 10,125.
A week later, the price of heating oil falls and correspondingly, the price of NYMEX Heating Oil futures drops to USD 1.3299 per gallon. Each contract is now worth only USD 55,857. So by closing out your futures position now, you can exit your short position in Heating Oil Futures with a profit of USD 6,206.
| Short Heating Oil Futures Strategy: Sell HIGH, Buy LOW | |
| SELL 42000 gallons of heating oil at USD 1.4777/gal | USD 62,063 |
| BUY 42000 gallons of heating oil at USD 1.3299/gal | USD 55,857 |
| Profit | USD 6,206 |
| Initial margin (assumed collateral) | USD 10,125 |
| Return on assumed initial margin | 61.2972% |
Margin Requirements & Leverage
In the examples shown above, although heating oil prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 16.3140%) required to control a large amount of heating 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 Heating Oil Futures & Options Trading
- Heating Oil Futures Basics
- Buying Heating Oil Futures to Profit from a Rise in Heating Oil Prices
- Heating Oil Options Basics
- Heating Oil Call Option Trading Basics
- Heating Oil Put Option Trading Basics
- Hedging Against Rising Heating Oil Prices with Heating Oil Futures
- Hedging Against Falling Heating Oil Prices with Heating 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.
