If you are bullish on coffee, you can profit from a rise in coffee price by taking up a long position in the coffee futures market. You can do so by buying (going long) one or more coffee futures contracts at a futures exchange.
Example: Long Coffee Futures Trade
You decide to go long one near-month Euronext Robusta Coffee (No. 409) Futures contract at the price of USD 1,648 per tonne. Since each Euronext Robusta Coffee (No. 409) Futures contract represents 10 tonnes of coffee, the value of the futures contract is USD 16,480. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 1,600 to open the long futures position.
Assuming that a week later, the price of coffee rises and correspondingly, the price of coffee futures jumps to USD 1,813 per tonne. Each contract is now worth USD 18,128. So by selling your futures contract now, you can exit your long position in coffee futures with a profit of USD 1,648.
|Long Coffee Futures Strategy: Buy LOW, Sell HIGH|
|BUY 10 tonnes of coffee at USD 1,648/ton||USD 16,480|
|SELL 10 tonnes of coffee at USD 1,813/ton||USD 18,128|
|Investment (Initial Margin)||USD 1,600|
|Return on Investment||103%|
Margin Requirements & Leverage
In the examples shown above, although coffee prices have moved by only 10%, the ROI generated is 103%. This leverage is made possible by the relatively low margin (approximately 10%) required to control a large amount of coffee 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.