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The long futures position is an unlimited profit, unlimited risk position that can be entered by the futures speculator to profit from a rise in the price of the underlying.
The long futures position is also used when a manufacturer wishes to lock in the price of a raw material that he will require sometime in the future. See long hedge.
| Long Futures Position Construction |
| Buy 1 Futures Contract |
To construct a long futures position, the trader must have enough balance in his account to meet the initial margin requirement for each futures contract he wishes to purchase.
Unlimited Profit Potential
There is no maximum profit for the long futures position. The futures trader stands to profit as long as the underlying futures price goes up.
The formula for calculating profit is given below:
Unlimited Risk
Large losses can occur for the long futures position if the underlying futures price falls dramatically.
The formula for calculating loss is given below:
Breakeven Point(s)
The underlier price at which break-even is achieved for the long futures position position can be calculated using the following formula.
Example
Suppose June Crude Oil futures is trading at $40 and each futures contract covers 1000 barrels of Crude Oil. A futures trader enters a long futures position by buying 1 contract of June Crude Oil futures at $40 a barrel.
Scenario #1: June Crude Oil futures rises to $50
If June Crude Oil futures instead rallies to $50 on delivery date, then the long futures position will gain $10 per barrel. Since the contract size for Crude Oil futures is 1000 barrels, the trader will achieve a profit of $10 x 1000 = $10000.
Scenario #2: June Crude Oil futures drops to $30
If June Crude Oil futures is trading at $30 on delivery date, then the long futures position will suffer a loss of $10 x 1000 barrel = $10000 in value.
Daily Mark-to-Market & Margin Requirement
The value of a long futures position is marked-to-market daily. Gains are credited and losses are debited from the future trader's account at the end of each trading day.
If the losses result in margin account balance falling below the required maintenance level, a margin call will be issued by the broker to the futures trader to top up his or her account in order for the futures position to remain open.
Synthetic Long Futures
An equivalent position known as a synthetic long futures position can be constructed using only options.
Next: Short Futures Position
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