Commodities Examples
Buying Silver
It is 12 April 2011 and the price of silver has been rising consistently over the past few months thanks to a widespread rally in commodity prices, and a surge in the prices of precious metals in particular.
You are keen to take advantage of the trend, but are equally wary of the potential for a sudden correction in prices, so you decide to open a position with a Guaranteed Stop.
Opening the position
Our July 2011 Silver price stands at 3970-3973. To follow the upward trend, you decide to 'buy' £3 per point at 3973, and as you want to absolutely limit your risk, you choose to place a controlled risk bet which adds a premium of 2 points to the 'buy' price, making it 3975.
You want to limit any potential losses to a maximum of £600, so place your Guaranteed Stop 200 points below your opening level, at 3775. The deposit required for this kind of bet equals the maximum amount you can lose: in this case, £600.
Closing the position
Throughout the next two weeks, the price of silver continues to rise. By 29 April the price of silver has reached multi-year highs and is trading at 4920–4923. You decide to take your profit and close the deal by 'selling' £3 per point at 4920.
Your profit is calculated as follows:
Profit on deal
| Opening level | 3975 |
| Closing level | 4920 |
| Difference | 945 |
Profit: 945 x £3 per point = £2835
Alternatively, if you had expected the price to rise further you could have kept your bet open. At the beginning of May, the price of silver suddenly falls, and on 5 May our July 2011 silver contract drops from 3924 to 3496 in volatile market conditions. As you opted for a controlled risk bet, when the bid price reaches your Guaranteed Stop level of 3775, your deal is closed at that price, regardless of the turbulence in the market on that day.
Your loss would be calculated as follows:
Loss on deal
| Opening level | 3975 |
| Closing level | 3775 |
| Difference | 200 |
Loss: 200 x £3 per point = £600
Buying US Light Crude Oil
It is 3 June 2011, and the price of a barrel of US Light Crude Oil is hovering below $100. You have observed that the recent political turmoil in North Africa and the Middle East has settled down, and several oil producers are increasing supply, so you believe that crude prices will drop as a result.
Opening the position
Our Daily US Light Crude price stands at 9958–9962 that morning. You decide to 'sell' £2 per point but want to limit any potential losses so opt to place a controlled risk bet – for which you pay a premium of 2 on the dealing spread. You sell £2 per point at 9956 (bid price of 9958 minus 2).
You want to limit any potential losses to £200 so place your Guaranteed Stop 100 points above your opening level at 10056. The deposit required for this kind of bet equals the maximum amount you can lose: in this case £200.
Closing the position
Against your expectations, the price of oil rises over the next few days, as tension in the Middle East flares up. On the morning of 8 June our US Light Crude price hits 10052–10056 and your Guaranteed Stop is triggered, closing your position.
The result
Loss on deal
| Opening level | 9956 |
| Closing level | 10056 |
| Difference | 100 |
Loss: 100 x £2 per point = £200
The next day, the price of oil continues to rise and by late afternoon our Daily US Light Crude price stands at 10240-10244, meaning you could have potentially lost over £500 had you not had the Guaranteed Stop in place.