Understanding Different Futures Trading Strategies

Futures contracts can help investors bet on future price movements of any asset. You can buy or sell any particular security at a predetermined price with a futures contract. The predetermined price and date for a futures contract are called the strike price and expiration date, respectively.

Futures contracts are used by both retail and institutional investors to hedge against price fluctuations. Investors must be familiar with futures contract hedging, spreading, and other strategies. Read on to understand different strategies for futures contracts.

Topics Covered:

• What are Different Strategies for Futures Contracts?
• Understanding Futures Contracts Strategies
• Conclusion

What are Different Strategies for Futures Contracts?

Futures are financial derivatives or contracts based on underlying securities. Futures are standardised and legally binding contracts available on stock exchanges. They are a type of financial instrument available for trading. Since they are treated as financial instruments, one can apply different strategies for maximising returns. Besides maximising returns, different strategies for futures contracts can help cap potential losses.

Many investors start trading futures without understanding different strategies. Since they aren’t aware of different investment strategies, portfolio risks increase. You can use futures in different ways to minimise portfolio risks.

For instance, one can use multiple futures contracts to implement a spread strategy. One must have a clear understanding of the costs involved, financial goals, and market conditions to successfully implement a futures trading strategy.

Understanding Futures Contracts Strategies

As discussed above, investors can implement a range of strategies to succeed with futures trading. These strategies can help minimise portfolio risks and cap potential losses. Also, investors can earn attractive returns with futures trading strategies. Let us discuss different strategies for futures contracts to achieve better results.

• Long Positions

  Investors can take long positions with futures to benefit from a price increase. Long futures, also known as the ‘Buy and Hold’ strategy, rely on upward price movements in the market. Investors take long positions in the market by purchasing futures contracts. Investors expect the price of underlying securities to rise in the market. When the price eventually rises, investors sell the futures at a higher rate.

  Additionally Read: About Demat Account

• Short Positions

  Short futures involve selling futures and expecting a decline in the price of the underlying asset. Investors take short positions by writing off futures. When the price of the underlying asset declines in the market, investors can buy them back at a lower price. The difference between the selling and buy-back price of futures is the profit for the investor.

• Hedging

  One cannot ignore hedging when discussing different strategies for futures contracts. Hedging refers to using futures to protect your assets against future price fluctuations. Let us say you own a stock of a particular company and suspect that its price might fall in the coming months.

  You can purchase a futures contract to sell the stock at the current market price. Even if the prices rise in the future, you can sell the asset at a better price by exercising the futures contract. Besides futures, investors also rely on options and swaps (financial agreements) for hedging.

• Spreading

  Spreads involve two or more futures contracts. The price difference between different futures leads to a profit for the investor. Spreading allows investors to cap losses and assure benefits by leveraging the price differences. Investors can also use two or more options for spreading.

• Price Speculation

  Price speculation is the most basic strategy for futures traders. You have to bet in the direction of anticipated price movement. When the prediction is accurate, you will make a profit. Investors can buy or sell futures contracts based on their price forecasts. Investors rely on a range of mathematical, statistical, and analytical methods to predict price movements and invest in futures accordingly.

• Arbitrage

  Investors can benefit from price differences in two or more markets. For instance, you can purchase futures in one market and sell them at a higher rate in another. However, effective arbitrage implementation requires an understanding of prices in different markets.

• Intraday Trading

  Many individual and institutional investors buy and sell futures repeatedly within a single trading day. The idea is to benefit from short-term price movements of underlying assets in the market. When the price of an underlying asset changes, the premium for futures rises or declines. Investors can take advantage of these price movements with intraday trading. However, you must know how to set stop-loss orders to prevent unwanted losses with intraday trading.

Conclusion

Investors can use a range of futures contracts strategies. You can try hedging, spreading, or arbitrage with the help of futures contracts. Many investors take long and short positions in the market to benefit from price movements. You can also find intraday traders who buy and sell futures within the same trading day to make profits on short-term price movements. Have you just started trading in futures and options? If yes, you must take some time to understand different strategies for futures contracts. Delve deeper into futures trading strategies now!

Diverse futures trading strategies, including hedging, speculation, and arbitrage, cater to varying risk appetites and market conditions. Facilitate your trading journey by initiating demat account opening, ensuring convenient access to execute and monitor different futures trading strategies with ease.

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