subject: Futures Trading Strategies [print this page] Every investment calls for caution, good understanding of the various options, market conditions and tips and strategies to be implemented to gain maximum benefit out of the investment. Trading in derivatives like futures requires extra vigilance and insight into its trading strategies. Let's look at specific futures trading strategies that are proven to be beneficial.
Futures are standardized contracts either to buy or sell a particular asset at a future date for an agreed price. The underlying asset can either be a commodity or in case of financial futures assets can be securities, bonds, currencies, stock indexes etc.
Strategies:
Position taking a position, either long (to buy) or short (to sell) on a futures contract is one of the most frequently used strategies. Going long entails buying a futures contract to hold till the price reaches the target and selling it in future for a profit.
Margin Trading futures on margin is advisable. Usually a percentage of the contract value, as decided by the exchange, is paid as margin amount and price variations are adjusted to that margin.
Spread This common strategy involves a trader buying and selling future contracts for the same commodity. The main goal of the strategy is to take advantage of the difference in the cash and futures market. Spreads can also be used for different commodities.
Tips to effectively use futures for hedging
As expiry date approaches, difference between the prices in futures market and cash market diminish and thereby hedging ability also lessens.
In case of contracts for physical settlement- delivery of the underlying asset, it is advisable to hold the position till maturity.
One must incorporate additional caution in case of hedging a position further than the expiry date in longest time to expiry contracts.
While taking out of a position, one must analyze the effect on margin.
Each kind of future contracts requires a unique strategy, hence a comprehensive knowledge of futures trading is recommended.
