Futures derive their value from an underlying financial asset likea Stock, Bond, or Index. They assist investors in gaining exposure to a range of financial instruments and hedging and managing risks. Under Futures Investment, you can make two big bets: go long (buy a Futures Contract) or go short (sell a Futures Contract). Every other trading strategy depends on these bets.
Traders also create other strategies that reduce risk in specific ways, depending on how the underlying asset performs. This article expands on different investment strategies that help you get started.
Buying a Futures contract, going long as it is called in the Futures Trading, is the most basic strategy tobuy a contract expecting its price to rise by expiration. It gets used for speculating on price rise as it offers a leveraged return on the underlying asset’s rise. The strategy provides uncapped upside if theasset price increases. However, it also exposes you to losses if the asset falls in value, placing more money to hold your position.
In other words, sell a Futures contract. It gets done when an investor expects the contract price to fall by expiration. While it is a simple trading strategy, it is riskier as there are potential uncapped losses if your underlying asset continues rising. Also, it offers similar rewards that go long,with the potential for leveraged return as asset price declines.
Bull Calendar Spread
Here, you buy and sell Futures contracts of the same underlying asset in the Futures Market. But they must have different expiration dates. Go long on the short-term contract and short on the long-term contract. Doing so reduces your risk by eliminating the value factor of the underlying asset. Plus, you have many ways to win this strategy: your long contract goes up, your short contract comes down, the long contract goes up while the short one comes down, the long one goes up more than the short one, or the long one comes down less than the short one.
Whatever happens, your spread widensin favour of the long contract. Once that happens, the spread value increases, raising the profit simultaneously.
Bear Calendar Spread
Like the bull calendar spread, youbuy and sell contracts of the same underlying asset with different expiry. However, you sell the short-term contract here and buy the long-term one. In this strategy, your spread widens in favour of the short contract. Again, you have multiple ways to win: the long contract comes down, the short contract goes up, the long come down more than the short one, or the long one goes up less than the short one.
Use this strategy when you expect theshort value contract to rise more than the long one. This widens the value of the spread in your favour, increasing your profits simultaneously.