January 19, by Research Desk Financial Planning , Investment Planning. Futures Contracts, standalone, are like raging bulls. You cannot predict the size of holes it may dig in your kitty. Hedgers do have a sound basis.

They need not worry much. Futures, although a hedging instrument, do have their share of risks. The risks may come up by way of naked positions and highly leveraged positions. Naked position refers to short selling without owning a position in the underlying stocks. You never know how much it hurts. And in between, cash in on the price differential. But if the market starts rallying, you end up in soup. On the one hand, you have to buy shares at a higher price. On the contrary, you margins keep draining owing to losses.

So, you need to address the frequent margin calls. In yet another scenario, you bite more than you can chew. I mean you take over-leveraged positions. If the weather is sunny as you expected, then you can make hay. But, if it gets stormy, then the extent of destruction becomes unfathomable. There exist so many strategies which would not only save your fingers from getting burnt.

Top 4 options strategies for beginners | Futures Magazine

But also would make trading a lucrative punt. To a large extent, investors take a long position in futures.

They look at profiting from rising markets. Historically, the markets have risen more than they have fallen.

Should You Trade Futures Contracts or Options?

So, under this strategy, the investor provides for the downside risk as well. Suppose investor purchases May Index Futures contract for Rs containing shares. He pays an initial margin of Rs He is bullish that the index may rise. But at the same time, he is apprehensive about the loss if the market falls. In this case, both the upside and downside potential are unlimited. He buys near month Nifty put options expiring in May at a strike price of Rs The put premium for the contract comes out to be Rs Rs per put for puts.

If the NIFTY rises to say points, then he makes a profit of Rs and retains his margin. The maximum loss, in that case, would be the premium on puts.

However, he recovers it by exercising put option. There are times when you may get bearish about the markets. Assume that you hold 3-month stock futures contract and go short on the volatility. In the times gone by, markets have always been bullish. The tendencies to go southwards are usually little. Nonetheless, you feel that stock prices of the company would fall. Here, the profit potential is limited to the stock price touching zero level.

It cannot go negative. But what if the reverse happens? The upside risk potential is unlimited.

You would be in soup. You can arrest this. Here again, with the help of options, you may check an un-hedged position. In this case, you may use a call option to bet on the upside potential of the stocks. Imagine an investor goes short on 3-month stock futures of ABC Ltd at Rs containing shares.

In this situation, his profit potential is limited while loss potential is unlimited. He buys 3-month 50 call options of Rs 20 each at an exercise price of Rs In this case, call expires worthless. He loses the premium of Rs To his astonishment, the stock prices of ABC Ltd rise to Rs But luckily, he has a call backing. He, thus, compensates his loss in futures. It is a strategy to buy and sell futures contract simultaneously. The contracts would have same strike price but different expiration dates.

It aims at betting on the price movement of the underlying within the narrow range i. The investor tries to hedge the short with a long. He would sell near month contract and buy long-dated futures.

Suppose an investor shorts one November Stock Futures contract of XYZ Co. He deposits Rs as an initial investment.

Options strategies - Wikipedia

Simultaneously, he assumes a long position on December Stock Futures of XYZ Co. If the stock prices rise to Rs , he incurs a loss of Rs on November futures. But this would be a blessing in disguise for the December futures. He may earn even higher profits with a steady rise in stock prices. Hence, loss of one contract is compensated by the gain on another. Here, the strike price is near the spot price.

It would be called as a Neutral Calendar Spread. If the strike price is higher than the spot price, it would be Bullish Calendar Spread. Futures Contracts are incredible risk management instruments indeed.

The only caution here is to assume hedged positions. Moreover, choose a suitable hedging instrument to cover the upside and downside risks in futures. It's one place where you can track, plan and invest seamlessly.

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