Outright Futures Positions Explained
An outright futures position represents a sole, unhedged bet on the direction of a futures contract. Unlike complex trading strategies, this position stands independently, affording traders the potential for high rewards but also exposing them to significant risks.
Key Insights
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Single Directional Bet: An outright futures position centers on a single bet—either predicting a rise or a fall in the price of a futures contract.
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Pure and Unhedged: As an unhedged position, outright futures carry greater risk but also higher potential rewards compared to hedged positions.
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Hedging Nullifies “Outright”: Adding any hedge or offsetting position transforms an outright position into a hedged or partially-hedged one.
Delving into the Mechanics
Outright futures positions can be either long (anticipating a price rise) or short (anticipating a price fall). They are referred to as “naked” futures because of their vulnerability to market fluctuations. Without any form of risk mitigation, these positions inherently embody high risk. However, many traders prefer outright futures for their simplicity and greater profit potential when market movements align with predictions.
Outright Futures in Action
Consider a scenario. A trader speculates that the S&P 500 will increase over a few months. In July, the trader buys a December E-Mini S&P 500 contract listed on the CME with the symbol ES, using a limit order to enter at $4321. This contract moves in 0.25 increments known as ticks, with each tick representing a $12.50 change in value.
Since no offsetting positions or hedges are taken, this trade is an outright futures position—a straightforward bet on the market’s direction.
Monitoring the Position
- After one month, if the price rises to $4351, the trader gains 30 points, translating to a $1500 profit (calculated as: 30 points x $50 per point).
- Conversely, if the price falls to $4311, the trader incurs a $500 loss (calculated as: 10 points x $50 per point).
The potential for high rewards or significant losses underscores the appeal and risk of outright futures positions.
Mitigating Risks
Even within inherently risky outright futures positions, traders can limit potential losses by purchasing protective options. For instance, a put option can cap losses for a long futures position, similar to an insurance policy against adverse price movements. In short positions, buying a call option can guard against unlimited upward movements in market prices.
Alternative Strategies
For traders seeking exposure to futures without the dizzying risks of outright positions, vertical spread trades offer a viable alternative. These strategies cap both profit and loss potential, providing a more controlled approach to speculative trading.
The Trader’s Choice
Outright futures positions are favored by many speculative traders for their simplicity and potential for significant gains. While risk is heightened, timely and informed decisions can make this strategy highly rewarding.
Whether embracing the straightforward approach of an outright futures position or opting for a more balanced spread trade, understanding the dynamics at play is key to success in futures trading.
Note: Trading futures involves significant risk and may not be suitable for all investors. Always consider your financial situation and consult with a financial advisor before making investment decisions.
Related Terms: hedged positions, market risk, long positions, short positions, futures contracts.
References
- CME Group. “E-mini S&P 500”.
