Choosing the right financial products for your portfolio is all about suitability.
First and foremost, traders need to ensure they are trading products they understand, strategies that fit their outlook, and portfolio exposures that match their risk profile and capital base.
Therefore, an important step when choosing the right products revolves around educating one's self on the financial landscape.
For market participants that are considering trading futures, a recent episode of Closing the Gap - Futures Edition is a great place to learn more about the product.
The episode presents some of the most important advantages and disadvantages of trading futures, and can help traders better evaluate whether this product is suitable.
As a reminder, futures are derivatives. That means futures "derive" their value from the price of another financial instrument. Additionally, futures also have a finite life. At a high level, that means direction and timing are very important considerations when trading futures.
To provide a better perspective on the futures universe, the list below illustrates some of the most commonly traded futures categories:
Equity Indexes (S&P 500, Nasdaq, etc...)
Interest Rates (30-year, 10-year, etc...)
Energy (crude oil, natural gas, etc...)
Metals (gold, silver, etc...)
Agricultural (corn, beans, sugar, etc...)
Foreign Currencies (Dollar, Euro, Yen, etc…)
The fact that the futures market has such a wide breadth of available exposures is one reason they are so popular. Investors and traders seeking to express a specific market assumption can usually find an outlet in this expansive market.
In terms of strategy, traders usually get involved in futures for two reasons: speculation or hedging.
In terms of hedging, imagine a volatility trader that is holding a significant short vega position. Short volatility usually underperforms when equity markets turn negative. In order to offset that exposure, some volatility traders choose to offset their portfolios with a short futures position in an equity index futures product like the S&P Mini.
Traders also use the futures market to execute a variety of market opinions through what is commonly called “speculation.” The most straightforward type of speculation in futures is, of course, a directional bet. For example, a trader believing that crude oil will bounce after recent weakness might buy crude oil futures.
Spreads are another common trade in the futures space. Spreads seek to exploit the price relationship between different futures products, or inefficiencies that exist between different maturities in the same underlying future.
For example, a trader might have identified opportunity in the price of crude oil relative to natural gas, and decide to go long one, while shorting the other - based on their historical correlation.
Opportunities for spread trades are also found in the same underlying futures product but across different maturities. In this case, imagine a trader believes short-term corn prices are too high, while longer-term prices are too low. Assuming the current month is September, the trader could establish a short November position alongside a long February position.
If you are looking for more information on a particular futures category, or commonly traded spreads in the futures universe, the tastytrade website contains an extensive archive of information.
Additionally, new content related to futures can be followed daily on tastytrade live. There are also several series on the tastytrade financial network dedicated to futures, including:
For more information on the suitability of futures in your portfolio, we also highly recommend watching the aforementioned episode of Closing the Gap - Futures Edition in its entirety.
On the show, the hosts discuss in greater detail some of the advantages and disadvantages of trading futures.
Anyone considering getting involved in futures can learn a lot from this segment, and increase their awareness of the risks and rewards associated with this niche of the financial market.
If you have any questions related to futures, we encourage you to leave a message in the space below, or reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.