Many managed futures trading strategies will likely incorporate some of the financial instruments available on the futures markets. The S&P and mini S&P are among the financial products which trade via the CME Group. Options on these futures products are often part of managed futures trading strategies. They are no less risky than outright futures positions, but many managed futures brokers may use them for long option techniques for hedging positions or even short option strategies designed to try to capitalize on economic volatility.
Since indices are normally comprised of a cross-section of certain companies, there are certain strategies to try to hedge an actual stock portfolio against a drop in the markets. These might include:
- Buying put options on the S&P or mini S&P
- Buying put spreads on the S&P or mini S&P
- Selling call options on the S&P or mini S&P
The first option strategy – buying put options – works in this way:
If the futures market declines, the put options may gain in value. The options may not move point for point with a move in the underlying futures market. If the market is declining in value, the put options may offer some opportunity to get limited gains to try to partially offset any losses in the stock portfolio.
Secondly, buying put spreads may offer a limited version of the same potential benefits as a put, but with a long option combined with a short one further from the money. This small collection of premium from the short option may partially offset the costs of the long option. Be aware – since this option strategy involves two contracts, there will be twice as many fees and commissions to account for. The short option also limits potential gain to its strike price.
The third strategy would involve selling options on the underlying futures market. Call options, to be specific. This would mean unlimited risk exposure for the potentially limited reward of call premium in the event the market declined.
These strategies – and more – may be something that the managed futures broker will consider for trading the S&P and mini S&P futures markets. Consult the CTAs disclosure document to learn more about techniques and always educate yourself as to the risks and rewards of such trading before opening and account.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.